Introduction:
India is the world’s second most populous country after China. The country has an expansive rail network and an ever-growing aviation industry. Robust economic growth in India had driven the aviation industry to such an extent that predictions by the International Air Transport Association (“IATA”) cited that India is likely to overtake the United Kingdom to become the world’s third largest domestic aviation market by 2024-25.
The onslaught of COVID19 caught the aviation industry in India unawares and has resulted in the regression of domestic passenger traffic by almost forty percent compared to pre-COVID19 levels.
This regression has resulted in the aviation industry having been virtually brought down to its knees with it starting to slowly get back on its feet. The status of the aviation industry, post COVID-19, is so dismal that the Government had to step in and regulate various aspects of the industry.
The truth however is that the aviation industry in India has always been tremendously regulated. One of the largest regulators dealing with aviation matters, including aircraft financing and leasing, is the Reserve Bank of India (the “RBI”).
The Reserve Bank of India:
The RBI is India’s central bank. The RBI is responsible for administering the “exchange control” laws[1] of India. It is not surprising that since aircraft finance and leasing transactions usually always have an element of foreign exchange, there is always some interplay between the transaction and the RBI. In this short note, we attempt to give an overview of the areas which the RBI regulates in relation to aircraft finance and leasing transactions.
A useful thumb rule to keep in mind is that since India is an exchange-controlled country, every outward or inward remittance of foreign exchange or goods and services, must have the prior permission of the RBI. The RBI has delegated several of its powers, resulting in a situation where actual interaction between a party and the RBI may be minimal, however, every transaction involving foreign exchange in India, having a cross border nature, needs to attain the (direct or indirect) “blessings” of the RBI.
The Authorised Dealer Bank (“AD Bank”):
As previously mentioned, the RBI seldom deals with parties to a transaction itself. Most of its responsibility has been delegated to “Authorised Dealers” or “AD” banks. AD’s are entities or persons authorised by the RBI to deal in foreign exchange or in foreign securities[2]. Therefore, in most situations, approvals for aircraft finance and leasing transactions must be sought from the relevant AD bank.
Entering into a lease for an Aircraft, entails several transactions which involve the remittance of foreign currency from India prior to the actual import of the Aircraft. This may be in the form advance remittances, providing guarantees in favour of overseas lessors, security deposits for payments of lease rentals, pre-delivery payments to the aircraft manufacturer, etc.
The Government has taken multiple steps over the last two decades to ease the process of remittance of foreign exchange (for the purpose of leasing of aircraft) by allowing certain exemptions.
Advance Remittances for import of aircraft, helicopters, etc.:
Scheduled or non-scheduled air transport operators are allowed to make advance remittances up to USD 50 million without a bank guarantee and has permitted AD Category – I banks to allow such advance remittances without bank guarantees or without unconditional, irrevocable standby letters of credit, for the direct import of each aircraft / helicopter / other aviation related purchase.[3]
There is a precondition however, of the scheduled or non-scheduled air transport operator obtaining the requisite approval from the Director General of Civil Aviation (the “DGCA”) for import of the aircraft in terms of extant Foreign Trade Policy for the purpose of operating Scheduled or Non-Scheduled Air Transport Services. It is important to note that once approval from the DGCA has been obtained, no separate approval from the Ministry of Civil Aviation (the “MoCA”) is required.
Further, there are certain safeguards in place for the AD Category – I banks to consider before allowing such remittances. The conditions which are required to be fulfilled are:
- AD category – 1 banks must be satisfied of the bona-fide(s) of the transaction.
- Advance payments should be made strictly as per the terms of the sale contract and made directly to the account of the manufacturer (supplier) concerned.
- Physical import of the good(s) must take place within 6 months from the date of remittance (of foreign exchange) and the importer must give an undertaking to furnish documentary evidence of import within 15 days from the close of the relevant period.
If the above preconditions are fulfilled by an operator holding a requisite approval from the DGCA for import of the aircraft for operating Scheduled or Non-Scheduled Air Transport Services (including Air Taxi Services), then the advance remittance of up to UDS $ 50 million will be allowed by the AD Category – 1 bank.
Corporate Guarantees to Foreign Parties:
Furthermore, in certain transactions an operator in India (or an operator’s promoter) may also be required to produce a corporate guarantee in favour of a foreign lessor or foreign entity and since, as also noted earlier, there is an element of foreign exchange involved, permission from the RBI is required.
In this regard, AD banks are allowed to convey a ‘no objection’ under the FEMA, 1999 for issue of corporate guarantee(s) in favour of an overseas lessor, for operating leases in respect of import of aircraft / aircraft engine / helicopter. The conditions that need to be complied with however are that guarantor must issue a board resolution approving the guarantee, the names of officials authorized to execute such guarantee must be specified and the period of corporate guarantee must be co-terminus with the lease period.[4] It must be noted however that this no objection which may be issued by an AD Bank is only in relation to operating leases – for financial leases or capital leases, specific RBI approval is required under the External Commercial Borrowing route. We have highlighted the subject of corporate guarantees in our article here.
