The International Financial Services Centres Authority (IFSCA) on Tuesday issued the framework for registration of entities under Finance Company Regulations for undertaking ship lease transactions in the International Financial Services Centres (IFSCs).
The framework seeks to promote Gujarat International Finance Tec-City or GIFT IFSC as a hub for international ship leasing and financing business.
An entity intending to undertake ship lease in IFSC, shall be registered as a finance company/unit, per the IFSCA (Finance Company) Regulations, 2021.
The framework permits an entity to set-up operations in IFSC in the form of a Company or a Limited Liability Partnership (LLP) or a Trust or a Branch. The framework requires a ship lease transaction to be classified as a lease such that it is in accordance with the Indian Accounting Standards (Ind AS 116) on Leases.
Further, the framework details out the requisite capital and prudential requirements based on the nature of lease being undertaken by the entity, whether operating lease or financial lease for ships or ocean vessels.
The entities set up in IFSC for carrying out permitted activities as envisaged in the framework shall comply with all requirements, exceptions, regulations and conditions imposed by any applicable statute including the Merchant Shipping Act, 1958, and shall also include circulars and notifications issued by competent authorities established under the Shipping Act or other applicable statutes, by the Ministry of Shipping or Director General of Shipping.
A lessor in IFSCs will be allowed to carry out operating lease; asset management support services for assets owned or leased out by the entity or by its wholly owned subsidiary/ies or by a branch of its wholly owned subsidiary set up in IFSCs in India; sale and lease back, purchase, novation, transfer, assignment, and such other similar transactions in relation to ship lease.
A lessor in IFSCs will be permitted to undertake financial lease; hybrid of financial and operating lease.
Income of a non-resident from royalty and interest on ship lease by a unit in the International Financial Services Centre (IFSC) will be exempted from tax, the Finance Minister Nirmala Sitharaman said while presenting the Union Budget in February.
“Fostering the development of ship leasing, financing and owning in IFSC will also serve as foundation for unleashing the employment and output multipliers on the shipping industry and the Indian economy,” according to a report submitted by a Committee on Development of Avenues for Ship Acquisition, Financing and Leasing Activities from the International Financial Services Centre (IFSC).
“The time is ripe for India to seize the opportunities being created also by the global crisis to promote a shipping ecosystem that can create and sustain companies that are benchmarked against the best globally and be able to compete and profit by participating in the global maritime play. It is time to align India’s shipping sector with global centres like Singapore, Hong Kong and Dubai and carve its place in global cross trades, besides leveraging and securing gainful transactions for its marketplace. It is proposed that the concept of IFSC, conceived for financial services, be naturally extended to ship acquisition, financing and leasing (SAFAL) products and services along the lines of the successful recent extension to aircraft acquisition, financing and leasing,” the Committee headed by Vandana Aggarwal, former Senior Economic Advisor to the government wrote in its report finalised in October 2021.
Among the main other considerations to give a concerted push to the establishment of a domestic leasing industry on the pattern of what has been recently done successfully for aircraft – another large mobile bankable asset – is that ship industry holds the key to push the success of “Make in India” initiative, due to the high dependence on connectivity and supply chain, with high output and employment multipliers for the Indian economy.
Furthermore, the market share in financing the industry stands presently captured by foreign lessors and financiers, and of late sizeably by Chinese leasing and financing companies.
Ship lease finance is a highly profitable avenue, and shipping being a least-polluting form of commercial transport, is critical in the decarbonization efforts. An effective ship financing eco system with adequate risk capital can also be permitted to invest in tonnage in domestic tariff areas, ensuring adequate funding for tonnage operating there, the panel wrote in its report.
Indian agencies (banks, insurance companies, pension funds, alternate capital and others) lack exposure to maritime finance and insurance, and hence tend to be non-risk takers or impose lengthy, time-consuming procedures. Besides, India’s tax regimes by and large are not encouraging to the shipping industry on par with the tax regimes of Singapore, Malta, Cyprus, and Panama where most of the international ships are registered. The tax burden on seafarers sailing on foreign ships is nil as they are exempted from paying income tax, whereas their counterparts on Indian ships are obliged to pay all taxes. Similarly, the GST provisions on ship building, ship managing, bunkering, repairing (spare parts, for instance) are skewed in favour of foreign entities, rendering Make-in-India unattractive.
Shipping as a global industry has cyclical ups and downs where the asset value gets linked to global charter hire rates. Indian entrepreneurs, in the context of other industries, have not considered investing in the shipping sector as a safe haven. Hence India, which has a huge export-import trade, is a country of charterers and not shipowners thereby resulting in a substantial spend of around $75 billion annually for chartering foreign flag vessels for India’s international trade.
“It is heart-wrenching to find that on registering ships, the industry finds it easier and more expedient to resort to Flags of Convenience (Panama, Marshall Islands, Liberia etc) rather than flagging in India. Through the avenues of development of leasing, it is proposed to impart brand value to Indian flagged vessels,” the committee report added.