Ship Leasing & Financing

On 23 June 2023, IFSCA issued framework for ship leasing for the entities to get registered under Finance Company Regulations for undertaking ship lease transactions in IFSC, GIFT City.

Our firm offers dedicated legal services in ship leasing and financing, supporting shipowners, lessors, lessees, financial institutions, and maritime investors. With an in-depth understanding of the shipping industry and maritime law, we provide expert legal guidance to navigate the complexities of ship leasing and financing transactions.

We provide advice on ship financing arrangements, including loans, sale and leaseback transactions, and secured financing through ship mortgages. We work closely with both financiers and shipowners to structure financing solutions that are efficient, compliant, and minimize exposure to financial risks. Shipping is a global industry, and our team is experienced in advising on cross-border leasing and financing transactions, including issues related to jurisdiction, documentation, and regulatory compliance in different regions.

Whether you are a shipowner, financier, or lessor, we provide comprehensive legal support to help you achieve your business goals in the maritime sector.

Our services in shipping and maritime include the following:

• Regulatory Compliance – Ensuring compliance with Ship Leasing and Finance Frameworks and other applicable laws and regulations, thereby minimizing their exposure to legal risk.
• Structuring and Drafting of Agreements – Drafting, negotiating and reviewing lease deeds for vessel acquisition, control, financing agreements, and other related documentation in compliance with IFSCA Framework.
• Vessel Registration and Flagging – Assisting in the registration or re-registration of vessels to comply with international and local maritime laws.
• Credit Risk Analysis: Evaluating the creditworthiness of lessees or borrowers by conducting proper due diligence.
• Litigation and Arbitration – Provide the representation in cross-border and domestic disputes.
• Insurance Compliance: Ensuring vessels under lease or financing agreements meet marine insurance requirements, including hull, cargo, and liability coverage.
• Setting up the office – Assist the lessors and lessees in setting up the office in GIFT City.
• Due Diligence: Conducting thorough checks on the vessel’s title, liens, and operational status before sale or lease agreements.
• Foreign Ownership Structures: Advising on setting up special purpose vehicles (SPVs) in jurisdictions favorable for ship leasing or financing.
• Regulatory Approvals: Assisting in obtaining necessary approvals and licenses from the regulator.

FAQs for Ship Leasing under IFSCA Framework

1. What is Ship Lease?

‘Ship Lease’ is a financial product which includes operating lease, hybrid of operating and financial lease, of a ship or ocean vessel, engines of ship or ocean vessel, or any other part thereof, as a financial product under Section 3(1)(d), of the IFSCA Act, 2019.

2. What are the benefits which has been provided by the IFSCA for ship leasing and financing?

Following benefits are provided by IFSCA for ship leasing and financing: –

• streamlined regulatory processes
• robust legal framework
• ease of doing business
• competitive cost
• availability of skilled talent
• tax incentives

3. What is Operating Lease and Financial Lease?

• Operating Lease – Activity of leasing ship, which does not transfer substantially all the risks and rewards incidental to the ownership of the asset involved. It comes under permitted non-core activity under FC Regulations.
• Financial Lease – Activity of leasing ship, that it transfers substantially all the risks and rewards incidental to the ownership of the asset involved. It comes under permitted core activity under FC Regulations. 

4. What type of entity can conduct the business of ship lease under IFSCA?

A Finance Company/ Finance Unit in the form of a Company or Limited Liability Partnership (LLP) or a Trust registered under sub-section (1) Section 3 of IFSCA (Finance Company) Regulations, 2021.

5. What is Ship Lease under the IFSCA Framework?

Ship lease is a financial product which shall include operating lease, and hybrid of operating and financial lease, of a ship or ocean vessel, engines of ship or ocean vessel, or any part thereof, as a financial product under clause (d) of sub-section (1) of section 3 of the said Act.

6. What activities are permitted under this framework?

Permissible activities for lessors include:

• Operating and financial leases of ships or ocean vessels.
• Voyage charters, contracts of affreightment, and participation in shipping pools.
• Sale and leaseback arrangements.
• Asset management support services for leased or owned ships.
• Purchase, transfer, assignment, or novation of lease

7. What are the laws governing Framework for Ship Leasing?

Following laws are governing Framework of Ship Leasing: –

• IFSCA Act, 2019
• IFSCA (Finance Company) Regulations, 2021
• Gujrat International Maritime Arbitration Centre
• Special Economic Zone Act, 2005

8. What are the tax benefits for ship leasing entities in GIFT City?

Entities benefit from:

• A 100% tax holiday on business income for 10 consecutive years within the first 15 years of operation.
• Exemption from capital gains tax on ship transfers during the tax holiday period.
• No withholding tax on lease payments or interest paid to non-residents

9. Who is Lessor?

“Lessor” shall mean an entity registered with IFSCA as a Finance Company or Finance Unit in accordance with this Framework –

1. engaged in the business of providing ships or ocean vessel and engines of ship or ocean vessels, or any other part thereof under an operating lease, financial lease and/or a hybrid of financial and operating lease, and/or;
2. any other related activity as may be specified by the Authority from time to time. 

