Despite brickbats, the government cannot afford to scrap the Jet-Etihad deal. K.R. Balasubramanyam and Manisha Singhal

When Etihad Airways announced in April it was picking up a stake in Jet Airways, it seemed like the long-delayed deal was finally ready to be signed, sealed and delivered. But nearly three months later, the agreement has run into controversy again and the big question everybody is asking is: will Jet manage to cross all hurdles and get the $379-million investment the United Arab Emirates' (UAE) airline has offered for a 24 per cent equity stake?

Most market observers expect the deal to go through despite a torrent of objections. The agreement hit a snag after the Foreign Investment Promotion Board (FIPB) and stock market regulator SEBI raised questions about ownership and effective control of the Indian airline passing into foreign hands.

Media reports say Etihad plans to control Jet through a clutch of management committees populated by its nominees and shift Jet's offices as well as many back-end activities to Abu Dhabi. Etihad Airways declined comment on the issue: "We are engaged in the regulatory process and it would therefore be inappropriate for us to comment."

But Jet sources say they are working with the investment board to address these concerns. A senior lawyer privy to the Jet-Etihad transaction says the clauses proposing to confer certain rights to Etihad are aimed more at protecting the UAE airline's investments in Jet rather than wresting management control from Indian hands. He adds the regulators and authorities can vet the deal to ensure it is in line with foreign equity cap rules.

Experts say the deal is unlikely to be derailed by allegations that the government hurriedly approved a bilateral traffic rights deal with Abu Dhabi as a quid pro quo for the investment in Jet. A few Opposition members have questioned the manner in which the Civil Aviation Ministry agreed to hand over nearly 37,000 additional seats per week over the next three years to the UAE just hours before the airlines signed the deal.

Ramesh Vaidyanathan, partner at Mumbai-based law firm Advaya Legal, says the deal document does not say the equity investment by Etihad hinges on the grant of additional bilateral seats. "It is a share purchase agreement between two private parties. But if the deal collapses on the issue of the bilateral, then the government will stand exposed," he says. Another lawyer who handled the Jet-Etihad transaction agrees. "In addition, the government can examine the security angle too. But the deal meets all these parameters," he says.

The latest events, including a move by the Prime Minister's Office to put all official proceedings on the bilateral agreement in the public domain, may delay approval, but will not block the deal, say government officials with direct knowledge of the matter. The government will not scrap the deal because it will make a poor impression on foreign investors.

That is the last thing India wants after the UAE's Etisalat Group shut its India operations last year after being stripped of its telecom licence. The UAE operator had invested $900 million for a 45 per cent stake in Swan Telecom. Etisalat has ruled out returning to India to do business.

Minister of Civil Aviation Ajit Singh is also confident about the deal. Singh successfully got government policy amended last September to clear the way for foreign airlines to invest up to 49 per cent in Indian carriers. He is also seen as the man who facilitated the Jet-Etihad deal as a precursor to possible investments from Abu Dhabi.

India cannot afford to let the deal fall through.

The UAE is New Delhi's largest trading partner: bilateral trade between the two countries stood at $74.4 billion in 2012/13. Singh said there was no question of his ministry going back on the bilateral pact it had sealed with its counterpart in the UAE. "Bilaterals are between two governments. There are repercussions of changing them unilaterally," he told Business Today.

Executives who were part of the transaction say the UAE national carrier is taking a calculated commercial risk by offering to invest in Jet. According to Shriram Subramanian, Managing Director of proxy advisory firm InGovern Research Services, investors are keenly watching the Jet-Etihad deal. "The government should not kill the transaction in India's larger economic interest, but must enhance its transparency and ensure it is fair to minority shareholders," he says.

An independent aviation analyst says both the airlines have worked for several months to make the terms acceptable to both sides, and so are unlikely to let it fail now. Etihad's investment is the first deal after India opened its aviation sector to direct investment by foreign airlines.

Jet Chairman Naresh Goyal just cannot afford to let go of the opportunity. Jet has not reported a profit in the last six years, and is sitting on a debt of about Rs 13,000 crore. And if Etihad's money does not reach Jet, it might just go belly up like Kingfisher Airlines.

BT