The Department of Industrial Policy and Promotion, Ministry of Commerce and Industry, Government of India, vide Press Note No. 6 of 2012 issued on September 20, 2012, liberalized the Foreign Direct Investment (“FDI”) policy by opening up avenues for foreign airlines intending to invest in the capital of Indian air transport services companies, a sector which was a part of the prohibited lot for the past few years. This move was long awaited and came up right in the face of the Kingfisher Airlines crisis in India and the struggling domestic airline industry.

The FDI policy earlier allowed investment in airlines (subject to certain conditions) however, investment by foreign airlines was prohibited in scheduled and non-scheduled air transport services. The revised policy has now allowed foreign airlines to invest up to 49% in the paid-up share capital of Indian companies operating scheduled and non-scheduled air transport services (including FDI and foreign institutional investment). However, this foreign investment is subject to the conditions more specifically mentioned in the said Press Note.

This policy has infused life in the otherwise dreary market conditions since all airlines are eager for partnering with foreign airlines. The first Indian company to benefit from the recently introduced policy was Jet Airways which allied with Abu Dhabi based Etihad Airways for an investment of $379 million resulting in Etihad Airways holding twenty-four per cent (24%) of the equity share capital of Jet Airways. Further, a deal which may be closed in the recent future is the alliance of Tata with Air Asia which received a nod from the Foreign Investment Promotion Board (“FIPB”) on March 6, 2013 allowing Air Asia to invest a sum of INR 80.98 Crore and to set up a joint venture company to undertake the business of operation of scheduled passenger airlines. This deal faced immense challenges before it got a clearance from the FIPB since the objective of the amendment was interpreted as a move to infuse capital in the already existing airlines and not for funding new companies which did not have an airline operating license. The newly formed airline now requires a no-objection certificate from the Aviation Ministry and an air transport license from the Directorate General of Civil Aviation in order to be declared as a scheduled airline. The FIPB approval in Air Asia case is a first of its kind wherein FDI approval has been granted to a company without it holding an existing DGCA license for operating scheduled airlines (unlike the Etihad-Jet Airways deal). This is nothing but a deviation from the literal interpretation of the policy. However, on a positive note, this may be viewed as welcome news for other foreign airliners intending to make their entry into the Indian aviation sector. Approval to the Tata-Air Asia deal displays the Government’s flexibility towards FDI in aviation.

The actual impact of the policy change on consumers is yet to be seen given the fact that integration of Indian airlines with foreign airlines would lead to different schemes and consumer handling principles from which the airline industry in India was insulated all this while.