Finance Minister Nirmala Sitharaman proposed legislative support to provide financing for leasing aircraft and ships in India in a bid to protect airlines from foreign exchange risks.
“We will seek the required legislative approval for providing an efficient and flexible mode for financing leasing of aircrafts and ships,” the Minister said in her Budget speech on July 23. She said legislative backing for “pooled funds of private equity through a variable company structure” would also be explored.
The Variable Capital Company (VCC) is a new corporate structure in Singapore that was introduced in January 2020 and tailored to address the unique needs of funds. It is considered a game-changer in the world of Singapore’s corporate finance. A VCC can be formed as a single standalone fund, or as an umbrella fund with two or more sub-funds, each holding different assets.
The uncertainty surrounding the level of future exchange rates gives rise to future exchange risks for airlines. Their main foreign currency exposure is often to the US dollar because key cost items, notably fuel, maintenance, and overhaul costs, along with aircraft purchase and lease payments, are typically priced in U.S. dollars.
Though the government has tried to promote leasing at Gujarat’s GIFT City through tax incentives and regulatory relaxations, most aircraft leases transacted are financial leases (lessee exercises right to retain ownership of aircraft) and not operating leases (lessor retains ownership) as there is little impetus for a vast majority of lessors well established in Ireland to set up a unit in GIFT City. Moreover, while GIFT City aims to attract foreign lessors, experts say there is a need to create an indigenous ecosystem for aircraft leasing.
The Finance Minister offered partial relief to the maintenance, repair and overhaul (MRO) sector by allowing entities a period of one year, instead of the previous six-month cap, to stock imported goods such as spares and test equipment before exporting them. The MRO industry though says there is a need to remove the cap. Additionally, MROs will be able to offer a warranty of five years, instead of three, to their customers overseas as the Minister has proposed to extend the time-limit for re-import of goods for repairs.
Alok Anand, chairman and CEO, Acumen Aviation, said various legal reforms are needed to promote domestic aircraft leasing. The first change that is needed is to allow availability of local capital to allow Indian banks to provide loans by recording aircraft as a collateral, he said. At present, aircraft are not considered adequate collateral and loans are sought on the basis of the strength of corporate balance sheets, he said.
Mr. Anand said banks should be allowed to set up individual sovereign entities for the purpose of extending financial support for aircraft leasing.
The Reserve Bank of India does not include aircraft in its list of equipment eligible for finance. Mr. Anand said banks are reluctant to treat aircraft as a collateral for extending finance because of the limitations in the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002, commonly known as the SARFAESI Act, that allows banks and other financial organisations to recover bad loans effectively. The Act excludes creation of any security in an aircraft.
