Global airlines get a shot at Air India divestment

The government on Wednesday allowed foreign entities to own up to a 49 per cent stake in Air India to increase the prospect of successful disinvestment in the carrier.

In a Cabinet meeting chaired by Prime Minister Narendra Modi, the government clarified that substantial ownership and effective control of Air India would continue to be vested in Indian nationals. “Foreign investments in Air India, including that of foreign airlines, shall not exceed 49 per cent either directly or indirectly,” the government said.

This effectively allows a foreign airline to bid for Air India after forming a joint venture with an Indian entity. For example, Singapore Airlines (SIA) can make a bid after forming a joint venture with Tata Sons, provided the Tatas own a majority stake in the venture.

The two entities already own Vistara in a similar arrangement. Tata Sons Chairman N Chandrasekharan had earlier said the group would consider buying Air India if it made business sense.

Last week, Vistara Chief Executive Officer Leslie Thng said Singapore Airlines would consider bidding for Air India. “I think Singapore Airlines has an open mind. It really depends eventually on whether there is a business case. I don’t think we know enough at this moment,” said Thng, a former SIA executive. When asked, an SIA spokeswoman said the airline’s priority was further expansion of Vistara. “However we will keep our options open with respect to proposed disinvestment of Air India,” she added.

An Emirates spokesperson said “Emirates has no plans to buy or acquire any airline. We continue to focus on our organic growth, and will partner with other airlines where it benefits our customers and makes commercial sense.”

Experts welcomed the government’s move. “We see Air India’s disinvestment with active participation from foreign airlines as a major reform. It sends a very important signal to global investors and may result in four to six serious bids,” said Kapil Kaul, chief executive officer-South Asia, of aviation consultancy firm CAPA

Reason for 100% FDI

The International Civil Aviation Organisation (ICAO) guidelines on ownership and control have two aspects. The first involves placing limits on foreign nationals’ ownership of the voting equity share capital of airlines. For instance, the US places a limit of 25 per cent on foreign ownership of its airlines; for Japanese airlines, the limit is 33 per cent; and the European Union (EU) limits non-EU ownership of the airlines of its member-states at 49 per cent.

The second element of the restrictions involve the nationality clauses present in the bilateral air services agreements between countries. In essence, the traffic rights granted under these bilaterals require that airlines benefiting from these rights are substantially owned and effectively controlled by nationals of the state in question.

Although the regulation was not binding and countries were free to set their own terms, India would have to amend the clause in its agreement with countries adhering to the regulations, the official said. “The government has to discuss and convince all the countries in order to change the norms. It is unlikely that the government will want it,” a senior government official said. Air India has flying and landing rights across the world. Among foreign airlines, British Airways, Lufthansa and Qantas, among others, were privatised, but foreign ownership was not allowed.