Up for sale: Just when Air India was making profits.

Up for sale: Just when Air India was making profits.

Before flying off to Davos, Modi offers 49% Air India to foreign buyers; 100 in retail

India Inc cheers, traders condemn; Congress, CPM question selling Air India

Agency Report | New Delhi | 10 January, 2018 | 09:30 PM

India cleared a proposal on Wednesday to allow foreign investors to own up to a 49 percent stake in the state-run carrier Air India, paving the way for global airlines to bid for the loss-making flagship carrier. It brings Air India, which previously had to be fully locally owned, in line with the country’s other local airlines in which foreign investment is allowed. India allows 100 percent foreign investment in its other local airlines but caps foreign airlines’ stake at 49 percent. In Air India, it will now allow a maximum of 49 percent foreign ownership including that by airlines. But a substantial ownership and effective control of Air India must remain with an Indian national, the government said in a statement.

Ahead of the World Economic Forum in Davos, which Prime Minister Narendra Modi will attend this month, the Union Cabinet on Wednesday opened up Air India for foreign investors and brought in changes in key sectors by allowing 100 per cent foreign investment in single-brand retail and construction development through the automatic route.

The decisions, taken at a meeting of the Union Cabinet chaired by Modi and intended to liberalize and simplify the FDI policy to provide ease of doing business, drew sharp criticism from both the opposition and trade bodies.

However, the government contended that the move would “lead to larger FDI inflows contributing to growth of investment, income and employment”.

Wednesday’s decision marked a key change in the aviation industry where the government had already allowed up to 49 per cent FDI in private carriers. There was a restriction that foreign airlines could not invest in the loss-making Air India.

“It has now been decided to do away with this restriction and allow foreign airlines to invest up to 49 per cent under approval route in Air India subject to the conditions that foreign investments in Air India including that of foreign airlines shall not exceed 49 per cent either directly or indirectly,” an official statement said.

It added that substantial ownership and effective control of the national carrier shall continue to be with “vested in Indian national”.

The Cabinet also approved 100 per cent FDI in single-brand retail trading, tweaking its present policy of allowing only 49 per cent foreign investment in the sector through automatic route and the rest through government approval.

It also gave a five-year holiday for foreign investors from the mandatory 30 per cent of local purchases. But after that, they will be required to meet 30 per cent of sourcing norms directly towards its India operations on an annual basis.

The Cabinet also decided to allow 100 per cent FDI in construction development relating to building townships, housing, infrastructure and real estate broking services.

“It has been decided to clarify that real estate broking service does not amount to real estate business and is, therefore, eligible for 100 per cent FDI under the automatic route.”

Making changes in the sector relating to power exchanges, the government removed the restrictions on investment by foreign institute investors and portfolio investors to invest in power exchanges through the primary market as well. Under the present policy, FII and FPI purchases were restricted to secondary market only.

The Congress and the CPI-M slammed the government move on Air India, saying it would only lead to the national carrier going into the hands of a foreign airline.

Former union minister Anand Sharma said the government should come clear on the Air India deal as to whether its assets “worth lakh of crores of rupees” and its route rights would also go to the investor.

He said the UPA government had consciously kept Air India out of the purview of FDI though it had allowed 49 per cent FDI in the civil aviation sector.

The Communist Party of India-Marxist (CPI-M) said the Modi government was now moving towards handing over Air India to a foreign airline.

“The government should heed the recommendation of the Parliamentary Standing Committee on Transport, Tourism and Culture which has asked the government to review its decision on privatisation of Air India and provide five years to revive the airline with its debt written off.”

There was support to the Air India move. Pervez Damania, a former Director of the now defunct Kingfisher Airlines, welcomed it saying the “government has no business to be in flying”.

P.N. Vijay, a market analyst, said the decision was “not good enough”. “It should be 100 per cent FDI in Air India.”

On allowing 100 per cent FDI through the automatic route in single-brand retail, the CPI-M said the move portends the Modi government’s intentions of “moving towards allowing FDI in multi-brand retail trade”. It warned of grave consequences for the domestic retail trade.

However, Ananda Sharma termed the FDI in retail “a cosmetic change” and “minor tweak”.

“I don’t think it’s going to make much change because almost all the major brands of the world are already here as 100 per cent FDI was already allowed. This is done perhaps for the Prime Minister to make a statement at Davos.”

Both Congress and the CPI-M reminded the BJP that it had opposed the entry of foreign companies into retail trade earlier and it has now “hypocritically reversed its position”.

Calling it a “serious matter” for small businesses, the Confederation of All India Traders (CAIT) strongly opposed the FDI in single-brand retail.

Condemning the Modi government’s “love for MNCs”, CAIT Secretary General Praveen Khandelwal said the move would facilitate easy entry of multi-national companies in retail trade and leave a large number of people jobless.

“It’s a serious matter for small businesses. It is a pity that instead of formulating policies for the welfare, upgrade and modernisation of existing retail trade, the government is more interested in paving the way for the MNCs to control and dominate the retail trade of India.”

Modi will be the first Prime Minister after 20 years to participate in the annual World Economic Forum show in Davos where world leaders and top industrialists and businessmen meet. The four-day event begins on January 23.
According to sector experts, the move will attract foreign bidders.

“The decision will bring Air India at par with other domestic carriers which are allowed to attract foreign capital,” Dhiraj Mathur, Partner and Leader (Aerospace and Defence) with PwC India, said.

“This will increase competition and the overall participation of bidders in the divestment process. A sensible and welcome decision.”

Independent aviation expert Amrit Pandurangi said: “Air India is not an easy transaction… so 49 per cent is good, but may not be good enough to make it attractive.”

“They need to first sort out a number of issues on Air India’s financial debt, people-related issues.”

Currently, a ministerial group — Air India-specific Alternative Mechanism — headed by Finance Minister Arun Jaitley is looking into the modalities to divest loss-making Air India. The group has been mandated to decide on key issues such as treatment of Air India’s debt and hiving-off of its assets.

Last month, Minister of State for Civil Aviation Jayant Sinha had announced that British consulting multinational EY has been appointed as transaction advisors to aid the government in the strategic divestment of Air India.

Making the announcement, Sinha said the Air India stake sale would most likely be an offering for an integrated airline through the bidding process “and both domestic and international operations will be divested as one entity”.

In September, the Department of Investment and Public Asset Management had invited bids for the role of advisors to guide the government on the financial and legal issues associated with the strategic disinvestment.

The airline, which is under a massive debt burden of Rs 50,000 crore, had posted an operating profit of Rs 105 crore in 2015-16, and is expected to report an improved operating profit margin for the last fiscal.

The national carrier got a new lease of life in April 2012, when the then UPA government approved a Rs 30,000-crore turnaround and financial restructuring package spanning up to 2021. (IANS)