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Tatas withdraw airline proposal, accuse government of dithering

Tata Industries Limited today withdrew its controversial proposal to float a domestic airline in India. The company communicated its decision to shelve the proposed Rs 14.75 billion joint venture (with 40 per cent foreign equity) to the aviation ministry as well as the Foreign Investment Promotion Board.

In a statement released in New Delhi, TIL said it first sought to set up the airline three years ago. The proposal has been hanging fire since then, during which four governments at the Centre did not grant it the go-ahead.

The FIPB was expected to take a decision last Saturday, but that was not to be as the aviation ministry sought six weeks time to articulate its stand on the project.

The proposal was last deferred by the FIPB on August 22 for a week on the demand of Finance Secretary Vijay Kelkar that he be given more time to study the proposal.

Earlier, the proposal was deferred on the request of the civil aviation ministry which sought some more time for giving a formal approval to the proposal. The ministry also wanted to confirm whether the proposal abides by the new aviation policy announced on June 12 this year.

The new policy permits an airline company to enter code-sharing, interlining and ground-handling arrangements with other airlines as long as it is not a management contract. The Tatas were asked to define clearly the technical collaboration they will have with Singapore International Airlines.

The Tatas last wrote to the government on July 6, 1998. The aviation ministry, however, did not seek further clarifications. Asked if the sensational decision was sudden and if the government was informed in advance, a Tata official in Bombay said: "We have been meeting government officials regularly. What is the point in informing them when they showed no interest in the last three years?"

The project ran into rough weather over aspects like the foreign equity composition, foreign partners, foreign institutional investors and the perceived threat to the domestic carrier, Indian Airlines.

While the aviation ministry has been seeking the exact details about the distribution of equity holding by the foreign institutional investors, the Tatas have been reluctant in coming out with the information stating that it could be made available only once the proposal is cleared.

In 1995, when the proposal was first submitted, the Tatas wanted to float an airline in collaboration with SIA. But the proposal was dropped as the then new aviation policy barred foreign equity in domestic airlines, especially from foreign airlines. In December 1997, TIL submitted a fresh plan that steered clear of foreign partners.

Later, the plan was changed a little to mean that a part of the equity would be held by foreign investors like US insurance major American International Group and the Singapore Investment Corporation. The proposal was cleared by the industry ministry -- some say even by the Prime Minister's Office -- but the civil aviation ministry, the nodal agency, put its foot down.

The Tatas planned to raise roughly $ 80 million or 40 per cent of the equity base of Rs 6.90 billion from FIIs. The new policy permits FIIs to hold a 40 per cent stake, but not if they are linked in any way to foreign airlines.

The Tatas were asked to prove that the FIIs who will be investing in the project had no links whatsoever with SIA.

As lobbying for and against the project reached a feverish pitch, the government referred the issue to a special committee, a move criticised by a section of parliamentarians who felt it sent the project into a ''tailspin''.

One of the MPs, Jayant Malhoutra, told Rediff On The NeT, this evening in Bombay, "The Tatas have done the right thing. This government should be snubbed. I feel Ratan Tata should also resign from the prime minister's economic advisory committees in protest."

TIL blamed the government for indefinitely delaying the project by not taking a decision. Worse, it said, the aviation ministry sought to consider issues raised by third parties that have no relevance to either the policy in place or to the Tata proposal.

Indian Airlines trade unions and a powerful group of MPs have been opposing the project. However, in a recent development, the United Parliamentary Group, led by Rajya Sabha member Malhoutra, decided to support the proposed airline and sought the prime minister's intervention.

TIL said the proposed project could have created 2,400 direct jobs and 10,000 indirect jobs by the fifth year of its operations. Speaking on condition of anonymity, a Tata official said in Bombay: "Our decision will certainly change the attitude of foreign investors currently eyeing India. I think our decision is not a piece of good news for the finance minister who has been talking of an economic recovery."

While Finance Minister Yashwant Sinha's reaction is not known, his advisor, Mohan Guruswamy, when contacted by Rediff On The NeT, refused to comment. Guruswamy is believed to have been one of the project's supporters in the government. Asked whether the Tatas' decision will affect the economy, he said it is not right to comment ''at this juncture''.

TIL, however, thought the time was right to come out in the open. Its statement indicated that given the absence of a credible time-frame for a decision, the withdrawal was inevitable. ''The Tata proposal to provide a world class airline remained on paper due to the inability of four successive governments to implement their policies,'' a company spokesperson said at a media briefing in New Delhi. ''The current proposal, made in December 1997, is fully in line with government policy and the guidelines issued by the directorate general of civil aviation.''

Asked whether the company will reconsider its decision, the spokesperson said, ''The project stands grounded as of now.'' Tata officials expressed confidence that the airline decision will not in any way have a bearing on the group's other projects.

(Additional inputs from UNI)