Thursday 13 September 2012

FDI norms allow foreign entities other than Airlines

Indian Prime Minister Dr Manmohan Singh, who has had to face some stinging criticism both at home and abroad for failing to push reforms that are crucial to revive a depressed economy, meets his ministers today to discuss norms to allow investment by foreign airlines in the aviation sector. This time the government hopes to get past its main hurdle, ally Trinamool Congress.

A Cabinet note - a copy of which has been accessed by NDTV - says that under the FDI proposal, foreign airlines will be allowed to invest in Indian peers, but can only hold up to a 49% stake. Although a 49 per cent stake gives the investors minority shareholder control, they will get the right to block a special resolution.

Current FDI norms allow foreign entities other than Airlines to directly or indirectly own an equity stake of up to 49 per cent in Indian airlines.

The new proposal incorporates suggestions not just by the Aviation Ministry but also the Home Ministry, since this is a crucial sector with security implications.

The government, in its FDI in aviation proposal, has attempted to cover most areas of concern voiced by political parties. According to the Cabinet note, it is proposed that the chairman and two-thirds of the board of any domestic airline receiving FDI will need to be Indians, and substantial ownership and control will remain with Indian nationals.

Also, all foreign nationals participating in the venture will need security clearance. Equipment imports will have to be vetted by the aviation ministry.

Most of India’s airlines are bleeding and private airlines like Vijay Mallya’s Kingfisher have been pushing for FDI to boost the sector. But even if the Cabinet does clear the proposal, it has to get the Trinamool Congress’ ok on it.

The Trinamool has said its one Cabinet minister Mukul Roy will not attend today’s meeting – the excuse this time is President Pranab Mukherjee’s first visit to Kolkata. Mr Roy was also absent at a yesterday's meeting of the Cabinet Committee on Political Affairs, which was discussing, among other things, a hike in fuel prices.

Staying away from meetings is a classic indication of a Trinamool sulk, but the party usually follows it up with a letter seeking a deferment on the issue it is opposing. This time it has sent no such letter on FDI in aviation yet, and the government has its fingers crossed that it will not. It has also done its homework better this time and circulated its proposal among ministers yesterday.

The Cabinet note explains the rationale behind the move to allow foreign airlines to invest. The Indian aviation industry, it says, is steering through acute turbulence as most private airlines are in dire need of funds for operation. A denial of access to foreign capital could result in collapse of these airlines, and any airline’s closure could create a systemic risk for financial institutions, which have a large exposure to these companies.

The total FDI inflow in the aviation industry, the note says, stands at a mere $433.75 million (Rs 2,405.36 crore). FDI inflow into the aviation industry is a meager 0.25 per cent of the total FDI inflow.

A capital raise by these airlines is not easy as private equity funds are not keen to invest in the sector.

The Manmohan Singh government and the Prime Minister personally, have for some time now been facing severe criticism for allowing the economy to slide by not taking politically tough reform decisions.

Long feted for his pivotal role in liberalising the Indian economy, Dr Singh has recently received several less than flattering report cards from international publications like Time magazine and the Washington Post.

India has been downgraded by major overseas rating agencies and investment banks which have reiterated their concern about the “policy paralysis” afflicting the Indian government.

Back home a panicked Industry has been sending out SOS’ that the government must now place economic revival over coalition dynamics.

Ms Banerjee is the Congress’ most difficult ally; she has resisted most reform measures, arm-twisting the UPA government with the threat of exiting with her 19 crucial MPs in the Lok Sabha. Ms Banerjee is seen as having single-handedly given the UPA government its image of suffering a “policy paralysis”.

Analysts and overseas rating agencies have reiterated their concern about the policy paralysis afflicting the Indian government.

She has opposed FDI in various sectors like retail and aviation. She has forced the government to roll back fuel price hikes despite the deregulation of petrol. She has also stalled privatization of the pension sector.

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