Aircraft leasing will now be made easier
| Photo Credit:
JOTHI RAMALINGAM B
The Cabinet’s recent approval of the Protection and Enforcement of Interests in Aircrafts Objects Bill addresses a gaping legislative anomaly that has placed India in conflict with global conventions on aircraft leasing. The Bill ratifies the Cape Town Convention (CTC), the global protocol on matters specific to aircraft equipment. The CTC has largely been inoperative in India, one of the largest aviation markets, despite the country having been a signatory to it since 2008 — because Parliament has not ratified the CTC.
CTC is an essential mechanism to achieve efficient financing of high-value aircraft and parts by lowering the risk of lessors (or owners). In the highly capital-intensive aviation industry, the general practice adopted by airlines is to lease aircraft so that they can develop a fleet without having to make big investments in buying aircraft. Presently, a majority of around 700 passenger commercial aircraft in India are leased. International protocols such as the CTC are necessary to safeguard the interests of the lessors who would otherwise have to deal with high-value aircraft/equipment stranded in foreign territories for prolonged periods without being able to repossess them. But in the absence of ratification, its provisions remained in conflict with domestic statutes including the Civil Procedure Code, the Specific Relief Act, the Companies Act and, most importantly, the Insolvency and Bankruptcy Code (IBC).
Symptomatic of this legislative anomaly was the case of Go First which initiated its voluntary insolvency under IBC which led to a freezing of the airline’s assets, including the aircraft. The lessors were prevented from recovering their aircraft as bankruptcy protection superseded the international protocol. Although the government subsequently amended the IBC to exempt transactions involving aircraft, aircraft engines and helicopters from bankruptcy proceedings, it failed to reassure global entities who became increasingly wary of leasing aircraft to Indian airlines. The Aviation Working Group, a global aviation leasing watchdog, placed India on a watchlist with a negative outlook, for not meeting international aircraft possession obligations. The overall impact for the Indian aviation sector was that risk premiums charged by global lessors multiplied and aircraft financing costs rose exponentially. Airlines passed on the enhanced costs to consumers through high air fares.
The legislation proposed now circumvents legal conundrums which have aggrieved global players in India. It would allow settlement of cases between lessors and airlines under CTC provisions. This would lower risk premiums, make airlines’ operations cost-effective and hopefully bring down passenger fares. The government hopes it will facilitate India’s growth as a leasing financial centre not just for domestic players but for foreign airlines as well. Currently, aircraft leasing business is mostly undertaken through foreign financial centres like Ireland.