The Standing Committee has categorically said that the increase in bilaterals appears to facilitate one airline’s ability to strike a stake-sale deal with a foreign airline at a huge premium. The FIPB, SEBI and the Competition Commission are worried about ownership and control of Jet

That the pricing of the deal between Naresh Goyal-led Jet Airways and Etihad Airways came so quick on the heels of signing a lucrative bilateral agreement increasing the weekly seat entitlement to 40,000 between India and Abu Dhabi has raised several pertinent questions from key quarters. The Prime Minister (PM), an inter-ministerial group (IMG), a Parliamentary Committee, the capital market regulator and last but not the least, the competition watchdog have expressed reservations about both the deal as well as the substantial seat enhancement.

PM Manmohan Singh expressed reservations about the seat enhancement to 40,000 per week and about Etihad controlling the bulk of seats on the India-Abu Dhabi route. The Securities and Exchange Board of India (SEBI) and the Competition Commission of India (CCI) have already sought clarity from the domestic carrier about the transaction. Their issue is whether Etihad’s controlling interest in Jet remains in line with its 24% stake in its equity capital.

A report of the Parliamentary Standing Committee on Transport Tourism and Culture, submitted in the Lok Sabha on 3 May 2013, had also expressed reservations about foreign direct investment (FDI) in the aviation sector, enhancement in the bilateral agreement and Jet-Etihad deal. The Committee noted that the much-fancied decision to allow FDI in civil aviation has found only one taker so far. “The Committee recommends that FDI may be allowed in such a way that it should not affect the operational viability of India's national carrier—Air India and various airports of India. The FDI in civil aviation sector should aim at developing aviation hubs within the country and any policy to the contrary should be discouraged,” the report said.

In fact, the Committee expressed surprise at the increase in bilateral entitlement to 36,670 seats a week. It said, “Prime facie this move appears to facilitate one airline to strike a deal with a foreign Airline for its stake sale at a huge premium. The Committee feels that the huge premium could be a backhanded way of obtaining access to the huge civil aviation market in India.”

On 22 April 2013, the government had increased the bilateral weekly seats between India and Abu Dhabi to 36,670 seats a week from 13,330 at that time. The announcement came in the backdrop of Etihad paying huge premium of 32% over the market price to pick up just 24% equity in Jet Airways.

“The increase in the bilateral agreement is questionable,” the Committee said, “especially, in view of the fact that the Indian carriers are not in a position to use increased seat capacity due to fleet constraints. In such a situation, the foreign airline may try to catch up passenger traffic headed to destinations in North America, Europe, Africa and Middle East resulting in huge losses to Air India and various airports of India.”

The creation of Emirate’s specific capacity entitlements, coupled with unbridled access to all major cities in India for the airlines of the UAE, has already resulted in Dubai establishing itself as the primary hub for Indian traffic. “Already Emirates Airlines is being called the ‘national airline’ of India, as it operates more flights and carries more passengers to/from India than Air India, our national carrier. More than 70% of the passengers carried by Emirates Airlines, however, travel to points beyond Dubai, on Emirates’ network. Now, Abu Dhabi is also keen to emulate the success of Dubai and Emirates Airlines, and is keen to establish Abu Dhabi as another hub airport on the back of Etihad Airways, and for this reason, is aggressively seeking an increase in capacity entitlements,” the Committee said.

Allowing Abu Dhabi to come up as another hub, which is only a three-hour flight away from the major Indian metros would certainly have an adverse impact on India’s efforts to establish a world-class hub in the country.

The Committee also asked the ministry of civil aviation (MCA) to the reconsider the bilateral agreement with the UAE, and keep it frozen at the current level of 13,330 seats and open any bilateral only after the capacity of the Indian carriers is increased.

The Committee was informed that Jet Airways sold three of its slots in London to Etihad, which was confirmed by the secretary of MCA. The Committee said, “Carriers have no right to sell the bilateral allotted to them to other airlines that too a foreign airline. The Committee recommends that the government should take away the slots from Jet Airways and the airlines should be penalized for selling the national property—bilateral.”

