MUMBAI (Reuters Breakingviews) - Narendra Modi faces an airborne dilemma. To keep Jet Airways flying, the Indian prime minister may have to choose between relaxing foreign ownership rules for Abu Dhabi backer Etihad, and letting state lenders take a hit on a private carrier. Both options touch the country’s financial sore points – and represent a quandary for the ruling party ahead of an election due by May.
India’s second-largest airline, one of two major home-grown long-haul operators, has been in a holding pattern since missing a repayment to banks earlier this month. Etihad is willing to pump in cash to hold onto a strategic investment which feeds traffic from a market of 1.3 billion people into its own sparsely populated Gulf base. Allowing Etihad to take the controls by ousting founder and majority owner Naresh Goyal would make financial and strategic sense.
But that would involve Etihad increasing its stake from 24 percent which would, in turn, trigger a requirement to launch an open offer for the rest and risk breaching rules limiting foreign carriers to owning 49 percent. Making an exception here would be awkward, given New Delhi has been tightening the implementation of foreign investment rules elsewhere, including in e-commerce, potentially causing significant pain for Amazon and U.S. retailer Walmart, which now controls local giant Flipkart.
The alternative scenario may be to let lenders swap some debt for equity. Jet said on Wednesday that it was in talks with stakeholders considering options including on the “debt-equity mix”. Financial institutions are rarely good owners of industrial assets, though. Indian banks look even less well-equipped, given so many of them are saddled with bad assets already, and are struggling with governance and bad loans.
Neither solution is politically palatable. Either a relaxation of foreign ownership or allowing lenders to prop up a failing private institution would provide the opposition with a stick to beat Modi in a poll that could be closely contested. But letting the airline fail isn’t an option either: that could cost thousands of jobs, and losses for banks too. There’s still hope of white knight bid from India’s biggest conglomerate, the Tata group. But the runway for Jet and the prime minister looks increasingly short.
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