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UPDATE 3-India's Kingfisher flights grounded by staff unrest

* All Kingfisher flights on Monday cancelled - minister

* Kingfisher will not be allowed to fly if safety norms not met - minister

* Some employees manhandled staff willing to work - Kingfisher

* Shares fall by maximum daily limit of 5 pct

(Adds minister's comments on safety)

By Anurag Kotoky

NEW DELHI, Oct 1 (Reuters) - Labour unrest forced India's Kingfisher Airlines Ltd to cancel all its flights on Monday in the latest blow for the ailing carrier as it scrambles to find an investor, sending its stock down by its maximum daily limit.

India warned it would not allow Kingfisher to fly if safety rules were not followed, and the industry regulator will meet Kingfisher executives on Tuesday to discuss safety issues, Civil Aviation Minister Ajit Singh said.

Kingfisher, controlled by flamboyant liquor baron Vijay Mallya and once India's No. 2 carrier by domestic market share, has struggled with its $1.4 billion debt and banks have refused to lend it more unless it can infuse fresh equity.

The carrier, which has never made a profit, had already grounded most of its fleet.

"A section of employees of Kingfisher Airlines has not been reporting for work over the last fortnight and over the past two days, they have been threatening and even manhandling the other employees who are reporting for work," Kingfisher spokesman Prakash Mirpuri said in a statement on Monday.

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Kingfisher said earlier on Monday it was cancelling "several" flights, but Singh said all the airline's Monday flights were cancelled. All Kingfisher flights scheduled to depart from Delhi on Monday were cancelled, the airport's website showed.

"I must have been crazy to have booked tickets on Kingfisher. I don't know what to do now," Bilal Ahmed, 29, who was due to be married on Wednesday in Srinagar, told Reuters at Delhi airport, where his flight had been cancelled.

Kingfisher's Mirpuri did not reply to phones calls and text messages, seeking further comment.

Shares in Kingfisher closed 4.95 percent down at 15.35 rupees on the National Stock Exchange. The stock is allowed to fall or rise a maximum of 5 percent a day, according to daily limits set by the exchanges.

SAFETY ISSUE

Kingfisher, which has been months behind on salary payments, has seen its operations disrupted several times by fed-up employees, although until the recent incident there had not apparently been any reports of violence.

"The point is if safety is jeopardised. That's the issue here," Singh told reporters on Monday. "This is the first time that safety issue has come up."

"There are certified engineers, only who can certify that airworthiness is there or not," Singh said. "If there is no certificate for airworthiness from the engineers who are qualified to do that, they won't be allowed to fly."

The Mint newspaper on Monday reported that airline ground staff had refused to attach an air bridge to a plane in Mumbai on Sunday, stranding passengers onboard, while some engineers "beat up" an executive, the newspaper said, citing two unnamed sources.

Arun Mishra, the Director General of Civil Aviation, told Reuters the regulator was "examining" the situation at Kingfisher.

Under Indian rules, an airline needs to operate at least five planes in order to maintain its licence.

INVESTMENT HOPES

Last month, India allowed foreign airlines to buy stakes of up to 49 percent in local carriers, a long-awaited policy move lobbied for by Kingfisher and seen as providing a lifeline to the country's debt-laden operators.

While no carrier has publicly expressed interest in buying a stake in Kingfisher, Mallya told shareholders last week he was in talks with foreign carriers for investments, echoing earlier comments about potential investments, which have yet to yield any announcement.

Kingfisher, which has never turned a profit, has seen its domestic market share fall from second place last year to last among India's six main carriers. Kingfisher shares have more-than-doubled from an all-time low of 7.05 rupees in mid-August.

Last week, its banks held inconclusive talks about the carrier's turnaround plan and will meet again this month.

Also last week, Mallya's United Spirits Ltd and Diageo Plc confirmed long-rumoured talks for the UK giant to take a stake in India's dominant whisky maker, a deal that could make it easier for Mallya to find funds to rescue Kingfisher.

(Additional reporting by Mansi Thapliyal; Writing by Devidutta Tripathy; Editing by Chris Gallagher and Tony Munroe and Catherine Evans)

((anurag.kotoky@thomsonreuters.com)(+91 11 4178 1024)(Reuters Messaging: anurag.kotoky.thomsonreuters.com@reuters.net))

Keywords: INDIA KINGFISHER/

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