BackJet, Etihad seek to ensure no change in policy ahead of deal
PM’s cancelled visit to UAE negative twist, say analysts; Jet plans to take $300 million loan from Etihad banks
Premium(Ramesh Pathania/Mint)
Mumbai: Jet Airways (India) Ltd and Abu Dhabi-based Etihad Airways PJSC are examining ways to secure an assurance from the Indian government against any policy changes that could affect their potential deal, according to two persons familiar with the situation.
Jet’s plan to sell a 24% stake to Etihad for over $300 million ran into a hurdle over the United Arab Emirates (UAE) airline’s concern that it may be forced to jettison the holding if the Indian government changes its policy.
Prime Minister Manmohan Singh was expected to assuage such worries during a visit to the UAE en route to South Africa for a BRICS (Brazil, Russia, India, China, South Africa) Summit on 26-27 March. Press Trust of India reported on 12 March that the visit had been cancelled because of scheduling issues.
The acquisition was to have been announced during commerce minister Anand Sharma’s current visit to the UAE.
“The unexpected cancellation is a negative twist in the Jet-Etihad deal," said one of the persons mentioned above. “Prime Minister’s visit was expected to clear the air. But both airlines are examining other options to extend a comfort to UAE."
Both the persons familiar with the situation declined to be identified.
The deal is still on track, with Jet Airways, India’s second largest airline by passengers carried, expected to get loans of about $300 million from lenders of Etihad Airways at a 3% interest rate, the person quoted above said.
“Jet Airways is expected to take a loan of $150 million from the banks of Etihad Airways at cheaper rates against the security of frequent flyer programme of Jet Airways. The banks are working out to extend another $150 million to Jet Airways at 3% interest rate with the backing of Etihad," this person said.
Spokespersons of Etihad and Jet Airways did not offer any comments for this story.
Etihad’s fears aren’t unfounded.
In 1993, Kuwait Airways and Gulf Air each bought a 20% stake in Tailwinds Pvt. Ltd, an overseas firm owned by London-based non-resident Indian (NRI) Naresh Goyal, that held all of Jet Airways’ stock at the time. In April 1997, the aviation ministry asked Jet to conform to the rule that overseas airlines shouldn’t hold stock in Indian airlines, resulting in Goyal being forced to acquire the 40% holding.
The government allows 100% investment by an NRI in an Indian airline.
The rule was relaxed in September to allow up to 49% investment by an overseas carrier in an Indian airline, after which Jet and Etihad began talks.
Jet Airways is expected to sign an agreement to lease its Airbus 330 planes to Etihad Airways, thereby raising some more money to clear its high-cost debt.
The UAE airline purchased the Heathrow slots of Jet Airways for $70 million recently.
“The purchase is part of a sale and lease back agreement signed on 26 February 2013. Jet Airways will continue to operate flights to London utilizing these slots... As previously advised, Etihad Airways continues to progress discussions about further investment in Jet Airways," Etihad said in a statement late February.
Meanwhile, Jet Airways has sought a clarification from the Foreign Investment Promotion Board (FIPB) for transferring Tailwinds holding to its promoter Goyal.
Goyal, who holds his stake through Tailwinds, registered in the tax haven Isle of Man, owns 80% in Jet Airways and the balance stake is held by public shareholders.
An FIPB official, requesting anonymity, confirmed the development.
Goyal had made the investment through Tailwinds in the mid-1990s.
The Reserve Bank of India has since ended the concept of overseas corporate bodies, or OCBs, and investments by such entities are now considered foreign holdings.
FIPB in 2011 had disallowed a Jet Airways’ proposal to raise $400 million through a qualified institutional placement because this would have raised the foreign investment in the airline.
Though an investment through an OCB is considered a foreign investment, Goyal has so far been enjoying a relaxation from the norm.
He will now transfer the stake to himself as an NRI to ensure the entry of another foreign entity.
On Wednesday, shares of Jet Airways ended trading at ₹ 575.95 on BSE, up 1.19%, while India’s benchmark index Sensex fell 1.03% to 19,362.55 points.
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