Visitor queue to access an Airbus A380-800 aircraft, operated by Etihad Airways, during 14th Dubai Air Show at Dubai World Central (DWC) in Dubai (Photographer: Jasper Juinen/Bloomberg)

Hurdles That May Prevent Etihad From Playing White Knight For Jet Airways

India’s foreign direct investment policy could pose a potential hurdle as lenders attempt to convince UAE-based carrier Etihad Airways to play white knight for Jet Airways.

Here’s why:

As per the FDI policy, foreign airlines are allowed to invest up to 49 percent in an Indian airline. But the substantial ownership and effective control has to be with Indian nationals.

That worked out great so far with Naresh Goyal – a non-resident Indian- owning 51 percent in Jet Airways, Etihad owning 24 percent and the remaining 25 percent with public shareholders. But with Jet’s mounting debt, Etihad is now being asked to step up. One option is that Etihad infuse fresh capital in the debt-strapped Indian airline by increasing its stake to up to 49 percent.

The question is, does the combined effect of FDI policy and market regulator SEBI’s Takeover Regulations, make it unviable for Etihad to do so?

The moment Etihad’s shareholding in Jet crosses 25 percent, it will be required to make an open offer as per the Takeover Regulations. Jet can tide over this hurdle by citing the SpiceJet precedent, where co-founder Ajay Singh was exempted from making a 26 percent open offer to the public shareholders. The Takeover Regulations allow a ‘competent authority’ to waive the need for an open offer. In SpiceJet’s case, the Directorate General of Civil Aviation, under the Aircraft Act, 1937, approved the deal and allowed Ajay Singh to skip this requirement.

The open offer is a non-starter and the principle applied in SpiceJet – of a domestic airline in stress and the power of the competent authority- can be used here as well, Vaibhav Kakkar, a partner at law firm Luthra & Luthra said. He said that the exemption will also need to be given to Etihad so that you can harmonise the FDI Policy with the Takeover Regulations,

The open offer money will go to the public shareholders. So obviously, Etihad will need to put in additional money in the company. If you combine this, the stake acquired through open offer plus what they currently own, they will breach the 49 percent cap.
Vaibhav Kakkar, Partner, Luthra & Luthra

Further, if Etihad is forced to make an open offer, the public shareholding norms, of minimum 25 percent, may likely be breached as well, he added.

That makes the case for an exemption from open offer stronger.

Yet, even if an exemption were to be given, Etihad may not see value in enhancing its shareholding to 49 percent, unless it is allowed commensurate rights such that it can exert significant influence over Jet but not cross the ‘control’ threshold, Kakkar said.

To be clear, when Etihad first bought into Jet, in 2013, it was forced to dilute several terms in its shareholder agreement on the contention that these might amount to “control” which is not permitted. The dilutions related to structure of the nomination committee, removal of independent directors and Etihad’s say in Jet’s commercial decisions.