India’s government allows foreign airlines to buy up to 49 percent stake and opens up retail sector to foreign investment

September 17, 2012

Business, International

India’s Foreign Direct Investment in aviation: Moving to the next level

India Brand Equity Foundation

NEW DELHI- In a bid to infuse liquidity in the civil aviation industry, the Indian government relaxed the Foreign Direct Investment (FDI) norms in the sector by allowing foreign airlines to buy up to 49 per cent stake in local carriers. It should be noted here that as per the earlier norms, foreign investors were allowed to invest up to 49 percent in the local carriers but only if foreign investors were directly or indirectly not related to the aviation industry.

As per the new policy, the investment limit of 49 percent for foreign airlines in local airlines includes both foreign institutional investments and foreign direct investment, according to a government document.

Here is the full text of the government approval on the proposal of allowing FDI in civil aviation sector:

The Cabinet Committee on Economic Affairs (CCEA) has approved the proposal of the Department of Industrial Policy and Promotion (DIPP) for permitting foreign airlines to make foreign investment, up to 49 per cent in scheduled and non-scheduled air transport services.

Removing the existing restriction on investment by foreign airlines would assist in bringing in strategic investors into the civil aviation sector. Higher foreign investment inflows are necessary at the present juncture, in order to strengthen the sector. Introduction of global best practices, concomitant with the induction of FDI from foreign airlines, is expected to lead to higher service standards, international best practices and induction of state-of-the-art technologies, in the air transport sector.

Until now, foreign airlines were allowed to participate in the equity of companies operating cargo airlines, helicopter and seaplane services, but not in the equity of an air transport undertaking operating scheduled and non-scheduled air transport services. The Government has now permitted foreign airlines to invest, under the Government approval route, in the capital of Indian companies operating scheduled and non-scheduled air transport services, up to the limit of 49 per cent of their paid up capital. The 49 per cent limit will subsume FDI and FII investment. The investments so made, would need to comply with the relevant regulations of SEBI, such as the Issue of Capital and Disclosure Requirements (ICDR) Regulations / Substantial Acquisition of Shares and Takeovers (SAST) Regulations, as well as other applicable rules and regulations. Such investment would further be subject to the conditions that:

A Scheduled Operator’s Permit can be granted only to a company:
That is registered and has its principal place of business within India,
The Chairman and at least two-thirds of the Directors of which are citizens of India, and
The substantial ownership and effective control of which is vested in Indian nationals.
All foreign nationals likely to be associated with Indian Scheduled and Non-Scheduled air transport services, as a result of such investment, shall be cleared from security view point before deployment, and
All technical equipment that might be imported into India, as a result of such investment, shall require clearance from the relevant authority in the Ministry of Civil Aviation.

The issue of permitting FDI by foreign airlines in the equity of an air transport undertaking operating Scheduled and Non-Scheduled air transport services has been under consideration of Government for some time. There has been a need to consider financing options available for private airlines in the country, for their operations and service upgradation, and to enable them to compete with other global carriers. Denial of access to foreign capital could result in the collapse of many of our domestic airlines, creating a systemic risk for financial institutions, and a vital gap in the country’s infrastructure.

The total FDI inflows into the air transport sector, during January, 2000 – April, 2012, were US$ 434.75 million, constituting only 0.25 per cent of the total FDI inflows into the country.


India Airlines Least in Need May Gain Most From New Owner Rules

By Siddharth Philip and Vipin Nair
Bloomberg News

India’s decision to allow local airlines sell stakes of as much as 49 percent to overseas carriers may be of most benefit to operators least in need of investment.

SpiceJet Ltd. (SJET), which has said it’s in “no rush” for funds, may be the most appealing target for foreign investors because of the discount carrier’s low debt and record of profitability, said Sharan Lillaney, an Angel Broking Ltd. analyst. Kingfisher Airlines Ltd. may struggle to win investment, even as billionaire Chairman Vijay Mallya seeks new financing, after posting at least five straight annual losses.

“The biggest beneficiary will be SpiceJet as it has lower debt and a decent brand image,” Lillaney said. “Kingfisher needs to restructure its balance sheet and convert debt into equity before it can look at attracting any foreign investment.”

The two carriers and Jet Airways (India) Ltd. rose Sept. 14 on speculation the rule change will help the industry win funds following years of losses caused by price wars, high fuel taxes and a weaker rupee. Prime Minister Manmohan Singh’s government announced the end of the ban along with a similar easing for retailers as its moves to open up Asia’s third-biggest economy.

Kingfisher Debts
Kingfisher (KAIR) has said it is in talks on investment that depend up regulatory changes as it struggles under an 86 billion rupee ($1.5 billion) debt pile. The carrier has also cut two- third of services, grounded planes and halted international flights in a bid to end losses.

“I am skeptical whether Kingfisher is able to attract” foreign investment, said Nikhil Vora, Mumbai-based managing director at IDFC Securities Ltd. “Kingfisher’s significant leverage on its balance sheet makes it a challenging proposition for any buyer.”

The airline, named for liquor tycoon Mallya’s flagship beer, needs an immediate capital infusion of $600 million for a turnaround, according to CAPA – Centre for Aviation. The company’s founders will need to provide at least half of this before talks with a foreign airline could begin, the research company said.

Kingfisher has only an “outside chance” of selling a stake compared with SpiceJet and Go Airlines (India) Ltd., CAPA said in an e-mailed statement. The carrier has a long-term debt to total capital ratio of 162 percent, according to data compiled by Bloomberg. That compares with 76 percent for SpiceJet and 58 percent for Mumbai-based Jet Air.

