Institutional members or government nominees on boards of those companies supported the management representing minority family promoters because those companies were run very efficiently making the state-owned FIs the biggest beneficiary as both majority or substantial shareholders and big lenders.

Tata Steel, in which the promoter’s stake through the 1970s and 1980s was as low as less than five per cent, was the best example of such an arrangement. The Tata Sons managed the Tata Iron & Steel Company with the support of the state-owned Life Insurance Corporation of India (LIC), alone holding as much as 47 per cent equity stake in the private sector steel giant. The practice gradually changed after India’s 1992 economic reforms with the government liberalizing foreign investment (FDI and FII) norms along with merger and acquisition (M & A) rules and restrictions on both foreign and local predators. And, FIs such as LIC, IDBI, IFCI, UTI and GIC chose to be less active in the board room affairs of public companies unless indirectly demanded of them by the national government, their owner, to thwart a hostile management take-over by an ‘undesirable’ group or other specific reasons.

Now, minority foreign investors seem to be playing a reverse role controlling majority Indian companies consensually using such mutually agreed tactics as soft loan providers and ‘private and confidential’ shareholders’ agreement between the promoters, often as a clever ‘off-shore’ act. These so-called minority foreign equity investors (FDIs) are indirectly running or controlling several Indian enterprises even with their official holdings in those enterprises staying as low as 24 per cent. Several insurance companies and telecom service providers are believed to be indirectly controlled by their minority overseas promoters. The latter are waiting for the government to relax the FDI norms to exercise full official control over these enterprises.

But, nothing can beat the amazing Jet-Etihad shareholders’ agreement under which the West Asian gulf airline, officially having only 24 per cent equity stake in Jet Airways, promoted by NRI investor Naresh Goyal, sought to openly control the country’s largest private airline with Etihad nominees, believed to be all foreign nationals, effectively outnumbering local representatives on key boards and management committees of Jet Airways. As if that was not enough, the revamped Jet Airways board has sought to move the hub of the what-is-supposed-to-be a domestic airline with licence to operate to overseas destinations to Abu Dhabi. But for the objection from the stock market regulator, Securities and Exchange Board of India (SEBI), the deal would have possibly gone through.

As it appears, the Jet-Etihad shareholders’ agreement, in its original form, is clearly devoid of legal sanction under both the companies act and SEBI rules. Jet Airways is a listed public company. One wondered what made Naresh Goyal agree to atrocious Etihad demands seeking to control the company’s operations with only 24 per cent equity stake. The matter remains a big mystery. Goyal had garnered the support of Union Civil Aviation Minister Ajit Singh to push through the 24 per cent stake sale to Etihad. The latter got the slice of Jet Airways’s subscribed equity capital for only $ 379 million to seize almost an effective control over the management of the Indian company worth about $1.58 billion. Under the new norms, FDI in civil aviation is allowed up to 49 per cent. The idea is to deny effective management control over the civil aviation sector by minority foreign investors.

There are several unexplained aspects of the Jet-Etihad deal. Firstly, why did Naresh Goyal agree to surrender the effective management of his company to a minority foreign stakeholder? Corporate promoters across the world, who doggedly fight for their management rights, are not known for their ambivalence when it comes to exercising the ownership control over their enterprises. Is there something between Jet Airways and Etihad management which could be too private and confidential to be shared with SEBI, the government and ordinary Indian shareholders? Tail Winds Limited, Naresh Goyal’s Isle of Mann-based offshore company, in which Gulf Air and Kuwait Air originally held 20 per cent stake each, promoted Jet Airways. It is not clear what prevented Etihad from acquiring a larger stake in Jet? Was it only to avoid an open offer to buy shares from the market which is mandatory under the takeover code and SEBI rules, or was there something else?

Why did the civil aviation minister and senior officials of the department, who had openly opposed the joint venture airlines deal between the Tatas and Air Asia, the low-cost Malaysian carrier, on technical grounds despite its clearance by the Foreign Investment Promotion Board (FIPB)? Was it not almost a remake of the civil aviation ministry’s rejection of Tata-Singapore Airlines deal in the mid-1990s while ignoring Jet promoters’ foreign airlines connection? The ministry, then, chose to ignore the holding pattern in Tail Winds, the promoters of Jet Airways. However, it would not be right to cast any aspersion on Goyal or his off-shore company for taking advantage of ambiguities in FDI rules. The fault lay with the government and the seemingly partisan attitude of the civil aviation ministry.

While the Jet Airways’ open defiance of SEBI rules should serve as an eye opener to the authorities, the FDI-hungry government should be more careful in treating foreign investment and business acquisition deals drawing experience from controversies involving Jet Airways, Vodafone of the UK and Walmart-Bharti among others. In order to make FDI and the composition and profile of promoters of offshore companies, seeking to invest in India, more transparent, the government should ask foreign investors to take the public-offer route to choose their Indian partners to comply with the stakeholding norm instead of taking private joint venture local partners engaging in shady deals. (IPA Service)