In a bid to liberalise the skies, the Commerce and Industry Ministry has reportedly circulated a draft Cabinet note for inter-ministerial consultations recommending allowing foreign airlines to pick up stake in domestic carriers with a 26 per cent foreign direct investment (FDI) cap.
The proposal, mooted by the Department of Industrial Policy and Promotion (DIPP) under the Ministry, could come as a major breather to some of the airlines such as Vijay Mallya-led Kingfisher airlines, which are cash strapped and struggling for survival. However, domestic players, including Jet Airways, are opposing any kind of FDI in the aviation sector.
The draft note proposes 26 per cent FDI in domestic carriers, something that has been opposed by the Civil Aviation Ministry which is against allowing foreign carriers to invest in their Indian counterparts on the grounds that it was not a practice in majority of the countries like the US. The note has stated that foreign players are least interested in to invest in an Indian entity with a 24 per cent equity cap suggested by the Aviation Ministry. For foreign players, such a low stake will not be acceptable as it would not give a right to block a special resolution in a company. Any equity holding greater than 25 per cent gives a right to block a special resolution.
Major players in the domestic sector feel that fledgling Indian carriers would be susceptible to hostile takeovers if enhanced FDI is allowed. Interestingly, the Federation of Indian Airlines, an umbrella body of Indian carriers, says: “it is important that India seeks reciprocal opening of the airline industry in other countries, before allowing open access of its market to foreign carriers". In an environment where restrictive foreign ownership in the airline industry is the norm, this protects the foreign carriers from both targeting Indian carriers for acquisition and also using bilateral air service rights to their advantage,” the FIA says in its discussion paper.
Those opposing entry of foreign carriers feel that these airlines, with deep pockets, could play havoc with the domestic market. They could also artificially lower the price of air travel to kill domestic competition. Similar laws barring investment by foreign airlines prevail in several countries, including the U.S. and Canada. The U.S. limits the amount of foreign ownership in its domestic airlines to a maximum of 25 per cent.