Cyrus Mistry’s 'letter bomb' may not have blown up Air Asia – but it has caused great turbulence

Sixty years after the Tatas ceded control in Air India, they returned to the aviation space in India via a joint venture with Malaysian low cost airline Air Asia in June 2014, making it the first foreign airline to set up a subsidiary in India. Today, it is the fourth largest carrier in the country with a market share of 2.2%. Tata’s stint with Air Asia has been marked with controversies from day one but Cyrus Mistry’s letter after his ouster from the chairmanship of Tata Sons just put the aviation company in a lot more trouble.

Mistry was unceremoniously replaced by Tata Sons as the chairman of Tata Group on Monday evening in an announcement that shocked Indian businesses, even though the company argued it was done in the longer term interest and stability of the group.

Mistry, however, didn’t go silently into the night and wrote a scathing letter to the board of the company alleging many wrongdoings inside the Tata Group. The controversy is far from over and Tata Group has hit back by claiming that Mistry’s allegations are unsubstantiated and baseless as the two parties gear up for a court battle over his ouster.

Courting trouble

A key part of Mistry's letter that attracted attention was about Air Asia:

Board members and trustees are also aware that in the case of Air Asia, ethical concerns have been raised with respect to certain transactions as well as the overall prevailing culture within the organization. A recent forensic investigation revealed fraudulent transactions of Rs. 22 crores involving non-existent parties in India and Singapore. 

The government has said that its keenly watching Mistry’s disclosure about the airline. “We are waiting for any input from any quarter,” Civil aviation secretary RN Choubey was quoted as saying by the Times of India. “We have not received anything so far,” he added.

Mistry’s letter claimed that Ratan Tata’s “passion for the airlines sector” prompted Tata to invest a lot more in the joint venture than they had planned at the beginning. Mistry said his "pushback was hard but futile" because Ratan Tata had already "concluded negotiations to partner with Air Asia and wanted the proposal tabled at the forthcoming Tata Sons board meeting".

In addition, Mistry claimed that the company did not initially want to probe the fraudulent transactions unveiled by an audit. “Executive Trustee, Mr. Venkatraman, who is on the board of Air Asia and also a shareholder in the company, considered these transactions as non-material and did not encourage further study,” Mistry wrote in his letter. “It was only at the insistence of the independent directors, one of whom immediately submitted his resignation, that the board decided to belatedly file a first information report.”

While the Civil Aviation Minister Ashok Gajapati Raju told NDTV that Air Asia was granted a flying license after following due process and that the courts will look at wrongdoings, if any, there is much more than just fraudulent transactions that Mistry spoke about that should get Tatas and Air Asia worried.

Turbulent skies

After Mistry’s letter, Federation of Indian Airlines moved the Supreme Court challenging the grant of license to Air Asia claiming that the Tata-Air Asia agreement covertly put more control in the hands of Air Asia rather than rest it in the hands of the Indian entity – the Tata Group – as required by the law.

These allegations were sought to be supported by emails and documents, scrutinised by Mint, which revealed that final decisions on key issues were taken by Air Asia officials rather than by those from the Tata Group, as revealed by an agreement which wasn't made public about the operations of the airline in India.

The 62-page agreement says AirAsia India “will observe and comply strictly with the following operating requirements which are to be determined in AirAsia’s sole discretion”.

The compliance includes just about every possible area—ancillary revenues, branding, catering and in-flight services, customer experience, engineering, finance, flight operations, innovation, commercial and technology, marketing, network planning, people, quality and assurance, revenue management, safety, sales and distribution.

The agreement has never been made public. With good reason—it goes against the grain of the 2012 Indian policy allowing foreign airlines to be partners in Indian airlines as long as the local operation was controlled and managed by the Indian partner.

Captain Shakti Lumba, an aviation analyst who headed operations at IndiGo and Air India said that strategic control of the operations seemed to be in the hands of Air Asia, which contradicts Indian foreign direct investment and aviation policy norms that require the control of a foreign subsidiary to be vested in an Indian entity.

“The rules are pretty clear that operations control or strategy control has to be with an Indian partner, that’s a basic [requirement],” Lumba said. “It appears that the strategic control was with Air Asia. All operational and policy decisions were being made by them.”

Lumba also said that there is a possibility that many of the agreements between the two entities were put in place after the license was granted, implying potential flouting of rules since license requirements would have stopped the entities from entering into these agreements.

“At the time of launch, many of the required agreements [between Tata and Air Asia] were not in place but they still got the permit,” he said. “These agreements were done post the grant of the permit, if they had done them before the permit was granted, they would have not received the license.”

Questionable lift-off

It is not the first time that the joint venture has courted controversy. A Public Interest Litigation against the airline was filed by Bharatiya Janata Party’s Subramanian Swamy in the year 2014. Swamy argued that Air Asia’s license be revoked since the new venture had received a foreign investment approval without having established operations in the country.

Swamy argued “that the grant of approval of FDI in a company yet to be incorporated and which till now is not engaged in operating scheduled and nonscheduled air transport services, is contrary to the FDI policy permitting FDI only in existing airlines.”

The court, however, provided interim relief to Air Asia claiming that the government was free to explain and amend its aviation policy as it deemed fit.

“The policy was formulated by the government and the government cannot be precluded from clarifying or amending its policy which is executive in nature. The matter is strictly within the domain of the internal functioning of the government,” the Delhi High Court observed in its interim order dated February 11, 2014.

While the matter remains pending in the High Court, aviation experts think that the damage done to the Tatas and the airline by Mistry’s revelations won’t be easy to reverse and could prove fatal in the long-term for the venture’s future.

Jitendra Bhargava, former executive director of Air India, said that fraudulent transactions that Mistry wrote about in his letter could potentially be a payment of bribe or over-invoicing.

“There are situations when such transactions are shown on the balance sheet when you pay a bribe but there’s no way to prove this,” Bhargava said. “Nobody disputes that Ratan Tata has a passion for aviation. But rules can’t be overlooked because of someone’s passions. If you recall the UPA time, rules could be bent easily to get what one wants.”

Meanwhile, Shakti Lumba insists that shutting down the airline or getting them to promise that the control will rest in India aren’t viable options to prevent further trouble for Air Asia since there is always space for someone to call the shots from a “back-room”.

“The challenge is how to undo it. You can’t close them down. But how do we know that there aren’t other people controlling from the back?” Lumba said. “The question mark is that there is an illegality but how are they going to rectify it? Cyrus is a mystery and Ratan Tata can do little to reverse the perceived damage that’s already been caused now.”