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Wait for FDI from foreign carriers to continue

Indian carriers hoping to attract investments from foreign airlines may have to wait longer as the government is yet to finalise its stand on a civil aviation ministry proposal sent three years ago.

india Updated: Sep 04, 2011 11:53 IST

Indian carriers hoping to attract investments from foreign airlines may have to wait longer as the government is yet to finalise its stand on a civil aviation ministry proposal sent three years ago.

The proposal to allow foreign airlines to invest in a domestic airline is being examined, official sources said, adding that no guidelines have been worked out.

Currently, FDI up to 49 % is allowed in domestic airlines or 100 % for investments by NRIs, but foreign airlines are barred from investing primarily on security grounds.

The civil aviation ministry had in 2008 proposed to the Department of Industrial Policy and Promotion to allow 26 of the total 49 % FDI by foreign airlines that would enable their presence on the Boards of the Indian carriers in which they invest.

But the ministry has opposed another proposal to allow foreign carriers to invest the entire 49 % FDI, instead of 26 % as suggested by it.

There is also a strong feeling that fledgling Indian carriers were susceptible to hostile takeovers as they have been passing through a difficult financial period.

The proposal to allow foreign carriers to invest in domestic airlines has been strongly backed by Kingfisher Airlines promoter Vijay Mallya as well as some foreign carriers.

But, Indian carriers like Jet Airways are opposed to such a move as they feel that a foreign carrier, with deep pockets, could play havoc with the domestic market. They could also artificially lower the price of air travel to kill domestic competition.

Similar laws prevail in several countries, including the United States and Canada. The US is even more restrictive in the airline sector and limits the amount of foreign ownership in its domestic airlines to a maximum of 25 %, like its neighbour.

Few years ago, the US Congress and the department of transportation have thwarted attempts to allow greater foreign ownership of American carriers and turned down Virgin Atlantic owner Richard Branson's initiative to create a foreign-owned US-based low-cost airline.

Aviation officials, requesting anonymity, said it was important that India should seek reciprocal opening of the airline industry in other countries before allowing open access of the Indian market to foreign carriers.

"In an environment where restrictive foreign ownership in the airline industry is the norm, this prohibits foreign carriers from both targeting Indian carriers for acquisition and also using bilateral air service rights to their advantage," the officials said.

They also say that the prevailing financial market conditions "do not seem to support" the cash-strapped Indian aviation industry.

But, the proponents say FDI by foreign airlines should be driven purely by economic considerations.

They say that in Europe, there are several cases where airlines have carried out cross-border mergers and acquisitions like German carrier Lufthansa merging with Swiss International Airlines and Air France acquiring Dutch carrier KLM.