All companies are currently governed by the Companies Act, 1956. The Act has been amended 24 times since then. Three committees were formed in the last ten years, chaired by Justice V B Eradi (2001), Naresh Chandra (2002) and J J Irani (2005) to look into various aspects of corporate governance and company law. The Companies Bill, 2009 incorporates some of these recommendations. Main features The major themes of the Bill are as follows: It moves a number of issues that are currently specified in the Act (and its schedules) to the Rules; this change will make the law more flexible, as changes can be made through government notification, and would not require an amendment bill in Parliament. On a number of issues, the Bill moves the onus of oversight towards shareholders and away from the government. It also requires a super-majority of 75 percent shareholder votes for certain decisions. The powers of creditors have been enhanced in cases where a company is in financial distress. It has new provisions regarding independent directors and auditors in order to strengthen corporate governance. Finally, the bill increases penalties, and provides for special courts. Types of companies The Bill provides for six types of companies. Public companies need to have at least seven shareholders, and private companies between two and 50 shareholders. Charitable companies should have at least one shareholder, may have only certain specified objectives, and may not distribute dividend. Three new types of companies have been defined, which have less stringent provisions. These are one-person companies, small companies (private companies with capital less than Rs 50 million and turnover below Rs 200 million), and dormant companies (formed for future projects, or no operations for two years). Corporate Governance The Bill defines the duties of directors and norms for composition of boards. The number of directors is capped at 12. At least one director should be resident in India for at least 183 days in a calendar year and at least a third of the board should consist of independent directors. The Bill also sets guidelines for auditors. Certain related persons such as creditors, debtors, shareholders and guarantors cannot be appointed as auditors. Certain services such as book-keeping, internal audit and management services may not be undertaken by the auditors. Removal of an auditor before completion of term requires approval of 75 percent of the shareholders. Adjudication The Bill provides for a National Company Law Tribunal (NCLT) to adjudicate disputes between companies and their stakeholders. It also establishes an Appellate Tribunal. The NCLT may ask the government to investigate the working of a company on an application made by 100 shareholders or those who hold 10 percent of the voting power. Arrangements All arrangements such as mergers, takeovers, debt split, share splits and reduction in share capital must be approved by 75 percent of creditors or shareholders, and sanctioned by the NCLT. Standing Committee’s Recommendations The Parliamentary Standing Committee on Finance has submitted its report, and suggested several significant amendments. Corporate governance Substantive matters covered in various corporate governance guidelines should be contained in the Bill. These include: separation of offices of Chairman and Chief Executive Officer; limiting the number of companies in which an individual may become director; attributes for independent directors; appointment of auditors. Delegated legislation The Committee noted that the Bill provided excessive scope for delegated legislation. Several substantive provisions were left for rule-making and the Ministry was asked to reconsider provisions made for excessive delegated legislation. The Ministry has agreed to make some changes to include the following provisions in the Act: the definition of small companies; the manner of subscribing names to the Memorandum of Association; the format of Memorandum of Association to be prescribed in the Schedule; the manner of conducting Extraordinary General Meetings; documents to be filed with the Registrar of Companies. The Committee recommended that provisions relating to independent directors in the Bill should be distinguished from other directors. There should be a clear expression of their mode of appointment, qualifications, extent of independence from management, roles, responsibilities, and liabilities. The Committee also recommended that the appointment process of independent Directors should be made independent of the company’s management. This should be done by constituting a panel to be maintained by the Ministry of Corporate Affairs, out of which companies can choose their requirement of independent directors. Investor protection The Ministry, in response to the Committee’s concerns for ensuring protection of small investors and minority shareholders, indicated new proposals. These include: enhanced disclosure requirements at the time of incorporation; shareholder’s associations/groups enabled to take legal action in case of any fraudulent action by the company; directors of a company which has defaulted in payment of interest to depositors to be disqualified for future appointment as directors. The Ministry also made some suggestions on protection of minority shareholders/small investors, which the Committee accepted, including the source of promoter’s contribution to be disclosed in the Prospectus; stricter rules for bigger and solvent companies on acceptance of deposits from the public; return to be filed with Registrar in case of promoters/top ten shareholders stake changing beyond a limit. Corporate Delinquency Recommendations include: subsidiary companies not to have further subsidiaries; main objects for raising public offer should be mentioned on the first page of the prospectus; tenure of independent director should be provided in law; the office of the Chairman and the Managing Director/CEO should be separated. The Committee emphasised that the procedural defaults should be viewed in a different perspective from fraudulent practices. Shareholder democracy The Committee recommended that the system of proxy voting should be discontinued. It also stated that the quorum for company meetings should be higher than the proposed five members, and should be increased to a reasonable percentage. Foreign companies The Bill requires foreign companies having a place of business in India and with Indian shareholding to comply with certain provisions in the proposed Bill. The Committee observed that the Bill does not clearly explain the applicability of the Bill to foreign companies incorporated outside India with a place of business in India. It recommended that all such foreign companies should be brought within the ambit of the chapter dealing with foreign companies. Next steps The report of the Standing Committee indicates that the Ministry has accepted many of its recommendations. It is likely that the government will take up the Bill for consideration and passing during the winter session, which starts on 9th November. This article was published in PRAGATI on November 1, 2010

India is one of the fastest growing aviation markets in the world.  Its domestic traffic makes up 69% of the total airline traffic in South Asia.  India’s airport capacity is expected to handle 1 billion trips annually by 2023. The Ministry of Civil Aviation is responsible for formulating national aviation policies and programmes.  Today, Lok Sabha will discuss and vote upon the budget of the Ministry of Civil Aviation. In light of this, we discuss key issues with the aviation sector in India. 

