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| May 23, 2005 | Monday | Rabi-us-Sani 14, 1426 |
Wadia to float an airline: Mumbai Letter
IT’S a scene that is enacted every summer in hundreds of railway terminals across India. Excited schoolchildren, accompanied by parents, lugging their bags and heading for the beaches, mountains, native places, or other destinations for their annual summer vacations.
Only this time, the venue of departure, for many of the holidaymakers, was different. Instead of over-crowded railway stations, thousands of kids along with their parents and grandparents headed for the domestic airports in cities across the country. Thanks to the clutch of new low-cost airlines, ordinary middle-class Indians are able to fly, an exercise that was till recently restricted to executives travelling on company expense, or the affluent.
This summer has seen a massive shake-up in the Indian domestic aviation section. Air Deccan, the first low-cost carrier, slashed tariffs to rock bottom levels, offering four seats on a first-come, first-served basis, on every Airbus flight at an unbelievable fare of rupee-one per ticket (plus Rs250 by way of mandatory airport tax).
The established airlines led by state-owned giant Indian Airlines, and the two leading private operators, Jet Airways and Air Sahara, were rattled by the move. Ominously for these airlines, the coming months will spell even more trouble.
Liquor baron and Member of Parliament Vijay Mallya launched his Kingfisher Airlines (named after his popular beer) this month, vowing to grab a five per cent share of the market within a short span, and emerge as the largest private airline by 2010. His fleet of modern aircraft offers a range of facilities, including in-flight entertainment by way of personal TV screens at the back of every seat.
Kingfisher triggered a fare war offering tickets on the busy Mumbai-Bangalore sector at Rs3,900, way below the Rs5,900 charged by the established players (though significantly higher than what Air Deccan offers). A few days later, the airline lopped off another thousand rupees from the fare.
Also this month, another low-cost carrier, SpiceJet, begins operations, flying to cities including Delhi, Ahmedabad and Mumbai. The airline plans to take on Air Deccan, offering even lower fares than the no-frills airline. In September, Nusli Wadia ,grandson of Pakistan’s founder, Quaid-e-Azam Mohammed Ali Jinnah will be launching Go Airlines, which promises to offer the cheapest fares in India.
At least two-dozen other airlines are expected to follow suit over the coming months. They include Magic Air, Indus Air, Air One, Paramount Airways and Yamuna Airways. India’s Civil Aviation Minister Praful Patel plans to convert Alliance Air- a subsidiary of Indian Airlines, into a low-cost carrier, even as Air India (the other state-owned giant) has launched Air India Express, a no-frills airline to service the Gulf and South East Asia markets.
Industry analysts expect phenomenal changes in the Indian aviation sector over the coming years. While fares will keep shedding, there’s likely to be organic growth, as passengers travelling by trains (especially second and third air-conditioned classes) switch over to air. Already, many of the fares being offered by the low-cost carriers compare well with second A/C train tickets today.
India’s domestic aviation sector is expected to grow by 20 to 25 per cent annually over the next five years. At present, a little-under 20 million Indians fly every year on domestic routes, but this is expected to surge by at least five million annually, touching the 50 million-mark by 2010.
What is worrying about this massive growth in air traffic is the abysmal lack of infrastructure on the ground. Most Indian airports are primitive, where even basic facilities like a conveyor-belt network, passenger bag trolleys, restaurants and toilets are dysfunctional.
Airport employees unions are opposed to privatisation or even corporatisation of these institutions, inefficiencies are built-in, and corruption is rampant in numerous airports and related departments (enabling the land mafia to grab prime real estate owned by airports in cities like Mumbai). India’s much-hyped aviation revolution may fail to take-off if the authorities do not clear up the mess on the ground.
WITH India’s foreign exchange reserves bulging at over $140 billion, the government is gradually relaxing norms relating to investments abroad. While corporates have been allowed for some time to invest overseas by acquiring companies, now institutions and individuals would be able to participate in the public offerings by international firms.
The Securities Exchange Board of India (SEBI), the capital market regulator, is finalising the norms that would enable foreign corporate entities to raise funds in India. According to M. Damodaran, the SEBI chief, international companies would be able to raise money in India in the current financial year itself by issuing Indian Depository Receipts (IDRs).
