India has approved a long-pending policy reform allowing foreign airlines to buy stakes of up to 49% in the country’s local carriers.

Though Foreign Direct Investment (FDI) was previously allowed in the aviation sector, foreign airlines were prohibited from investing in Indian carriers, says Civil Aviation Minister Ajit Singh.

“Until now, foreign airlines were allowed to participate in the equity of companies operating cargo airlines, helicopter and seaplane services, but not in the equity of an air transport undertaking operating scheduled and non-scheduled air transport services,” Singh notes. That restriction is now lifted, and foreign airlines can now own up to 49% of an Indian carrier.

The decision is expected to pave the way for much-needed equity infusion into the country’s cash-strapped airlines.

“The issue of permitting FDI by foreign airlines in the equity of an air transport undertaking operating scheduled and non-scheduled air transport services has been under consideration of government for some time,” says Singh.

“There has been a need to consider financing options available for private airlines in the country, for their operations and service upgradation, and to enable them to compete with other global carriers. Denial of access to foreign capital could result in the collapse of many of our domestic airlines, creating a systemic risk for financial institutions, and a vital gap in the country’s infrastructure,” he adds.

The total FDI inflows into the air transport sector from January 2000 to April 2012 totaled $434.75 million, constituting 0.25% of the total FDI inflows into the country.

Indian carriers, such as privately owned Kingfisher Airlines and SpiceJet, have been urging the government to allow foreign airlines to buy stakes, saying it would enable Indian airlines to raise much-needed funds.

IndigGo is the only airline in India to post a profit in the fiscal year ending March 31.

“Removing the existing restriction on investment by foreign airlines would assist in bringing in strategic investors into the civil aviation sector,” says Singh, adding, “Higher foreign investment inflows are necessary at the present juncture, in order to strengthen the sector.”

While relaxing investment rules, India still requires an airline’s chairman and at least two-thirds of the directors to be Indian citizens, and substantial ownership and effective control must be vested in Indian nationals.