The proposed changes in the revised agreement are merely cosmetic in nature, especially when areas of ‘co-operation’ between Jet –Etihad gives far reaching powers to Etihad to control the policy decisions of the Indian carrier, disproportionate to what may be granted for a minority investor in similar transactions

Abu Dhabi-based Etihad Airlines has reportedly agreed to reduce the number of its directors on the Board of Jet Airways (India) Ltd from four to two, under the Rs2,058-crore deal. Etihad had submitted the revised shareholding agreement to address the concerns of Foreign Investment Promotion Board (FIPB) and market regulator Securities and Exchange Board of India (SEBI) with regard to effective control after the foreign direct investment (FDI), which is the largest so far in the Indian aviation space. However, there still are several deficiencies in the agreement that make the revision a mere cosmetic makeover.

Even on a standalone basis, the second revision is nothing but a subterfuge. The changes are shallow and cosmetic once again, leaving Etihad with the ability to exercise control in the managing, functioning and decision making of Jet Airways.

Following are some examples where such clauses would demonstrate control in practice:-

Shareholders Agreement

• • The Agreement curiously continues to be silent on a valid quorum. Under law, even two directors can form a quorum. It is surprising that with 12 directors on the board, no quorum has been specified.
   
• • Thus in effect, similar to the state of voting in the parliament and state assemblies in our country, if the other/ independent directors are advised to abstain from attending meetings, even the two directors representing Etihad would constitute a quorum in order effective decisions.

Commercial Co-operation Agreement

“2.1.6 Etihad shall recommend suitable candidates for senior management positions within Jet and both parties shall second employees to each other businesses, as mutually agreed and appropriate and only where it is deemed that this would benefit both parties.”

Merely making a clause ‘mutual’ does not make it less directive, since the Governance Procedure continues to have equal representatives of both parties and prescribes a consensus approach. If representatives fail to reach a consensus, a ‘deadlock situation’ can occur, which will be detrimental of commercial interest of Jet. There are no provisions to demonstrate that such “recommendations” by Etihad would not be binding on Jet.

The clause 2.1.7, relating to location of network and revenue management in Abu Dhabi has now been reworded. It would now be located in Mumbai and now, Jet would send its employees to Abu Dhabi for gaining expertise in the subject area.

The following clauses, concerned with Etihad having control over business decisions of Jet, still remain unchanged:-

• • “2.2.5 Jet using Abu Dhabi as its executive hub for scheduled services to and fro from Africa, north and south America and UAE (the “Exclusive Territory” ), unless it is mutually agreed that Jet operating nonstop service between India and destinations in the exclusive territories is economically beneficial to the parties. The parties agree that Canada will be excluded from the exclusive territory until appropriate amendments to the relevant air service agreements allow Jet to operate through Abu Dhabi with 5th freedom rights. This includes Jet refraining from code-sharing with any other airline (or any other airline code-sharing with Jet), the impact of which would result in bypassing the Abu Dhabi hub for traffic to/from the exclusive territory.”
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• • “2.2.6 exiting by Jet as soon as reasonably practicable, those existing Code Share arrangements or joint ventures with third party carriers which are incompatible with or detrimental to the cooperation contemplated by this Cooperation Agreement. This includes Jet refraining from entering any new Code Share arrangements or joint ventures with any third party carriers which would be incompatible with or detrimental to such cooperation. The Parties shall use the Governance Procedures to determine whether particular joint ventures or Code Share arrangements are incompatible with or detrimental to the cooperation contemplated by this Cooperation Agreement.”

2.3.1    Joint route and schedule coordination

• • 2.3.2    joint pricing, joint dealing, joint marketing, distribution, sales representation and cooperation, including joint travel agency and corporate account dealing arrangements as defined in Schedule 1.”

• • “2.6 Given Etihad’s commercial relationship with certain suppliers, Etihad shall take the lead in negotiations on Aircraft and engine purchases, BFE, IFE and other areas where the parties agree that Etihad’s supplier relationship brings benefits to Jet.”

• • “2.8 The Parties will take all reasonably necessary steps to extend, as soon as reasonably practicable, the scope of the cooperation envisaged by its terms, mutatis mutandis, to any other carriers which are, or may be in future, majority owned or controlled by Jet by means of executing a Commercial Cooperation Agreement Addendum in the form set out in Schedule 2 hereto.”

In a nutshell, there are no substantive changes to prevent interference by Etihad in the day to day management, control, functioning of the Indian carrier. The changes are merely cosmetic in nature, especially when they give far reaching powers to Etihad to control the policy decisions of Jet, disproportionate to what may be granted for a minority investor in similar transactions. Merely making changes in Shareholders Agreement cannot be sufficient to grant approval. The entire transaction needs to be scrutinized from the perspective of effective control.

The governance procedure set out in the agreement continues in the garb of a consultative regime. In reality, the governance procedure prescribes a consensus mechanism, which grants veto rights to Etihad, leading to ‘deadlock situation’ in Jet’s policy decisions. This is likely to derail Jet’s operations, thereby directly affecting its revenues, profitability and shareholder value. These provisions do not allow Jet to run its commercial operations without interference from Etihad.

The terms and conditions of above ‘areas of cooperation’ are yet to be negotiated and concluded, this being only the broad outline. Therefore, approval cannot be granted on incomplete final documentation with respect to commercial arrangements intending to grant control to Etihad. Thus, the FDI application still stands incomplete, non-compliant and deserves to be rejected.   

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