Following liberalisation of the Indian aviation sector in 1991, the airline industry progressed at an expeditious rate and a number of legacy and low-cost carriers were established in the market. However, the aviation market faced its first turbulence post-liberalisation in the bankruptcy proceedings of Kingfisher Airlines Limited (“KAL”), as a number of aircraft lessors faced enforcement issues since India did not have means to enforce remedies under the then applicable laws. Adding to the issues faced by the judiciary in the infamous KAL proceedings, the need for codified bankruptcy laws was also felt as a need of the hour.
Since KAL’s bankruptcy proceedings, the Government of India (“GoI”) has taken a number of positive steps to build an investment-friendly environment in India. The enactment of the Insolvency and Bankruptcy Code, 2016 (“IBC”) can be said to be a major development to tackle bankruptcy proceedings in the aviation sector.
The Jet Airways bankruptcy proceeding in 2019 is also a prime example of how the aviation market has progressed. Many aircraft and aircraft engine lessors were able to repossess their equipment without any difficulty before the declaration of a moratorium under the IBC.
Despite the turbulence caused by the outbreak of COVID-19, which led to the imposition of travel restrictions, the airline industry in India is now set for a significant upswing.
The Indian aviation sector is one of the fastest-growing aviation markets in the world; it is now the third-largest domestic aviation market globally. An amalgamation of factors, including a burgeoning middle class, healthy competition among low-cost carriers driving ticket fares down, improvement in infrastructure at leading airports and an industry-friendly policy framework, has catalysed growth in the aviation sector in India.
To satisfy both the current and projected upsurge in demand for commercial air travel, Indian airlines have placed large orders for aircraft. India’s aeroplane fleet is projected to quadruple in size by 2038.
Currently, India has approximately 137 operational airports, comprising 24 international, 103 domestic and ten custom airports. To augment the airport infrastructure and to meet the growing demand for air travel in India, it has also become imperative to increase the capacity of airport infrastructure. In this regard, the GoI aims to develop 100 airports by 2024 (under the UDAN scheme described below) and expects to invest 1.83 billion in the development of airport infrastructure by 2026.
The projected upsurge in air travel in India also requires more aircraft usage, thus in turn igniting the demand for maintenance, repair and overhaul (“MRO”) services. The Indian MRO market is anticipated to grow to USD4.33 billion by 2025.
Further, the increasing number of projects under the public-private partnership (“PPP”) scheme is another noteworthy trend taking place in the Indian aviation sector. These projects involve long-term collaborative contracts between the GoI and private entities for public infrastructure development whereby several airports have already been constructed. Six of these airports have been leased out to Adani Enterprises Limited (“AEL”) for 50 years under this scheme. The acquisition of Mumbai International Airport by AEL from the GVK Group can also be seen as a prime example of the growth in India’s airport infrastructure. Similarly, several “greenfield” projects have been given “in principle” approval by the GoI. This heralds a trend of airport modernisation which will serve as a significant attraction point for customers, facilitated through concession agreements with the Airports Authority of India (“AAI”).
There have also been a number of developments in the policy and regulatory scheme of the aviation sector that emphasise the GoI’s desire to promote growth within the aviation industry.
(1) The Ministry of Civil Aviation (“MoCA”) is the key ministry in India that is responsible for the formulation of national policies and programmes for the development and regulation of civil aviation. It oversees the planning and implementation of schemes for the growth and expansion of civil air transport, airport facilities, air traffic services and carriage of passengers and goods by air, and is also responsible for the administration of the various pieces of legislation pertaining to the aviation sector (as mentioned below).
(2) The following are the principal regulatory authorities which function under the authority of MoCA:
- The Directorate General of Civil Aviation (“DGCA”), which enforces civil aviation regulations and regulates air transport services, air safety and airworthiness standards.
- The AAI, which creates, upgrades, maintains and manages civil aviation infrastructure both on the ground and in the airspace of India.
- The Airport Economic Regulatory Authority (“AERA”), which determines the tariffs for aeronautical services and Passenger Service Fees performance standards relating to quality, continuity and reliability of service.
- The Aircraft Accident Investigation Bureau (“AAIB”), which is inter alia formed to conduct independent aircraft accident investigations involving aircraft operating in the Indian airspace.
- The Bureau of Civil Aviation Security (“BCAS”), which ensures that and international obligations as also adherence to treaties on air safety to which India is a signatory.