The aviation sector came under severe financial stress during the Covid-19 pandemic. After air travel was suspended in March 2020, airline operators in India reported losses worth more than Rs 19,500 crore while airports reported losses worth more than Rs 5,120 crore. However, several airline companies were under financial stress before the pandemic affected passenger travel. For instance, in the past 15 years, seventeen airlines have exited the market.  Out of those, two airlines, Air Odisha Aviation Pvt Ltd and Deccan Charters Pvt Ltd exited the market in 2020.  Air India has been reporting consistent losses over the past four years. All other major private airlines in India such as Indigo and Spice Jet faced losses in 2018-19.  

Figure 1: Operating profit/loss of major airlines in India (in Rs crore)

 image

Note: Vistara Airlines commenced operations in 2015, while Air Asia began in 2014; Negative values indicate operating loss.
Source: Unstarred Question 1812 answered on August 4, 2021, and Unstarred Question 1127 answered on September 21, 2020; Rajya Sabha; PRS.

Sale of Air India

Air India has accounted for the biggest expenditure head of the Ministry of Civil Aviation since 2011-12.  Between 2009-10 and 2020-21, the government spent Rs 1,22,542 crore on Air India through budgeted allocations.  In October 2021, the sale of Air India to Talace Ltd., which is a subsidiary of Tata Sons Pvt Ltd, was approved.  The bid for Air India was finalised at Rs 18,000 crore.  

Up to January 2020, Air India had accumulated debt worth Rs 60,000 crore.  The central government is repaying this debt in the financial year 2021-22.  After the finalisation of the sale, the government allocated roughly Rs 71,000 crore for expenses related to Air India. 

In addition to loan repayment, in 2021-22, the government will provide Air India with a fresh loan (Rs 4,500 crore) and grants (Rs 1,944 crore) to recover from the shock of Covid-19.  To pay for the medical benefits of retired employees of Air India, a recurring expense of Rs 165 crore will be borne by the central government each year.   

In 2022-23, Rs 9,260 crore is allocated towards servicing the debt of AIAHL (see Table 1). AIAHL is a Special Purpose Vehicle (SPV) formed by the government to hold the assets and liabilities of Air India while the process of its sale takes place. 

Table 1: Breakdown of expenditure on Air India (in Rs crore)

Major Head

2020-21 Actual

2021-22 RE

2022-23 BE

% change from 2021-22 RE to 2022-23 BE

Equity infusion in AIAHL

-

62,057

-

-100%

Debt servicing of AIAHL

2,184

2,217

9,260

318%

Medical benefit to retired employees

-

165

165

0%

Loans to AI

-

4,500

-

-100%

Grants for cash losses during Covid-19

-

1,944

-

-100%

Total

2,184

70,883

9,425

-87%

           

Note: BE – Budget Estimate; RE – Revised Estimate; AAI: Airports Authority of India; AIAHL – Air India Asset Holding Limited; AI – Air India. Percentage change is from RE 2021-22 to BE 2022-23. 
Source: Demands for Grants 2022-23, Ministry of Civil Aviation; PRS.

Privatisation of Airports

Airports Authority of India (AAI) is responsible for creating, upgrading, maintaining and managing civil aviation infrastructure in the country.   As on June 23, 2020, it operates and manages 137 airports in the country.   Domestic air traffic has more than doubled from around 61 million passengers in 2013-14 to around 137 million in 2019-20.  International passenger traffic has grown from 47 million in 2013-14 to around 67 million in 2019-20, registering a growth of over 6% per annum.  As a result, airports in India are witnessing rising levels of congestion.  Most major airports are operating at 85% to 120% of their handling capacity.   In response to this, the government has decided to privatise some airports to address the problem of congestion.  

AAI has leased out eight of its airports through Public Private Partnership (PPP) for operation, management and development on long term lease basis.  Six of these airports namely, Ahmedabad, Jaipur, Lucknow, Guwahati, Thiruvananthapuram, and Mangaluru have been leased out to M/s Adani Enterprises Limited (AEL) for 50 years (under PPP).  The ownership of these airports remains with AAI and the operations will be back with AAI after the concession period is over.  The Standing Committee on Transport (2021) had noted that the government expects to have 24 PPP airports by 2024.  

Figure 2: Allocation towards AAI (in Rs crore)

image

Note: BE – Budget Estimate; RE – Revised Estimate; AAI – Airports Authority of India; IEBR – Internal and Extra-Budgetary Resources;
Source: Demand for Grant documents, Ministry of Civil Aviation; PRS. 

