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India’s Big Bet on Aircraft Leasing at GIFT-City Needs Funds

India’s Big Bet on Aircraft Leasing at GIFT-City Needs Funds

With GIFT-City, India is betting big on the multi-billion dollar aircraft leasing industry, but crucial financing is missing

The absence of a robust financing framework in GIFT-City may prove to be a dampener for aircraft leasing to take off meaningfully. (Illustration: Raj Verma) The absence of a robust financing framework in GIFT-City may prove to be a dampener for aircraft leasing to take off meaningfully. (Illustration: Raj Verma)

In a bid to take a big bite of the global pie, aircraft leasing companies that start operations from the International Financial Services Centre (IFSC) in Gujarat International Finance Tec-City (GIFT-City) have been exempted from paying corporate and withholding tax on leasing transactions. Besides, more concessions are available to them if they lease aircraft from the multi-services special economic zone near Ahmedabad.

The exemptions are part of the government’s efforts to transform the country into a global aircraft leasing hub to rival centres such as Dublin or Singapore by incentivising foreign lessors to commence operations from here. Even as the move has been described as crucial in making the world’s third-largest domestic aviation market self-reliant in leasing, experts have expressed concerns over a lack of provisions to make financing for such deals easily available.

The absence of a robust financing framework in GIFT-City may prove to be a dampener for aircraft leasing to take off meaningfully, as the industry flourishes in centres that have easy access to capital. A failure, then, would mean missing out on the opportunity to capture a slice of the $170-billion global aircraft leasing industry, experts say. “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, the leasing business needs strong financial support,” says Rohit Tomar, Partner at aviation advisory firm Caladrius Aero.

As per data compiled by BT, since 2011, the cumulative order book of major Indian scheduled carriers stands at more than 1,100 aircraft. Currently, most Indian carriers are dependent on centres like Ireland to meet their leasing-related requirements. For instance, all sale and leaseback transactions of IndiGo—India’s largest airline—are handled from Dublin, that too at one of the lowest negotiated prices. But with the incentives unveiled recently, private players are expected to start leasing domestically, experts say.

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

In contrast, other global hubs have robust financial support for the aircraft leasing industry. For instance, lessors in Ireland’s capital Dublin are supported by European banks, whereas firms from Singapore are supported by the government-owned Temasek Holdings as well as Singaporean banks, and companies based out of Hong Kong and mainland China are supported by banks from Hong Kong and China.

“In this backdrop, 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?” asks Tomar. Ajay Kumar, Managing Partner at law firm KLA Legal, says that these funds can have skin in the game, “provided adequate provisions are made in this regard”. While such funds generally invest in the capital markets, GIFT-City can consider appropriate schemes to attract these funds to assist lessors here.

While some Indian banks may have extended working capital loans to certain carriers, they have usually shunned aviation financing. The hesitation probably stems from their earlier unsavoury experiences with carriers such as Kingfisher Airlines and Jet Airways. But there might be a way out in terms of financing for players who are looking to set up operations here.

“The most viable option for GIFT-City lessors will be to raise funds from the overseas market. Foreign currency loans are available in the international market at very attractive rates compared to what Indian banks would normally charge,” says KLA Legal’s Kumar, adding that overseas lenders usually charge interest of 2.5 per cent, depending on factors such as the balance sheet of the borrower and the securities offered.

However, overseas funding arrangements are often riddled with riders. “Funding from overseas means additional costs, making it less attractive to do business from GIFT-City. A push towards cost-effective financing and clarity on aircraft repossession will make it attractive for lessors,” says DSK’s Pardasani. But Kumar disagrees. Indian banks, he says, charge around 10-12 per cent interest, which is too expensive. To overcome that challenge, several options such as guarantees from the Indian Exim Bank are being explored to bring the Indian lenders to the table, sources say.

From a demand perspective, the country is projected to need more than 2,200 new aircraft over the next few decades on the back of expanding demand for air travel, says a Boeing forecast for South Asia. This includes 2,000 single-aisle, and 240 wide-body aircraft. In such a backdrop, a thriving domestic leasing industry can only help. And, it is to that end that GIFT-City offers many tax incentives. This includes a 100 per cent exemption on corporate tax for 10 years, tax depreciation allowance on the aircraft at 40 per cent written-down value, zero withholding tax on the lease rental paid to lessors, GST on lease payments by Indian airlines at 5 per cent, zero stamp duty, and no capital tax provided the lessor has commenced operations on or before March 31, 2024.

Yet challenges persist. “The challenge here is that related departments such as customs and GST haven’t been sensitised to the new framework. If we are making a dollar-denominated payment from IFSC, we still get calls!” says Arun Lohiya, COO of CAD Ventures, a home-grown aircraft sale and purchase firm that recently financed six small aircraft for an Indian airline.

The ministries of finance and civil aviation may, therefore, need to review the financial aspect of aircraft leasing, and work out a robust financing ecosystem. With that, GIFT-City could become a game changer, and provide a viable option for offshore lessors, Kumar says, adding that the time has come for India to have a home-grown aircraft leasing ecosystem that can serve the country and its neighbours. The carriers will definitely be hoping for the idea to take off.

 

@manishpant22