Government weighs plan to allow LLPs and NRIs to register ships in India

P. Manoj Mumbai | Updated on October 29, 2019

The Shipping Ministry is weighing a plan to allow Limited Liability Partnerships (LLPs) and Non-Resident Indians (NRIs) to own and register ships under the Indian flag, under the revamped Merchant Shipping Act.

The move is designed to make ship registration in India attractive to more participants. It will also help in the privatisation of Shipping Corporation, if a foreign entity buys the state-owned carrier.

Currently, ships are allowed to be registered under the Indian flag only when they are fully owned by Indian entities.

“A ship shall not be deemed to be an Indian ship unless wholly owned by persons to each of whom the following description applies - a citizen of India, a company or a body established under any state or central act having its principal place of business in India or a co-operative society registered or deemed to be registered under the Co-operative Societies Act or any other law relating to co-operative societies,” according to Section 21 of the Merchant Shipping Act.

The revamped Merchant Shipping Bill drafted by the Ministry seeks to allow registration of ships that are substantially-owned by Indian entities and those purchased through a so-called bare-bat-charter-cum-demise (BBCD) route, having a charter period of at least three years.

The new rule would facilitate foreign fleet owners to open a subsidiary in India through a joint venture with a local firm. Even if the local firm owns 51 per cent equity in that subsidiary with the foreign company owning the balance 49 per cent , the ships acquired by that company can be registered under the Indian flag.

Bare-bat-charter-cum-demise (BBCD) route

BBCD is a form of financing ship acquisition. Under this hire-purchase scheme, the acquisition is typically done by paying a fourth of the total cost of the vessel as down payment, while the balance is paid in instalments over the demise period, typically ranging from three to five years, out of the revenues earned from operating the ship.

During the lease rental period, the ship flies the flag of the country from where the acquisition is made. On completion of the lease rentals, the ownership of the vessel is transferred to the Indian entity, which hired the vessel, and the ship becomes an Indian flag ship thereafter.

Indian-controlled tonnage, a new scheme for ship acquisition, introduced by the government in 2014, will be brought under the revamped Act as a separate category.

The scheme enables local shipping companies the flexibility to directly register their ships overseas, without opening subsidiaries abroad to help access cheap funds to buy ships and skirt tight rules in India.

The government hopes that the changes would trigger a renewed interest among fleet owners with lesser risk-taking ability to register ships in India and grab a share of India’s cabotage business: allowing only Indian flagged ships to carry cargo on local routes.

Indian tonnage

The aim behind the policy changes is to bring more ships under Indian tonnage, which is hovering at about 12.74 million gross tonnage (GT) or 19.34 million dead weight tonnes (DWT). The Shipping Ministry has set an ambitious target to raise the country’s tonnage by four times to 43 million tonnes by 2020.

The target, though, could suffer a setback if the government succeeds in privatising Shipping Corporation, India’s biggest ocean carrier, which owns about one-third of the Indian tonnage.

In the event of a foreign entity buying Shipping Corporation, it will likely re-flag the Indian-flagged ships of SCI to tax-friendly overseas jurisdictions, to circumvent tight rules, regulations and restrictions such as tax on seafarers, higher cost of borrowing, mandatory hiring of Indian crew and the extra burden of 5 per cent Goods and Services Tax (GST) applicable to local fleet owners, according to a shipping industry official.

If that happens one-third of Indian tonnage will be shaved off from the registry.

The move should be viewed in another context.

From 2001, India has allowed 100 per cent foreign direct investment (FDI) in the country’s shipping industry, but foreign fleet owners have so far shied away from setting up shop in India to take advantage of this rule, citing an unfavourable tax regime and operating conditions.

Foreign fleet owners currently carry as much as 92 per cent of India’s annual EXIM trade shipped by sea, underscoring the fact that they can access Indian cargo contracts sitting anywhere in the world, without owning Indian flagged ships.

Published on October 29, 2019

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