Financing support necessary to turn India into a global player in aircraft leasing

Aircraft leasing companies inking deals with customers at the International Financial Services Centre (IFSC) for aircraft will be absolved from paying withholding tax on such transactions from July 1.

No lease or supplement lease rent will be paid on aircraft leasing done at IFSC at the upcoming Gujarat International Finance Tec-City (or popularly known as GIFT) near Ahmedabad, according to a gazette notification published by the Central Board of Direct Taxes (CBDT) under the Ministry of Finance on June 16.

The exemption is part of the government’s efforts to transform the country into a global aircraft leasing hub to rival Dublin or Singapore by incentivising foreign lessors to commence operations here. While the move has, thus, been described as a positive in making the world’s third-largest domestic aviation market self-reliant in leasing, experts have concerns over the easy availability of financing for such deals.

“The private sector is doing its part by registering at least 13 leasing companies at IFSC. However, the government and the regulatory bodies, like Reserve Bank, will have to do more by allowing and incentivising banks to fund the transactions,” opined partner at law firm DSK Legal, Dinesh Pardasani.

The lack of a proper financing framework may prove to be a dampener for aircraft leasing, which could only flourish in centres with easy access to capital.

“Aircraft leasing has two parts to it – aircraft trading and aircraft financing. Any capital-intensive industry requires financing and the aircraft is a hard asset. However, leasing business needs strong financial support,” asserts partner at aviation advisory Caladrius Aero, Rohit Tomar.

For instance, Dublin is supported by the European banks, Singapore by the government-owned Temasek Holdings as well as Singaporean banks and Hong Kong and Mainland China by Hong Kong and Chinese banks.

“Funding from overseas means additional costs, making it less attractive to set up shop and do business from the GIFT city. A push towards cost-effective financing and clarity on aircraft repossession will make GIFT city more attractive to lessors,” advises DSK’s Pardasani.

In the absence of an adequate support system, foreign banks are unwilling to take on risks in a jurisdiction.

“In this background, why should leasing companies start a business here when the policy is not complemented by financing? There is a provision in India under Alternative Investment Fund (AIF), Category-II, but then where is that equity support?” asked Caladrius Aero’s Tomar rhetorically.

As per data compiled by Business Today, since 2011, the order book at major Indian scheduled carriers today stands at more than 1100 aircraft. Presently, most Indian carriers are dependent on centres like Dublin to meet their leasing-related requirements.  

The ministries of finance and civil aviation may, therefore, need to review this aspect to work out a robust financing ecosystem. Only then will India be counted as a global contender in the nearly $168 billion aircraft leasing business.

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