FDI in airlines may hit air pocket with Centre’s circular on ownership

Effective control of airline even with 100% FDI needs to be with an Indian national.

July 05, 2016 02:52 am | Updated November 17, 2021 04:06 am IST - NEW DELHI:

Kochi, Kerala, 18/09/2013: Airplanes in their parking positions at the Cochin International Airport Limited. The State government is about to pen to the Union Government asking it to regulate airlines from charging exorbitant fares during peak season traffic. 
Photo: Thulasi Kakkat

Kochi, Kerala, 18/09/2013: Airplanes in their parking positions at the Cochin International Airport Limited. The State government is about to pen to the Union Government asking it to regulate airlines from charging exorbitant fares during peak season traffic. Photo: Thulasi Kakkat

Experts have described as ‘contradictory’ and ‘confusing’ a circular issued by the Centre stating substantial ownership and effective control (SOEC) of airlines should vest with Indian nationals as it runs contradictory to its decision to raise > foreign direct investment (FDI) limit in airlines to 100 per cent .

The Department of Industrial Policy and Promotion (DIPP) had issued the circular retaining the clause which said substantial ownership and effective control (SOEC) should vest with Indian nationals.

“Hundred per cent FDI with substantial ownership and control lying with Indian nationals is contradictory, baffling and has created needless confusion,” said Amber Dubey, Partner and India Head of Aerospace and Defence, KPMG.

‘No change’ While the DIPP circular mentions that 100 per cent FDI equity is permitted for scheduled domestic airlines and regional air transport services, it also adds that “there is no change in the Other Conditions mentioned in the FDI policy for this sector.” The other conditions for the civil aviation sector, in the FDI policy (2016), clearly mention that an air operator permit will be granted to a company only if it is registered in India, the Chairman and two-thirds of its directors are Indian citizens and substantial ownership and effective control is vested in Indian nationals.

Amending rules “Either the government has to change the conditions (of the FDI policy) or amend some rules,” said Devraj Singh, Executive Director – Tax and Regulatory Services, EY. “Unfortunately or fortunately, they have deliberately mentioned that other conditions will remain the same.”

There was no clarity on the ownership clause for foreign airlines among both the civil aviation ministry and the DIPP.

“Please ask the civil aviation ministry about the other conditions. As far as we are concerned, the conditions remain the same,” a senior DIPP official said.

At least two officials in the civil aviation ministry said the DIPP circular supersedes all other rules and the effective control of the airline with even 100 per cent FDI needs to be with an Indian national. “The FDI circular supersedes all existing rules,” said Civil Aviation Secretary R. N. Choubey. “It is necessary to amend the rules related to SOEC. If required, we will seek a clarification from DIPP,” he said.

‘Avoidable confusion’ “This avoidable confusion smacks of undue haste and lack of coordination between Prime Minister’s Office, DIPP and Civil Aviation Ministry,” KPMG’s Mr. Dubey said. “We hope these three important drivers of aviation reforms sit down together and sort this out, as of yesterday. It has taken some sheen off the huge goodwill generated by first ever aviation policy released since independence.”

Domestic airlines have opposed the opening up to more FDI.

The issue must be dealt with on the basis of reciprocity, according to Ajay Singh, Chairman and Managing Director, SpiceJet. He argues that it cannot be that countries outside India won’t allow Indian companies to go own and effectively control airlines in their country whereas India allows foreign airlines to do the same.

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