NEW DELHI: The Cabinet will shortly consider a proposal to allow foreign airlines to invest in domestic carriers, a move that could offer a breather to cash-strapped companies.
The industry ministry has circulated a draft cabinet note for inter-ministerial consultation after a nod from the civil aviation ministry. "Though the aviation ministry has given an in-principle approval, the sectoral cap will be decided by the Cabinet," said an official of the Department of Industrial Policy and Promotion (DIPP), which frames policy on foreign direct investment.
While DIPP favours a 26% cap on foreign airlines' holding, the aviation ministry wants it restricted to 24%. A holding above 25% gives the right to block a 'special resolution'.
India allows 49% FDI in airline companies, but foreign airlines have been banned from investing in the sector. "No foreign airline would be allowed to participate directly or indirectly in the equity of an air transport undertaking engaged in operating scheduled and non-scheduled air transport services, except cargo airlines," the current policy says.
According to industry estimates, private domestic airlines have run up losses of more than 3,500 crore in the first half of the current fiscal year. Some, like Vijay Mallya's Kingfisher Airlines, desperately need capital to pay off debt. Budget airline IndiGo is the only carrier making profits while state-owned Air India has the highest losses. Experts say the situation may remain the same for most carriers in the coming quarters.
"This quarter is going to be very bad compared with last year because of supply addition by low-cost airlines, competition, high fuel prices and rupee depreciation," said Rashesh Shah, analyst at brokerage firm ICICI Direct. "For this fiscal, all of them will make a loss."
India has five big private operators and a loss-making national carrier, Air India. Although domestic air traffic has been growing at near 20% due to a rising middle class, some carriers have been faring poorly and find it difficult to raise capital in a restrictive FDI regime.
In the past, opposition to FDI in aviation has largely come from some private airlines. In the mid-1990s, a proposal from Singapore Airlines to form a venture with Tatas was put on hold by successive governments. The two also had to abandon a joint effort to pick up a stake in Air India in 2001.
This time, however, the aviation ministry has favourably replied to DIPP's letter to allow foreign airlines to pick up minority stakes, though it wants the regime to be more restrictive.
But the DIPP official said any cap below 26% would serve no purpose and no foreign firm would be interested in investing. The department, under the industry ministry, is keen on allowing at least 49% FDI in all sectors and had even floated a discussion paper on the issue earlier.
"We can expect strategic M&As in the near future and the sector shall benefit from both capital inflows and technology collaborations," said Akash Gupt, executive director, PricewaterhouseCoopers.
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