Mumbai: Jet Airways (India) Ltd, the country’s second largest airline by passengers carried, and Kingfisher Airlines Ltd, which has been grounded since October because of a financial crunch, seem to be inching towards securing foreign direct investment (FDI).
India allows 49% FDI including investment by foreign airlines in a domestic airline and 100% investment by non-resident Indians (NRIs).
While NRI Naresh Goyal-promoted Jet Airways has started the final round of negotiations with the national airline of the United Arab Emirates (UAE), Etihad Airways, Kingfisher Airlines on Thursday restricted its foreign institutional investment (FII) limit to 3% to facilitate FDI up to 46%. It’s not clear who Kingfisher Airlines is talking to.
On Tuesday, Jet Airways started discussions with Etihad for diluting a minority equity stake, according to two persons close to the development. Consultancy firm Ernst and Young is advising the Indian airline, and PricewaterhouseCoopers Pvt. Ltd is advising the UAE airline.
“The meeting is progressing,” one of the persons said, without divulging details.
Shares of Jet Airways gained 7.29% to close at Rs.603.65 on Thursday on the BSE, and Kingfisher Airlines shares rose 4.98% to close at Rs.17.27 apiece, while the benchmark Sensex lost 0.65%. The shares of another listed airline, SpiceJet Ltd, rose 1.48% to close at Rs.48.10.
In the past one month, Jet Airways has gained 62.08%, SpiceJet 39.22%, and Kingfisher Airlines 16.69%, even as the Sensex has gained 3.28%.
On 3 December, Mint reported that Jet Airways will shortly approach the Foreign Investment Promotion Board for permission to tweak its ownership pattern to facilitate an equity investment by Etihad Airways.
While restricting FII investment to 3%, a Kingfisher Airlines note to stock exchanges on Thursday said, “In this connection, it has been advised that a fresh infusion of capital by a financial or strategic, Indian or non-resident investor is a possible alternative.”
FII shareholding in the airline is now at 2.46%.
“With a view to keeping the company’s capital structure in readiness for transactions that may be identified in the future for the benefit of all stakeholders of the company, the board has passed a resolution that no FII, qualified foreign investor or other non-strategic foreign investment (excluding investment by non-resident Indians) shall be permitted in the airline beyond its current level of 3% or such other percentage that the board may decide from time to time,” the airline said.
“This restriction shall be valid till such time as the board may decide from time to time, which shall be intimated to the stock exchanges appropriately,” it said.
“Appropriate steps are being undertaken to intimate RBI (Reserve bank of India) about the same and to seek consequent measures and also to seek any other approvals that may be considered necessary to give full effect to this decision,” the statement to the exchanges added.
The move will allow an overseas airline or other entity to invest in the airline up to 46%. The airline, which needs regulatory permission before it can resume flying, has been in talks with potential overseas investors.
The Kingfisher Airlines note suggests it may be in advanced talks with a foreign company or airline for a potential investment, the experts said, but this may not necessarily suggest fresh investment in the airline as existing shareholders may sell their stakes.
“The latest move means the airline is facilitating the transfer of shares from existing shareholders to new ones. The banks may be looking at exiting the airline,” said an equity analyst who declined to be named.
As of 13 December, Kingfisher’s market capitalization was Rs.1,396 crore, and banks and financial institutions held a 13% stake.
“I have no comments to offer at this point,” said Vijay Mallya, chairman of Kingfisher Airlines.
Kingfisher’s directors discussed ways of improving the financial position of the company in the best interest of all stakeholders at a meeting on 12 December, it told the BSE.
The Mumbai Mirror reported Tuesday that Etihad was close to buying a 48% stake in debt-ridden Kingfisher Airlines for a little over Rs.3,000 crore, and a formal announcement would be made around 18 December, the birthday of Kingfisher promoter Mallya.
Earlier this week, Kingfisher Airlines had said in a release that it was in talks with various investors, including Etihad, but nothing had been finalized. “No agreement has been reached either with Etihad or any other airline, and the matters are merely at negotiation stages,” it said.
The airline was grounded on 20 October, pending a revival plan. As of 30 June, it had accumulated losses of $1.9 billion (around Rs.10,300 crore today) and it owed $2.5 billion to banks and majority shareholders, according to a report by aviation consultant Capa.
The lenders, led by State Bank of India, want Mallya to infuse capital before lending more money to the airline for bailout. They are expected to meet next week to take stock of the situation.
James Hogan, president and chief executive officer of Etihad Airways, told the Financial Times on 11 December that his airline was looking at a couple of opportunities in India and it was “going through the due diligence at the moment. If we believe we can meet the criteria, we’ll then discuss that with our board”. If any deal is done, it would be a minority stake. “We don’t want to take over someone’s airline,” he told the Financial Times.
“The code-share, alliance and ownership arrangements among airlines are changing rapidly for many reasons, such as the understanding by the Gulf-based carriers of the difficulty of remaining independent, relaxation by governments of the ownership rules, and the realignment by airlines of their equity positions to strengthen their networks and balance sheets,” said Nawal Taneja, professor emeritus in the department of aviation at Ohio State University, who writes on aviation.
“All of these movements are different forms of consolidation for airlines to improve their financial positions. As for the movement of the UAE carriers to form relations with airlines based in India, the strategies could be mutually beneficial if the India-based airlines are willing to listen to their foreign partners and adapt to the changing marketplace,” Taneja said.
On Thursday, Emirates said it amended its partnership with Jet Airways to offer more choice and seamless connections to customers for flights to and from Dubai. This will also benefit Emirates frequent flyers, it said in a statement.
A senior Jet Airways executive, requesting anonymity, said the airline had sought permission for such partnerships with several airlines. The Emirates approval has just come through, this person said.