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Bangalore: A crude carrier bought by shipping firm Mercator Lines Ltd for $168 million (about Rs720 crore) in May is at the centre of a controversy that could redefine India’s ship registration rules.

Registration issues: A file photograph of vessels at the Mumbai port. (Photograph by Ashesh Shah/ Mint)

This may lead other firms too to explore the possibility of registering their ships in countries where the tax and regulatory rules are liberal, though some industry experts say that this is a direct challenge to India’s maritime rules.

Local shipping companies have been registering ships in tax-friendly nations such as Singapore, but never directly. These firms float subsidiaries abroad to be able to own and register ships outside India.

Mercator itself has a listed subsidiary in Singapore that operates 11 dry-bulk ships.

Great Eastern Shipping Co. Ltd, India’s largest private shipping firm, and Varun Shipping Co. Ltd, the country’s biggest LPG shipping fleet owner, have have units in Singapore.

Mercator’s decision, an official at India’s maritime regulator said, goes against provisions in the Merchant Shipping Act, which governs India’s maritime sector. “Ships purchased by companies formed and operating in India have to be registered in India," said the official with the Directorate General of Shipping. He didn’t want to be named as he is not authorized to speak with the media.

A spokesperson for the regulator declined to comment.

Mint could not independently verify whether Mercator needed the regulator’s approval to register a ship outside India and whether such a permission was granted.

The regulator has sought opinion from maritime lawyers after the issue was brought to its notice by Mercator’s biggest rival, Great Eastern.

A spokesman for Mercator declined to comment, while Great Eastern officials could not be reached over the weekend.

“Ownership of ships is important and not the country where it is registered," Atul J. Agarwal, Mercator’s managing director, had told Mint earlier.

When a shipping firm registered in India buys a ship, that vessel has to be mandatorily registered in India according to the Merchant Shipping Act, said S. Priya, a Mumbai-based lawyer specializing in maritime law. “There is no doubt at all in the Act on this issue."

However, some shipping companies, waking up to the possibility of directly registering their ships outside the country, say the Act does not specifically rule out registration of ships outside India.

“I was told it is possible to register ships outside also even if a company is registered in India and is bound by the Merchant Shipping Act," said S. Hajara, chairman and managing director of state-run Shipping Corp. of India Ltd.

Some industry experts say Mercator could have taken advantage by interpreting some “grey areas" in the Act.

The company had taken legal opinion from Mumbai-based shipping law firm Bose and Mitra and Co. on the issue. “According to me, a shipping company registered in India can register its ships outside India," said Amitava Majumdar, partner at Bose and Mitra.

“If you go through the rules and regulations of the Merchant Shipping Act, there is nothing there that prohibits local firms from registering ships outside India," said an industry official, who did not want to be identified due to the sensitive nature of the issue. “There is nothing in the Act that clearly and explicitly says a shipping company registered and operating in India must have their ships registered in India."

Kamakshi Prem, originally registered in Panama, was bought from Taipei-based Taiwan Maritime Transport Co. Ltd, or TMT. The tanker, built in 2006 with a capacity to load 299,235 tonnes of crude oil, has since been rented to TMT on a two-year contract at a day rate of about $80,000, according to shipbrokers’ reports.

Registration of ships in India helps build an adequate shipping fleet to carry the country’s overseas cargo, and fetches revenue for the government, thought not significant. The registration cost varies according to the ship’s gross tonnage, or GT. Port dues are also calculated on the basis of GT.

For local ship owners, who are burdened with 12 different taxes in India, being able to directly register ships abroad would mean freedom from stringent manning or staffing requirements. Under the Merchant Shipping Act, ships registered in India have to hire only Indian crew. Mercator has hired Russian officers and Bangladeshi crew to run Kamakshi Prem.

“Indians working on local ships are subjected to tax, while those on foreign ships are not," added Y. Khatau, managing director, Varun Shipping.

The controversy comes at a time when India is shoring up its shipping fleet, which was floundering at about 6 million GT a decade ago.

In April 2004, after several years of lobbying by the shipping industry, India introduced tonnage tax, a levy based on the cargo carrying capacity of ships, instead of the traditional corporate tax. This brought Indian firms on par with those abroad as the tax was cut to 1-2% of operating revenue, from 30-35%.

The country’s shipping tonnage rose to more than 9 million GT in 2007, as shipowners bought more ships to take advantage of the new tax system.

Indian shipping companies plan to invest $20 billion over the next five years to raise the capacity to 15 million GT.

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