Over the past 150 years, the house of Tata has built a pristine reputation of doing business the ethical way and largely staying away from the murky activities which often define the functioning of corporate India. That reputation is now at stake as the goings-on at AirAsia india, its first venture in the civil aviation sector since the days of J.R.D. Tata, have come under the scrutiny of India’s top law enforcement agencies.
Turbulence for the carrier began in May this year when the Central Bureau of Investigation (CBI) registered a first information report (FIR) against Malaysia-based AirAsia Group chief Tony Fernandes for alleged bribery to obtain flying licences and changing regulations. The agency also filed a case against R. Venkataramanan, managing trustee of Tata Trusts; Tharumalingam Kanagalingam, better known as Bo Lingam, deputy group CEO (operations), AirAsia; HNR Trading’s Rajender Dubey; lobbyist Deepak Talwar, and Travel Food Services chairman Sunil Kapur.
The CBI in its FIR, which has been reviewed by Fortune India, also alleged that Lingam and Kapur bribed government officials to remove the 5/20 rule. Under this rule, the ministry of civil aviation stipulated that a domestic airline needed a minimum of five years of operational experience and a fleet of at least 20 aircraft before it could be allowed to fly to international destinations. It was replaced in 2016 with a new norm that scrapped the five-year waiting time.
Soon after the CBI filed its FIR, the Enforcement Directorate (ED) filed a case of money laundering against AirAsia India officials. Both AirAsia Group Berhad and Tata Trusts have refuted the charges and backed their men. AirAsia Group Berhad, the parent company of the airline group, is the largest low-cost service provider in Southeast Asia by fleet size and destinations.
In a recent statement, AirAsia Group denied Fernandes’ involvement with AirAsia India and lobby firm HNR Trading’s transactions, and passed the buck on to Mittu Chandilya, former CEO and managing director of AirAsia India. It noted that it had filed a case against Chandilya in 2017, which was being investigated by the Bengaluru police.
AirAsia Group admitted that “AirAsia India, as with others in the aviation industry, lobbied the government of India to remove the 5/20 rule that inhibits competition and the development of a healthy aviation sector that ensures the benefit of the Indian consumer but this was done in compliance with the law and certainly without any unlawful payments”.
Tata Trusts also stood its ground. It said in a statement after reviewing the issues emerging from the investigations, “The trustees reaffirmed their complete trust and continued support to Mr. Venkataramanan under whose executive leadership as managing trustee, the Tata Trusts have done, and are continuing to do, outstanding work across India.” AirAsia Group and the Tata group did not respond to queries from Fortune India.
How did the Tata group find itself in a hard landing situation? The answer, perhaps, lies in the murky nature of the airline industry in India. High levels of regulations, which don’t change often, have led to a shadowy world of influencers and lobbyists, who are engaged by several airlines. Given that lobbying is not legal in India, the amount of money, the skill sets of lobbyists, and what actually constitutes lobbying is difficult to be ascertained accurately. The range extends from public outreach programmes, in the most harmless cases, to bribery at the extreme end.
“[Mr Ratan Tata] had concluded the negotiations to partner with AirAsia and wanted the proposal tabled at the forthcoming board meeting.My pushback was hard but futile”.Cyrus P. Mistry, Tata group chairman from 2012 to 2016.
For the Tata group, despite a passion for aviation and a seemingly flawless reputation, entering the airline business has not been easy. Tata Trusts chairman Ratan Tata shared the legendary J.R.D. Tata’s passion for aviation. He twice tried to enter the business with Singapore Airlines as a partner. But in the mid-1990s and the early 2000s, New Delhi was not in favour of allowing foreign direct investment (FDI) in a fledgling industry.
Months before Ratan Tata was to demit office as chairman of the Tata group and hand over the reins to Cyrus P. Mistry in 2012, a window of opportunity emerged. The government opened up the aviation sector and allowed foreign airlines to own a 49% stake in Indian ventures provided that “substantial ownership and effective control” remained with Indian nationals.
All the Tata group had to do was to find a foreign partner and enter the aviation industry. Sounds easy? Not quite.
On December 6, 2012, in one of his final board meetings as chairman, Ratan Tata invited Fernandes, the maverick Malaysian businessman and promoter of AirAsia Group, to make a presentation. The board, in principle, gave its approval to invest $9 million, with no recourse to guarantees for loans to the proposed joint venture by the Tata group and appropriate board representation, to set up AirAsia India.
By February 20, 2013, when the joint venture was announced, Fernandes and the Tata group had found a third partner in Arun Bhatia, the owner of investment holding company Telestra Tradeplace, which would restrict the Tata group’s ownership to 30%. Tata Sons said it would be “merely an investor” in the joint venture and not have any operating role. It did, however, nominate two non-executive directors to the board, which also included Bhatia and Fernandes .
