India is the world’s third largest domestic aviation market. The unparalleled growth of the Indian aviation industry in last decade has been largely fueled by low cost airlines entering into sale and lease back (SLB) transactions with foreign lessors to procure aircraft.

The vast majority of aircraft, approximately 70%, operated by Indian airlines are on lease compared with the global average of 41%. Some of the world’s top lessors have leased aircraft to airlines in India.

Despite the advantages of SLB transactions, the continually depreciating Indian rupee against the USD has increased the cost of operations for Indian airlines significantly. Apart from leasing costs, Indian airlines pay for fuel and aircraft maintenance in USD too.

The Ministry of Civil Aviation (MoCA) spearheaded Project Rupee Raftar, which was focused on developing a local aircraft leasing and financing eco-system in the country. A key component of this initiative was the setting up of the International Financial Services Centres Authority (the “Authority”).

The Authority discussed the inclusion of Aircraft Financing and Leasing as a financial product in its 2^nd meeting held on the 09^th of September 2020.

Since this meeting, the Government of India has on the 16^th of October 2020 notified “aircraft lease” as a financial product which may be provided by financial institutions in International Financial Services Centres in India. This has caused a great amount of interest in the industry and thus, we have tried to summarize the effect of the notification to the aviation industry in India.

What is the change that has been introduced vide notification dated 16^th October 2020?

A financial institution[1], i.e. a unit set up in an International Financial Services Centre (“IFSC”) which in engaged in rendering financial services in respect of a financial product[2] pertaining to aircraft lease (which shall include operating and financial leases, hybrids of operating and financial leases of aircraft or helicopters and engines of aircraft and helicopter or any part thereof) has now been given official recognition under the International Financial Services Centres Authority Act, 2019 (the “Act”). The IFSC usually extends a number of benefits to institutions being set up within the special zone – the benefits are, for the purposes of this article, not being highlighted.

The term “financial service”[3] has a wide definition under the Act. Some of the services which an institution dealing with aircraft leases in the IFSC may now undertake include:

1. buying or selling aircraft leases (or agreeing to do so).
2. safeguarding and administering assets consisting of assets (aircraft, helicopters or parts thereof) on operating, financial or hybrid leases – belonging to other persons.
3. offering, managing or agreeing to manage assets consisting of assets (aircraft, helicopters or parts thereof) on operating, financial or hybrid leases – belonging to other persons.
4. exercise any right associated with assets (aircraft, helicopters or parts thereof) on operating, financial or hybrid leases.
5. making arrangements to carry out any of the above services.

What is the role of the Authority in relation to aircraft leases (as defined in the notification) as “financial products”?

The Central Government has established the Authority vide notification dated 27^th April 2020 and notified that the head office of the Authority shall be at Gandhinagar, Gujarat. The Authority is cast with the duty to develop and regulate the financial products (now including aircraft leases) and financial institutions (persons engaged in the provision of financial services viz. aircraft leases). The Authority exercises various powers which are currently exercised by the Reserve Bank of India, the Securities and Exchange Board of India, the Insurance Regulatory and Development Authority of India, the Pension Fund Regulatory and Development Authority. Therefore, the Authority has very wide and far reaching powers. The Authority may also delegate its powers under the Act to any member or officer or committee of the Authority. No suit, prosecution or legal proceedings shall lie against the Authority of its members of officers for anything done or intended to be done in good faith under the Act.

What currency is to be used in the IFSC?

Transactions in an IFSC, in relation to financial products, are to be carried out in such foreign exchange[4] as specified in regulations in consultation with the Central Government.

What happens to the various other laws in India which could prohibit smooth functioning of a financial institution providing financial services in relation to aircraft leases?

There are several other laws in India which may, hinder the growth of this new sector. To overcome this the Central Government may by notification direct that any other act, rules, regulations, notification, orders may not apply to financial products (as defined), financial services (as defined) and financial institutions (as defined) in an IFSC.

Practical impact?

Notifying aircraft leases as a financial product is a first step in the right direction as it paves the way for development of the sector in India. Further, specific rules and regulations to further enhance the experience and benefits of a financial institution setting up shop in the IFSC will be developed over the course of time. Not only would a flourishing market benefit the Indian aviation industry, but it has the effect of promoting the aircraft leasing and financing activities from Indian entities, set up in an IFSC in India.

[1] Section 3(1)(c) of the Act.

[2] Section 3 (1)(d) of the Act.

[3] Section 3 (1)(e) of the Act.

[4] Section 20 of the Act.