The Cabinet Committee on Economic Affairs on Friday relaxed norms for foreign direct investment in the aviation sector, allowing international airlines to invest in domestic peers. It has overridden the opposition of its ally Trinamool Congress on this.
Today’s decision means that global airlines can now invest up to 49 per cent in the aviation sector. Previous FDI rules allowed foreign entities other than airlines to own, directly or indirectly, an equity stake of up to 49 per cent in Indian carriers.
Reacting to the decision, Captain G.R. Gopinath, founder of Deccan 360, said: "The order issued is very good for the sector and, importantly, for the common man. As long as it’s an Indian-owned company, it is a good move...hope there is no retraction in the policy."
"Allowing foreign airlines to invest in civil aviation will bring in much needed capital into the industry, thereby enabling healthy re-capitalization of airline companies, promoting vital connectivity and bringing benefits to all stakeholders including banks," CII president Adi Godrej said.
The move comes a day after the government took the politically tough decision to hike the price of diesel by Rs 5 per litre and also capped the supply of subsidized liquefied petroleum gas (LPG) cylinders to six per household. Allies and Opposition parties alike have slammed it and demanded a rollback, but, faced with the threat of becoming the first in the BRICS (Brazil-Russia-India-China-South Africa) group of emerging economies to be downgraded to junk, the government now seems clear that economic imperatives outweigh political expediency.
That signal has brought cheer to industry and the markets, which surged today in anticipation of reforms, with the Sensex clocking the biggest one-day gain in 10 months. The BSE benchmark index closed at 18,464.27, up 443 points or 2.46 per cent—a 14-month high.
Relaxing FDI norms in aviation is expected to help provide much-needed cash flow to India's bleeding private airlines. It is also expected to result in technology upgradation both in ground handling and flight operations as it will get into the industry some best international management practices and equipment.
Although a 49 per cent stake gives the investors minority shareholder control, they will get the right to block a special resolution. The government has attempted to cover most areas of concern voiced by political parties. A cabinet note accessed by NDTV says it is proposed that the chairman and two-thirds of the board of any domestic airline receiving FDI will need to be Indians, and substantial ownership and control will remain with Indian nationals.
Security implications and the need to ensure that no dubious investor takes advantage of this has been a constant concern and the new proposal incorporates suggestions not just by the Aviation Ministry but also the Home Ministry. It proposes that all foreign nationals participating in the venture will need security clearance. Equipment imports will have to be vetted by the aviation ministry.
Shares in debt-laden Kingfisher Airlines surged 14 per cent on hopes of foreign direct investment being allowed in India's airlines. Other aviation stocks - SpiceJet and Jet Airways - also traded with strong gains amid a broad rally in the markets Friday. While Kingfisher shares ended the day’s trading at Rs 10.81, up 7.88 per cent on the BSE, SpiceJet rose 4.39 per cent to close at Rs 34.50. Jet Airways closed at Rs 368.35, a gain of 1.97 per cent.
The FDI will apply to scheduled private operators—those that run regular operations—like Jet Airways, Indigo, SpiceJet, Kingfisher, JetLite and Go Air. There are also some regional scheduled private players.
Opening the sector to foreign airlines is likely to mean good things for passengers. More competition is likely to result in more competitive fares and better services. Better international connectivity will also be a likely fallout.
Airlines like Vijay Mallya’s Kingfisher have been pushing for FDI to boost the sector, but the airline industry is divided on this. More successful players like Indigo and Jet have expressed reservations in the past that allowing global players in will lead to cartelization and takeovers of Indian carriers.
There have been political hurdles. The Trinamool, which opposes FDI per se, did not send its one Cabinet minister Mukul Roy for today’s meeting. Mr Roy was also absent at a yesterday's meeting of the Cabinet Committee on Political Affairs, which decided on the diesel price hike. The government is already facing the heat from its allies and the Opposition alike after announcing a hike in diesel prices by Rs 5 per litre, but sources say this time it is resolute that there shall be no rollback this time.