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Wednesday, 22 February, 2012, 16 : 00 PM [IST]

Govt breaks the logjam over 49 per cent foreign investment in Indian carriers

The government is learnt to have finally worked out a solution that will facilitate foreign airlines acquire up to 49 per cent in domestic carriers without necessarily breaching the Takeover Code of the Securities and Exchange Board of India (Sebi). At present, foreign direct investment up to 49 per cent is permitted in domestic airlines, but foreign carriers are barred from acquiring a stake.

The code requires an entity acquiring 25 per cent or more equity in a listed company to compulsorily make an open offer for another 26 per cent to ensure individual shareholders too get an exit route. In the case of airlines, this will mean that a foreign airline can acquire up to 51 per cent stake, thus breaching the 49 per cent FDI cap.
According to government officials, foreign airlines may be asked to first make an open offer of 26 per cent to shareholders of the target company (domestic carrier) and later acquire up to 23 per cent such that foreign investment remains within the 49 per cent FDI cap. “It is expected to be a wholesome process, and the two stages will not be independent of each other,” an official explained.

With the market regulator Sebi ruling out any tweaking of the Takeover Code specifically for one sector, the Ministries of Finance, Industry and Civil Aviation were compelled to explore other solutions. “The proposal has come to us from the Ministry of Finance after consulting with Sebi and the Ministry of Civil Aviation. This is the solution we are looking at and we hope the Cabinet note would be finalised soon,” the official said.

Legal experts are of the view that the proposed formula for the acquisition is possible without violating the Takeover Code.  “The open offer can precede the base transaction, but it has to be done in conjunction,” Jagannadham Thunuguntla, Head of Research at SMC Global Securities said. Citing the example of Cairn Vedanta deal, he said in this case too, Vedanta first announced an open offer to acquire 20 per cent in Cairn India.

Ajit Singh, Minister of Civil Aviation, Govt of India has been maintaining that his Ministry would soon move a note for Cabinet approval for allowing 49 per cent FDI in airlines. For a sector that is bleeding in the country, FDI through foreign airlines will be a major boost, according to an Indian Express report by Shruti Srivastava.

Earlier, international carriers including British Airways and Singapore Airlines had evinced interest in investing in Indian carriers. Cash-strapped airlines like Kingfisher have been advocating opening up the sector for quite some time.
 
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