Issuance of framework for ‘ship leasing’ by IFSCA

BACKGROUND

In an important development, International Financial Services Centres Authority (IFSCA) has issued the framework for undertaking ship leasing business in the IFSCA (Framework). The International Financial Services Centres Authority (Finance Company) Regulations (IFSCR), 2021 allows a Finance Company or a Finance Unit to undertake permitted core and non-core activities (the quantum of capital requirements vary as per the nature of activity).

As regards ship-leasing, (a) activity of financial lease has been categorised in the IFSCR as a “permitted core activity”, whereas (b) transactions permitted under the Framework for Ship Operating Lease are classified as a “permitted non-core activity”.

It is noteworthy that while the IFSCR refers only to a framework for Ship Operating Lease, the present Framework consists of both, operating lease as well as finance lease (and a hybrid of both).

By virtue of issuance of the present Framework, entities would be able to commence ship leasing activities from the IFSC.  Key aspects from the Framework are set out below:

Financial Lease

Definition	Financial lease for a ship lease arrangement has been defined to mean “the activity of leasing such that it transfers substantially all the risks and rewards incidental to the ownership of the asset involved”
Permitted Activities	The following are denoted to be the permissible activities under financial lease: Financial lease Hybrid of financial and operating lease Permitted Activities as stated above for Operating lease Any other related activity with the prior approval of the IFSCA
Capital requirement	USD 3 million or its equivalent in freely convertible foreign currency, is mandatorily required to be maintained by the entity and based on the scale of business, IFSCA may specify maintenance of additional capital.

 Operating Lease

Definition	Operating lease for a ship lease arrangement has been defined to mean “the activity of leasing such that it does not transfer substantially all the risks and rewards incidental to the ownership of the asset involved”
Permitted Activities	The following are denoted to be the permissible activities under operating lease: 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 Any other related activity with the prior approval of the IFSCA
Capital requirement	USD 200,000 or its equivalent in freely convertible foreign currency, is mandatorily required to be maintained by the entity.

Note: A transaction is to be classified as a lease if it is in accordance with the Indian Accounting Standards (Ind AS 116) on Leases (applicable for both, operating lease as well as finance lease).

Currency for conduct of business

It has been clarified in the Framework that all transactions undertaken by a lessor shall need to be in a freely convertible foreign currency. However, a lessor has been permitted to defray their administrative expenses in INR by maintaining a separate INR account.

In addition to the above, the Framework also sets out the general conditions which the lessor is required to comply with along with the process for registration of a lessor with the IFSCA.

ELP Comments

The shipping industry has awaited the release of the present Framework with great intent, especially since the release of the expert committee report on Ship Acquisition, Financing and Leasing (SAFAL). This Framework draws up a roadmap for promoting GIFT IFSC as a hub for international ship leasing and financing business and is likely to be welcomed by the industry. In addition to the ease of administration, the benefits provided by GIFT IFSC including the income tax holiday for 10 years is likely to attract various shipowners to relocate their offshore ship-leasing business to GIFT IFSC.

 

We hope you have found this information useful. For any queries/clarifications please write to us at insights@elp-in.com  or write to our authors:

Stella Joseph, Partner – Email – StellaJoseph@elp-in.com
Niraj Hande, Principal Associate – Email – NirajHande@elp-in.com

Disclaimer: The information contained in this document is intended for informational purposes only and does not constitute legal opinion or advice. This document is not intended to address the circumstances of any individual or corporate body. Readers should not act on the information provided herein without appropriate professional advice after a thorough examination of the facts and circumstances of a situation. There can be no assurance that the judicial/quasi-judicial authorities may not take a position contrary to the views mentioned herein