(3) A few key pieces of legislation applicable in the aviation sector are mentioned below:
- The Aircraft Act, 1934 (“Aircraft Act”) and the Aircraft Rules, 1937 (“Aircraft Rules”), which (i) regulate and control the manufacture, possession, use, operation, sale, import and export of aircraft and (ii) stipulate the parameters for determining airworthiness, maintenance of aircraft, general conditions for flying and safety, registration of aircraft and the conduct of investigations.
- The Carriage by Air Act, 1972 (“Carriage Act”), which governs the rights and liabilities of air carriers and is applicable to both domestic and international carriage by air, irrespective of the nationality of the performing the carriage.
(4) One of the most notable developments in the regulatory framework of the aviation sector in India is the issuance of the National Civil Aviation Policy 2016 (“NCAP”) by the GoI. Some of the most significant aims of the NCAP are to provide safe, secure, affordable and sustainable air travel for passengers and air transportation of cargo, with access to various parts of India and the world, and to establish an integrated ecosystem leading to significant growth in the aviation sector. It also aims to promote the entire aviation sector in a harmonised manner, thereby including cargo, MRO, general aviation, aerospace manufacturing and skill development within its ambit.
(5) The NCAP has introduced the Regional Connectivity Scheme – UDAN (“RCS”), which, inter alia, seeks to provide various concessions and support to air operators, airports and other stakeholders, and seeks to sustain and nurture a competitive market environment in the civil aviation sector, including enhancement of regional connectivity through fiscal support and infrastructure development. The operation of the RCS is proposed to be through a market mechanism whereby operators would assess demand on routes, submit proposals for operating/providing connectivity on such routes, and seek viability gap funding, if any, while committing to certain minimum operating conditions. The same would be finalised in interaction with other market participants.
Further, the RCS, inter alia, stipulates that for up to ten years from the date of commencement of flight operations:
- there shall be no airport charges levied for operations under the RCS;
- parking and Terminal Navigation Landing Charges shall be waived; and
- Route Navigation and Facilitation Charges shall be levied on a nominal basis.
Prioritisation of routes is to be carried out and reviewed from time to time so that there is balanced growth of regional connectivity across different parts of the country.
(6) The National Air Sports Policy, 2022 (“NASP”) has been formulated by the GoI with one key objective being the promotion of air sports culture in India. The NASP aims to include air sports such as drones, parachuting, paragliding, etc. It is proposed that there would be a four-tier governing structure for air sports in India of which the Air Sports Federation of India, an autonomous body under MoCA, would be the apex governing body.
International Bilaterals and Conventions
(1) India has entered into 118 bilateral air service agreements with various foreign nations that play a significant role in the aviation sector, which include countries such as the United States of America, Canada, the United Kingdom, Germany, France, Russia, China (including Hong Kong), Australia Singapore and the United Arab Emirates.
(2) India is also a party to certain international conventions such as the Chicago Convention on International Civil Aviation, 1944; the Hague Convention for the Suppression of Unlawful Seizure of Aircraft, 1970; the Tokyo Convention on Offences and Certain Other Acts Committed on Board Aircraft, 1963; and the Montreal Convention, 1999. The provisions provided under the Montreal Convention, 1999 are subject to the provisions of the Carriage Act, which has the force of law in India in relation to any carriage by air irrespective of the nationality of the performing the carriage.
(3) India ratified the Cape Town Convention on International Interests in Mobile Equipment and the Protocol to the Cape Town Convention on International Interests in Mobile Equipment (Protocol) (“Cape Town Convention and Protocol”) on 31 March 2008. Limited provisions of the Cape Town Convention and Protocol have been made effective by way of an amendment to the Aircraft Rules in 2015 which permits a holder of an Irrevocable Deregistration and Export Request Authorisation (“IDERA”) to deregister an aircraft from the aircraft register of the DGCA within five working days. In 2018, the DGCA issued a standard operating procedure for the deregistration process which prescribes and clarifies the procedure to be adopted by the DGCA, airport operators and IDERA holders for deregistration of aircraft upon filing of an IDERA application.
(4) Recently, MoCA published the Protection and Enforcement of Interests in Aircraft Objects Bill, 2022 (“Bill”), which seeks to implement certain provisions of the Cape Town Convention and Protocol in India with a view to discharging the treaty obligations and to avail benefits of the Indian accession to the treaty. The Bill not only provides for remedies related to repossession of s but also provides for insolvency remedies. The Bill includes a provision that will accord primacy to the provisions of the Cape Town Convention and Protocol in case of conflict with any other law and empowers the Government to make rules, if necessary, for implementing the Convention and the Protocol in India. The Bill has undergone public consultations hence it is difficult to anticipate or ascertain when it will be enacted as legislation by the Parliament.
