India has a vast coastline and easy access to shipping routes, yet India contributes only 1% in global trade. Many major shipowners and operators have chosen key international maritime centres such as Singapore, Hong Kong, and Dubai as their base for operations.
To create a stimulating ecosystem that can help Indian entities compete with global marine hubs by accelerating and boosting their presence internationally, IFSCA has constituted a Committee on Development of Avenues for Ship Acquisition, Financing and Leasing Activities (“SAFAL Committee”) to obtain a complete overview and assessment of the existing legal and regulatory regime in IFSC in India for ship acquisition, financing and leasing.
Overview of the Regulatory Environment for Ship Leasing in IFSC
Pursuant to the above, on August 16, 2022, IFSCA issued the ‘Framework for Ship Leasing’ (“Framework”). The Framework allows Finance Companies and Finance Units registered under the IFSCA (Finance Company) Regulations, 2021 (“Finance Company Regulations”), to undertake activities permitted under financial leases and hybrid of financial and operating leases as core activities and activities permitted under operating leases as non-core activities.
The Framework was preceded by the notification of ‘ship lease’ as a financial product in the IFSC, thereby enabling financial services to be undertaken in accordance with the IFSCA Act, subject to compliance with the regulatory mechanism in place. As per the said notification, ‘ship leasing’ includes operating leases and hybrids of operating and financial lease of ships, ocean vessels, or any of their parts. Thus, with ship leasing being notified as a ‘financial product’ in terms of the IFSCA Act, the activity of ship leasing can be carried out by Finance Companies and Finance Units, as per the Finance Company Regulations detailed below. The financial services undertaken with respect to ship leasing in accordance with Framework will be entitled to tax benefits in the IFSC, such as the 10-year tax holiday and other benefits such as minimum alternate tax.
Framework for Ship Leasing
Further to the notification of “ship lease” as mentioned above, in order to enable the business of ship leasing in IFSCs and to operationalise the mechanism under the Finance Company Regulations, the IFSCA recently issued the ‘Framework for Ship Leasing’ (“Framework”). The Framework provides guidance to Finance Companies and Finance Units registered with the IFSCA under the Finance Company Regulations to undertake operating lease, financial lease, or a hybrid of operating and financial lease of ships, ocean vessels, or any of their parts. Entities can register either for core activity or non-core activity.
As per Clause 3E of the Framework, the entities who have obtained the registration for undertaking operating leases are also permitted to undertake (i) Asset Management Support Services for assets owned or leased out by them or by their wholly owned subsidiary (“WOS”) or by a branch of their WOS set up in an IFSC in India; (ii) sale and lease back, purchase, novation, transfer, assignment, or other similar transactions in respect of ship lease; (iii) other related activities with prior approval of the IFSCA. As per Clause 3H of the Framework, entities with registration for undertaking financial lease or hybrid of financial and operating lease are also permitted to undertake activities permitted under operating lease and other related activities, with the prior approval of the IFSCA. However, as per Clause D (iii) of the Framework, entities with operating lease registration need permission to undertake activities permitted under financial lease.
Further, finance units undertaking core activities, including financial leases, would also have to comply with additional requirements under the IFSCA (Finance Company) (Amendment) Regulations, 2022.
Compliance with Other Laws
It is relevant to note that all IFSC entities that carry out permitted activities under the Framework are required to ensure compliance with all requirements, exceptions, regulations, and conditions imposed by relevant statutes, including the Merchant Shipping Act, 1958 (“Shipping Act”). Therefore, circulars or orders issued under the Shipping Act are applicable to entities registered in the IFSC, who own Indian flagged or foreign flagged vessels, as the case may be. This results in certain restrictions for foreign vessels. For instance, the extant framework under the Shipping Act, inter alia, gives preference to Indian vessels for activities related to chartering through the tendering process. Secondly, entities registered in India acquiring vessels flagged outside India are required to ensure compliance with tonnage and crew requirements in India. These requirements which have, inter alia, resulted in Indian entities setting up vehicles offshore, continue.
Further, from the broader perspective of chartering activities, the Shipping Act requires that in certain scenarios, licence of the Director General of Shipping (“DG Shipping”) be obtained for coastal and international trade. While some exceptions have been made for chartering by entities registered in India and for activities related to movement of agriculture, fishery, farm produce, and horticulture commodities, for which no licence is required from the DG Shipping, the requirement to obtain such licence for other chartering activities would continue to apply, including for activities within the IFSCs. These regulatory requirements could also impact sale and lease back transactions (as permitted under the Framework), depending on the nature of the structure being contemplated.
Other Regulatory Requirements
Under the Shipping Act, DG Shipping is vested with powers to regulate movement of Indian vessels, which would also be applicable to activities carried out in IFSC. For instance, ships built or acquired outside India that are provisionally registered under the Shipping Act are subject to various rules of further registration in a port situated in India, which would also be applicable to the IFSC regime. Additionally, the approval of DG Shipping is required under the Merchant Shipping (Registration of Indian Ships) Rules, 1960 (“Registration Rules”), for transfer of ships.
Another issue that is relevant to ship finance is the creation of security over ships. Typically, security is created by way of mortgage. However, under the Shipping Act, read with the Registration Rules, such charge can only be created over an Indian flagged ship. Thus, charge created over foreign flagged ships must be registered offshore.
As regards the dispute resolution mechanism, while general remedies available to financing, including the Insolvency and Bankruptcy Code, 2016, would be available to entities registered with the IFSC, resolution with respect to the maritime liens and maritime claims will be covered by the Admiralty (Jurisdiction and Settlement of Maritime Claims) Act, 2017. The IFSCA has also signed a Memorandum of Understanding (MOU) with the Gujarat Maritime University to promote the Gujarat International Maritime Arbitration Centre (GIMAC), which is a welcome move for speedy resolution of maritime disputes in GIFT City.
The Framework is a positive step towards developing a global shipping industry in India. This should pave the way for ship owners and charterers to be incentivised to choose India as their place of operations, rather than setting up their shipping bases offshore. Considering that shipping as an industry is capital-intensive, opening up of new avenues of financing within the territory of India, will aid in growth of the sector. Appropriate changes to the maritime laws and tax laws will provide further impetus to the sector’s growth.