Ship leasing from IFSC: A new business takes shape

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The International Financial Services Centre, from Gift City, was intended to enable leasing of aircrafts as well as ships. Such leases have traditionally been done from offshore jurisdictions, and the admitted intent of IFSC was to bring these businesses to IFSC.

Ship financing business in India and the world

India is a very important player in the global shipping market, and is ranked no 17 in terms of shipping volume. It has a coastline of about 7,517 km, with 12 major and 205 minor ports. Additionally, it is estimated that about 95% of India’s goods trade by volume and 70% by value is done through maritime transport.

Ship financing volume globally is about USD 500 billion, largely consisting of bank finance. There are two types of leases against ships: bare board charter, and voyage or time charter. In case of the former, the lessor merely provides the vessel, with neither the crew or any other services, whereas in case of the latter, the ship is provided on time basis, with all services.

India is a substantial importer of shipping freight. It is estimated that annually, Indian companies pay about $75 billion for seaborne freight to foreign shipping companies. 

Ship financing from IFSC:

In October 2021, a committee on Development Of Avenues For Ship Acquisition, Financing And Leasing From Ifsc In India, called SAFAL Committee, submitted a report. It recommended, as a starting point, the notification by the IFSCA of vessel leasing as a form of leasing permitted from IFSC.

Accordingly, the IFSCA notified ship lease as a “financial product”, permitted to be carried out by a finance company from IFSC, whether such lease be an operating lease, finance lease or a hybrid.

Further, a ship leasing framework was notified by IFSCA vide a notification dated 16th August 2022. The framework required a registration of the lessor with the IFSCA. A separate registration has been mandated in case of “asset management support services” in connection with a ship lease. It provides for a minimum capital of USD 200000 for a lessor wanting to do operating lease, and USD 3 million for an entity wanting to do financial lease.

Tax incentives for ship leasing from IFSC

Sec 80LA (2) (d) grants a tax holiday for income arising from transfer of any asset, being an aircraft or a ship, which was leased by a unit which has commenced operations in IFSC on or before 31st March, 2024. The holiday is applicable for 10 out of 15 years beginning the start of operations.

Sec 10 (4F) grants an exemption from tax to income accruing or arising to a non-resident by way of royalty or interest on account of lease of an aircraft or ship. Notably, the word “royalty” has a wide definition under the Act – see definition in sec. 9 which defines it to include amount payable in respect of any right, property or information.

Further, there is also an exemption under sec. 194 I from deduction of tax at source on payment of lease rentals to a unit in IFSC.

Traction begins

These regulatory measures have set the stage for the inception of leasing business from IFSC. As per the IFSCA Directory, there are currently 6 lessors of ships registered in the IFSC as on date. There are reports to suggest that several shipping companies, from Dubai and Singapore, have applied for setting up of subsidiaries in IFSC. A report in July 2023 stated that Ripley Shipping India IFSC Private Ltd has become the first company to lease a vessel from the GIFT City.

Conclusion

Gift City was set with a vision – bringing on Indian shores the huge funding needs of Indian businesses met from out of international financial centers. Ship leasing is an important need; as India’s participation in global business increases, the potential for ship leasing is bound to grow. In addition, IFSC is not merely the place to meet the needs of Indian businesses – it caters to global businesses too.

Our other resources on IFSC

1. Financial entities in IFSC: A primer
2. Finance Companies / Units in International Financial Services Centre (IFSC)
3. Budget 2023 and Gift IFSC: Making Things Happen
4. Consultation paper on the proposed IFSCA (Payment Services) Regulations, 20XX: An Analysis
5. IFSC Banking Units allowed to deal in Structured Finance Products
6. Banking & Finance units in IFSC- A regulatory overview