Etihad Airways' protracted acquisition of a 24 percent stake in India’s Jet Airways for $370m has hit a further snag, following allegations surrounding a bilateral traffic rights deal and 11th hour government interference.
The deal between Jet and Abu Dhabi’s Etihad, announced in April, was the first example of foreign direct investment in India’s cash-strapped aviation sector by an overseas carrier following a change in the law this year.
The acquisition came hours after a new bilateral deal was announced that would increase by three-fold weekly passenger capacity between the UAE capital and India.
In a letter to the Indian Prime Minister and Central Vigilance Commission, MP Nishikant Dubey claimed that four government ministers colluded to clear “in haste” the bilateral traffic agreement in order to speed up the Jet-Etihad deal. Jet, owned by tycoon Nayesh Goyal, was about $1.5bn in debt prior to the acquisition and in desperate need of new funding.
Dubay also alleged the Director General for Civil Aviation (DGCA) discretely made a number of key changes to codes governing Indian aviation, that in turn paved the way for the sale of Jet.
Clauses modified or removed from the DGCA’s 2008 guidelines included one that prevented a domestic airline from passing on control of management to a foreign carrier and another that prevented financial arrangements such as lease-hire and hire-purchase with an overseas airline.
On June 13, India’s Foreign Investment Promotion Board deferred its approval of the Jet-Etihad deal as it sought more clarity on the proposed control and ownership structure of Jet. Under the acquisition, Etihad would nominate three directors to Jet’s seven-member board, while concerns have also been raised by the Indian government over fears Etihad could move significant parts of Jet’s operations from India to Abu Dhabi.
In early May, it was reported that Jet was seeking to raise $300m at 3 percent interest via Etihad’s financial network in an agreement which may have also been prohibited prior to the change in the DCGA code.
Dubey also raised concerns that the proposed ownership structure of Jet under Etihad could violate FDI rules. Jet is currently 66 percent owned by Goyal, with a further 9 percent owned by Isle of Man-based holding company Tailwinds. Dubey suggests that once Etihad takes 24 percent of Goyal’s stake, the combined foreign ownership of Jet by Etihad and Tailwinds will exceed the 49 percent permitted by the FDI law.
The letter from Dubey has been forwarded onto India’s Central Bureau of Investigation, which could launch an inquiry into the matter. The air services agreement itself is yet to be ratified by the Indian Cabinet, with a decision due later in the year.
The proposed deal between Etihad and Jet, as well as the Bilateral Air Services Agreement, has been unpopular with certain factions of the Indian administration due to the perceived negative impact it would have on state-run carrier Air India.
India’s aviation minister Ajit Singh has already threatened to resign over mounting opposition to the acquisition.
Saj Ahmad, chief analyst at Strategic Aero, said that the complications in the Jet-Etihad deal would act as a litmus test for appetite towards further FDI in the sector. “Between the corruption, apathy and red tape, the changes in the FDI haven't exactly brought a groundswell of willing investors,” he said. “If the bilateral collapses, so will the Jet-Etihad deal. If that happens, I see no incentive for Etihad - or anyone else - to rush back and reignite a deal.”
A spokesperson for Etihad said: “We are engaged in a regulatory process, and it would
be inappropriate for us to comment at this time.”