10. What is capital requirement under Ship Operating Lease and Ship Financial Lease?

• Ship Leasing – USD 200,000 or its equivalent in freely convertible foreign currency
• Financial Lease – USD 3 Million or its equivalent in freely convertible foreign currency

11. What is the eligibility criteria for Lessor under Framework?

An applicant wishing to engage in permitted activities in IFSCs as a lessor must meet the following eligibility criteria and requirements set out in the Finance Company Regulations: –

• Applicants must establish operations in an IFSC as a Company, LLP, Trust, or Branch, as specified by the IFSCA.
• If the applicant is a company, its promoter must be from a FATF-compliant jurisdiction. In case the applicant is LLPs or Trusts, the partners or trustees must also meet the same requirement.
• Entities in the IFSC must adhere to all relevant regulations, including those under the Merchant Shipping Act, 1958, and any related circulars or notifications from the Ministry of Shipping or Director General of Shipping.
• The applicant must maintain a minimum owned fund as prescribed. They must ensure their capital, owned funds, or net worth meets or exceeds the highest minimum requirement specified in the Framework issued by the Authority. 

12. What is the expected time for obtaining registration as a Lessor from the authority?

13. Is it permissible for Lessor to commence business after obtaining a provisional registration?

The Authority may grant Provisional Registration (PR) in certain cases to allow extra time for compliance. However, according to Regulation 3(1) of the FC Regulations, the Lessor must begin business only after receiving its Certificate of Registration from the Authority and meeting the specified conditions. 

14. What are the various kinds of fee applicable for an entity intending to register as a Lessor, and where should the fees be remitted?

The applicant is subject to four categories of fee:

• Application Fee – Paid along with the application.
• Registration Fee – Paid within 15 days from the grant of provisional registration.
• Recurring Fee – Paid within 30 days from the grant of certificate of registration.
• Processing Fee – Paid for handling specific requests such as modification of terms of license, waiver of regulations, etc.

15. What key elements should be included in the business plan of the Lessor along with the application form?

The business plan should cover the following key elements: –

• A comprehensive business profile of the applicant or its parent entity, including business history, industry presence, market position, target customers/markets, and other relevant operational details.
• An overview of the proposed Ship Leasing activity, including process flows, implementation roadmap, and other pertinent information.
• Business projections for the next three years, including the projected balance sheet, income statement, and cash flow statement, with assumptions used for these projections.
• The proposed source for fulfilling the owned fund requirement for the intended activity.
• Information on the number of officials to be posted in the Ship Leasing Entity.

16. What steps are required to set up a leasing entity in GIFT City?

• Register with IFSCA: Entities must register as a Finance Company/Unit under the IFSCA (Finance Company) Regulations, 2021.
• Choose a Structure: Entities can operate as a company, LLP, trust, or branch.
• Capital Compliance: Maintain the requisite owned funds based on the leasing model.
• Follow Ind AS 116: Transactions must comply with Indian Accounting Standards for leases.
• Obtain Approvals: Comply with GIFT City operational and regulatory requirements, including tax and exchange control provisions

17. Is the Certificate of Registration granted to the Lessor subject to the annual renewal?

The Lessor must continue to meet the Authority’s fit and proper requirements and notify the Authority of any significant changes to the registration information. If an FC/FU fails to meet the registration conditions, the Authority may take appropriate actions, including suspension, withdrawal, or cancellation of registration, after allowing the entity an opportunity to respond.

18. What are the compliance requirements to be adhered to post receiving registration from the Authority?

After receiving registration from the Authority, the entity must: –

• Comply with the conditions outlined in the Certificate of Registration.
• Follow all relevant rules, laws, and regulations issued by IFSCA or other authorities, including FEMA and Companies Act requirements.
• Adhere to the IFSCA (Anti-Money Laundering, Counter-Terrorist Financing, and Know Your Customer Guidelines), 2022.
• Meet all applicable reporting and supervisory requirements.

19. What are the corporate governance and disclosure requirements applicable for Financial Company/ Finance Unit as Lessor?

An entity undertaking the following activities: –

• Financial lease
• Hybrid of financial and operational lease
• Any other related activity with the prior approval of IFSCA

Are subject to requirements under following Regulations: –

Regulation 4 – Applicable prudential regulations

• Capital Ratio (CR) – A Finance Company or a Finance Unit, shall maintain a minimum capital ratio at 8%. of its regulatory capital to its risk-weighted assets.
• Liquidity Coverage Ratio (LCR) – A Finance Company or a Finance Unit, shall maintain LCR on stand- alone basis, at all times, as may be determined by the Authority.

Provided that in the case of a Finance Unit, the LCR may be allowed to be maintained by the parent entity, with specific approval of the Authority.

• Exposure Ceiling (EC) – The sum of all the exposures of a Finance Company or a Finance Unit, as the case may be, to a single counterparty or group of connected counterparties shall not exceed twenty-five per cent. of its available eligible capital base without the approval of the Authority.

Explanation: The Authority shall issue operational guidelines with respect to the implementation of the requirements under sub-regulations (1) to (4) of regulation 4.

Regulation 7 – Know Your Customer and Anti-Money Laundering

Every Finance Company and Finance Unit shall follow Know Your Customer norms, combating of financing of terrorism and other anti-money laundering requirements, including reporting requirements, as specified for a Banking Unit in IFSCs.

Regulation 8 – Corporate Governance and Disclosure Requirements

1) Every Finance Company and Finance Unit shall adhere to the guidelines on corporate governance and disclosure requirements to be specified by the Authority.

2) Any mergers, acquisitions, takeovers or change in management of a Finance Company, which results in its change in control of at least twenty per-cent. of total share capital, or of business decisions under an agreement, shall be subject to prior approval and such other requirements as may be specified by the Authority:

Provided that mergers, acquisitions, takeovers or change in management in the parent of a Finance Unit shall be in compliance to its registration requirements and shall be intimated to the Authority within a period of 15 days from the date of such event.