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Pay bribes to end Crony capitalistic Rules in Incredible India!

JUNE 15, 2018

By Naresh Minocha, Consulting Editor

WAS 5/20 aviation rule akin to sacred Lakshman Rekha? Or was it contrived to help a few private airline operators enter overseas flights domain earlier reserved for national carriers?

Did bribes exchange hands during UPA & NDA regimes for doing away with five-year domestic experience criteria to seek permit for flying abroad? The relaxed rule now only stipulates operation of 20 aircraft at time of application under the 2016 National Aviation Policy.

Many such questions would stir mind of anyone tracking low-cost airline Air Asia's turbulent entry into India through joint venture (JV) route in 2013.

The turbulence was caused by turmoil within JV, anti-JV machinations by certain airlines, political lobbying & litigation. The turbulence touched a new high on 28th May 2018.

On this day, Central Bureau of Investigation (CBI) filed a first information report (FIR) against "criminal conspiracy and criminal misconduct" during 2013 to 2016 to benefit Malaysia's Air Asia (AA), its JV Air Asia (India) Pvt. Ltd. (AAI) and certain associates.

FIR has named several suspects including unspecified public servants.CBI also raided premises of certain suspects and seized some documents.

Stakes are high in aviation business as evident from the Government pursuing a parallel hunt for the facts about alleged bribes-tainted lobbying for reforms & breach of regulations. The facts discovery is already being pursued in the courts through two separate petitions filed in 2013 and 2016.

The bombshell in FIR reads: "Information has further revealed that Mr. Sunil Kapur in the month of December, 2014 at the coffee shop in the Four Season, Mumbai Hotel along with Mr.Bo Lingam handed over a closed packet containing cash of Rs. 50 lakhs to one Mr. Sriram, which was given by Bo Lingam to facilitate the removal of the then 5/20 rule".

CBI has alleged that Mr. Kapur,a food service provider, is a lobbyist for AA. He got onboard catering contract on quid pro basis from Tharumalingam Kanalingam @ BO Lingam, AA's Deputy Group CEO.

Though issues relating to AAI are complex and too many, one that deserves scrutiny is 5/20 rule. This is because many such rules have sustained India's legendary crony capitalism, smothering economic competitiveness. Moreover, arbitrary and discretionary rules promote corruption. They make a mockery of Government's ease of doing business claims.

While no one should doubt CBI probe into bribery charges relating to AAI, one should ask why it has not investigated those who pulled strings in UPA to create 5/20 barrier against competition, jobs creation and economic growth. The beneficiaries later resorted to Mergers & Acquisitions (M&A) to further minimize competition to the detriment of air travelers.

AAI promoters have to realize they created fodder for AAI rivals.AAI was formed as JV between Air Asia India Investment Ltd. (AAIL) with 49% equity stake, Tata Sons Limited (TSL) with 30% and Telestra Trade place Private Limited with 21%.

Erstwhile Foreign Investment Promotion Board (FIPB) approved AAIL's investment in AAI during April 2013.

On 19th September 2013, TSL disclosed that it has signed a MOU with Singapore Airlines Limited (SIA) to form a JV to operate an airline on full-service model. A day later, Telestra promoter Arun Bhatia, stated that he was kept in dark about the proposed JV named TATA SIA Airlines Ltd, which now operates under brand Vistara. He accused TSL of being unethical.

In December 2015, Mr. Bhatia fired a salvo against the other two promoters of AAI, accusing them of attempt to edge him out of JV. He also alleged that AA controlled AAI. The allegations came after he refused to pump in further equity capital. With other two promoters infusing additional funds, Mr. Bhatia's stake in JV declined to 10% from 21% in expanded share capital. In March 2016, he sold off his stake to TSL & two Tata top executives. In AAI, both AAIL & TSL hold 49% stake each with the balance 2% split between two Tata top management professionals.

Mr. Bhatia left enough ammunition for Dr. Subramanian Swamy, BJP who has been battling against both AAI & Vistara even before they were granted FIPB clearances both inside and outside courts. Federation of Airlines (FIA), second litigant against AAI, would have obviously lapped up Mr. Bhatia's outbursts on governance issues at AAI.

Subsequently, deposed Tata Group chairman Cyrus Mistry's leaked boardroom communication and affidavits served the icing on cake for litigants against AAI.

Reverting back to 5/20 story, it all began in September 2004 when the Cabinet belatedly decided to review monopoly of Air India (AI) and erstwhile Indian Airlines (IA) to fly abroad.

While approving India's air services agreement with Tunisia, the Cabinet directed Ministry of Civil Aviation (MCA) to examine "issues relating to building up of the capacity both in the public and private sector for providing air services between India and other countries and optimal utilization of such capacity". The Cabinet desired a note on this issue at the earliest.

Later, MCA submitted a Cabinet Note during December 2004 to allow private scheduled carriers to operate on international routes for optimal usage of bilateral traffic rights. The Note mooted steps to rectify imbalance between use of these rights by Indian carriers and foreign airlines.

