Post successful enablement of the activity of Aircraft Leasing through the issuance of ‘Framework for Aircraft Operating Lease’ dated February 19, 2021, the International Financial Services Centres Authority (IFSCA) after evaluating the potential of ship leasing in the context of “Atma Nirbhar Bharat”, aims to provide an enabling regulatory framework for promoting GIFT IFSC as an hub for international ship leasing and financing business.
2. IFSCA had constituted an expert committee on positioning IFSC as a global hub for Ship Acquisition, Financing and Leasing (SAFAL). The report of the committee was published on October 28, 2021 (SAFAL Report). One of the recommendations of the said report was to notify ‘Ship lease’ a financial product in the IFSC. It also recommended that the Authority may issue a Framework for Ship lease to enable ship leasing activity in the IFSC.
3. Based on the suggestions of the SAFAL report, the Authority vide notification No. IFSCA/2021-22/GN/021 dated January 7, 2022 published in the Gazette of India: Extraordinary, specified ‘ship lease’ including operating lease, and hybrid of operating and financial lease, of a ship or ocean vessel, engine of a ship or ocean vessel, or any other part thereof as a financial product under the IFSCA Act.
4. The activity of Ship Leasing is also one of the permitted activities under the IFSCA (Finance Company) Regulations, 2021. To operationalize the activity IFSCA issues the ‘Framework for Ship Lease’, vide Circular No. 496/IFSCA/SFL/2022-23/001, dated August 12, 2022. The Framework covers guidelines on operating lease, financial lease and a hybrid of operating and financial lease of a ship or ocean vessel, engine of a ship or ocean vessel, or any other part thereof.
5. As per the Framework, an entity intending to undertake ship lease in IFSC, shall be registered as a Finance Company / Unit, as per the IFSCA (Finance Company) Regulations, 2021. The Framework permits an entity to set-up operations in IFSC in the form of a Company or a Limited Liability Partnership (LLP) or a Trust or a Branch. The Framework requires a ship lease transaction to be classified as a lease such that it is in accordance with the Indian Accounting Standards (Ind AS 116) on Leases. Further, the Framework details out the requisite capital and prudential requirements based on the nature of lease being undertaken by the entity i.e. operating lease or financial lease for ships or ocean vessels. The entity registered as Finance Companies / Units shall at all times be guided by the IFSCA (Finance Company) Regulations, 2021.
6. The Framework will help in furthering of the mandate of the Authority to develop and regulate financial products, financial services and financial institutions in the IFSC.
***
International Financial Services Centres Authority
Circular No. F. No. 496/IFSCA/FC/SLF/2022-23/001
August 16, 2022
(Updated as on June 23, 2023)
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.
(i) 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’.
(ii) 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.
1 [(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(iii) 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:
2[A lessor in IFSCs shall be permitted to undertake all or any of the following activities:
(i) Operating lease;
(ii) Voyage Charters, Contract of Affreightments, employment in shipping pools and all other legal commercial transactions for employment of ships;
(iii) Asset Management Support Services for assets owned or leased out by the lessor or by any of its Group Entities set up in IFSCs in India;
Here the term ‘Group Entities’ shall mean an arrangement involving two or more entities related to each other through any of the relationships, viz. Subsidiary – parent (defined in terms of AS 21), Joint venture (defined in terms of AS 27), Associate (defined in terms of AS 23), a related party (defined in terms of AS 18) Common brand name and investment in equity shares (of 20% and above).
(iv) Sale and lease back, purchase, novation, transfer, assignment, and such other similar transactions in relation to ship lease;
(v) 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.
Explanation: “Owned fund” for a lessor under this Framework shall mean the paid-up-capital and free reserves balance in share premium account and capital reserves representing surplus arising out of sale proceeds of asset, excluding reserves created by revaluation of asset, as reduced by accumulated loss balance, book value of intangible assets and deferred revenue expenditure, if any;
(ii) In addition to (i) above, the IFSCA may specify maintenance of additional capital as a risk management measure, based on the nature and scale of business of the lessor.
G. Fees
3[(i) The entity desirous of undertaking permissible activities under this Part shall adhere to the provisions under IFSCA Circular on ‘Fee structure for the entities undertaking or intending to undertake permissible activities in IFSC’ dated May 17, 2023 (No. 865/IFSCA/Banking/Fee Revision/2022-23).
(ii) The fees payable during the process of application (application fees and registration fees) and after grant of registration (recurring fee) shall be as per clause 5 and 6 respectively, of the Circular mentioned in point (i) above. As per the said circular, the applicable fees are as under:
(a) Application Fee: $ 1,000 (one time)
(b) Registration Fee: $ 12,500 (one time)
(c) Annual Fee: $ 5,000 (recurring fee)]
Part II
Ship Financial Lease
H. Permissible Activities under financial lease and hybrid of operating and financial lease:
A lessor in IFSCs shall be permitted to undertake all or any of the following activities:
(i)Financial lease;
(ii) Hybrid of financial and operating lease;
(iii) Permitted Activities as stated above at clause 3.E of this Framework;
(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.
I. Capital Requirement:
(i) A minimum owned fund of USD 3 million or its equivalent in freely convertible foreign currency, is to be maintained at all times by the entity as per item no. 2 of Schedule to the Finance Company Regulations;
(ii) In addition to (i) above, the IFSCA may specify maintenance of additional capital, as a risk management measure, based on the nature and scale of business of the entity.