The problem was that this was a brand new flight plan. When the government opened up civil aviation for FDI, the airline industry was facing a severe funds crunch. Almost every Indian airline, apart from IndiGo, was reeling under high debt and mounting losses. Vijay Mallya’s Kingfisher Airlines had grounded its fleet, and the fear was that without foreign capital, many others would meet the same fate. Losses of domestic airlines had touched Rs 10,429 crore in 2012-13, according to Centre for Asia Pacific Aviation estimates.
Many expected existing airlines to be the beneficiaries of the first FDI in civil aviation. Ajit Singh, the then civil aviation minister, had also declared that the change in FDI policy was for existing airlines. In such a scenario, AirAsia India’s proposal had split the government down the middle.
In the lead-up to the crucial March 6, 2013, meeting of the Foreign Investment Promotion Board (FIPB) where AirAsia India’s proposal was to come up, the ministry of civil aviation expressed reservations about the venture. “It was our understanding that Press Note 6 of 2012 pertaining to FDI in civil aviation was meant for existing airlines only, and not new ventures. Others in the government, and specifically the Department of Industrial Policy and Promotion, who framed the policy, were of a different view,” says an official who worked with the ministry at the time.
Differences with regard to AirAsia India’s proposal were so apparent that even on the day of the FIPB meeting, Singh said that AirAsia’s proposal for investing in a joint venture with Tata Sons may face “procedural problems”. He never elaborated what these problems could be. Singh and his ministry’s reservations did not stop AirAsia’s investment proposal getting the FIPB nod. But that was just a small hurdle cleared in a thorny road ahead.
Mistry, the Tata group’s new chairman at the time, was never keen on the new venture, reveal documents that have since come to light. On October 25, 2016, a day after his dramatic removal as chairman, Mistry wrote in a letter to the board of Tata Sons, “Early in my tenure, our foray in the aviation sector began when Mr [Ratan] Tata ushered me into his office and handed me a report on AirAsia by Bain & Co. He had concluded the negotiations to partner with AirAsia and wanted the proposal tabled at the forthcoming board meeting. My pushback was hard but futile. However, I was able to extract a promise of the debt to be raised at the level of the JV as well as limiting Tata Sons’ investment to 30% of the $30 million equity.”
Mistry’s concerns about an alliance with the AirAsia Group were not entirely without logic. In early 2013, the AirAsia Group was in turbulent weather when it came to overseas joint ventures. Its pact with Vietnam’s VietJet Aviation was called off in 2011 and its partnership with Japan’s ANA was on the rocks, ultimately ending in June 2013. Mistry placed the then Tata Sons general counsel Bharat Vasani on the board of AirAsia India to keep a close watch on the operations of the venture.
Vasani was on the ball from day one. In an email to Venkataramanan (former executive assistant to Ratan Tata and one of the first directors on the AirAsia India board) on February 24, 2013, Vasani flagged several concerns regarding the joint venture agreement for AirAsia India. Chief among them was the issue of “substantial ownership and effective control with Indian nationals”. Fortune India has reviewed these emails, which were submitted to the National Company Law Tribunal as evidence in the ongoing case between Mistry and Tata Sons.
“My concern is given that the Indian JV partners have declared that they are going to play a passive role of financial investors, there is going to be significant opposition from competitors who are likely to resist approval/licensing to a JV company, whose ‘effective control’ is with a foreign airline. We have to be mindful of this issue and consider solutions to address this concern,” Vasani wrote.
Venkataramanan’s response was short but sharp. He retorted that the issues had been discussed with AirAsia’s Malaysia team. But Vasani’s concerns were far from over.
An email exchange between Vasani and Amir Fazal Zakaria from AirAsia Group’s legal team on April 6, 2013, provides an insight into the kind of relations the two companies had. Vasani’s team had raised concerns regarding the operating requirements under the brand licensing agreement (BLA) to which the AirAsia Group’s team expressed ‘disappointment’ at the constant request for revision of both the BLA and the shareholders’ agreement.
We have also received comments on our standard operational requirements which we have only agreed to consider editing for purposes of giving the right effective control opticals that the JVCo [AirAsia India is] subscribing to its own manuals and operating requirements rather than that of a foreigner… You would also note that we conceded (for optical purposes) that the right to nominate the CEO and CFO was at the discretion of TSL [Tata Sons Ltd],” wrote Zakaria.
“I am really not sure this joint venture is working… We areconstantly being accused of running this airline badly.”Tony Fernandes AirAsia Group chief, in an email to AirAsia India board members.
According to the BLA, a copy of which has been reviewed by Fortune India, AirAsia India would have to “observe and strictly comply” with the AirAsia Group’s operating requirements, which would be determined solely by AirAsia Group. These requirements were far-reaching, and included operational requirements in areas such as finance/corporate finance, flight operations, network planning, revenue management, and sales and distribution, among others.
Tata Sons wasn’t a signatory to the agreement. The signatory representing AirAsia India was Fernandes, and for AirAsia Group, it was Lingam.