According to an official released, Cabinet decided on 29th December 2004, to adopt a calibrated approach in this domain to give time to AI & IA to adjust to the "new competitive environment".

The Government thus decided to reserve for the duo for next three years the operations to the Gulf countries of UAE, Qatar, Oman, Bahrain and Kuwait as well as Saudi Arabia. It also decided to allow other Indian scheduled carriers to operate on all other international routes.

This liberalization came with a rider that such permission should be granted only to private airlines with "proven credentials". As put by the release, "This is particularly important as airlines, in a way, are symbols of a nation's prestige and no ‘non-serious' operators should be permitted to operate on international routes".

The Cabinet thus decided that "only Indian Scheduled Carriers with a minimum of five years continuous operations and having minimum of 20 aircraft in their fleet be allowed to operate on international routes".

The hidden hand against aviation policy & reforms worked well during Vajpayee Government and preceding coalition regimes. It wanted status quo – operation of inefficient AI and IA with declining market and tough entry for prospective players. This created perfect ecosystem for growth of existing private airlines.

No wonder National Aviation Policy was kept in the works or put on the back burner for 21 years at behest of hidden hand till Modi Government mustered political will to unveil NCAP during June 2016.

It took pride in dismantling absurd 5/20 rule that it considered as "unique" to India.

NCAP says: "The requirement for 5/20 is modified and all airlines can commence

international operations provided that they deploy 20 aircraft or 20% of total capacity (in term of average number of seats on all departures put together), whichever is higher for domestic operations. For this purpose, the published schedule of airlines will be the basis for monitoring, assuming that one aircraft would have six departures per day ".

The significance of this liberalization can be gauged from the fact that Indian national carriers utilized 23% of their entitlement under bilateral traffic rights when UPA Government drafted Cabinet Note to scrap 5/20 rule in February 2014 allegedly after lobbying on behalf of AAI.

UPA could not take a timely call on 5/20 due to announcement of LokSabha elections. Hence CBI allegation includes lobbying done during 2013 to 2016. Lobbying for and against reforms has been integral part of India's growth story since Independence. Bribes often drive influence-peddling.

What is new here is CBI embarking on challenge to prove that speed money was paid to lobby for change of 5/20 rule and seek certain approvals. While several media have reported CBI FIR to project 5/20 rule as sacrosanct, the fact remains that there has been loud thinking against 5/20 evil both within and outside the UPA Government.

On 3 rd July 2013, AA group CEO Tony Fernandes said at Press Conference: "five years and 20 aircraft rule before an Indian airline is allowed to go abroad does not make sense. "Probably Naresh (Goyal) or someone put it down ".

He pointed out that this bizarre rule actually harmed Indian airlines and benefited foreign airlines, which could fly in and out of India without application of this rule on them.

MrFernandes added: "it is a shame that India has lost many years. See what new airlines in the region have done. India has lost because of vested interests even though it has a lot of talent and economic activities."

UPA Finance Minister P. Chidambaram and UPA Civil Aviation Minister Ajit Singh questioned relevance of 5/20 rule.

On 11th October 2013,Mr Chidambaram said that he agreed with Mr Singh's idea of scrapping 5/20. The former stated: "If he (Ajit Singh) brings a paper to the Cabinet to throw out that rule, I will support it strongly ," he told a Washington audience as put by news report.

Mr. Chidambaram was responding to a question on this provision, which the Centre for Asia Pacific Aviation (CAPA) in a recent report described as one of the "most damaging and discriminatory regulations."

Much before 5/20 was contrived, MCA realized that India was losing heavily for its failure to utilize bilateral traffic rights.

In draft NCAP dated 31st December 1997, MCA observed: "For future bilateral civil aviation negotiations, we need a long-term perspective, keeping in view the interest of India, its passengers, its tourists, its commercial relations with other countries and also, of course, its airlines….National airlines have to put their house in order and get ready for competition, if they wish to survive. The interest of the nation cannot subserve those of the airlines. It has to be the other way round ".

Draft NCAP thus stated: "Guidelines will be finalized for the designation of private sector Indian operators to operate on some select international routes to exploit the unutilized capacity entitlements of Indian side in our various bilateral".

NCAP went through several drafts over the years. The hidden hand of crony capitalists ensured that the policy was delayed by 21 years.

(See Civil Aviation Becomes Alice in the Wonderland of Policy Drafts)

The same hand ensured that 5/20 rule stayed in spite of recommendations of three panels including Competition Commission of India.

It is here pertinent to recall what Arun Shourie, Disinvestment Minister, disclosed during September 2000. He quoted both politicians, parliamentary and FICCI documents to focus on verbatim opposition against sale of 26 percent stake in Air India to foreign investor.

Mr Shourie wondered: "Great minds that think alike? Or one great mind that was making everyone think alike "? At a seminar organized by FICCI, he traced the origin of crescendo of opposition to Jet Airways Chairman, who headed FICCI's Aviation Committee.


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