The Cabinet Committee of Economic Affairs
("Committee") on September 14, 2012 approved the proposal
of Department of Policy and Promotion ("DIPP") for
permitting foreign airlines to make Foreign Direct Investment
("FDI") in the aviation sector. Once the proposal is
implemented, the prevailing restriction on foreign airlines from
investing in the airline business will be removed. Prior to the
change in policy, foreign airlines were permitted to invest and
participate in equity only in companies operating cargo airlines,
helicopter and seaplane services.
The change in FDI shall permit foreign airlines to invest in
"scheduled and non-scheduled air transport services." The
investment will be allowed under the approval route up to a maximum
of 49%. In addition to this, any investment in the aviation sector
must also comply with the relevant regulations of Securities
Exchange Board of India such as the Issue of Capital and Disclosure
Requirements Regulations/Substantial Acquisition of Shares and
Takeovers Regulations, as well as other applicable rules and
The announcement by the Committee also lists certain specific
conditions which form the basis for permitting FDI up to 49% by a
foreign airline. Firstly, for a Company (in which 49% FDI has been
allowed ) to obtain a scheduled operator's license, its
principal place of business and registered office must be in India,
the Chairman and at least two- third of the directors of the
company must be Indian citizens and substantial ownership and
effective control should be in the hands of Indian nationals.
Secondly, any foreign national who will be associated with Indian
scheduled or non-scheduled operations, i.e. who will be appointed
to the board of the Indian airline which has received FDI, must
also go through and obtain security clearance, presumably from the
Ministry of Home Affairs before beginning any work in India.
Lastly, the Committee has also mentioned that all import of
technical equipment as a result of the investment under the 49%
limit must be approved by the Ministry of Civil Aviation. Though
these specific conditions have been mentioned, the directives for
implementation are yet to be announced and it is likely that these
directives will be made public by mid October.
From a general reading of the conditions mentioned by the
Committee, it is apparent that the grant of FDI to foreign airlines
is simply to bolster the ailing Indian Aviation sector by access to
another avenue for funds and equity infusion. It is evident that
the intention is to ensure that control and management of Indian
Scheduled airlines stays in Indian hands. While the permission for
FDI by foreign airlines has been long anticipated for rescuing the
aviation industry in India, whether this strategy will succeed
remains to be seen. In our opinion, introduction of direct
investment and involvement by foreign airlines will do much for
raising the standards of service in the aviation sector, there is
also a possibility, though remote, of cartelization by foreign
airlines which may not only render the strategy of the government
for reviving the aviation sector ineffective, but also adversely
affect the struggling Indian airlines.
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Nishith Desai Associates is a research-based Indian law firm with offices in Mumbai, Silicon Valley, Bangalore, Singapore, Mumbai BKC, Delhi and Munich that aims at providing strategic, legal and tax...
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