Background

The Department of Industrial Policy and Promotion (DIPP), vide a press note issued in September 2012, revised the policy Foreign Direct Investment (FDI) in civil aviation sector to permit FDI up to 49% in scheduled and non-scheduled air transport services by foreign airlines under the Government approval route. Prior to the policy revision, foreign airlines were allowed to participate in the equity of companies operating cargo airlines, helicopter and seaplane services, but not in the equity of an air transport undertaking operating scheduled and non-scheduled air transport services. The 49% limit includes both FDI and FII investments which would have to necessarily comply with the regulations of Securities and Exchange Board of India as well as other laws and regulations, if applicable.

In view of the above, the Director General of Civil Aviation (DGCA) has recently issued guidelines (Guidelines) for interpretation of indirect investment by foreign investing institution/ entity/ airlines, conforming with the provisions of the Aircraft Act 1934 and the Aircraft Rules 1937. This update aims to capture some of the key highlights of the Guidelines.

Guidelines for Scheduled Air Transport Service / Domestic Scheduled Passenger Airline (Scheduled Services) and Non-Scheduled Air Transport Service/ Non-Scheduled Airlines, Chartered Airlines and Cargo Airlines (Non-Scheduled Services)

The permission to operate scheduled or non- scheduled services would be granted either to a citizen of India or to a company or a body corporate registered and having its principal business within India. For scheduled services, such company or body corporate must fulfill the following conditions: (a) its Chairman and two-thirds of its directors are citizens of India, and (b) its substantial ownership and effective control is vested in Indian nationals. In respect of non-scheduled services, the majority on the board of directors must be Indian citizens. For both scheduled and non-scheduled services, the senior positions in the domestic company such as Managing Director, Chief Executive Officer and Chief Financial Officer may be held by foreign nationals subject to scrutiny by the Ministry of Home Affairs.

The domestic applicant company seeking permission to operate scheduled or non-scheduled services would have to furnish details of the shareholding of any airline in the investing foreign entity as well as the composition of board of directors and senior management of such foreign investing entity. Further, a domestic applicant company, not having any FDI by a foreign airline, would not be permitted to have any agreement which may give a foreign airline the right to interfere in the management of domestic operator.

Guidelines for Cargo Airlines, Helicopters and Seaplane Services

An air cargo operator’s permit can be granted only to (a) a citizen of India; or (b) a group of individuals of Indian nationality or a trust/society registered under the Societies Registration Act 1860; or (c) a Non-resident Indian (NRI)/overseas corporate bodies; or (d) a company registered under the Companies Act, 1956, having its principle place of business within India and with or without foreign equity participation (excluding NRI equity) as approved by Government from time to time; (e) the Central Government or a State Government or an undertaking owned or controlled by either of the said Governments.

However, the permission to operate helicopter and seaplane services would be granted only to a citizen of India or to a registered company or a body corporate having its principal business within India. In respect of cargo airlines, helicopters and seaplane services, the majority on the board of directors of the domestic company would be Indian citizens.

Conditions applicable to scheduled and non-scheduled services with respect to key positions being held by foreign nationals, furnishing of details of the shareholding of any airline in the investing foreign entity as well as the composition of board of directors and senior management of such foreign investing entity, prohibition on having any agreement which may give a foreign airline the right to interfere in the management of domestic operator, as mentioned above, have also been made applicable to cargo airlines, helicopters and seaplane services.

Guidelines for Maintenance and Repair Organizations / Flying Training Institutes / Technical Training Institutes

A foreign company may set up a maintenance and repair organization, flying training institute or technical training institute by incorporating a company under the Companies Act 1956 through a joint venture or a wholly owned subsidiary, after obtaining necessary approvals of DGCA. The foreign equity may be up to 100% in such Indian company.

Conclusion

The FDI policy in civil aviation sector has been progressively liberalized over a period of time. The much awaited Guidelines issued by the DGCA appears to be a concrete step in the direction of welcoming the entry of foreign airlines subject to fulfilment of the conditions as provided in the Guidelines.