Kingfisher has plunged 58 percent in the past year in Mumbai trading. SpiceJet has jumped 44 percent and Jet Air has climbed 35 percent. India’s three other main carriers, state- owned Air India, IndiGo and Go Airlines are all closely held.

Kingfisher Re-Engagement
The easing of the investment rules will help Kingfisher re- engage with prospective airline investors “in a more meaningful manner,” Prakash Mirpuri, a spokesman, said in a Sept. 14 text message. The carrier will also move toward re-capitalization and ramp up its operations, he said.

SpiceJet Chief Executive Officer Neil Mills didn’t answer calls to his mobile phone on Sept. 14. GoAir Managing Director Jeh Wadia, IndiGo President Aditya Ghosh and Jet Air Chief Operating Officer Sudheer Raghavan also failed to answer calls the same day.

Kingfisher posted a 6.5 billion rupee loss in the quarter ended June, compared with 2.6 billion rupees a year earlier. SpiceJet and Jet Air both posted profits in the period.

Non-airline investors from overseas were allowed to hold as much as 49 percent in local carriers before the rule change.

Gulf Airlines
Middle East airlines may be the most likely to buy into Indian carriers because of their geographical proximity, existing service connections and state backing.

Qatar Airways Ltd. Chief Executive Akbar Al Baker said in April that that anyone who didn’t want to invest in China or India “must be crazy.”

The country’s annual passenger numbers may surge to 180 million by 2020 from 61 million last year as rising wealth makes travel affordable to more people, according to a government forecast. Qatar Air declined to comment by e-mail yesterday.

Abu Dhabi-based Etihad Airways PJSC said yesterday equity investments are an “important evolution of its successful partnership strategy.” The carrier already has stakes in Virgin Australia Holdings Ltd., Air Seychelles Ltd. and Air Berlin Plc.

“The Indian aviation industry offers tremendous potential, with significant passenger movement on domestic and international sectors,” it said without commenting on whether it wanted to buy into a local carrier. The airline will add flights to a ninth Indian city, Ahmedabad, in November, it said.

Low-Cost Ventures
Low-cost Asian airlines may also look to expand in India following the rule change, possibly through new ventures, said CAPA. AirAsia Bhd. (AIRA), the region’s biggest discount carrier, declined to comment Sept. 14. Qantas Airways Ltd.’s budget arm Jetstar will focus on its recently opened venture in Japan and planned operation in Hong Kong before considering more affiliates, said Andrew McGinnes, a spokesman. FlyDubai, where SpiceJet CEO Mills used to work, has no plans to invest in other airlines, it said yesterday.

Dubai-based Emirates, the world’s largest international airline, also “has no plans to acquire a stake in another airline in India or anywhere else,” it said. British Airways’ parent, International Consolidated Airlines Group SA (IAG), and Deutsche Lufthansa AG both said Sept. 14 that they had ruled out investments in Indian airlines. Air France-KLM Group declined to comment.

‘Destroy the Market’
IAG Chief Executive Officer Willie Walsh said in April that India was “a great example of where governments interfere and destroy the market.” The Indian government said the same month that state-owned Air India may get 300 billion rupees of bailouts through 2020 if the unprofitable carrier hit performance goals.

India’s “regulatory bottlenecks” and “exorbitant” fuel taxes may also cause overseas carriers to shun direct stakes in favor of cooperation with local carriers, said K. Ajith, a Singapore-based airline analyst at UOB-Kay Hian Research. “An equity investment might not be able to change the dynamics.”

SpiceJet is adding more planes and routes helped by backing from billionaire Chairman Kalanithi Maran. The carrier, which operates about 300 flights a day to around 36 cities, had a market share of 18 percent in July about the same as Air India. Discount carrier IndiGo and Jet Air both had about 27 percent, with Kingfisher on 3.4 percent, according to data from the Directorate General of Civil Aviation.

CEO Mills said in an interview last month that SpiceJet would be “attractive” to foreign investors. He also said the company had received interest from two private-equity funds and that it was in “no rush” for new investment. The airline has 10 billion rupees of short and long-term debt, according to data compiled by Bloomberg.

“Potential investors would look for a robust balance sheet and a robust business model,” said Mahantesh Sabarad, an analyst at Fortune Equity Brokers India Ltd. “Both exist for SpiceJet.”


India opens up its retail sector to foreign investment

India Brand Equity Foundation

NEW DELHI- The Union Government made a major policy announcement permitting Foreign Direct Investment (FDI) in its retail sector. The lucrative Indian retail market, currently dominated by domestic players will now be open to investment from foreign players, who have been eyeing the burgeoning Indian retail sector for some time now.

Under the new policy, the government has announced FDI of 51 percent for the multi-brand retailers that are interested in setting up operations in India. At the same time, the government also allowed 100 per cent FDI in single-brand retail.

With this policy change, the multinational retailers would now be able to sell directly in India and benefit from the growing middle class Indian population. As per the policy structure, the minimum FDI limit in single-brand retail has been set at US$ 100 million and half of the investment has to be made in areas like cold storage chains and warehouses.

It is expected that allowing FDI in single brand and multi-brand retail would create jobs in the locations where they will open up stores also in the procurement chain. An important condition in the single-brand FDI policy is that the companies will need to fulfil the requirement of 30 per cent local procurement while doing business in India. Any company that is looking for a waiver of the mandatory 30 per cent local sourcing norms would have to set up a manufacturing facility in the country.


Video: India welcomes aviation investment


Video: The FDI politics continue to keep the pressure on the government


Video: Industry reaction to Foreign Direct Investment (FDI)



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Population: 1,205,073,612 (July 2012 est.)


Some airlines of India

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