finance

IFSCA Expands Ship Leasing Framework: Key Changes and Implications

Introduction

This blog examines the recent amendment by the International Financial Services Centres Authority (IFSCA) concerning the ship leasing framework. The amendment expands the range of permissible activities under operating leases, allowing finance companies registered in International Financial Services Centres (IFSCs) to engage in new commercial transactions and improve their operational capabilities.

Amendment to the Framework for Ship Leasing

Per Circular No. F.No. 496/IFSCA/FC/SLF/2022-23/002, dated March 22, 2023, directed at finance companies and finance units registered in IFSCs, the following outlines the significant changes introduced to the ship leasing framework.

Context and Background

  1. The earlier Circular No. 496/IFSCA/FC/SLF/2022-23/001, issued on August 16, 2022, specified permissible activities under operating leases. Post-issuance, IFSCA received numerous stakeholder requests to allow voyage charters and other commercial transactions related to ship employment.

  2. The Directorate General of Shipping, India, evaluated these requests, highlighting the necessity of incorporating these activities into the IFSC shipping sector. This amendment responds to the considerable demand from Indian entities currently seeking such services abroad.

Key Changes

  1. The amendment authorizes the provision of ‘Asset Management Support Services’ to both wholly owned subsidiaries of the lessor and affiliated entities established within the IFSC.

  2. Consequently, Clause 3.E of the original Circular has been revised to permit the following activities:

    • Operating Lease
    • Voyage Charters: This includes contracts of affreightment, participation in shipping pools, and all other related activities concerning ship employment.
    • Asset Management Support Services: Applicable to assets owned or leased by the lessor, including those held by any of its group entities situated in IFSCs.
      • Definition of Group Entities: Includes two or more entities linked through arrangements such as subsidiary-parent (AS 21), joint ventures (AS 27), associates (AS 23), related parties (AS 18), common brand name, or equity investments of 20% or more.
    • Related Transactions: This encompasses sale and leaseback arrangements, purchasing, novation, transfer, assignment, and similar transactions pertaining to ship leasing.
    • Additional Activities: Other relevant activities may be executed with prior IFSCA approval.

  3. Clarifications on Permissible Activities (2024) IFSCA has clarified that assets owned by Indian entities for shipping operations with Indian clients cannot be transferred or leased to Indian clients by an IFSC entity within the same financial year.

  4. Additionally, it is clarified that a transaction will be classified as a lease according to the Indian Accounting Standards (Ind AS 116) on Leases.

Conclusion

This circular, issued under the authority of Section 12 of the IFSCA Act, is designed to enhance and regulate financial products, services, and institutions within the IFSCs. Stakeholders are encouraged to refer to the complete circular available on the IFSCA website for further details.