Now that Naresh Goyal is set to exit the board of Jet Airways, prospects of the beleaguered airline attracting new investment and averting a collapse are starting to look up. But this outcome by itself would only offer temporary relief, and, contrary to expectations, could end up working against the interest of its lenders that are expected to take charge. On Monday, Jet announced that Goyal, who founded the airline more than two decades ago, will resign as chairman and quit its board. His wife and a nominee of Etihad (which owns a 24% stakein Jet), will also step down as directors. In an arrangement that would see Jet’s debt converted to equity, Goyal’s stake might get diluted to about a quarter, although it isn’t clear exactly how much of its ownership pie will end up with the banks. What is certain, though, is that the carrier is in their hands now, with an interim panel being set up to manage its operations. These banks say they will inject ₹1,500 crore into Jet to help it stay airborne.
Technically, Goyal’s resignation means that various other scenarios could yet emerge. For one, Etihad may revive an interest in upping its ownership to 49%, which is the most any foreign investor is permitted to own of an Indian carrier. This looks unlikely, however, given that Etihad has financial troubles of its own. It had offered to sell its stake to State Bank of India (SBI), Jet’s chief lender, which suggests it is keen to exit. For another, Jet could have found a new investor waiting in the wings to buy in. But this does not look likely either,considering the extent of due diligence any such deal would require. That leaves thepossibilities which arise from state-owned banks gaining control of Jet. Note that an SBI proposal to convert its loans into shares has already been approved by the airline’s board. The government could now have the banks either find a strategic buyer to offload Jet’s shares, or sell these to a state-run institution such as the National Investment and Infrastructure Fund. This would imply nationalization, of course, but it cannot be written off since private buyers may not be easy to locate. In any case, ownership of a floundering airline is a burden the government could do without.
That banks do not know how to run abusiness in one of the country’s most difficult sectors is obvious. Their ownership of Jet should not last beyond a few months. Fromthe example of Air India, it is also clear that government ownership in any form is more likely to destroy than enhance value. The best course, then, would be to open up thecountry’s skies to investors from across the globe. Current policies that restrict foreign ownership need to be eased. An overseas acquirer of anything larger than a 49% stake requires prior government approval, a rule which keeps significant sums of foreign investment away from Indian aviation. Perhaps we could retain a policy proviso that every local carrier must have some domestic ownership, sufficient to wield a veto over big corporate resolutions. Raising the sector’s foreign direct investment cap to 74% would meet that need. It would also make Indian aviation attractive to global players and enhance the country’s chances of finding a suitor for Jet Airways.