(5) It is also pertinent to note that India has to date not ratified the Geneva Convention on the International Recognition of Rights in Aircraft , 1948.
Foreign Direct Investment Regulations
The GoI has revised the position as regards foreign direct investment (“FDI”) in civil aviation as follows:
For both greenfield projects and existing projects – 100% FDI has been permitted under the automatic route.
Air transport services
For Scheduled Air Transport Services/Domestic Scheduled Passenger Airlines – 100% FDI has been permitted. However, the automatic route is permitted only up to 49%, with an exception made for a Non-Resident Indian, who is permitted up to 100% under the automatic route.
Further, as per Schedule XI of the Aircraft Rules, permission to operate scheduled air transport services may be granted either (i) to a citizen of India, or (ii) to a company or a body corporate provided that (a) it is registered and has its principal place of business within India; (b) the Chairman of the company and at least two-thirds of its directors are citizens of India; and (c) its substantial ownership and effective control is vested in Indian nationals.
For Regional Air Transport Services – 100% FDI has been permitted; however, government approval is required beyond 49%.
For both (i) Non-Scheduled Air Transport Services and (ii) Helicopter Services/Seaplane Services requiring DGCA Approval – 100% FDI is permitted under the automatic route.
In addition to the aforesaid provisions pertaining to FDI, foreign airlines seeking to invest in the capital of Indian companies would need to comply with the relevant regulations of the Securities and Exchange Board of India (“SEBI”) such as the Issue of Capital and Disclosure Requirements and Substantial Acquisition of Shares and Takeovers, as well as other applicable rules and regulations.
Other services within the civil aviation sector
For ground-handling services (which are subject to sectoral regulations and security clearance), MROs, flying training institutes and technical training institutions- 100% FDI is permitted under the automatic route.
Notable Developments Relating to Foreign Investment in the Aviation Sector
Airbus delivered 57 aircraft to Indian carriers during the COVID-19 pandemic, thus cementing Airbus’s position as one of the largest sources of FDI in the Indian aviation sector.
In September 2021, the Defence Ministry signed a contract worth nearly INR20,000 crore with Airbus to procure 56 medium transport aircraft to replace an existing model for the Indian Air Force. The project will be jointly undertaken by the Tata Group and Airbus, and is emblematic of a “make in India” attitude and a push to ensure a robust and thriving aviation sector in India.
In July 2021, Zurich Airport International signed a Shareholders’ Agreement with Noida International Airport Limited, an entity of the Uttar Pradesh government, for the development of Noida International Airport. The airport is expected to accelerate the development of industrial infrastructure, boost tourism, promote exports, ease air traffic and lead to the creation of more jobs in the state of Uttar Pradesh.
Introduction of IFSC – Gift City
It is also noteworthy that another goal of the GoI has been to make India an aircraft leasing hub. India’s first International Financial Services Centre (“IFSC”), situated in Gandhinagar, Gujarat, is steadily aiming to become a market for aircraft leasing and financing. The Gujarat International Finance Tec-City (“GIFT City”) is a GoI initiative to provide a platform to set up Indian companies whose businesses, inter alia, include banking, insurance, aircraft financing and leasing activities in the IFSC. The objective is to attract aviation companies from countries such as Ireland, Singapore, USA, etc, which are considered aircraft leasing hubs, to set up bases in India. Pursuant to this, the International Financial Services Centres Authority (“IFSCA”) has been set up under the IFSCA Act, 2019 (“IFSCA Act”), as notified by the GoI in 2019. The IFSCA is vested with regulatory powers akin to those of “domestic financial regulators” such as the Reserve Bank of India and SEBI, which enable it to serve as a “unified” regulatory body which regulates products, services and institutions that are set up in the IFSC.
The Ministry of Finance, by way of a notification dated 16 October 2020, notified an “aircraft lease”, including an operating or financial lease or any hybrid thereof pertaining to aircraft or helicopters or engines of aircraft or helicopters or any other part thereof, to be a “financial product” under the IFSCA Act. A corollary to this is that entities set up in the IFSC can now undertake aircraft leasing activities regulated by the IFCSA. These permissible activities include:
- buying or selling of aircraft;
- safeguarding and administering assets consisting of assets (aircraft, helicopters or parts thereof) on operating, financial or hybrid leases belonging to other persons;
- offering, managing or agreeing to manage assets consisting of assets (aircraft, helicopters or parts thereof) on operaticng, financial or hybrid leases;
- exercising any right associated with such as aircraft, helicopters or parts thereof on operating, financial or hybrid leases; and
- making arrangements to carry out any of the above services.
