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Takeaways from the Jet-Etihad Deal

August 5, 2013

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Liberalization is sparkling in India like a rising star as evidenced from many of the foreign investment deals which are on the verge of finalization. As per the circular issued by the government of India in the year 2012, a total 49% equity investment could be made by a foreign investor in aviation industry subject to certain restrictions. This has brought about a drastic change in the aviation industry and has made a platform for structuring the deal of Jet airways with United Arab Emirates Etihad Airways. The deal, which came after months of negotiations, is the first investment by an overseas operator in an Indian airline since the government liberalized airline investment rules. The Jet airways is controlled through Tail Winds Ltd, a company registered in the Isle of Man which holds 80 per cent stake in Jet Airways

The Jet airway is struggling with losses and is saddled with a debt burden of more than Rs 13,000 crore. The fresh flow of funds will save the airline some Rs 230 crore in interest costs annually (according to an Edelweiss Research note). Etihad will also invest $220 million in a frequent flyer programme and slots at Heathrow airport, and will arrange another $150 million to help Jet pare its high-cost debt.

The UAE flag carrier has also announced plans to invest about $750 million in the indebted Jet Airways through both equity and debt, which includes $379 million for a 24 per cent stake and 32 per cent premium over the stock's closing price before the agreement

Both jet airways and Ethiad are in a win-win situation by negotiating this deal as Jet will relived by its overburden debt and Ethiad will make a foothold in one of the world’s fastest growing aviation markets.

The green signal to the foreign investment in aviation industry in India is not as simple as it can be seen from the wordings of the circular which authorizes such investment. It needs to pass through different hurdles of regulatory compliances in order to take off the deal. The deal needs to take compliance and no objection, first of all from the Securities and Exchange Board of India (“SEBI”), the SEBI is much concerned about the management, ownership and control of the company and the clauses in the tie up shareholder agreement and SEBI is also insisting on amending the change in the Articles of Association.

The circular says that 49% of foreign equity stake can be allowed in Indian aviation industry and also as per the SEBI’s takeover regulations; it would have to make a public offer to acquire a further 26 per cent stake when it reaches the 25 per cent threshold. The SEBI takeover regulations contemplate public offer to be made in two alternative eventualities — when the Rubicon is crossed in terms of percentage of stake acquired, or when effective control is handed over.

Unlike the percentage norm, effective control is easy to understand, but difficult to define. And it is this ambivalence that acquirers take advantage of. They can wriggle out of a huge public offer, hot on the heels of a negotiated deal with those in the saddle.

Therefore the basic criterion which SEBI is genuinely looking for finalizing the deal is to regulate the control of management and clauses of the shareholder agreement

Than the second hurdle which need to be crossed is the affirmation from the Foreign Investment Promotion Board (“FIPB”), which says that the agreement clauses needs to be changed which give the management control to the Investor

The proposal will also need the nod of the Competition Commission of India and the Cabinet Committee on Economic Affairs before the deal is finally done. Then the Ministry of Corporate Affairs is seeking details of the shareholder agreement while the Civil Aviation Ministry feels that the place of business could shift from India if the proposal in its current form is given the nod.

If all the above regulatory compliance is fulfilled, than only the deal could finally find its path on the runway for the take off.


A shareholders' agreement is an essential document to confirm the rights of the shareholders, one against another and against other stakeholders in the business, and to set out how the shareholders intend to operate the company. It takes over where company law stops.

A shareholders’ agreement on the other hand is signed sub-rosa between two dominant shareholders and is effectively the norm in foreign collaboration agreements.

The common terms of the agreement as given by different news article can be summarized as follows:-The agreement says that no further capital can be raised without the foreign collaborator’s nod, and it would be so even if the foreign collaborator is holding just 24 per cent.

More ominously, it would say, that the nominee of the foreign collaborator can veto any decision in the board meeting, and this too would be put into effect though it is violative of the company law.

The shareholder agreement between Jet Airways (India) and Abu Dhabi-based Etihad Airways says that any board resolutions require the consent of three-fourths of members. According to people aware of the development, the clause might be amended to say a simple majority will be required to pass resolutions in the board.

According to the agreement, Etihad will get three board positions, while Jet will have four members. There will be seven independent members on the board. In simple terms, the proposed amendment means that a vote of eight board members will be sufficient to pass a resolution.

One of the key points in agreement appreciated by the government is that the Etihad will not have the unilateral right to terminate the commercial cooperation agreement and this right will now be held by both sides.

Then, the nomination committee will include one person nominated each by Jet and Etihad and three other board members will be chosen through consensus. Etihad is being regarded as an ordinary public shareholder under the agreement it signed with Jet and such a classification does not require it to make an open offer.


Therefore, giving a affirmative or negative remarks on the above deal is beyond the scope of a common man but then we could say that a government whose every economic decision is coming under close scrutiny, be it 2G licences or allotment of coal blocks, might fear being hauled over the government that if it allows the Etihad deal to go through without verifying what is there in the secretive private agreement whose sanctity remains suspect under the Indian laws apart from all these ups and down faced for the enforcement of the deal this deal could prove to be very beneficial for the people of India as because of all such investment we could aptly expect for some downfall in the prices of the air transportation in India.

Disclaimer: The entire contents of this document have been developed on the basis of relevant information and are purely the views of the authors. Though the authors have made utmost efforts to provide authentic information however, the authors and the company expressly disclaim all and any liability to any person who has read this document, or otherwise, in respect of anything, and of consequences of anything done, or omitted to be done by any such person in reliance upon the contents of this document.



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