Ship Funding in India

Amit Oza

Ship funding in India, in historical perspective since independence, has always been in the domain of the public sector. The erstwhile ‘Shipping Development Fund’ created by the government of India in 1961 had mixed success and had to be wound up with substantial losses in 1985. The creation of SCICI also could not have any significant impact on Indian shipping and the organization was merged with parent company ICICI 1996.

Post liberalization, the Indian banking industry was hampered by lack of domain knowledge because commercial ship management skills did not develop in India due to high taxation and regulatory issues. Funding of ships was restricted to public sector companies or large well-established companies with strong balance sheets. Banks insisted ’employment’ of the ships to cover any borrowings, which is not possible in international shipping markets. Lending by Indian banks has therefore been restricted to funding assets which is owned by companies with large balance sheet, with recourse on balance sheet and other non-asset guarantees. Some recent unfortunate incidents like Mercator shipping, ABG shipping, Bhatia shipping, caused primarily due to the volatile shipping markets which resulted from the credit boom/bust in 2009, further made lenders cautious. Lack of domain knowledge by banks and continued reluctance to consider asset-based financing for shipping makes ship funding from Indian sources difficult.

Foreign lenders have not been able to contribute to funding in India, though they have funded Indian companies who have set up subsidiaries abroad. This is primarily due to the lenders not being comfortable with Indian flag, as most large shipping banks and other lenders are comfortable with other foreign flags due to perceived speed of execution and service.

Other sources of funding like VC, AIF, bonds etc. remain muted in India, mostly due to lack of domain knowledge and perceived risks around the volatile and cyclical industry. With strong balance sheets, cash flows and asset base, only very large Indian shipping companies have been able to access global ship finance at internationally competitive rates.

One of the key reasons for Indian banks not being able to effectively fund shipping is the lack of expertise in the banking systems. Shipping finance requires specialist who understand the trade. It also requires a dedicated vertical within the bank, rather than a generalist ‘relationship Manager’ handling the opportunity based on client allocation. Restrictions on shipping industry and the consequent flight of capital and skills from India to overseas locations like Dubai and Singapore meant that Indian banks and lenders never received exposure to intermediate players like ship operators and commercial ship managers, which led to lack of skill development in the banking sector. The lack of funding further prevented the development of healthy shipping eco system within India.

Projects like GIFT IFSC, which provide for competitive tax and regulatory regime, hold great promise for bringing in global funding to India. India flag administration also needs to be made more attractive to global shipping companies, with Indian flag being the flag of choice rather than a flag required for ‘right of first refusal’ for Indian tendered cargoes and Indian coastal cargoes. Restrictions of flying foreign flag from India also need to be reviewed, as it acts a barrier for Indian shipping companies to access funds from lenders who are associated with a specific flag state. Most lenders are comfortable with flag state regime which they understand and endorse, as they are comfortable with the flag regime, and it allows them to control the funded asset in terms of re-possession in the event of default. Restricting the flag for India owned tonnage also severely restricts funding options, forcing capital to move out of India.

It is heartening to see banks already using the GIFT IFSC platforms for funding ships, with the international business units (IBUs) of the banks acting as ‘offshore lenders’ to the shipping industry. This structure has immense potential not only for funding Indian shipping, but also for allowing Indian banks to participate in global ship finance sector.

The ‘Maritime Development Fund (MDF), which has been a long-standing demand of the industry, can be structured as a commercial fund with mandate to participate not only in Indian shipping play, but also global opportunities. This exposure will provide much need experience and skills to Indian lenders.

With maturing equity and debt markets, large forex reserves and large expanding economy, India is well poised to provide funding to local and global shipping markets.

Marex Media