Soon after signing an agreement with Etihad, the Naresh Goyal-led Jet carrier submitted an application before the Foreign Investment Promotion Board (FIPB) on 26 April 2013. FIPB asked Jet Airways to revise the application by modifying the shareholders' agreement, in which, it was apparent that the effective control was being passing to Etihad.

Later, Jet submitted a fresh amended document and restated the shareholders' agreement, along with the commercial co-operation agreement dated 27 May 2013. However, even this had the same terms for effective control and operation.

Clause 2.1.6 states that:

“Etihad shall source candidates for senior management positions within Jet and both parties shall second employees to each other’s businesses, as appropriate”.

This clearly shows that Etihad would decide all senior management positions in Jet Airways, thereby, gaining effective management control and the right of the foreign airline to interfere in the management of the domestic carrier.   

Clause 2.1.7 states that:

“Co-location of network and revenue management functions to be relocated to Abu Dhabi at Jet’s expense.  In an phased manner;  Phase 1, which shall be completed within 90 days of the Closing Date (as such term is defined in the Investment Agreement), and will consist of international and domestic network planning, international pricing—non India point of sale and the management of Joint fare filing, and the inventory control of the Abu Dhabi hub routes.  Phase 2, which shall be completed as soon as reasonably possible, will consist of international revenue management, domestic scheduling and pricing, international India point of sale pricing, interline pricing and all other functions associated with network and revenue management not contained in Phase 1. Specific details of India point of sale pricing to be reviewed by the Parties. Etihad shall provide the office infrastructure and technology needs of Jet’s functions to be relocated to Abu Dhabi”.

This in effect means that Etihad would operate and manage affairs of Jet Air both domestically and internationally. In short, Jet Air was becoming a virtual subsidiary of Etihad with effective control in the hands of UAE carrier.

According to Clause 2.2 of the shareholders agreement submitted by Jet to FIPB, the deployment of Jet’s fleet on new services to Abu Dhabi would be done in 2013 itself. It also determines that Jet would fly to both New Jersey and New York using Indian bilateral rights and Chicago via Abu Dhabi. This would provide Abu Dhabi with greater frequency and connectivity into the US, using India’s bilateral rights.

Further, the Clause 2.2.5 makes is mandatory for Jet to use Abu Dhabi as its exclusive hub to Africa, North and South America and the UAE. This means that Jet can only fly to these countries via Abu Dhabi and not directly from India and all this using Indian bilateral rights with those third countries.

Clause 2.2.5 states:

“Jet using Abu Dhabi as its exclusive hub for scheduled services to and from Africa, North and South America and the UAE (the ‘Exclusive Territory’), unless it is mutually agreed that Jet operating non-stop 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”.

Last month, FIPB deferred a decision on the Rs2,000-crore Jet-Etihad deal, the largest foreign investment in the Indian aviation sector, and sought clarity on control and ownership. However, FIPB want SEBI to take a call on the effective ownership and control of Jet Airways in the wake of revised agreement.

SEBI is concerned only with matters relating to, and for protecting the public shareholder interest, and enforcing the Takeover Code with the relevant provisions of effective Control and Ownership. These are not related in any way to the laws and rules on effective control and ownership in civil aviation. Effective control in terms of the FDI and FDI policy are determined either by Department Of Industrial Policy & Promotion (DIPP) and FIPB. 

In terms of Civil Aviation Law (schedule 9 of Aircraft rules 937 read with rule 134) the civil aviation ministry is the competent authority to determine effective control. This means SEBI is not the competent or the appropriate authority to handle the Jet-Etihad deal. Then why the FIPB headed by economic affairs secretary Arving Mayaram wants SEBI to take a call?

As per the proposal, Jet Airways plans to sell 24% stake to Etihad for about Rs2,058 crore.

Jet Airways, following concerns raised by SEBI, on 24 May 2013 deferred a crucial proposal to amend its Articles of Association (AoA). SEBI had expressed reservations regarding the shareholders' agreement entered into by Jet and Etihad that gives the UAE carrier substantial management rights and the right to nominate three directors on the board of Naresh Goyal-led airline as well to decide senior management positions.

Fair trade regulator, the CCI, after receiving an application seeking approval for the Jet-Etihad deal is also looking from the point of anti-competitive practices.

Reported by: Yogesh Sapkale

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