The deal was finalised only after receiving appropriate ministerial push. Here is the chronology of how Jet pulled it off. Incidentally, well before the FDI limit in airlines was raised, the major shareholder in Jet was Isle of Man based Tailwinds

The deal between Naresh Goyal-led Jet Airways and Etihad Airways, the national airline of the United Arab Emirates (UAE), and the signing of the bilateral between India and Abu Dhabi comprises chain of events taking place one after another. The “smooth and automatic” flow of events makes one wonder whether these incidents were mere coincidence or part of collusion.

It all started on 14 September 2012 with the Cabinet Committee on Economic Affairs (CCEA) approving the proposal from the Department of Industrial Policy and Promotion (DIPP) to permit foreign airlines to invest up to 49% in scheduled and non-scheduled air transport services in India.

During January 2000 to April 2012, total foreign direct investment (FDI) inflows into the air transport sector were $434.75 million, constituting only 0.25% of the total FDI inflows in India.

Interestingly, the move to allow 49% FDI in airlines was looked upon more at facilitating the ailing and debt-ridden Kingfisher Airlines. In fact, the Vijay Mallya-led carrier was the first to initiate talks with Etihad. But by that time, Kingfisher was merely surviving on hopes. After scaling down the fleet, in October 2012 Kingfisher finally decided to cease operations. This gave a chance for Naresh Goyal, a non-resident Indian (NRI) to push for the deal between Jet and Etihad. It also opened up opportunity for SpiceJet, which was rumoured to be in talks with Malaysian carrier AirAsia and UAE’s Qatar Airways. However, there is not much progress on SpiceJet’s deal.

In January 2013, officials from both Jet and Etihad met Ajit Singh and Anand Sharma, minister for commerce and industries. After the meeting, Singh confirmed that both the carriers were negotiating a stake purchase deal.

On 1st February, the board of Jet Airways approved stake sale to Etihad and was expected to finalise the deal within a week. However, it did not materialise as expected. Even as both the carriers were negotiating the deal, on 27th February, Etihad paid $70 million to buy Jet's slots at London's Heathrow Airport, said a report from Reuters. Etihad was quoted in the report as saying that the deal to buy slots was a part of a “sale and lease-back” agreement, and Jet would continue to operate flights to London using those slots.

It is important to note that initially the Jet Airways deal was to be consummated and concluded on the 28 February 2013. This had been announced much earlier by Jet and Etihad themselves. At that time, the chairman of Etihad—a member of the ruling family—stated that all the requirements of Etihad and Abu Dhabi had not been fulfilled and hence Etihad’s investment in Jet was yet to be concluded.

DGCA swings into action

On the next day, i.e. on 1 March 2013, the Director General of Civil Aviation (DGCA) issued fresh guidelines as approved by the ministry of civil aviation. Clearly, the changes made in the 2008 guidelines were aimed to facilitate the deal between Jet and Etihad. Here are the modifications made in the guidelines...

2008 - Clause 1.7 states “A Scheduled Air Transport Service/Domestic Scheduled Passenger Airline shall not have agreements such as shareholders agreements, etc. with a foreign airline, containing provisions/arrangements empowering such foreign airlines or others on their behalf to have effective control in the management of the domestic airline”.

1 March 2013 - this was deleted.

2008 - Clause 1.8 states “A Scheduled Air Transport Service/Domestic Scheduled Passenger Airline shall not enter into an agreement with a foreign airline which may give such foreign airline the right to interfere in the management of the domestic operator.”

1 March 2013 - replaced by Clause 1.5 that states “A Scheduled Air Transport Service/ Domestic Scheduled Passenger Airline other than those who have FDI by foreign airlines shall not enter into an agreement with a foreign airline, which may give such foreign airline, the right to interfere in the management of the domestic operator”.

It is evident from the above change that a foreign carrier, through its investment in a domestic operator, can now interfere with the management of the Indian carrier. These changes in guidelines are in total contradiction to the policy, which mandates the effective control in the hands of an Indian shareholder. It is therefore obvious as to why this clause has been diluted and the clause earlier referred to namely, Clause 1.7 has been delegated—the reason to dilute the definition of effective control.

In order to facilitate Jet in receiving the consideration of $300 million through a soft loan at 3% the guidelines were required to be changed. 

2008 - Clause 1.9 states “A Scheduled Air Transport Service/Domestic Scheduled Passenger Airline may enter into financial arrangements with a bank and/or other financial institutions for the purpose of lease-finance, hire-purchase or other loan arrangements, but such a tie-up shall not be permitted with a foreign airline”.

