FIA Raises 'Ownership' And 'Control' Bogey To Stop Changes To 5/20 Rule

Persisting with its older argument that new airlines - Vistara and Air Asia India - are not effectively under Indian "control" and Indian "ownership", the Federation of Indian Airlines (FIA) consisting of Jet Airways, SpiceJet, IndiGo and Go Air have once again registered their opposition on any government move to do away with the 5/20 norm for domestic carriers. This come within days after the Air India management is said to have informed the civil aviation ministry that it remains unaffected whether the 5/20 norms are retained, modified or scrapped in the proposed National Civil Aviation Policy which is under finalisation currently. For Air India, this is a departure from its earlier stand taken in January 2014 when it had opposed doing away with the 5/20 rules.

The 5/20 rule that pertains to a precedent set a decade ago under the UPA government where domestic carriers are not allowed to fly on international routes unless they fly within India for five years and have a fleet of at least 20 aircrafts.

Earlier this week, Nusli Wadia and Jeh Wadia, promoters of GoAir along with SpiceJet Chairman Ajay Singh were part of a delegation that met Minister of State for Civil Aviation Mahesh Sharma as part of a FIA to express their concerns on changes being proposed with regard to the 5/20 rules.

The FIA has raised its concerns citing the "substantial ownership and effective control (SOEC)" norms being flouted by the foreign partners of Indian carriers. Reports suggested that FIA firmly believes that India has not clearly defined "effective control" or has properly enforced the same. "Pending India addressing the issue of effective control, the 5/20 rule affords some protection," said a note of FIA on SOEC published by a newspaper recently. FIA wants SOEC to become an integral part of the every bilateral pact that India would sign with other countries, "without exception" else it leaves the scope of any country to enter the Indian aviation sector by investing in a domestic airline while effectively controlling it from outside.

What Is SOEC?
It must be noted here that the issue of substantial ownership and effective control (SOEC) norms appear in the Schedule XI of the Aircraft Rules. The bogey of SOEC was raised by FIA in 2014 when the Director General Civil Aviation had invited comments to the proposal by Tata SIA Airlines to obtain the Air Operator Permit for starting a scheduled airline. Despite FIA's objections back then, answers were provided by DGCA while granting the Air Operator Permit to Tata SIA. Vistara a joint venture between Tata Sons and Singapore Airlines while Air Asia India is a joint venture with Air Asia Berhad (holds 49 per cent) while Tata Sons holding 40.06 per cent and Telestra Tradeplace having the remaining 10 per cent in Air Asia India. Telstra Tradeplace is an investment holding company of Arun Bhatia. Hindustan Aerosystems, a Telstra group company, manufactures and supplies precision components for the aerospace industry.

At the time of granting the Air Operator Permit, the DGCA had said in the letter dated July 09, 2014: "The government is aware of the Clause "Substantial Ownership and Effective Control" as one of the requirement for issue of Air Operator Permit." He said after allowing maximum 49 per cent equity by foreign airlines and leaving the balance 51 per cent to be invested by Indian nationals, Tata SIA Airlines (51:49 in favour of Tata) fulfils the condition of 'Substantial Ownership'.

On Effective Ownership, DGCA had argued that as Tata is an Indian company regulated under Indian laws, therefore, the objections regarding foreign shareholders in Tata did not hold. "A company is controlled by the board of directors. In the board of directors of Tata SIA if 2/3rd of the directors and chairman are Indian citizens, it can be said that the effective control vests in Indian nationals because the management/policy decisions shall always be taken by board where the majority lies with the Indian citizens/nationals."

However, regarding the objection raised by FIA that as per the FDI policy, the FDI by foreign airlines is not allowed in the greenfield airlines, Kumar said that the issue has already been examined by the FIPB at the time of allowing 49 per cent equity participation by SIA in M/s. TATA SIA Airlines Ltd. " Moreover, this issue has been challenged by the FIA in the Hon'ble High Court, Delhi, which is still subjudice," it had said in the letter back in July 2014.

FIA's Concerns
FIA maintains that the concept of SOEC is followed and protected globally by countries like the US and Canada that allow only 25 per cent of voting rights to foreign nationals and entities in their airlines. Europe allows 49% ownership but has codified effective control to ensure that control of European airlines is clearly with the Europeans. In other aviation markets such as the Gulf, Russia and China, ownership and control is very restricted or not allowed.

In private, FIA member airlines point out that AirAsia India and Vistara are clearly controlled by their foreign parent and continue to operate in India blatantly flouting the principle of effective control. "If this is allowed to go on very soon there could be a situation where foreign airlines would establish Indian airlines but will be effectively owned and controlled by them." If such a situation comes while 5/20 is scrapped, such so called "Indian" carriers will claim entitlement to bilateral rights to fly to overseas markets including to their home markets. "In such a situation, such airlines can potentially obtain rights to and from their origin countries into India which can virtually lead to a monopoly over key routes," said one executive who works for a FIA member company.

Expected Beneficiaries
Doing away the 5/20 rule is expected to benefits the likes of Vistara and Air Asia India which are less than 20-month into their operations and have less than half the mandatory fleet size of 20 aircrafts. Vistara commenced operations on 9th January 2015. Currently, Vistara has a fleet size of nine aircrafts. Air Asia India has a fleet size of six aircrafts currently and it had commenced operations on 12th June 2014.

Earlier, national carrier Air India was opposed to any changes to the 5/20 rule. However, last week Air India is said to have tweaked its earlier stand and said that national interest should be the criteria for the government when it decides on either retaining or scrapping the rule to allow Indian carriers to fly overseas. Even the civil aviation minister and his deputy - Ashok Gajapathy Raju and Mahesh Sharma - have often been quoted as saying that in their personal opinion, the government should do away with the 5/20 rule.