This move heralds promising returns for the Indian aviation sector in terms of boosting the sector as well as its development. Further, it is also expected to promote the allied MRO businesses in India.
Notable Tax Incentives Under IFSC
With the aim of attracting foreign investment and promoting GIFT City as a global aircraft leasing and financing hub, the GoI in its Annual Budget 2021–22 proposed certain tax exemptions.
Under Section 80LA of the Income Tax Act, 1961 (“Income Tax Act”), units set up in the IFSC have been provided with a that are earned from permitted financial activities over the first five years and 50% of the business profits that are earned over the next five years.
Pursuant to the Annual Budget, a new clause 4F to Section 10 of the Income Tax Act has been inserted to provide tax exemptions for income of a non-resident by way of royalty on account of lease of an aircraft paid by a unit of the IFSC which commenced operations on or before 31 March 2024. In view thereof, foreign lessors located in GIFT City will not be required to pay tax derived from leasing aircraft, provided that they commenced operations on or before 31 March 2024.
Under the new tax regime, income, if any, from transfer of aircraft or aircraft engines which were leased by IFSC units to domestic companies/airlines would be eligible for tax deduction, subject to the condition that the unit commenced operations on or before 31 March 2024.
Recent Developments in Aviation in India
(1) As of May 2022, the DGCA has reissued the air operating certificate of Jet Airways, which is preparing for its relaunch as Jet 2.0 following the its Corporate Insolvency Resolution Process which was initiated in 2019 under the IBC. The National Company Law Tribunal, Mumbai, approved the resolution plan in June 2021 submitted by Jalan-Kalrock Capital for revival of the company.
(2) Air India, India’s national carrier, which was a government-owned commercial airline, enjoyed a significant market share up until the 1990s. However, after this period, when the GoI paved the way for private players, Air India started to witness a colossal downfall due to the competitive pricing offered by private airlines in combination with aggressive marketing, which provided consumers with alternative options. Since Air India could not keep pace with the competition, it began incurring severe losses, and after several failed attempts at its revival by the GoI, privatisation was seen as the only viable solution. In October 2021, the Tata Group emerged victorious in its bid in the divestment process of Air India and its wholly-owned subsidiary, Air India Express, and also acquired a 50% stake in Air India SATS Airport Services Pvt. Ltd. The Tata Group’s holding company, Tata Sons, through its wholly-owned subsidiary Talace Pvt. Ltd., submitted a winning bid of INR18,000 crore as the enterprise value of the national carrier (with debt to be retained at INR15,300 crore and a cash component of INR2,700 crore). The Tata Group currently holds 26.6% market share in the Indian aviation market. This major acquisition is expected to provide a boost to the aviation sector, due to its strong hold in both the domestic and international markets. However, Singapore’s Competition Commission has raised concerns regarding Air India’s acquisition by Tata Group, primarily due to concerns regarding overlapping air cargo transport routes and overlapping air passenger transport routes.
(3) The recent launch of Akasa Air by stock market investor Rakesh Jhunjhunwala through the aviation venture SNV Aviation also seems to be promising for the Indian aviation sector since it is expected to follow the “low-cost carrier” model. This will enable it to charge lower fares for air travel, thus making it more affordable for the general public; fares are expected to be even lower than those of the typical budget airlines in India such as IndiGo and SpiceJet. Further, the company has taken on the risky venture of connecting the metros to Tier II and Tier III cities. Akasa very recently received its air operating certificate from the DGCA on 7 July 2022. This will serve as a “green light” for the airlines to officially commence operations. While the airline is expected to commence operations very soon, whether the company can sustain itself in this sector parallel to established and trusted competitors, especially given the high investment requirements, remains to be seen.
(4) In March 2021, Indira Gandhi International Airport in Delhi announced a key expansion project to increase its passenger-handling capacity. The expansion project includes a new terminal, advanced facilities, an additional runway and improved capacity to handle more passengers.
(5) The DGCA has issued a circular dated 26 August 2021 pursuant to which the GoI has allowed MAX 737-8 and 737-9 aircraft to operate in India. The decision to ground the Max B737-8 and B737-9 was taken by the DGCA in light of the fatal crash of Ethiopian Airlines B737 Max 8 Aircraft ET-AVJ which occurred after take-off on 10 March 2019 near Addis Ababa, Ethiopia.
Given the recent trends and developments in the Indian aviation sector, the future prospects for the airline industry in India appear promising due to the industry-friendly policies and regulations formulated by the GoI that are catalysing its growth.