The proposal was approved at a meeting of the Foreign Investment Promotion Board (FIPB), Economic Affairs Secretary Arvind Mayaram told reporters. He is chairman of the FIPB.
"We strongly believe that the current environment is perfect to introduce our low fares," said AirAsia boss Tony Fernandes.
AirAsia would own 49 percent of the new airline. The other two Indian companies would own the remaining stake and the new carrier would operate from Chennai in southern India.
India's aviation industry was opened to foreign investors in September last year, allowing overseas companies to own up to 49 percent of local airlines.
As yet, no other operators have taken advantage of the rules.
AirAsia is Southeast Asia's largest carrier by fleet size.
Chief executive Tony Fernandes also owns English football team QPR.
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