J. Prudential and Other Requirements:
An entity undertaking the activities referred to under clause 3H(i),(ii) and (iv) shall be subject to the requirements under Regulation 4 (applicable prudential regulations), Regulation 7 (Know Your Customer and Anti-Money Laundering) and Regulation 8 (Corporate Governance and Disclosure requirements).
K. Fees
4[ (i) The entity desirous of undertaking permissible activities under this Part shall adhere to the provisions under IFSCA Circular on ‘Fee structure for the entities undertaking or intending to undertake permissible activities in IFSC’ dated May 17, 2023 (No. 865/IFSCA/Banking/Fee Revision/2022-23).
(ii) The fees payable during the process of application (application fees and registration fees) and after grant of registration (recurring fee) shall be as per clause 5 and 6 respectively, of the Circular mentioned in point (i) above. As per the said circular, the applicable fees are as under:
(a) Application Fee: $ 1,000 (one time)
(b) Registration Fee: $ 12,500 (one time)
(c) Annual Fee: $ 12,500 (recurring fee)]
Part III
General Conditions
L. Currency for Conduct of Business:
All transactions undertaken by a lessor shall be in a freely convertible foreign currency only. However, the lessor may defray their administrative expenses in INR by maintaining a separate INR account.
M. Maintenance of Books of Accounts, Records and Documents
The lessor shall maintain its books of accounts, records and documents as required under applicable law. The books of accounts and their financial information shall be maintained in any freely convertible currency.
N. Submissions of Report / Information
(i) The lessor shall furnish the following information to the IFSCA within 15 days from the finalisation of annual financial statements:
a. Audited Annual financial statements.
b. Confirmation of compliance with the applicable regulations, circulars, guidelines and directions issued by the IFSCA.
c. Confirmation of compliance with capital requirement and details thereof.
d. Details of material regulatory action, if any, against the Promoters, Key Managerial Persons or persons controlling the lessor.
(ii) The lessor shall submit all the financial information, expressed in USD, to the IFSCA, unless otherwise specified.
(iii) The IFSCA may, from time to time, call for any information, documents, or records as it may deem necessary from the lessor.
O. Compliance with Other Requirements
(i) The lessor shall comply with all other applicable statutory obligations, regulatory requirements, standards, policies, directions and guidelines.
(ii) The lessor shall deploy resources commensurate with its business operations. 5[ (iii) The lessor shall comply with the ‘IFSCA (Anti Money Laundering, Counter-Terrorist Financing and Know Your Customer) Guidelines, 2022, dated October 28, 2022.]
P. Action in Case of Default
If a lessor fails to fulfil the conditions subject to which the registration is granted, the IFSCA may take any action as it may deem fit, after giving an opportunity of making submissions, if any.
Q. Power to Remove Difficulties, Specify Procedures and Issue Clarifications
For the purpose of implementation of this Framework and matters incidental thereto, or in order to facilitate and regulate the permissible activities, the IFSCA may specify the necessary norms, procedures, processes, manners and may also provide necessary relaxations.
(iii) This Circular is issued in exercise of powers conferred by section 12 of the IFSCA Act to develop and regulate the financial products, financial services and financial institutions in the IFSCs.
(iv) A copy of this Circular is available on the website of the IFSCA at ifsca.gov.in/circular .
Yours faithfully,
R. Kumar
(General Manager)
rag.kumar@ifsca.gov.in
Encl.: As above
Annexure
Note:-
1 Revised vide Circular No. 496/IFSCA/FC/SLF/2022-23/002, titled ‘Amendment to the Circular titled ‘Framework for Ship Leasing’, dated March 22, 2023. Before revision it stood as under:
“(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.”
2 Substituted vide Circular No. 496/IFSCA/FC/SLF/2022-23/002, titled ‘Amendment to the Circular titled ‘Framework for Ship Leasing’, dated March 22, 2023. Before substitution, it stood as under:
“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”
3 Revised vide Circular No. 865/IFSCA/Banking/Fee Revision/2022-23, titled ‘Fee Structure for entities undertaking or intending to undertake permissible activities in IFSC’, dated May 17, 2023. Before revision it stood as under:
“The entity desirous of undertaking permissible activities under this Part shall pay to the IFSCA the following fees:
(i) Application Fee: $ 1,000 (one time)
(ii) Registration Fee: $ 12,500 (one time)
(iii) Annual Fee: $ 5,000 (second year onwards)”
4 Revised vide Circular No. 865/IFSCA/Banking/Fee Revision/2022-23, titled ‘Fee Structure for the entities undertaking or intending to undertake permissible activities in IFSC’, dated May 17, 2023. Before revision it stood as under:
“The entity desirous of undertaking permissible activities under this Part shall pay to the IFSCA the following fees:
(i) Application Fee: $ 1,000 (one time)
(ii) Registration Fee: $ 12,500 (one time)
(iii) Annual Fee: $ 12,500 (second year onwards)”
5 Inserted vide notification No. IFSCA/2022-23/GN/GL/001, titled ‘International Financial Services Centres Authority (Anti Money Laundering, Counter-Terrorist Financing and Know Your Customer) Guidelines, 2022, dated October 28, 2022.
