Foreign Investment In India’s Airline Industry

1. WHETHER THE AVIATION SECTOR IS REALLY HAVING A BOOM

AFTER THE OPENING OF THE FINANCIAL FLOOD GATES
THROUGH FDI?

2. WHETHER THE RESTRICTIONS IMPOSED BY THE SOEC

REQUREMENTS SHOULD BE PREVALENT?

Aviation sector being one of the booming sectors has had its own challenges. In order
to project India on the world map in convenience of trade in goods or services and
transport of human capital across the globe, aviation sector has become an imp area to
focus upon by the Regulatory agencies of the government.

First, India is one of the fastest growing aviation markets in the world. Second, the
Indian Government has introduced substantial reforms to liberalize the aviation sector.

Although we had transitioned from a highly restrictive regime to one that is among
the most liberal in the world, and that too within a relatively short span of time.

The “nationality rule” ensures that an airline is necessarily owned and controlled by a
state or citizens of such a state. Such a requirement by which the “substantial
ownership and effective control” (SOEC) of an airline must vest in a state or its
citizens substantially limits the flow of foreign investment into the airline industry.

It talks about the control vested with an individual having an SOEC status who
predominantly is a person who is the citizen of the country in which the company
availing investment accepts or merges with the foreign player.

In 2017, India acquired the status of being the third largest aviation market in terms of
domestic traffic (after the U.S. and China) and the fourth largest in terms of overall air
passenger traffic (that includes both domestic and international).

HISTORICALLY

Initially, a limit of 40% was placed on foreign investment. In 2012, the Government
removed a barrier that kept foreign airlines from investing in Indian airlines, and
permitted them to invest up to 49%. More recently, in 2016, limits have been lifted on
non-airline foreign investments that can now been made up to 100% of an Indian
airline, while airline investments are still subject to the 49% limit with the SOEC
requirements. Few critics said this not only hampers capital raising activities by
airlines to fund their business, but it also stifles cross-border mergers and acquisitions
activity in the industry, thereby impeding the benefits of size and efficiencies

We could see in the Jet Etihad case where Etihad had to withdraw their de facto
control due to the SOEC requirements.

Brownfield and greenfield airports

According to the government, the extant of 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

II. FOREIGN INVESTMENT RESTRICTIONS IN THE AIRLINE INDUSTRY

A. Substantial Ownership and Effective Control

B. The Origins of Foreign Ownership Restrictions
C. The Expansion of Foreign Ownership Restrictions around the World.
European Union

The European Union (“EU”), the SOEC requirements initially operations on a

national basis, i.e. with reference to each individual country. However, subsequent
reforms have “marked the transition from nationally owned and controlled airlines to
community owned and controlled airlines.” This has resulted in a fully
liberalized aviation market within the EU, as it does away with nationality
requirements across various EU nations. However, the SOEC requirements apply in
relation to bilateral ASAs with other non-EU countries.

Elsewhere in the Asia-Pacific region, most, if not all, states have domestic laws that
impose ownership restrictions in the airline industry.

Often, the SOEC requirements are ambiguous, leading to substantial uncertainty for
industry players.

III. INDIA’S FOREIGN INVESTMENT REGIME IN THE AIRLINE INDUSTRY

A. Restrictive Regime Historically

B. The Entry of Foreign Airlines

National Civil Aviation Policy 2016 (“NCAP 2016”) with a view not only to
prescribing a comprehensive regulatory policy governing the sector, but also to
liberalizing the administrative and regulatory setup.

Since 2004, the Government required that, for Indian private carriers to fly on
international routes, they must have been flying on domestic routes for five years and
must also have a fleet of at least 20 aircraft.

The NCAP 2016 “all airlines can commence international operations provided
that they deploy 20 aircraft or 20% of total capacity (in term[s] of average
number of seats on all departures put together), whichever is higher for domestic
operations.” This policy arguably works to incentivize foreign investment in
Indian carriers as they can spread their business and risks through both
domestic as well as international operations.

BOMBAY TO MALAYASIA

BOMBAY TO SINGAPORE

BOMBAY TO UK

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%.

First, India is the only country in recent history that makes a distinction in its foreign
investment policy on ownership and control by foreign airline investors and non-
airline investors.

An Indian airline receiving investment from a foreign airline would be granted a

permit to operate only if:

i. its principal place of business is in India;

ii. the chairman and at least two-thirds of the directors are Indian citizens; and

iii. the SOEC is vested with Indian nationals.

India’s aviation sector has demonstrated strong growth (and will continue to do so)
“despite facing numerous policy and regulatory challenges”. The entry of three
foreign airlines into the Indian markets over the last five years is evidence that there
are takers for India’s regulatory approach. However, the further potential of the
industry can be unleased through continued redesign of the policy as well as its
effective implementation.

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).

KEY ACHIEVEMENTS
 FDI grew 5 times - from USD 229 million (2010-14) to USD 1148 million
(2014-18) in Air Transport sector.
 National Civil Aviation Policy (NCAP) to boost regional air
connectivity,establish an integrated ecosystem to promote tourism and generate
employment.

 160 airports being revived & operationalized.

 18 greenfield airports approved.

 16 Common User Domestic Cargo Terminals (CUDCT) operationalized.

 The GPS-Aided Geo Augmented Navigation system (GAGAN) launched.

 75 airports opened in 75 years of Independence while 33 new airports have

been started in just 1 year

 More than 80 international airlines connecting to over 40 countries

CAPA(Centre for Asia PacificAviation)