Incidentally, once an industry has opened up for FDI and is inviting such investments, it is natural to expect that operations of ventures in such industries will be the domain of the foreign partner. This was especially true in the case of aviation, since the UPA government and the incumbent NDA government led by Prime Minister Narendra Modi have suggested that fliers in India should benefit from the best that global airlines have to offer. Given the rapid pace of growth of India’s aviation sector, such a policy outlook is seen as sound as it provides greater access to foreign capital. And the industry does gobble up money. As the AirAsia chief’s hero and tycoon Richard Branson has famously said, “If you want to be a millionaire, start with a billion dollars and launch a new airline.”
There was a problem in implementing the integration of AirAsia India with the Malaysian mother ship: Getting the documents ready for applying to the ministry of civil aviation and the Directorate General of Civil Aviation (DGCA) would take time. Singh and his ministry specially made sure that every painful detail that was required under Indian law was provided by AirAsia India before giving a No Objection Certificate (NOC). AirAsia India needed this NOC before it could apply for an air operator’s permit (AOP).
The to-and-fro took nearly six months. It wasn’t before October 2013 that AirAsia India had all the required documents to apply for an AOP. But by that time, the noise raised by its detractors had started booming. The then director general of civil aviation, Prabhat Kumar, decided to play it safe.
Kumar dusted off a rule dating back to 1937 and issued a public notice to throw open AirAsia India’s application for public scrutiny. Eighteen representations were received by the DGCA. Of these, at least two had objected to AirAsia India receiving an AOP. These were from IndiGo’s parent, Interglobe Aviation Ltd, and the lobby body for domestic airlines, Federation of Indian Airlines (FIA). Both FIA and IndiGo claimed that allowing AirAsia India to fly would result in “wasteful duplication of and will be in material diversion of traffic from existing air transport services” under an old rule of the DGCA.
Kumar even set up an internal committee to examine the objections. But on February 21, 2014, exactly a year after the joint venture was announced, Kumar released a detailed statement explaining why the committee believed that AirAsia India’s application had merit.
“The issue of FDI, substantial ownership and effective control has already been considered by the FIPB while approving the FDI for M/s Air Asia (India) Pvt. Ltd… Ministry of civil aviation, while granting the initial NOC to M/s Air Asia (India) Pvt. Ltd. to operate Scheduled Air Transport Services, also considered all the above aspects,” Kumar said in the statement.
After a probe by the DGCA into the BLA in 2017, the civil aviation regulator gave a clean chit to AirAsia India on issues of effective control. This was also reiterated by the minister of state for civil aviation, Jayant Sinha, in the Lok Sabha in March last year.
Meanwhile, the atmosphere within AirAsia India was not exactly free of turbulence. With the airline preparing for launch in 2014, Vasani began to flag concerns beyond issues of effective control. In an email to Mistry on March 10, 2014, Vasani said that the board of directors of AirAsia India was not provided with the details of the aircraft that were being leased from AirAsia Group. Despite Mistry’s advice to Vasani to ensure that the rates were not detrimental to AirAsia India, he was unable to extract the details.
AirAsia India and AirAsia group’s latest annual reports reveal that the Indian airline paid $39.68 million on aircraft lease rentals in FY17. Back of the envelope calculations peg the per plane per month average at $330,000, which is at least 20-25% higher than current market rates, according to a leading aviation expert who refused to be identified.
Once the airline was airborne, Vasani—who nearly quit in mid2014—was starting to get worried about possible violations of the Foreign Exchange Management Act in AirAsia India. His emails to Subramanian Ramadorai, chairman of AirAsia India and advisor to Manmohan Singh while he was prime minister, and Venkataramanan, from June 2015 raised such fears. Vasani’s concerns triggered a forensic investigation by Deloitte.
Back in Malaysia, Fernandes was getting restless at the lack of movement on the removal of the 5/20 rule. “I am really not sure this joint venture is working… We are constantly being accused of running this airline badly… The local shareholders were supposed to have gotten us the 5/20 rule changed… There was a huge delay in getting the licences,” Fernandes wrote in an email to AirAsia India’s board members and shareholders on November 19, 2015.
The removal of the 5/20 rule was essential for a deep integration of AirAsia India within the AirAsia Group network. After appointing Deepak Talwar Associates in 2014 for a retainership of $20,000 per month failed to yield the desired regulatory changes, Fernandes approved the appointment of HNR Trading PTE to act as an agent to assist AirAsia India’s regulatory and corporate affairs liaising.
The 5/20 rule was finally removed in June 2016. Whether this was the result of lobbying by AirAsia India’s promoters will perhaps never be ascertained. AirAsia India is yet to fly international routes.
The saga of AirAsia India over the past four years mirrors the way Indian aviation functions. It is possible that the CBI and ED investigations may not find any illegalities, but the damaging details of AirAsia India’s inner workings becoming public is sure to reverberate. AirAsia India may have helped the Tata group return to the skies, but in the process it has also besmirched the reputation of the House of Tata.
(The article was originally published in July 2018 issue of the magazine.)