India eases foreign investment rules for airlines

By Aditi Shah

NEW DELHI (Reuters) - India eased rules for foreign investment in the country's aviation sector on Monday in a bid to boost air travel and develop new airports in Asia's third-largest economy.

The new measures allow 100 percent foreign ownership of India-based airlines, raising the limit from 49 percent, but only with prior approval from the government, according to a statement issued by Prime Minister Narendra Modi's office.

They also allow more than 74 percent foreign investment in brownfield airports, on condition of government approval.

Domestic airline stocks gained with SpiceJet Ltd up 7.4 percent, Jet Airways rose 6.6 percent and InterGlobe Aviation's IndiGo Airlines ended the day 5.8 percent higher.

"The opening of FDI (foreign direct investment) will help bring in much-needed cash, aircraft fleet and best practices," said Amber Dubey, partner and India head of aerospace and defence at consultant KPMG.

"We may see its positive impact over the next 6-12 months," Dubey said.

The liberalisation comes days after India announced a new civil aviation policy that eased flying rules for domestic carriers, which no longer need to wait five years to fly overseas as long as they deploy 20 aircraft in the domestic market.

This is a fillip for start-up airlines such as Vistara, 49 percent owned by Singapore Airlines and controlled by India's $100 billion Tata Group, and AirAsia India, an AirAsia Bhd and Tata venture.

However, there is still some ambiguity on the impact of the new foreign investment rules and analyst opinions are divided.

India has limited the equity holding of foreign airlines to 49 percent, but these airlines can bring in investors such as private equity firms or sovereign wealth funds to establish a 100 percent owned airline in India.

There is, however, still no clarity on whether such an airline would be allowed to fly overseas once it deploys 20 aircraft in India, the world's fastest-growing aviation market.

"I don't think this would be applicable or impact present carriers," said Kapil Kaul, CEO at the Centre for Aviation, a consultancy, adding that for a carrier to fly overseas it needs to have substantial Indian ownership.

He said companies could have two separate entities - one to service the domestic market and the other for international operations but that may not be practical.

"This is a good headline statement but when you get deeper into it, there are fault lines," Kaul said.

A Singapore Airlines spokesman said the company is happy with the partnership it has with Tata.

"At this point there are no plans for changes to our 49 percent ownership of Vistara," the spokesman said.

(Additional reporting by Siva Govindasamy in Singapore; Editing by Douglas Busvine and Susan Fenton)