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Business Trends

AirAsia India case sounds fresh alarms for foreign businesses

Federal charges of alleged 'conspiracy' serve as reminder over common practices

An AirAsia counter at Kempegowda International Airport in Bangalore. The Malaysian-based airline and Tata Sons, the Tata Group's holding company, formed the AirAsia India joint venture in 2013.   © AP

MUMBAI -- Federal investigators in India have filed criminal charges against AirAsia India, a joint venture between AirAsia and Tata Sons, and the company's executives for an alleged “conspiracy” involving bribes to policymakers to change regulations.

While the surprise move, made on May 28, is already inflicting damage on the Malaysia-based low cost carrier's stock price and reputation, it may also potentially harm India’s image as a business destination.

The document filed by the Central Bureau of Investigation, a federal crime investigator, describes criminal charges against those companies; Tony Fernandes, AirAsia group's chief executive; Ramachandran Venkataramanan, Tata Group's executive sitting on AirAsia India’s board; and other individuals. AirAsia has denied the allegations.

The case serves as a cautionary tale for anyone doing business in India or considering it. While the CBI tries to make a case of a conspiracy involving bribes between business persons and government officials over civil aviation regulations, the document lists only the names of business-side individuals and companies. It leaves alleged bribe recipients unspecified, simply describing them as “unknown public servants of Ministry of Civil Aviation and the then Foreign Investment Promotion Board.” (The latter agency was abolished in May 2017.)

The case also draws attention to the fact that the CBI's document accuses a brand licensing agreement as being a vehicle to breach a rule that required an Indian joint venture with a foreign carrier to maintain a substantial majority ownership and “effective control” by Indian shareholders.

Furthermore, the file describes lobbying activities by Venkataramanan himself and via lobbyists as something that constitutes “conspiracy.” It even criticizes a strategy to lobby for regulatory changes.

Tony Fernandes, AirAsia's CEO, had criticized India’s 5/20 rule, which required airlines to have a fleet of 20 planes and to have completed five years of domestic operations before starting international flights.   © AP

Cross-border brand licensing agreements and franchise licensing agreements are commonly used around the world in sectors in which foreign direct investment is restricted. 

Lobbying by a company’s own leaders and employees as well as by third-party consultancies and individual lobbyists are all commonplace business practices.

In AirAsia India’s case, the biggest regulatory issue was the so-called 5/20 rule, which required an Indian airline to have a fleet of at least 20 planes and to have completed a minimum of five years of domestic operations before starting international flights.

Fernandes had openly and repeatedly criticized that rule as leading to “less economic activity” in India. The administration of Indian Prime Minister Narendra Modi removed the five-year requirement in June 2016, amending it to the 0/20 rule, despite objections from Indian airlines. Following the change, AirAsia India is now preparing to launch international services by the end of this year, less than five years after its commercial services launched in June 2014. 

India’s airlines and some observers have criticized the way AirAsia India is run, saying it is in effect controlled by the Malaysian company, led by Fernandes, and thus breaching the effective control rule. The CBI cited the brand licensing agreement as evidence supporting its accusation.

But when AirAsia and Tata Sons, the Tata Group's holding company, announced the joint venture plan in February 2013, Tata clearly articulated that the new airline would be run by AirAsia. Still, the joint venture was subsequently granted a commercial airline license by the coalition government led by then-Prime Minister Manmohan Singh.

In response to persistent criticisms, the joint venture even requested a government investigation on its governance and operations. In February 2017, it obtained a clear government affirmation that it was complying with Indian laws and rules, including the effective control clause.

Now, the CBI apparently is challenging that conclusion by the Modi government.

Such accusations against business practices involving foreign capital may well look reminiscent of the high-profile government-agency attacks on Nestle’s Maggi instant noodles in 2015, which eventually ended up being halted by India's high court but resulted in billions of dollars in losses for the world’s largest food conglomerate.

In the Maggi case, a state food-safety watchdog said monosodium glutamate was found in the instant noodles despite packaging that states “no added MSG,” although it is nearly impossible to distinguish between naturally occurring glutamate and dissolved MSG. And recent scientific studies have concluded that some health issues caused by MSG are unfounded. 

Maggi's case also involved whether its instant noodles contained excessive amounts of lead and ash substances, but all government-run lab tests proved negative.

While no one can predict how the AirAsia issue will be resolved, the legal actions are a stark reminder that, in India, watchdog and law-enforcement organizations of federal and state governments can sometimes abruptly launch a sensational public accusation against businesses before sufficiently establishing their case.

AirAsia India has been, almost constantly, a source of headaches for both AirAsia and Tata ever since it was formally established in March 2013. Some Indian news media have even described it as “haunted.”

The joint venture has been losing money despite Fernandes’s bullish prediction at the outset that AirAsia India would break even within its first year. Its weak financial performance led to repeated complaints by Telestra Tradeplace, an initial joint venture partner with a 20% stake, all of which was eventually acquired by Tata.

AirAsia India’s first chief executive, Mittu Chandilya, a former part-time model whom Fernandes had hand-picked for the position, was repeatedly criticized for a lack of management abilities. He resigned in February 2016, facing accusations of impropriety from the Indian joint venture partners. AirAsia later went to court in an effort to recover money that was allegedly embezzled by Chandilya. Chandilya counter-sued, claiming defamation. The parties are still embroiled in their legal battle.

The next CEO, Amar Abrol, a Malaysian citizen picked by Fernandes, failed to deliver and Tata effectively ousted him last month. Now it is Tata that will select the new chief executive.

Above all the stumbles, the most troublesome cloud hanging over the joint venture has been the long fight between Tata Group and its former chairman, Cyrus Mistry, which has continued since the group ousted Mistry in October 2016. AirAsia India has been one of the main topics of the blame game.

Immediately after his ouster, Mistry alleged, in an open letter to the Tata Sons board, that there were “fraudulent” transactions of 220 million rupees ($3.28 million) at the joint venture airline involving bogus entities in India and Singapore.

The allegation led the Enforcement Directorate, another federal law enforcer specializing in economic crimes under the Finance Ministry, in December 2016 to open a case, suspecting a violation of the Foreign Exchange Management Act, or FEMA.

The Enforcement Directorate repeatedly summoned Chandilya in the spring of 2017 to answer questions about the 220-million-rupee allegation, but he reportedly has failed to present himself before the investigators. It has been reported that the CBI investigation was prompted by the Enforcement Directorate’s FEMA probes.

Mistry began accusing Venkataramanan in 2016 of involvement in “wrong doing” at AirAsia India. Venkataramanan was a close aide to former Tata Group Chairman Ratan Tata, who was reportedly the one who decided to fire Mistry.

Mistry has again started public personal accusations against Venkataramanan in the wake of the CBI filing of criminal charges. Venkataramanan has openly criticized Mistry for what he says are false accusation and implied that Mistry has tried to influence the CBI. Mistry fired back, and the heated fight continues.

The Enforcement Directorate has now opened another case to probe AirAsia India over suspicions that a separate 122.8-million-rupee remittance that the CBI says is part of the regulation-change “conspiracy” may have violated anti-money laundering laws. Meanwhile, AirAsia and its Indian joint venture appear to be trying to deflect all the CBI-raised allegations onto Chandilya, the ex-CEO of AirAsia India.

The saga will not end any time soon, and both domestic and foreign businesses will keep watching.

Additional reporting by Nikkei staff writers CK Tan in Kuala Lumpur and Rosemary Marandi in Mumbai.

 

 

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