Time for aircraft leasing business to take off at IFSC GIFT city
The civil aviation industry in India has emerged as one of the fastest growing industries in the country during the last few years. We have built a conducive business environment where the industry is sustainable, affordable, and internationally competitive. The Indian aviation market has grown tremendously over the past decade and showed immense resilience despite strong headwinds due to COVID-19. With the industry almost recovering to pre-COVID-19 levels, the long-term outlook is very bullish, and time is now ripe to build the leasing and financing ecosystem in India.
The foundation of this was laid in the maiden budget speech of the honourable Finance Minister in 2019. We have come a long way since and the recent framework issued by IFSCA to facilitate the setting up of aircraft leasing business at the International Financial Services Centre at GIFT City in Gujarat has provided wings to this ecosystem. The testimony of the work done by the government comes from the fact that within 10 days of the framework announcement, two global aircraft financing and leasing companies, and two domestic aviation-related firms have decided to set up aircraft leasing arms in IFSC.
The Framework allows leasing companies to set up a company, a limited liability partnership or a trust in India and have such entity registered with the IFSC authority as a ‘lessor’. A ‘lessor’ can be engaged in the business of providing aircraft or helicopters and the engines of aircraft or helicopters or any other part thereof under lease arrangements, including sale and lease back, purchase, transfer, assignment and novation. A ‘lessor’ must have a minimum of $200,000 capital or its equivalent in a foreign currency and is required to transact in foreign currency, although it can maintain an Indian rupee account for defraying administrative expenses. In addition, a ‘lessor’ will be required to make filings with the IFSC authority. The initial statutory cost of setting up a ‘lessor’ is $6,000 and the recurring annual statutory cost is $3,000.
Leasing Ecosystem in India
Airlines have an option to either buy the plane or to procure the same on lease. Buying aircrafts involves massive cash outlay and given the sensitivity of the industry to external factors, these massive sums of money can raise a question mark on the liquidity of the company. Therefore, leasing is an option that minimizes the cash burn for airlines and is preferred today. Most of the airlines purchase the aircraft and then sell to a leasing company to lease back for its own use. Sometimes the leasing company purchases the aircrafts directly from manufacturers to lease to airlines. Currently, more than 75% of planes of Indian Airlines (except Air India) are leased and all this is denominated in $ as the lessors are not based in India. Hedging currency fluctuations becomes an additional cost for the airlines, over and above the huge sums of money flowing out of India.
Think of a scenario of increase in crude oil prices- the airlines bleed on 3 sides in such a situation.
- Prices of ATF go up,
- INR tends to depreciate as its current account balance deteriorates which pushes up the local prices of ATF higher, and
- The $-denominated leases also get more expensive.
Thus, is it extremely critical to build this ecosystem in India and require extensive contribution from all stakeholders. The setting up of IFSC in India is a step in the right direction to establishing this industry in India. This would have many benefits including-
- High-skill job creation in financing and across the value chain,
- Retaining economic value in India,
- Offering local savers a new investment class,
- Creating a product more-suited to the needs and requirements of the local industry.
We need to learn from Ireland’s experience, a country which has over 50% share in the global aircraft financing business. Ireland’s deep talent pool, supporting infrastructure, favourable tax regime, double tax treaties and a culture of innovation are some of the ingredients which made it a favourable destination for airlines. With immense talent pool in India, world class infrastructure in GIFT City, and a tax regime more attractive than the likes of Mauritius and Singapore, this decade belongs to IFSC when it comes to aviation financing.
The Government of India has taken bold steps and IFSCA aircraft leasing framework would act as a game changer in this industry. With active consultations from all stakeholders and development of 360-degree ecosystem, IFSC will make India a compelling alternative to existing leasing destinations thus, fulfilling the vision of AtmaNirbhar Bharat in aviation.