Majority foreign stake puts curbs on overseas flights

Airlines with a majority foreign ownership will not be allowed to fly on international routes, senior Civil Aviation Ministry officials said on Tuesday. On Monday the government liberalised norms in the sector, allowing foreign investors to own up to 100 per cent stake in domestic carriers.

The bilateral air traffic agreements that India has signed with most of the countries have ‘substantial ownership and effective control’ (SOEC) clause which may not permit the airlines with majority foreign ownership to fly abroad from India, a senior Ministry official said.

At present, India has bilateral air service agreements with 109 countries. “The SOEC clause is applicable at two places – at the stage of air operators’ permit and for bilateral rights to fly abroad,” said another senior official.

The ICAO template on air services agreements says the SOEC norms in bilateral agreements address “potential concerns such as safety, security or other economic aspects including potential emergence of “flag of convenience.” However, the template is not binding and the countries are free to set their own terms. India will have to amend the SOEC clause in its agreement with a particular country for allowing an airline with majority foreign control to fly abroad, an official said. “At present, only a couple of countries that India has bilateral agreements with do not acknowledge the SOEC norms,” the official added.

Some analysts feel that foreign players may not be attracted to set up airline in India only to fly on domestic routes. “No foreign airline is likely to come in primarily to serve the domestic market, and why? In case any country does not agree to such a change, it may need to be resolved diplomatically,” said Amber Dubey, partner and India head of aerospace and defence at global consultancy KPMG.

“FDI brings more competition and that is the biggest vitamin pill which any sector can have. More investment will lead to more competition and the customers will gain. India is a huge aviation market and everybody recognises that. Where will an investor see 21 per cent growth with potential growth for the next decade,” Civil Aviation Secretary RN Choubey told

The Hindu .

Substantial ownership

Once the new FDI policy is notified, domestic airlines can sell its full stakes to foreign investors and not worry about the SOEC norms as the civil aviation ministry will amend the Aircraft Rules to dilute the rule. According to existing norms, air operator permit will only granted to a company if its Chairman and two-third Directors are Indian citizens and its substantial ownership and effective control is vested in Indian nationals.

“The FDI circular will supersede all the existing rules. The SOEC provisions will be diluted in the Aircraft Rule,” said a third civil aviation ministry official.

The government will set parameters to ensure due diligence goes into allowing foreign carriers to set up an airline with foreign investors. “The government will look into whether appropriate arm’s length has been maintained by the foreign carrier with the other investors or not,” said an official. The new FDI norm allows a foreign carrier to only invest up to 49 per cent to set up an airline in India but the rest, up to 51 per cent, can come from either local or foreign investors.

A foreign airline can tie up with airports, sovereign fund or other private investors to set up an airline in India, officials said.