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).