1 March 2013 - Clause 1.6 states “A Scheduled Air Transport Service/Domestic Scheduled Passenger Airline may enter into financial arrangements with a bank and/or other financial institutions including foreign airline for the purpose of lease-finance, higher purchase or other loan arrangements”.

The bilateral and sealing the deal

The 48-hours between 22nd and 24 April 2013 are most crucial in finalising the Jet-Etihad deal. On 22nd April “under the direction of the Prime Minister” the Cabinet Committee approved the signing of the grant of 40,000 additional bilateral seat rights per week to Abu Dhabi. However, the prime minister's office in a note issued on 13 June 2013 clarified that “the decisions were not taken under the direction of the Prime Minister”.

In short, 22nd April was the most crucial day at the government level. It was on the same day, Ajit Singh convinced PM Manmohan Singh to urgently clear the bilateral deal between India and Abu Dhabi. Prime Minister Singh then directed finance minister P Chidambaram to hold a meeting with Ajit Singh, Anand Sharma, and Salman Khurshid, minister of external affairs. This meeting was held on 22 April 2013 itself.

Immediately after this meeting, Chidambaram along with the other three ministers and Shivshankar Menon, National Security Advisor and Pulok Chatterji, principal secretary, met the PM. This time, the PM raised some issues about the bilateral. However, Ajit Singh and other ministers assured the PM that all these concerns were considered while arriving at the enhancement.

“The finance minister and external affairs minister were in agreement with and endorsed the views of the other ministers. On the basis of the above, it was agreed to give an ‘in principle’ go-ahead to the negotiating team as per the formulations (40,000 seats per week),” the note from the PMO says.

Although PM Singh directed the matter to be brought before the Cabinet for a decision before operationalizing any agreements, on 24th April, the bilateral was signed.

Immediately after signing the bilateral (thus granting 40,000 additional bilateral seat rights per week to Abu Dhabi), Etihad and Jet finalised their stake purchase deal. As per the proposal, Jet Airways would sell 24% stake to Etihad for about Rs2,058 crore.

It is therefore, obvious that the consideration to be received or received by Jet Airways was clearly linked and co-related to the value of the bilateral that Abu Dhabi was receiving along with its investment in carrier. The sole beneficiary of the largesse of this bilateral deal was Naresh Goyal and not India as the government wants us to believe.

This is because the Jet founder controls about 80% stake in the carrier through his 100% ownership in Tail Winds. Earlier in May, Tailwinds, an Isle of Man registered entity sold 2.51 crore shares in Jet to Goyal at Rs570 per share. This was done because Tailwinds cannot trade shares of an Indian company with another foreign company. However, Goyal can sell his personal stake to anyone.

As of 7 June 2013, Naresh Goyal holds 65.99% while Tailwinds hold 9.01% in Jet Airways. Another promoter group, Anita Naresh Goyal holds just 1,000 shares. All three promoters or promoter group entity hold 75% stake in the carrier, as per BSE.
 

This is interesting because among the promoter group entities, only those 1,000 shares held by Anita Naresh Goyal, wife of the Jet founder, are shown as from Indian promoter. The rest are owned by foreign promoters, Goyal and Tailwinds. This is also an example of how rules and regulations are being interpreted to facilitate “mutual interests”.


As per the law, foreign companies can hold maximum 49% stake in a domestic carrier. This was permitted in September 2012. However, even on March 2013, Tailwinds, a foreign registered entity, was holding 79.99% stake in Jet Airways. This was way above the stipulated 49% limit of FDI. However, neither the ministry of civil aviation nor any other regulator seems to be bothered by this.

According to the company’s Articles of Association, the bulk of Goyal’s shares in Tailwinds are held on behalf of several other individuals who all seem to be resident citizens of India. While Indian government officials have been satisfied that these arrangements do not compromise Jet Airways’ status as an Indian-owned airline that is effectively controlled by Indian citizens, they were viewed as ‘problematic’ by the American authorities.

Earlier, it took Jet Airways more than two years to get the necessary clearances from US authorities to fly to the US. The US State Department gave permission to proceed on 15 November 2006. The more serious allegation that delayed Jet Airways being permitted to fly to the US focused on its opaque ownership structure as well as its alleged links to organised crime in India and abroad. Jet was originally set up as a subsidiary of Tailwinds, an Isle of Man-based holding company designed as a tax shelter, whose sole shareholder was Goyal, the airline’s NRI founder and chairman.

Even today, Goyal, termed as an NRI, holds nearly 66% stake. He may not be a resident Indian but he is not foreign shareholder either. Classic Indian situation where anything goes!

Reported by: Yogesh Sapkale

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