Importance of SPVs in aviation finance and aspects to consider for Gift City

IMPORTANCE OF SPVS IN AVIATION FINANCE AND ASPECTS TO CONSIDER FOR GIFT CITY

Indian aviation industry has seen a rapid growth in the past few years. India is now considered as the third largest aviation market in the world. However, majority of aircrafts in India are procured through lease arrangements. Despite India being an aviation hub, airlines/ non-schedule operators typically rely upon foreign jurisdictions to structure aircraft leases. Therefore, it became imperative for India to have its own aircraft leasing ecosystem. To address this, the Government of India has set up the Gujarat International Financial Tech-City (Gift City) to enable aircraft leasing in India.

Aircraft leasing in Gift City

Gift City is an International Finance Services Centre (IFSC) located at Gandhinagar, Gujarat. It was set up towards the end of 2020 to undertake, as one of its primary objectives, aircraft financing and leasing activities. By establishing Gift City, the Indian Government aimed to establish a framework for aircraft leasing in line with developed aviation leasing markets such as Ireland, Hong Kong, Singapore, Dubai, and the United States.

IFSCs are regulated by the International Financial Services Centres Authority (IFSCA). Gift City offers 'non-resident' status, which implies that any transaction between a lessor set up in IFSC/ Gift City and a non-resident entity will not require compliance with the Indian foreign exchange control laws. In addition, Gift City provides several incentives to lessors such as exemption of basic custom duty and tax exemptions.

Despite a framework being in place for a while now, Gift City is still not considered as a preferred place for setting up business by the international lessors. Even several Indian entities are of the view that cost for leasing an aircraft from Gift City is higher than from offshore destinations. It is argued that leasing aircrafts from Ireland is still 20 per cent cheaper than doing so from Gift City. It is interesting to note that the government owned Pawan Hans recently leased six choppers from an Ireland-based aircraft leasing firm¹.

While enabling aviation finance at Gift City has been welcomed by the Indian aviation industry, the leasing ecosystem is still at a nascent stage and requires several amendments to compete with the global aviation leasing markets. We understand that several aspects are under consideration to make the framework more attractive. However, in our view, one of the key issues which require a prompt redressal is reduction of operational cost for Gift City entities.

We, in this article, examine the role of Special Purpose Vehicles (SPVs) in aviation financing and certain measures which can be considered by relevant authorities to reduce operational cost of SPVs and bring it in line with the global practices.

Role of Special Purpose Vehicles in the Aviation Sphere

SPV is a legal entity typically set up by lessors to hold title of the aircraft subject to financing and leasing to the operators. SPV enables structuring of transactions in a bankruptcy remote manner since activities of SPV are limited to holding of title to specific aircraft(s). As a matter of practice, each SPV typically holds title of one or two aircrafts. The SPV usually grants security over the aircraft, its related contracts and pledge on its shares in favour of the creditors. SPVs help in reducing exposure of lenders to other assets of the lessor.

From lender's perspective, SPV provides comfort to a lender that the company has no pre-existing obligations or liabilities. However, exposure of lenders is limited to assets and liabilities of that specific SPV.

SPVs in IFSC

Setting up of SPVs is a common practice adopted by international lessors specifically in countries like Ireland (which is still most preferred jurisdiction for Indian aircraft transactions) due to the reasons discussed above. The international lessors preferring Gift City to commence aircraft leasing activities expect similar SPV structures.

Although there is no legal bar in incorporating SPVs in Gift City, the process for setting it up remains to be cumbersome. A lessor having an entity in Gift City is required to follow all the steps (required for setting up an entity) to establish each of its SPV(s) which is a time consuming and expensive process.

Steps to follow for setting up an entity in Gift City

While IFSCA has its own set of requirements for setting up an entity in Gift City, an additional obligation on the lessors is to comply with the requirements set out in the Special Economic Zones Act, 2005 (SEZ Act) and the Special Economic Zone Rules, 2006 (SEZ Rules), as Gift City is essentially operating as a multi-service special economic zone. Therefore, a lessor not only has to consider the rules and regulations of IFSCA but is also required to comply with the SEZ Act and the SEZ Rules for setting up a unit in the Gift City.

We have set out below broad steps required to be followed for setting up in Gift City:

Step 1: Incorporation of a legal entity

Step 2: Office space identification in Gift City

Step 3: Developer (who manages infrastructure facilities in Gift City) to issue Provision Letter of Allotment (PLOA) for taking office premises on lease

Step 4: Application in Form-F to SEZ authority, i.e., the consolidated application form for setting up unit in SEZ

Step 5: SEZ Authority to issue Final Letter of Approval

Step 6: Application to IFSCA to register as aircraft lessor

Step 7: Finalisation of space with the developer and entering into a lease agreement

Step 8: Commencement of business

It may be noted that completion of these steps takes around 4-6 months' time. While the aforesaid steps and timeline seems reasonable while setting up the primary entity in Gift City, complying with all steps while setting up of each SPV by a lessor may be a cumbersome process.

International practice relating to SPVs

It may be noted that developed aviation leasing markets contemplate a simpler and expedited process when it comes to setting up of SPVs. For instance, Abu Dhabi Global Market (ADGM) – an international financial centre in Abu Dhabi offers a competitive SPV regime for holding aircraft assets, benchmarked against leading jurisdictions in terms of cost and ease of process.

The key benefits offered by ADGM with respect to SPVs are as follows:

• No office space requirement for SPVs;

• No audit requirement for SPVs;

• Fast setup process and fully online; and

• Simplified and cost-effective wind-down process SPVs (no liquidator required)².

We understand that similar advantages are available in other leading jurisdictions such as Ireland while setting up SPVs. Further, the timeline and process for setting up a SPV is quicker in most of the matured jurisdictions.

Way Forward for Gift City

Gift City has been set up with an intent to provide a platform to aircraft lessors which is competing with developed international markets. However, in our view, several additional measures are required to be adopted to attain this objective successfully.

The Indian Government is considering several amendments in the law to provide Gift City level playing field with the global markets. Nevertheless, it is imperative to simultaneously consider relaxations with respect to setting up of SPVs as there are no carve outs or exceptions in Gift City.

In our view, the following aspects should be considered with respect to SPVs:

(a) No requirement of a separate office space for setting up of SPV;

(b) Single window for obtaining licenses/ approvals under SEZ Act/ Rules and IFSCA; and

(c) Expedited process with shorter timelines.

Disclaimer: The views of authors of this article are personal. This article is meant for information purposes only and does not purport to be an advice or opinion, legal or otherwise. A reader must take legal advice before applying the information contained herein to a specific circumstance. The authors or the firm are neither responsible for any error or omission in this article nor for any action taken based on its content.