Shares in Jet Airways dipped more than 12 per cent on Monday morning on Friday’s decision by India’s Foreign Investment Promotion Board (FIPB) to defer approving Etihad Airways’ plan to buy a stake in the Indian airline.

They recovered later in the day to close up 1.3 per cent to Rs476.5 afte investors realised the delay was just that – a temporary glitch – and wouldn’t stop the deal going ahead. No problem, then?

It’s not that simple, unfortunately. Foreign investors are watching carefully to see how the Indian government follows through on the FDI liberalisation measures it promised last year and moves like this from the FIPB aren’t encouraging.

If permitted, the Jet-Etihad deal would be the first foreign direct investment into the Indian aviation market since the government upped the cap on FDI into Indian carriers to 49 per cent in September. And the FIPB, India’s FDI regulatory body, has now said it needs more clarification on effective control and ownership before it can take a decision on the deal.

“I am surprised at what the FIPB is trying to do and I think they should have gone ahead with the deal,” Ramesh Vaidyanathan, an aviation lawyer at Advaya Legal, told beyondbrics. “Once you put out a policy in the public domain and people have acted in accordance with it, you have no business tinkering.”

He says that the delay isn’t a threat to the transaction as there is too much at stake here, explaining: “I think the deferment is just to clarify what the level of control is. The FIPB can’t add what is not there in the policy document and in the FDI policy on aviation investment, there is no specific language on effective control or how the board will be constituted.”

The plan, which has been approved by the board of Jet, is for Etihad to pay Rs754.74 per share for a 24 per cent stake.

For the Indian carrier, the investment would provide relief as it struggles to pay off its estimated $2.3bn of debt. And for Etihad, it’s a leg up into the valuable Indian aviation market, adding up to a million passengers to its network.

The Jet-Etihad deal could see a foreign state-owned carrier gaining at and Indian state-owned carrier’s cost, however, as Air India is the only real competitor for Jet’s international traffic now Kingfisher Airlines lies dormant. Emirates has already tipped Air India from the top spot in terms of market share of international traffic to and from India, in the fiscal year ended this March.

Yet, Vaidyanathan says the government has no option but to invite FDI into India’s ailing aviation sector. The industry lost a total $1.65bn in the fiscal year ended this March and $2.28bn the previous year, according to the Centre for Aviation. Despite growing passenger numbers, price wars, expensive fuel and combined debts of approximately $14.5bn are weighing on Indian carriers.

The industry needs all the FDI it can get and the FIPB should be wary of scaring off potential incomers.

Related reading:
India aviation: turning a corner? beyondbrics
Jet-Etihad deal: Air India the loser, beyondbrics
Jet agrees to sell stake to Etihad, FT

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