Framework for Ship Leasing by Finance Companies or Units

[Image omitted. See the official document.]

CIRCULAR

F. No. 496/IFSCA/FC/SLF/2022-23/001

August 16, 2022

All Finance Company / Finance Unit registered in the International Financial Services Centres Authority (IFSCs)

Framework for Ship Leasing

In exercise of the powers conferred by section 12 of the International Financial Services Centres Authority Act, 2019 (50 of 2019) (hereinafter referred as the "said Act") read with notification number S.O.5199 (E) dated December 14, 2021 issued by Ministry of Finance, Government of India, published in the Gazette of India, Extraordinary, Part II, Section 3, Sub-section (ii), dated the December 14, 2021, the Authority has notified 'ship lease' as a financial product vide Gazette notification dated January 07, 2022. As per the said notification, the 'ship lease' 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 other part thereof, as a financial product under clause (d) of sub-section (1) of section 3 of the said Act.

2. As per sub clause (g) of clause (iii) of sub-regulation (1) of regulation 5 of International Financial Services Centres Authority (Finance Company) Regulations, 2021 (hereinafter referred to as “Finance Company Regulations”), an operating lease transactions for ship lease is classified as a ‘permitted non-core activity’ and as per sub clause (a) of clause (ii) of sub-regulation (1) of regulation 5 of the Finance Company Regulations, a financial lease transaction for ship lease including a hybrid of financial lease and operating lease transaction for ship lease is classified as a ‘permitted core activity’.

3. The International Financial Services Centres Authority (hereinafter referred to as ”IFSCA”), in order to facilitate the Ship Leasing business in the International Financial Services Centres (hereinafter referred to as “IFSCs”) in India and in exercise of the powers conferred under section 12 read with section 13 of the IFSCA Act, 2019, hereby specifies the following Framework for entities to get registered under Finance Company Regulations

for undertaking ship lease transactions

A. Applicability:

This Framework shall apply to all eligible applicants engaging in one or more of the permissible activities as per this circular.

B. Definition:

For the purpose of this Circular

• (i) “Financial lease” for a ship lease arrangement shall mean the activity of leasing such that it transfers substantially all the risks and rewards incidental to the ownership of the asset involved;
• (ii) “Lessor” shall mean an entity registered with IFSCA as a Finance Company or Finance Unit in accordance with this Framework, and
  • a. 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;
  • b. any other related activity as may be specified by the Authority from time to time.
• (iii) “Ocean vessel” shall include every description of watercraft used or capable of being used in the marine environment, such as ship, boat, sailing vessel, fishing vessel, submersible, semi-submersible, hydrofoils, non-displacement crafts, amphibious crafts, wing-in-ground crafts, pleasure crafts, barges, lighters, Mobile Offshore Drilling units, Mobile offshore Units, or of any other description, or any part thereof, and shall include inland water vessels and coasting vessels, but does not include fishing or sailing watercraft;
• (iv) “Operating lease” for a ship lease arrangement shall 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;
• (v) “Ship” shall include any watercraft, used or capable of being used in navigation by its own propulsion, in, above, or under the water but does not include fishing or sailing watercraft.

C. Eligibility of Applicant:

• (i) An applicant desirous of undertaking permissible activities in IFSCs as a lessor shall meet the eligibility criteria and other requirements as specified under the Finance Company Regulations, including the following:

  • a. The applicant shall set up operations in an IFSC in the form of a Company or a Limited Liability Partnership (LLP) or a Trust or a Branch under this Framework or in any other form as may be specified by the IFSCA from time to time.

    Explanation: The branch set up in IFSC may also be of a wholly owned subsidiary (including a subsidiary incorporated outside IFSC) of the IFSC registered entity, for the purpose.

  • b. In case the applicant is a company, the ‘promoter’, as defined in the Companies Act, 2013, of the applicant shall be located in a Financial Action Task Force compliant jurisdiction. In case the applicant is a LLP or a Trust, the partners or the trustees, as the case may be, shall also comply with this requirement.

• (ii) All entities set up in IFSC for carrying out permitted activities as envisaged in the Framework shall comply with all requirements, exceptions, regulations and conditions imposed by any applicable statute including the Merchant Shipping Act, 1958 (“Shipping Act”), and shall also include circulars and notifications issued by competent authorities established under the Shipping Act or other applicable statutes, by the Ministry of Shipping or Director General of Shipping.

D. Registration of lessor:

• (i) An applicant desirous of undertaking permissible activities as a lessor shall submit an application form in the format specified in Annexure hereunder to the IFSCA along with the application fees as specified in this Framework.

• (ii) An applicant shall not undertake any activity as a lessor unless it has obtained a Certificate of Registration from the IFSCA under Finance Company Regulations.

  Explanation: An applicant desirous of undertaking ‘Asset Management Support Services related to ship lease’ for an asset other than as mentioned at clause E(ii) of this Circular shall obtain a separate authorisation under the Framework for enabling ancillary services at IFSC (Circular F.No. 206/IFSCA/Anc.Aux/2020-21 dated February 10, 2021), issued by the IFSCA.

• (iii) An entity registered or authorized with IFSCA, which is not undertaking Ship leasing and is desirous of undertaking permissible activities as per this framework, shall apply separately for registration under this framework. For this purpose, an entity registered with IFSCA for undertaking operating lease for ship shall also have to seek permission if it is desirous of undertaking permissible activities referred at clause 3H(i), (ii) and (iv) below.

Part I

Ship Operating Lease

E. Permissible Activities under operating lease:

A lessor in IFSCs shall be permitted to undertake all or any of the following activities:

• (i) Operating lease;
• (ii) 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;
• (iii) Sale and lease back, purchase, novation, transfer, assignment, and such other similar transactions in relation to ship lease.
• (iv) any other related activity with the prior approval of the IFSCA.

Explanation: A transaction shall be classified as a lease if it is in accordance with the Indian Accounting Standards (Ind AS 116) on Leases.

F. Capital Requirement:

• (i) A minimum owned fund of USD 200,000 or its equivalent in freely convertible foreign currency, is to be maintained at all times by the entity as specified in item no. 1 of Schedule of the Finance Company Regulations.