India bars foreign carriers from raising stake in local airlines

[MUMBAI] India retained restrictions that prevent overseas airlines from raising stakes in local carriers even as it unveiled new rules to attract foreign investors into the world's fastest growing major aviation market.

The government will allow foreign entities such as funds and portfolio investors to fully own local airlines, removing an earlier cap of 49 per cent, it said in a statement on Monday.

Prime Minister Narendra Modi's administration, however, decided to bar foreign carriers from raising their stakes beyond 49 per cent. Last week, India eased rules for local carriers keen to fly to overseas destinations.

The latest changes in foreign direct investment rules are unlikely to lure overseas investors until the government cuts red tape, according to Mark D Martin, founder of Dubai-based Martin Consulting LLC.

Setting up an airline in India involves multiple ministries and permits for aircraft registration, recruitment and parking slots. The revamp doesn't allow Singapore Airlines Ltd or AirAsia Bhd to boost stake in their local ventures to gain full control.

"We're not going to see anything earth-shattering anytime soon," Mr Martin said. "Red tape is still the biggest obstacle to aviation in the country and even if you own 100 per cent, getting an airline off the ground is still the biggest challenge."

Singapore Airlines has a local venture known as Vistara with the Tata Group, and AirAsia Bhd, the region's biggest discount carrier, began domestic Indian flights in June 2014.

Overseas investors will have to seek government permission to boost stake beyond 49 per cent, according to the statement. Foreign airlines can still join hands with overseas investors to set up a fully foreign-owned airline, said Amber Dubey, a consultant at KPMG in Gurgaon near New Delhi.

"Indian carriers can look for enhanced valuations in case they wish to raise funds or go for partial or complete divestment," said Ms Dubey. "We may see its positive impact over the next six to 12 months. The government plans to go for a massive improvement in India's global and domestic connectivity, affordability and ease of doing business."

Shares of carriers rallied Monday on the announcement. IndiGo, operated by InterGlobe Aviation Ltd, jumped 5.8 per cent, the biggest gain since April 4, while SpiceJet surged 7.4 per cent. Jet Airways, 24 per cent owned by Etihad Airways PJSC, advanced 6.6 per cent, the most in more than four months.

Singapore Airlines said in an e-mailed statement that it is happy with the partnership it has with India's Tata Group at this point, and there are no plans for changes to its 49 per cent ownership of Vistara.

Etihad said it will "carefully examine" Monday's announcement by India, while Emirates airline said it will continue to "focus on our organic growth," partnering with others where it makes commercial sense.

Last week, Mr Modi's cabinet decided to permit domestic airlines to fly overseas provided they deploy 20 planes or 20 per cent of capacity, whichever is higher, on local routes. Earlier, carriers needed to have a minimum of 20 aircraft in their fleet and five years of domestic services.

Air travel in the South Asian country grew more than 20 per cent last year, according to the International Air Transport Association. In comparison, passenger traffic in China rose about 10 per cent and by less than 5 per cent in the US, IATA said in a December presentation.

The easing of foreign direct investment rules on Monday was part of a slew of measures Mr Modi's government took for other industries as well, such as pharmaceuticals, single-brand retail and private security.

The government raised investment limits for existing airports and defense. Foreign investors can now own 100 per cent of so-called 'brownfield projects,' versus an earlier limit of 74 per cent, without the need for approvals, according to the statement.

The government allowed foreign investment beyond 49 per cent in defense, subject to approval in cases that help bring in "modern technology," according to the statement.

BLOOMBERG