New scheme for ship acquisition finally takes off

The so-called Indian-controlled tonnage scheme seeks to allow shipowners in India to acquire ships abroad, flag them in country of their convenience


Four private equity firms—India Equity Partners Fund Advisors Pvt. Ltd, Kaup Capital of Singapore, International Finance Corp. and Standard Chartered Private Equity—hold a combined 45% stake in Ocean Sparkle, an unlisted firm.
Four private equity firms—India Equity Partners Fund Advisors Pvt. Ltd, Kaup Capital of Singapore, International Finance Corp. and Standard Chartered Private Equity—hold a combined 45% stake in Ocean Sparkle, an unlisted firm.

Hyderabad-based port operations and marine services company Ocean Sparkle Ltd has become the first Indian fleet owner to opt for a new scheme for ship acquisition announced by finance minister Arun Jaitley in July 2014 to boost India’s home fleet by over four times its current capacity.

India’s national shipping tonnage (capacity) was pegged at 10.47 million gross tonnage (GT) on 1 April 2015.

The so-called Indian-controlled tonnage scheme seeks to allow shipowners based in India to acquire ships abroad and also flag them in the country of their convenience—typically, tax-friendly jurisdictions to help access cheap sources of funds—and yet get fiscal and cargo benefits in India.

The scheme gives local shipping companies the flexibility to directly register their ships overseas without opening multiple subsidiaries abroad to acquire and manage such ships, which had become the trend among fleet owners for tax reasons.

This led to a drain of ships, which would otherwise have been registered under the Indian flag.

Four private equity firms—India Equity Partners Fund Advisors Pvt. Ltd, Kaup Capital of Singapore, International Finance Corp. and Standard Chartered Private Equity—hold a combined 45% stake in Ocean Sparkle, an unlisted firm that provides support services such as pilotage, anchoring and berthing to incoming and departing ships. It also undertakes dredging contracts.

Ocean Sparkle has registered two of its harbour tug boats in the Polynesian state of Tuvalu, after overcoming procedural hurdles on securing permits for such ships from the Director General of Shipping (DGS), India’s maritime regulator.

After the budget announcement, DGS had issued detailed guidelines for implementing the Indian-controlled tonnage scheme. But Ocean Sparkle had to wait for more than three months to get a DGS permit for the scheme, prompting the local shipowners’ lobby to take a swipe at the government, asking “Is this ease of doing business?”

The typical bureaucratic mentality when confronted with a new scheme was in full play when Ocean Sparkle applied for the scheme.

“The Indian-controlled tonnage is neither an Indian flag ship nor is it a ship chartered by an Indian company,” DGS argued. “So, we have made a reference to the shipping ministry seeking clarity on how to issue licences to such ships. The scheme is on. Nothing stops fleet owners from acquiring additional ships through this scheme, but they will get tonnage tax benefit only when a licence is issued by the DGS.”

This was a key issue.

Local laws permit only Indian-registered ships to operate along India’s coast for carrying cargo; foreign ships can be hired only when Indian ships are not available. Such in-chartering of foreign-registered ships controlled by Indian entities will also allow the vessels to claim the benefit of tonnage tax, a levy based on the cargo carrying capacity of ships as compared with the traditional corporate tax.

The tonnage tax scheme was introduced by the Union government in 2004 as a substitute for corporate tax. More than 90% of the global shipping fleet operates on tonnage tax, where the tax burden is just 1-2% of their operating income, compared with the corporate tax rate of 33.9%.

To qualify for tonnage tax benefits, ships have to be registered in India. Ships hired from overseas are also eligible for the benefit if they hold a licence issued by DGS under Section 406 of the Merchant Shipping Act.

The shipping ministry admonished DGS for referring the matter to it. “Under Section 406 of the Merchant Shipping Act, the power to issue licences rests with DGS,” a spokesman for the shipping ministry said.

DGS finally complied and granted a permit to Ocean Sparkle last week.

The two harbour tug boats that Ocean Sparkle registered in Tuvalu were earlier registered in India but were operating in Saudi Arabia under a contract with Saudi Aramco, the national oil company. Operational requirements, including hiring local crew, demanded a change in registration of the boats.

The controlled tonnage scheme required local fleet owners to maintain their existing tonnage (capacity) as applicable on 1 April 2014 under the Indian flag, according to the guidelines framed by DGS. They can flag out or register ships acquired after 1 April 2014 in overseas jurisdictions equivalent to the tonnage (capacity) they owned under the Indian flag on 1 April 2014, it said.

The two harbour tug boats that Ocean Sparkle converted into foreign flag were bought after 1 April 2014 and, hence, were eligible to opt for the scheme.

P. Jairaj Kumar, chairman and managing director of Ocean Sparkle, said the scheme will help Indian fleet owners garner overseas contracts. It will also improve their competitiveness in global tenders, where local requirements necessitate a change of ship registration either of the country where the tender was issued or under a tax-friendly jurisdiction such as Tuvalu.

With the much-needed clarity on issuing licences to controlled tonnage ships in place, it would not be long before more fleet owners resort to utilizing this scheme.

P. Manoj looks at trends in the shipping industry.

More From Livemint