Indian companies have been raising funds abroad, especially in New York and London, for well over a decade, by issuing American Depository Receipts (ADRs) and Global Depository Receipts (GDRs). The IDRs would enable international firms to raise funds in India, and also list the receipts at the National Stock Exchange (NSE) and the Bombay Stock Exchange (BSE).
SEBI, under the instructions of the government, is insisting on tough norms for companies seeking Indian capital. In fact, according to SEBI sources, the process would be as transparent- calling for full disclosures- as those governing ADR and GDR issues in exchanges abroad.
And to ensure that fly-by-night operators do not rip off Indian investors, the regulator is insisting that the issuer of IDRs should have a minimum turnover of over $500 million in the previous three years, and paid-up capital and reserves topping $100 million.
Analysts do not expect a rush from potential issuers of IDRs initially, especially from the developed economies. But companies operating in developing markets and seeking large infusion of funds could be tempted to raise money in the liquid Indian market. Both the NSE and the BSE offer state-of-the-art infrastructure in terms of trading platforms, accessibility, and settlement systems, and the Indian depository system is also at par with the best in the world.
The regulatory mechanism is also firmly in place, and both domestic and international institutions, and individuals have shown an appetite for new products including derivatives. IDRs would not only add to the bouquet of capital market products available in India, boosting trading activities, but also provide more exciting (and riskier) investment opportunities for the Indian investor.
GROWING indebtedness usually triggers off desperate moves on the part of governments to raise funds by means fair or foul. Maharashtra, once a well managed state with sound finances, is in the throes of a major financial crisis, with the government having sunk neck-deep in over one trillion rupees of debt.
Servicing this mounting debt means a major chunk of government finances disappear even before the various ministries lay claims on them. The situation gets aggravated in a coalition government- the Democratic Front regime in Maharashtra comprises the Congress and the Nationalist Congress Party (NCP) as major partners with pulls and pressures coming from various quarters.
One of the major sources of revenue for governments is the stamp duty, and recent days have seen the Maharashtra government yo-yoing wildly on rates applicable to various contracts and agreements.
In a desperate bid to raise revenues, the government imposed hefty stamp duties on securities transactions, even taxing brokers and clients who are located in other states, but use the trading platforms of the National Stock Exchange and the Bombay Stock Exchange.
But the government had to hastily back-peddle after angry traders and brokers threatened to boycott the state. Last fortnight, the government was forced to slash the stamp duty on debt and securities transactions by a massive 95 per cent, and on commodities by 90 per cent, following the collapse of the corporate bonds market.
It also decided not to collect stamp duty from brokers servicing clients outside the state, to avoid double taxation. Brokers who pay stamp duties in other states will also be exempted from paying the duties in Maharashtra. While brokers in the securities market heaved a sigh of relief, the government decided to flex its muscles in the real estate sector.
The government decided to revise the stamp duty on properties taken on long lease (30 years and above), by reframing the rules. Until now, five per cent stamp duty is paid on the annual lease rental, but in the future (when the old lease agreements come up for renewal), the duty will be levied on 90 per cent of the market value.
Many large companies, banks and financial institutions, hotels and clubs, and other properties have been taken on long leases of up to 99 years. Quite a few of these properties - the land on which they are located is owned by the state government- are coming up for renewal in a year or two, and the new agreements would be taxed not on the actual rent that is paid, but on the market value of the property.
The government move, industry sources fear, will drive many companies to relocate to other states, or at least out of Mumbai. Several state governments are eagerly monitoring the developments in Mumbai, and are willing to offer concessional land to companies wanting to move out of the state.
In fact, the government of Gujarat has been aggressively marketing the advantages of doing business in the state in recent weeks, hoping to woo industries crippled by the power cut in Maharashtra. Massive power cuts have forced industries to shut down for over four hours daily in many cities in Maharashtra.
Shortsighted policies of the state government — as evident in its revised stamp duty proposals, and in its power policies — are forcing many industries and companies to do a rethink on continuing in the state. Government leaders though are unworried, and are more concerned about protecting the ‘morals’ of its citizens.
Even though Maharashtra is facing a severe power crisis, and a financial crunch, the state’s ultra-conservative deputy chief minister is busy working on an ordinance to ban dance bars that provide harmless entertainment in several cities. The move will render thousands (including nearly 100,000 women dancers) jobless, but the government is unconcerned.
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