Is Etihad getting too much control in Jet Airways with too little investment?

When the UAE flag carrier Etihad Airways entered into a deal with Jet Airways in April this year, was the transaction limited to just picking up a 24 per cent stake? Or did it also include management control?

This is the question that is bothering the Indian stock market and investment regulators - read the Securities and Exchange Board of India and Foreign Investment Promotion Board (FIPB). They are now carefully examining every line in the shareholder agreement between the two airlines to see if the Gulf carrier has received any disproportionate rights and privileges from Jet Airways' promoters.

Indian regulations cap foreign direct investment in the airline sector at 49 per cent with a view to ensure that management control remains firmly in the hands of Indians.  The UAE carrier, however, has extracted certain concessions from Jet promoters by having a few clauses inserted in the shareholder agreement. It is this set of clauses that has now sparked off a debate and blocked approval of the first FDI deal in an Indian carrier since the relaxing of FDI rules relating to aviation last year.  

With Etihad on board, the Jet Airways Board of Directors has proposed a set of amendments to its Articles of Association that provide Etihad Airways superior rights over other public shareholders.

Some of the rights proposed to Etihad Airways include:

• Appointing three nominee/investor directors
• Appointing one of its nominee directors as Vice-Chairman of the Board
• Having the authority to appoint one of the Joint Auditors
• Having the authority to have at least one of its nominee directors in each of the Board Committees
• Getting unrestricted access to Jet Airways' books, registers, records, premises, sites, offices, officers, employees, accountants, consultants, etc.

 
In transactions where a large stake is sold to a private equity firm, minority investors are given an open offer/exit route. "The amendments proposed by Jet to its Articles of Association allows Etihad Airways to exercise substantial management control and contribute to operational matters with a mere 24 per cent stake in the company and without providing minority shareholders an open offer/exit route," says Shriram Subramanian, Managing Director at InGovern Research Services, a proxy advisory firm.

According to another expert, the Jet-Etihad transaction is unusual in the Indian context because it confers unequal rights on one shareholder of a listed company. In such a transaction, there was no need for a separate shareholder agreement, he says.  A senior lawyer privy to the Jet-Etihad transaction, however, provides a contrary view arguing that these clauses were meant more to protect Etihad's investments in Jet rather than wrest management control from Indian hands.

Surprisingly, one of the amendments under the heading "Investors Board Member" says: "The Investor Board Member (Etihad nominee) shall not be liable for any default or failure of the Company in complying with the provisions of any applicable laws. The Investor Board Members shall not be identified as an 'officer in default' of the Company or occupiers of any premises used by the Company under Laws." This amendment has raised eyebrows. "Making the Investor Board Member immune from consequences for any management lapses should be a cause for concern for shareholders," says Subramanian.

The aviation industry, both in India and overseas, is closely watching the developments to see in what shape will the deal finally be cleared by Indian regulators, and if Etihad indeed gets the kind of powers it seeks.