The Ministry of Civil Aviation (the “MoCA”) has over the past few years been pursuing the initiative of enabling the setting up of an aircraft leasing ecosystem in the country.
The notification of the International Financial Services Centres Authority (the “Authority”) and the inclusion of “aircraft financing and leasing” as a Financial Product under the International Financial Services Centres Act (the “IFSC Act”) were notable first steps towards achieving this goal. Our article titled “The Indian Aircraft Leasing Ecosystem – First Steps” summarized these early developments.
The Authority has published the framework for establishing and functioning of entities interested in setting up operations as operating aircraft lessors (the “Lessor Entities”) at International Financial Services Centres (“IFSCs”) in India vide its circular dated 19th February 2021 (the “Framework”). These entities may enter into operating lease arrangements which may inter-alia, include sale and lease back transactions, purchase transactions, novations of agreements, transfers, assignments, and such other similar transactions in relation to aircraft or helicopters and engines of aircraft or helicopters or any other part thereof or other related activity as approved by the Authority (“Operating Lease Activities”).
In the recent budget, a number of tax benefits have also been announced for entities carrying out business through an IFSC in the field of aircraft financing and leasing. While these benefits are sweeping and very encouraging, tax experts around India are analyzing the “on the ground” affect these changes will have.
We summarize the notable requirements which these Lessor Entities must fulfil to register and operate in IFSCs in the country.
Eligibility and Capital Requirements
Lessor Entities wishing to engage in Operating Lease Activities at IFSCs would be required to obtain a certificate of registration from the Authority. To do so, they must fulfil the following requirements:
- Setup operations in an IFSC in India by way of a Company or a Limited Liability Partnership or a Trust or in any other form as may be specified by the Authority.
- The person(s) in control of the entity shall be located in a Financial Action Task Force compliant jurisdiction.
- Deploy resources in such IFSC commensurate with the business operations under the framework.
- Must maintain a minimum capital of USD 200,000 or its equivalent in freely convertible foreign currency.
Noteworthy Details
The Authority may prescribe maintenance of additional capital as a risk management measure, based on the nature and scale of business of the entity.
That there is no mandatory requirement of any minimum years of prior experience and the person(s) in control need not necessarily be Indian nationals or in India and can be from any Financial Action Task Force compliant jurisdiction, thereby enabling foreign aircraft operating lessors to establish a unit of their foreign entity in an Indian IFSC.
The Lessor Entities are permitted to transact in freely convertible foreign currency only. However, they may defray their administrative expenses in INR by maintaining a separate INR account.
Fees and Costs
There is a onetime application and registration fee of USD 6,000 (USD$ 1000 as the one-time application fee and USD$ 5000 as initial registration fee) for Lessor Entities seeking a certificate of registration from the Authority.
Further, they would be required to pay an annual fee of USD 3,000 from the second year onwards.
Regulatory Compliance
Lessor Entities are required to maintain books of accounts, records and documents in the foreign currency declared at the time of the application.
Further, they are required to submit statements confirming compliance with the various regulations, circulars, guidelines, and directions issued by the Authority, along with their annual financial statements within 15 days of finalization of the same.
All financial information must be submitted in USD, unless otherwise specified.
Lastly, these entities are also required to comply with all other applicable statutory obligations, regulatory requirements, standards, policies, directions, and guidelines.
Power of Authority
The Authority has been given sweeping powers to take any action as it may deem fit in case a Lessor Entity fails to comply with the conditions subject to which registration is granted, of course after giving an opportunity of being heard, by the Lessor entity.
It is interesting to note that the Authority has unbridled powers in case of a defaulting Lessor Entity. Importantly however, the Authority has also been given equally sweeping powers to remove difficulties, specify procedures and to issue issue clarifications for the purpose of implementation of the Framework.
Conclusion
To attract large investments, IFSCs around the world, offer globally recognized legal, taxation and regulatory regimes.
While this framework details the actions required for the establishment of Lessor Entities in IFSCs in India, it is felt that the Government of India would have to provide a comprehensive plan which details the various tax and cost benefits to the global leasing community, for them to be able to consider setting up shop in India. Therefore, the next few months and years are crucial to see the development and shape in which these regulations are implemented.
