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Can India be a market for shipowners?

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Over the past decade, ship leasing has grown to become an important substitute as a provision for financing ship acquisition. The ship rental market is expected to grow further at a fairly significant rate in the near future with the expansion of Chinese leasing companies.[1] Indian International Financial Services Authority (Hereinafter referred to as “IFSA”) in line with global ship leasing market trends, recently released Framework for Ship Leasing.[2] The idea resulted in the acquisition, financing and leasing of vessels (Hereinafter referred to as “SAFAL”) Report that redefined ship leasing as a financial product, to be perpetuated in the global maritime game. The current framework acts as a channel through which to achieve the original objective of SAFAL.[3] Considering the increase in the number of entities establishing their operations in the Indian IFSC, after the IFSC authority issued the framework enabling aircraft leasing and ancillary services, one can naturally also predict a positive outcome of the ship rental framework. [4]

Any entity undertaking vessel leasing in the IFSC must be registered as a finance company/unit. Operations can take the form of a corporation or limited liability partnership (LLP) or a trust or branch. These IFSCA-registered entities will be governed in accordance with the IFSCA (Financial Company) Regulations 2021. prudential and differ according to the nature of the activity. Extraordinarily, the framework covers guidelines on operating lease, financial lease and a hybrid of the two or an ocean going vessel, vessel engine or any other part thereof. These leases must comply with Indian accounting standards on leases. Further, the applicable law to comply with the requirements, exceptions and regulations as notified is the Merchant Shipping Act 1958. The circular also authorizes the imposition of notifications by the competent authorities, as provided for by law, such as the Ministry of Merchant Marine or the Director General of Merchant Marine.

Paving the way for an owner’s position in the market, a lessor will be permitted to perform operating leases, asset management support services for assets owned or leased by a particular entity or its subsidiaries in wholly owned or their branches established under the IFSC in India, this includes the transfer, assignment, purchase, sale and leaseback, novation or any other similar transaction in connection with the rental of a vessel. Finally, to further stimulate investment in financing vessel leasing, a non-resident’s income from interest and royalties on the leasing of a vessel by an IFSC unit should be exempt from tax. under the new EU budget. [5]

Comparison with global jurisdictions

It should be noted that IFSCA recognizes the potential of the global vessel leasing scenario to further promote GIFT IFC and the idea of ​​a “Atma-Nirbhar Bharat”. The object can be seen end to end to make India a global hub for ship leasing and finance business. Speculation also continues to recognize Asia as a major ship finance market compared to Europe and the United States and with shipowners resorting to Chinese leasing companies, India needs to recognize this advancement and further promote the financing of the rental of vessels. To draw a parallel, India holds only 1% of the world market share against 16% for China.[6] Given India’s stellar common law system, huge workforce, large number of ports, proximity to major markets and Asia as a base of operations, countries like that of China with low tax regimes are eagerly awaiting offshore properties, making the ship rental industry a lucrative business. opportunity for India to capitalize by adopting a more owner-centric approach.[7]

Due to the fact that the Indian lessor market is focusing on a charterer approach, the already impending advance of China owning a very large number of vessels is indeed alarming. The current market position of vessel leasing makes it a prime source of finance rather than an alternative. Therefore, the IFSC should further issue guidelines that facilitate access to finance for lessors, as they should be encouraged to operate vessels and auxiliary vessels as owners. rather than tenants. [8] To put statistics in place, due to the lessee approach, the Indian shipping industry has become charterers and not owners, resulting in an annual expenditure of $75 billion for the chartering of foreign vessels. However, induction of the framework is a step towards flagging ownership of vessels in India rather than resorting to industry stakeholders i.e. Panama, Marshall Islands, Dubai, Liberia and China.[9] Will we always remain a shippers market with phenomenal growth in manufacturing and exports or should we really act today self-reliant in supporting manufacturers, traders and exporters to make India a market owners in the years to come?

Initiatives like this can also help to strengthen the financing framework for maritime transport in India, but this requires considerable investment. There have been new reports that CSSC Shipping, the leasing unit of China State Shipbuilding Corporation (CSSC) has announced plans to issue two bonds worth a total of US$800 million maturing in 2025 and 2030 and to use the net proceeds primarily to expand its leasing business and refinance its existing debt.[10]

Similarly, Japanese and South Korean financial institutions have also pledged to be prominent players in the ship rental business. In June 2020, the Hong Kong government released a rather attractive tax incentive for ship leasing to compete with favorable tax regimes in Singapore and other jurisdictions by providing tax benefits to ship leasing companies and Eligible Vessel Leasing Managers, which are applied in a similar manner by the Government of India. The incentive applies to Hong Kong-based managers using separate special purpose companies incorporated in Hong Kong to own and lease vessels for use outside Hong Kong waters on the basis of operating or finance leases entered into with affiliated or third-party tenants. The vessel charter company must have a sufficient number of full-time employees in Hong Kong (in any event, not less than two) and adequate annual operating expenses in Hong Kong (in any event, no less than around US$1 million), while the figures for a vessel leasing management company are US$1 and US$128,000 respectively. The terms would generally be less onerous than those in Singapore and were designed to help promote Hong Kong as a preferred jurisdiction for vessel charter business.11

Refreshingly, the Indian framework also offers attractive incentives, for example, all transactions made by a minus must be done in a freely convertible foreign currency, but a minus is allowed to cover all administrative expenses through a different INR account, the layout proves to be accommodating and reassuring for chartering owners. Indian units may face a lack of marine funding and insurance, they are generally referred to as non-risk, and the framework may also prove to be time-consuming. In addition, there needs to be a review of the tax regime in the context of maritime industries, as can be seen in the tax regimes of Singapore, Panama, Malta and Cyprus which are proving to be booming centers of maritime finance. The nations mentioned above operate the lesser ones without any tax burden. Similarly, GST provisions in India also require further assessment as the current framework tends to favor foreign entities rather than promoting the Make-in-India regime. A holistic approach taking into consideration the Indian legislative framework, competition from multiple maritime jurisdictions and flag states thus making investment in the maritime industry attractive is the need of the hour. Indian banks and financial institutions will also need to simultaneously explore leasing structures and business opportunities to encourage this initiative.

The objectives of the framework were previously set out in a report by the Vessel Acquisition, Finance and Leasing Pathways Development Committee, IFSC, which again played an important role in promoting an owners market. The report promised to foster the development of vessel leasing, financing and ownership within the IFSC to create job opportunities and production multipliers in the field, thereby boosting the Indian economy.12