Active Stocks
Mon Dec 04 2023 15:47:26
  1. Power Grid Corporation Of India share price
  2. 212.9 1.21%
  1. Reliance Industries share price
  2. 2,421 1.15%
  1. State Bank Of India share price
  2. 594.65 3.99%
  1. HDFC Bank share price
  2. 1,609.05 3.44%
  1. Tata Steel share price
  2. 130.95 0.77%
Business News/ Politics / Policy/  What does 100% FDI in aviation mean?
Back Back

What does 100% FDI in aviation mean?

While FDI up to 49% will be permitted under the automatic route, FDI beyond 49% will come through government approval

For non-resident Indians (NRIs), 100% FDI will continue to be allowed under the automatic route. Photo: HTPremium
For non-resident Indians (NRIs), 100% FDI will continue to be allowed under the automatic route. Photo: HT

Mumbai: India has decided to allow overseas entities—excluding airlines—to own 100% in domestic airlines as it seeks greater foreign direct investment (FDI) inflows into the country. This is against the current 49% FDI limit under the automatic route in domestic airlines (scheduled air transport service/domestic scheduled passenger airline and regional air transport service).

It has now been decided to raise this limit to 100%, with FDI up to 49% permitted under the automatic route and FDI beyond 49% through government approval. For non-resident Indians (NRIs), 100% FDI will continue to be allowed under the automatic route.

Here’s how the new rules will play out for different entities and investment scenarios.

Foreign airlines

While the foreign airlines are keen to have a 100% stake in Indian airlines, they have been excluded.

Investment by foreign airlines in domestic airlines will be limited to 49% of paid-up capital, the government said on Monday.

The Indian market is wooing foreign airlines.

India’s domestic traffic soared 21.8% in April, marking the 20th month of double-digit growth and the 13th consecutive month in which it led traffic in domestic markets worldwide.

According to the International Air Transport Association (IATA), which represents some 260 airlines that make up 83% of global air traffic, growth in India is being propelled by a comparatively strong economic backdrop as well as by a substantial increase in service frequencies.

Jet Airways (India) Ltd had sold a 24% stake to Etihad Airways PJSC in 2013.

Vistara, run by Tata SIA Airlines Ltd, is a joint venture between Tata Sons Ltd (51%) and Singapore Airlines Ltd (49%), while AirAsia India is a joint venture in which AirAsia Bhd holds 49% and Tata Sons 51%.

“Etihad Airways is a committed, long-term partner and investor in India. In 2013, we became the first international airline to invest in an Indian carrier—Jet Airways—under the then FDI rules. We value our strategic partnership with Jet Airways and will carefully examine the government of India’s decision made on a revision of the FDI rules in the civil aviation sector," Etihad Airways spokesperson said.

The spokesperson did not divulge details whether the Abu Dhabi airline is keen on increasing its stake from 24% to 49%.

However, AirAsia Group Bhd’s founder and group chief executive officer Tony Fernandes told CNBC on Monday that his airline would like to increase its stake in its Indian unit, AirAsia India, given a chance.

Foreign entities

But there are indeed some silver lines in the FDI policy, experts say.

Foreign entities are allowed to invest up to 100% in local airlines.

“The 100% FDI could make Indian airlines interesting to foreign capital markets that could support initial public offerings without worrying about foreigner ownership limits," said Craig Jenks, president at New York-based consultancy firm Airline/Aircraft Projects Inc.

Pankaj Sharma, executive director, head of equities, Equirus Capital Ltd, said the FDI relaxation will make existing operating airlines a good vehicle for many overseas companies that will be favourably inclined towards India and will be looking to have or want to increase their exposure in the country.

Another senior analyst with an Indian brokerage, who did not want to be named, said the FDI relaxations are welcome as it is will bring useful capital to a beleaguered sector.

He pointed out that the real implications are not much for existing scheduled airlines, but for regional carriers under the new civil aviation policy.

“They will be attracted, provided the subsidy mechanism has a state buy-in and enough airport infrastructure is upgraded to make operations viable," he said.

Currently, India has 10 airlines, including scheduled and regional airlines. They are IndiGo (run by InterGlobe Aviation Ltd), Jet Airways, Air India Ltd, GoAir (Go Airlines (India) Ltd), SpiceJet Ltd, AirAsia (India) Pvt. Ltd, Vistara, regional airlines Air Costa Aviation Pvt. Ltd, Air Pegasus (Decor Aviation Pvt. Ltd) and TrueJet (Turbo Megha Airways Pvt. Ltd).

Last week, the civil aviation ministry had announced a complex regional connectivity policy that seeks to connect unconnected towns with the help of viability gap funding. This will be done by capping fares at about 2,500 for those routes and helping airlines with some funding to ply them. The funds will be generated by charging a cess on other domestic flights.

Business case for investment

The senior analyst quoted earlier also cautioned that the existing airlines need relaxation in other rules (on directors, route dispersal norms, minimum domestic flying, on grandfathered schedules and routes, crew flying permits, among others) to attract foreign capital.

“Going forward, if the government decides to take other measures including reducing cost of doing business like rationalisation of input costs, then incrementally this opening up of the sector may yield some positive results," said K.G. Vishwanath, a partner at consulting firm Trinity Aviation Consultants Pte Ltd of Singapore and former vice-president (commercial strategy and investor relations) at Jet Airways.

Vishwanath said India already has 49% which has not been utilised. He added that he does not see any informed international investors taking a big stake in Indian aviation companies.

Brownfield and greenfield airports

On Monday, the government also had something for airports.

According to the government, the extant FDI policy on airports permits 100% FDI under automatic route in greenfield projects and 74% FDI in brownfield projects under automatic route. FDI beyond 74% for brownfield projects is under government route.

Brownfield airports are existing airports such as airports in Mumbai and Delhi, while greenfield airports are those that are built from scratch such as Hyderabad and Bengaluru airports.

Consultancy firm Capa India estimated that India needs $30-40 billion capital for modernizing airport infrastructure in the next 10-15 years.

Capa India’s chief executive officer and director Kapil Kaul said the move on airports is beneficial for the GMR Group (that runs Delhi and Hyderabad airports) and GVK Group (that runs Mumbai and Bengaluru airports), given their plans to raise investment in their existing assets.

Airports Authority of India

However, Kaul said most of brownfield airports are owned by state-run Airports Authority of India (AAI), making restructuring of AAI critical.

“The government has to recognize that most of top 45 AAI airports will saturate in the next 3-5 years, necessitating the need for a second airport in most of these airports. We need clarity on what happens when the second airport is planned? Will the investors come on board now till such crucial clarity is given? Most of these airports cannot have second airport operations simultaneously due to traffic size. Does the current policy of closing current airports when new greenfield airports become operational continue when new investors come on board?" Kaul asked.

Capa believes restructuring of AAI is critical to allow long-term capital flows but restructuring will take time and will not be easy.

“Continuing AAI in the present form is neither practical nor feasible. AAI needs to be broken into smaller and manageable entities with professional investors and management. CAPA looks forward to government decision on AAI and till there is clarity on this crucial aspect, not much can be expected," Kaul added.

Milestone Alert!
Livemint tops charts as the fastest growing news website in the world 🌏 Click here to know more.

Catch all the Elections News, Politics News and Updates on Live Mint. Download The Mint News App to get Daily Market Updates & Live Business News.
More Less
Updated: 21 Jun 2016, 04:06 PM IST
Next Story footLogo
Recommended For You
Switch to the Mint app for fast and personalized news - Get App