India has an extensive coastline and easy access to sea routes, but India contributes only 1% of world trade. Many large shipowners and operators have chosen key international shipping hubs such as Singapore, Hong Kong and Dubai as their base of operations.
To create a stimulating ecosystem that can help Indian entities compete with global maritime hubs by accelerating and strengthening their presence internationally, the IFSCA has formed a committee on the development of acquisition, financing and ship rental (“SAFAL Committee”) for a comprehensive overview and assessment of the existing legal and regulatory regime within the IFSC in India for the acquisition, financing and leasing of vessels.
Overview of the IFSC Vessel Leasing Regulatory Environment
In accordance with the above, on August 16, 2022, the IFSCA published the “Framework for the leasing of vessels” (“Frame”). The framework enables financial companies and financial units registered under the IFSCA (Financial Company) Regulations 2021 (“Regulation of financial companies”), to undertake activities permitted under finance leases and hybrids of finance and operating leases as principal activities and activities permitted under operating leases as non-essential activities.
The framework was preceded by the notification of ‘vessel leasing’ as a financial product to the IFSC, thereby enabling financial services to be undertaken in accordance with the IFSCA Act, subject to compliance with the regulatory mechanism in place. According to the said notification, “ship leasing” includes operating leases and hybrid operating and finance leases of ships, ocean-going vessels or any part thereof. Thus, vessel leasing being notified as a “financial product” within the meaning of the IFSCA law, the vessel leasing activity can be exercised by finance companies and financing units, in accordance with the regulation on finance companies detailed below. Financial services undertaken in connection with the leasing of vessels in accordance with the framework will be entitled to tax benefits in the IFSC, such as the 10-year tax holiday and other benefits such as the alternative minimum tax.
Framework for ship rental
Following the “Vessel Leasing” notification mentioned above, in order to enable vessel leasing activity in the IFSCs and to operationalize the mechanism under the Financial Companies Regulations, the IFSCA has recently published the “Vessel Leasing Framework” (“Frame”). The framework provides guidance to financial companies and financial units registered with the IFSCA under the Financial Companies Regulation to undertake an operating lease, finance lease or a hybrid operating lease and financial lease. financing of ships, ocean-going vessels or any part thereof. Entities can register either for a main activity or for a secondary activity.
Pursuant to clause 3E of the framework, entities which have obtained registration to undertake operating leases are also permitted to undertake (i) asset management support services for assets owned or leased by them or by their wholly-owned subsidiary (“WOS”) or by a branch of their WOS established in an IFSC in India; (ii) the sale-leaseback, purchase, novation, transfer, disposal or other similar transactions relating to the rental of vessels; (iii) other related activities with the prior approval of the IFSCA. Pursuant to clause 3H of the framework, entities registered to undertake financial leasing or a hybrid of financial leasing and operating hire are also permitted to undertake activities permitted under an operating lease and other activities related, with the prior approval of the IFSCA. However, in accordance with Clause D(iii) of the Framework, entities with an operating lease registration require an authorization to undertake permitted activities under a finance lease.
In addition, financial units carrying out principal activities, including financial leasing, would also have to comply with additional requirements under the IFSCA (Financial Company) (Amendment) Regulations 2022.
Compliance with Other Laws
It should be noted that all IFSC entities carrying out permitted activities under the framework are required to ensure compliance with all requirements, exceptions, regulations and conditions imposed by relevant laws, including the merchant shipping (“Merchant Shipping Act, 1958”).Merchant Navy Act”). Therefore, circulars or orders issued under the Shipping Act apply to entities registered with the IFSC, which own Indian or foreign flagged vessels, as the case may be. This results in certain restrictions for foreign ships. For example, the existing framework under the Shipping Act, among others, gives preference to Indian vessels for charter-related activities through the tender procedure. Second, Indian-registered entities acquiring vessels flagged outside India are required to ensure compliance with tonnage and crew requirements in India. These requirements which have, among othersled Indian entities to install vehicles abroad, continue.
In addition, from a broader charter business perspective, the Merchant Marine Act requires that, in certain scenarios, the Merchant Marine Director General’s License (“DG Expedition”) be obtained for coastal and international trade. Although some exceptions have been made for chartering by entities registered in India and for activities related to the movement of agriculture, fisheries, agricultural products and horticulture, for which no license is is required from DG Shipping, the requirement to obtain such a license for other charter activities would continue to apply, including for activities within IFSCs. These regulatory requirements could also impact sale-leaseback transactions (as permitted by the framework), depending on the nature of the structure being considered.
Other regulatory requirements
Under the Shipping Act, DG Shipping is vested with the power to regulate the movement of Indian vessels, which would also apply to activities within the IFSC. For example, vessels built or acquired outside India which are provisionally registered under the Shipping Act are subject to various rules of subsequent registration in a port located in India, which would also apply under the IFSC regime. In addition, DG Shipping approval is required under the Merchant Shipping (Registration of Indian Ships) Rules 1960 (“Registration rules”), for the transfer of vessels.
Another issue relevant to ship financing is the creation of security interests in ships. Typically, security is created by means of a mortgage. However, under the Merchant Shipping Act, read together with the Registration Rules, such a charge can only be created on an Indian-flagged vessel. Thus, the load created on foreign-flagged vessels must be recorded offshore.
With regard to the dispute resolution mechanism, while the general remedies available for funding, including the Insolvency and Bankruptcy Code, 2016, would be available to entities registered with the IFSC, the resolution regarding maritime liens and maritime claims will be covered by the Admiralty (Jurisdiction and Settlement of Maritime Claims Act, 2017. IFSCA has also signed a Memorandum of Understanding (MOU) with Gujarat Maritime University to promote the Center Gujarat International Maritime Arbitration Center (GIMAC), which is a welcome initiative for prompt resolution of maritime disputes in GIFT City.
The framework is a positive step towards the development of a global shipping industry in India. This should pave the way for ship owners and charterers to be incentivized to choose India as their place of operations, rather than establishing their maritime bases offshore. Considering that shipping as an industry is capital-intensive, opening new avenues of finance in India will help in the growth of the sector. Appropriate changes in maritime laws and tax laws will give further impetus to the growth of the sector.