Financial Leases are considered External Commercial Borrowings:
As mentioned, exemptions are in place from operating leases however all financial leases are classified to be External Commercial Borrowings (“ECBs”)[5] and require the approval of the RBI or an AD Bank (depending on whether the transaction falls under the “approval route” or the “automatic route”). Various forms are required to be completed and submitted, the most important being the “Form ECB” as prescribed under the Framework.
Creation of Charges on Immovable Assets:
Similarly, the AD Category – 1 banks must also convey a “no objection” under the FEMA, 1999 before a party may create a charge on immovable assets, financial securities and / or issuance of corporate or personal guarantees in favour of overseas lenders or security trustees, to secure the ECB to be raised by a borrower.[6]
Remittances for Security Deposits under Aircraft Acquisition Agreements:
In relation to remittance of foreign exchange towards security deposits (for payment of lease rentals) with lessors for import of aircraft / aircraft engines / helicopters on operating lease, AD Category – 1 banks may permit airlines to remit up to USD$ 1,000,000 per aircraft without a standby letter of credit or a guarantee from a reputed international bank abroad or a guarantee of an AD in India against the counter-guarantee of a reputed international bank abroad subject to various conditions.[7]
There are certain safeguards in place for the AD Category – I banks to consider before allowing such remittance. The conditions which are required to be fulfilled are the following:
- AD category – 1 banks shall be satisfied of the bona-fide of the transaction(s).
- Necessary approvals from the appropriate authorities for importing the airport / helicopter on operating lease.
- The remittance is permitted as per the Policy on Advance Remittances approved by Board of Directors of the bank.
- The final maturity of the security deposit should not be beyond the date of the last instalment towards lease rental or rate of return of the aircraft / helicopter to the lessor, whichever is later.
It is interesting to note that specific waiver is required from the Ministry of Finance, Government of India, in case of remittances exceeding USD$ 1,00,000 per aircraft towards security deposit (for payment of lease rentals) in case of an airline owned by the public sector / government.
Remittance of Aircraft Lease Rentals:
After the Aircraft is imported into the country, payments are usually made in the form of foreign exchange remittances to foreign lessors.
The approval of the RBI is required in the case of such remittances towards lease rentals or for opening a letter of credit for finance lease transactions, however AD’s may allow (without having to go to the RBI) remittance lease rentals, opening of letter of credit towards security deposit etc. in respect of import of aircraft/aircraft engine/helicopter on operating lease basis on the condition that necessary approval from appropriate authorities like the MoCA or the DGCA have been obtained.[8]
Permission at the time of export from India:
Interestingly, even in the case of export of an Aircraft from India, the RBI plays a prominent role. In case the export is taking place by the importer (usually the Airline), then the RBI must issue a waiver (known as a GR waiver) to the exporter before the customs authorities would allow the export of the Aircraft. This aspect has been a bone of contention over the years as it precluded an owner of an Aircraft who had repossessed an aircraft from a defaulting operator, from exporting it from India.
Taking cognizance of this problem, the MoCA worked with the Ministry of Finance to remove the requirement to procure such a waiver in cases where aircraft have been deregistered on the basis of Irrevocable Deregistration and Export Request Authorisations (“IDERA’s”) issued in accordance with the Aircraft Protocol to the Cape Town Convention, 2001.
Conclusion:
It is safe to state that India is still a highly regulated country in so far as aircraft financing and leasing transactions are concerned.
At every step of the way the RBI and the DGCA / the MoCA, play an important role in assisting and regulating the financing or leasing of aircraft in the country. Hence, it is prudent for all parties intending to do business in India to be aware of this.
[1] The Foreign Exchange Management Act, 1999 (the “FEMA, 1999”) and the Rules and Regulations notified thereunder.
[2] Section 10(1) of the FEMA, 1999
[3] A.P. (DIR Series) Circular No. 77 of 29.06.2007, read with A.P. (DIR Series) Circular No. 30 of 26.11.2015, read with Notification No. 24/2015-2020 dated 09.10.2015, Director General of Foreign Trade.
[4] A.P. (DIR Series) Circular No. 62 of 20.04.2009.
[5] RBI/2018-19/109 A.P. (DIR Series) Circular No. 17 – “External Commercial Borrowings (ECB) Policy – New ECB Framework.
[6] A.P. (DIR Series) Circular No. 01 dated 11.07.2008.
[7] A.P. (DIR Series) Circular No. 13 of 27.09.2005.
[8] A.P. (DIR Series) Circular No. 24 of 01.03.2002.
