Aviation: Clubbing FDI, FII will dilute the policy, say analysts

New Delhi, Sept. 23:  

Liberalising foreign investment norms for scheduled domestic airlines have raised a question mark over existing foreign institutional investment (FII) in airlines.

Experts also feel that the new norms make the three listed companies – Jet Airways, SpiceJet and Kingfisher – less attractive.

The new norms, as mentioned in the press note number 6 dated September 20, say the 49 per cent limit will subsume the limits on both Foreign Direct Investment (FDI) and Foreign Institutional Investors (FII) investors. When asked whether the 49 per stake be either through FDI or FII route alone, the Commerce and Industry Ministry replied in the negative.

It said, “This implies that when foreign airlines are investing in the capital of Indian companies, operating scheduled and/or non-scheduled air transport services, they can do so up to the limit of 49 per cent of the paid-up capital of such companies.”

Generally speaking, foreign investment can be made either directly or indirectly. Direct investment is guided by the Government policy. Foreign investors buy shares directly from the company and here money will come into the account of the company.

Indirect investment is also termed as portfolio investment and guided by the Reserve Bank of India’s regulations. In this case foreign investors buy shares in the secondary market and here money does not come to the company’s account.

Pointing out that it was conceptually incorrect to club FII and FDI, Dhiraj Mathur, Executive Director and Head of National Aerospace and Defence Practice, PwC, felt that legally both are governed by different provisions.  

FII is short-term capital which will not go into the company, while FDI is a long-term strategic investment. He added that clubbing the two would dilute the policy.

Another senior analyst felt that the latest move goes against the Government’s objective of bringing in long-term strategic investors for airlines.

“If you club the two together, FIIs will pick up from the secondary market and then seek a premium when the company wants them to exit. How will this benefit the airline?” he added. According to experts, this shows the “confusion” that exists in the mind of the Government on this issue.

http://www.thehindubusinessline.com/todays-paper/tp-economy/article3929823.ece