Tata Sons caps exposure in airline JV at Rs 49 cr

A day after making clear its exposure in the proposed airline joint venture with AirAsia was to be only a “financial investment”, Tata Sons on Thursday capped its equity investment in the company at Rs 49 crore ($9 million).

The memorandum of agreement signed among AirAsia, Tata and Telestra Tradeplace - the three shareholders - says the “obligation of Tata Sons to subscribe to the shares of the JV will be limited to an aggregate $9 million by way of equity investment.”

It adds Tata Sons will not be required to provide any guarantee letter of comfort or other direct or indirect shareholder support in any form in relation to any debt or further equity funding for the JV.

A Tata spokesperson on Thursday said: “Tata Sons has no comments to offer on the clauses of the FIPB application. It is premature to provide any guidance for investment in the future.”

Even so, experts say this means Tata Sons’ liabilities, if the airline company closes down, would be limited to $9 million. This also implies Tata Son’s stake, currently at 30 per cent, would come down if the proposed company’s equity capital is increased.

“This would protect Tata’s liabilities in the new venture. If the venture gets debt-trapped, Tata will not be responsible for paying back the debt, as its total investment has a ceiling. If the new venture gets fresh funding, Tata’s equity holding will naturally come down,” says an analyst with a management consulting firm.

The board of the proposed new joint venture would have six members. With four of its directors Indian citizens, the proposed firm’s

FIPB application is in consonance with the current FDI policy.

AirAsia will have two board members - Founder Tony Fernandes and Kamarudin Bin Meranun. Tata Sons will also have two - R Venkataramanan and Tata Sons’ chief legal & group general counsel, Bharat Vasani.

Telestra Tradeplace, with 20 per cent stake, will be represented by Arun Bhatia. The sixth board member shall be an Indian national who will be appointed non-executive chairman of the board upon agreement of the three shareholders.

Fernandes is trying to rope in Ratan Tata for this position.

In its application to the Foreign Investment Promotion Board, the three partners have committed they will, not later than fourteen days, infuse Rs 50 crore ($9 million), in the proportion of their shareholding, to set up the joint venture.

Within 45 days of receiving the no-objection certificate to set up a new airline from DGCA, it will further recapitalise the JV with an additional $21 million, in the proportion agreed among the partners.

The proposed company plans to provide low-cost scheduled passenger services, operating single-aisle narrow body aircraft flying under four hours.

It is to initially operate on domestic routes but later move to international ones from India, if the government and regulations permit.

It also plans to carry other ancillary business activities, such as cargo handling, renting and leasing (except financial leasing).

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