The Committee also noted a structural issue in the way airport concessions are given.  As of now, entities that bid the highest amount are given the rights to operate an airport.  This leads them to pass on the high charge to airline operators.  This system does not consider the actual cost of the services and leads to an arbitrary increase in the cost of airline operators.  The Ministry sees the role of AAI in future policy issues to include providing high quality, safe and customer-oriented airport and air navigation services.  In 2022-23, the government has allocated Rs 150 crore to AAI, which is almost ten times higher than the budget estimates of 2021-22. 

Regional Connectivity Scheme (RCS-UDAN)

The top 15 airports in the country account for about 83% of the total passenger traffic.  These airports are also close to their saturation limit, and hence the Ministry notes that there is a need to add more Tier-II and Tier-III cities to the aviation network.  The Regional Connectivity Scheme was introduced in 2016 to stimulate regional air connectivity and make air travel affordable to the masses.  The budget for this scheme is Rs 4,500 crore over five years from 2016-17 to 2021-22.   As of December 16, 2021, 46% of this amount has been released.  In 2022-23, the scheme has been allocated Rs 601 crore, which is 60% lower than the revised estimates of 2021-22 (Rs 994 crore).  

Under the scheme, airline operators are incentivised to operate on under-served routes by providing them with viability gap funding and airport fee waivers.  AAI, which is the implementing agency of this scheme, has sanctioned 948 routes to boost regional connectivity.  As of January 31, 2022, 43% of these routes have been operationalised.  As per the Ministry, lack of availability of land and creation of regional infrastructure has led to delays in the scheme.  Issues with obtaining licenses and unsustainable operation of awarded routes also contribute to the delay.  As per the Ministry, these issues, along with the setback faced due to the pandemic acted as major obstacles for the effective utilisation of funds.

Figure 3: Expenditure on Regional Connectivity Scheme (in Rs crore)

image
 Note: BE – Budget Estimate; RE – Revised Estimate; 
 Source: Demand for Grants documents, Ministry of Civil Aviation; PRS.

Potential of air cargo 

The Standing Committee on Transport (2021) had noted India’s cargo industry’s huge potential with respect to its geographical location, its growing economy, and its growth in domestic and international trade in the last decade.  In 2019-20, all Indian airports together handled 3.33 million metric tonnes (MMT) of freight.  This is much lower than the cargo handled by Hong Kong (4.5 MMT), Memphis (4.8 MMT), and Shanghai (3.7 MMT), which are the top three airports in terms of the volume of freight handled.  The Standing Committee on Transport (2021) has noted inadequate infrastructure as a major bottleneck in developing the country’s air cargo sector.  To reduce such bottleneck, it recommended the Ministry to establish dedicated cargo airports, and automate air cargo procedures and information systems to streamline redundant processes.   

The Committee has also highlighted that the Open Sky Policy enables foreign cargo carriers to freely operate cargo services to and from any airports in India having customs/immigration facilities.  They account for 90-95% of the total international cargo carried to and from the country.  On the other hand, Indian air cargo operators face discriminatory practices and regulatory impediments for operating international cargo flights in foreign countries.  The Committee urged the Ministry to provide a level-playing field for Indian air cargo operators and to ensure equal opportunities for them.  The Ministry revised the Open Sky Policy in December 2020.   Under the revised policy, the operations of foreign ad hoc and pure non-scheduled freighter charter service flights have been restricted to six airports - Bengaluru, Chennai, Delhi, Kolkata, Hyderabad, and Mumbai. 

Rising cost of Aviation Turbine Fuel

The cost of Aviation Turbine Fuel (ATF) forms around 40% of the total operating cost of airlines and impacts their financial viability.  ATF prices have been consistently rising over the past years, placing stress on the balance sheets of airline companies.  As per recent news reports, airfares are expected to rise as the conflict between Russia and Ukraine is making ATF costlier.

ATF attracts VAT which is variable across states and does not have a provision for input tax credit.  High rates of aviation fuel coupled with high VAT rates are adversely affecting airline companies.

Table 2: Expenditure on ATF by airlines over the years (in Rs crore)

Year

National Carriers

Private Domestic Airlines

2016-17

         7,286 

       10,506 

2017-18

         8,563 

       13,596 

2018-19

       11,788 

       20,662 

2019-20

       11,103 

       23,354 

2020-21

         3,047 

         7,452 

Source: Unstarred Question 2581, Rajya Sabha; PRS. 

The Ministry, in January 2020,  has reduced the tax burden on ATF by eliminating fuel throughput charges that were levied by airport operators at all airports across India.  Central excise on ATF was reduced from 14% to 11% w.e.f. October 11, 2018.  State governments have also reduced VAT/Sales Tax on ATF drawn on RCS airports to 1% or less for 10 years.  For non-RCS-UDAN operations, various state governments have reduced VAT/Sales Tax on ATF to within 5%.  The Standing Committee on Transport (2021) has recommended ATF to be included within the ambit of GST and that applicable GST should not exceed 12% on ATF with full Input Tax Credit. 

For more details, please refer to the Demand for Grants Analysis of the Ministry of Civil Aviation, 2022-23.