With a fourfold increase in fleet size over 2019 and requiring 2,210 aircraft over the next 20 years, India's aviation sector is on track to rank among the world's top three by 2041. Against the global average of 53 percent, 80 percent of India's commercial fleet is leased.
India’s aircraft and aircraft equipment demands rely heavily on foreign lessors. Prolonged delivery timelines for new aircraft have prompted airlines to adopt lease-back business models. Such over-reliance presents various challenges, notably in reclaiming aircraft within India, making Indian carriers pay additional expenses of US$1.2-1.3 billion in lease rentals. This friction stems from the conflict between India's insolvency laws and its commitments under the Cape Town Convention (CTC).
Lessening India’s reliance on foreign lessors
Aircraft lease was notified as a financial product subject to regulatory oversight by financial regulators. However, local manufacturing and profitable businesses in the aircraft leasing space have yet to pick up pace. The presence of domestic players could provide airlines leverage to negotiate more favourable leasing terms with foreign companies, mitigate currency risks, and enhance operational stability. Additionally, by allowing maintenance-repairs-operations (MRO) checks within India, home-grown lessors would level the playing field and generate increased tax revenues, benefitting the leasing industry and associated sectors.
The presence of domestic players could provide airlines leverage to negotiate more favourable leasing terms with foreign companies, mitigate currency risks, and enhance operational stability.
Learning from Irish and Chinese models
With over 74 double tax avoidance agreements (DTAA) and favourable regulations, Ireland is the global aircraft leasing leader, enticing numerous businesses to establish their aviation equipment headquarters there.
Liberalisation of China’s civil aviation policies in 2007, prompted major Chinese banks and financial institutions to expand their aircraft-leasing divisions. Consequently, 600 leasing companies emerged in the Shanghai Free Trade Zone within two years. With eight companies among the top 20 lessors globally Today, and ownership of over 2,500 leased aircraft, China has demonstrated how proactive policies improve domestic long-term prospects. If carried out gradually, similar financing reforms hold promise for India. Anticipating market demand and supply trends, sustaining a low cost-of-capital and optimal portfolio management, and maximising returns on each lease are essential for lessors to be successful.
The GIFT IFSC model
GIFT City, India's first International Financial Services Centre (IFSC), can become an emerging prospect for the aircraft leasing industry. GIFT City exempts lessors from dividend distribution tax, minimum alternate tax and withholding tax and provides a tax holiday for 10 years for aircraft leasing income. Leasing of aircraft and aircraft machinery through IFSC is exempt from the Integrated Goods and Services Tax (IGST), customs and stamp duty.
With eight companies among the top 20 lessors globally Today, and ownership of over 2,500 leased aircraft, China has demonstrated how proactive policies improve domestic long-term prospects.
With 21 registered entities sealing 26 deals—12 for aircraft/helicopters, one for an engine, and 13 for ground support gear, GIFT City also has the potential to attract foreign players. Recent finance lease transactions by Air India and IndiGo show market and bank willingness to upscale leasing business models.
When airlines nosedive: How Jet Airways and Go First insolvencies impacted lessors
Creditors are restricted with limited remedies and are vulnerable to issues concerning security rights and incompatible priorities of security interests across jurisdictions.
The Insolvency and Bankruptcy Code moratorium imposed by Go First's insolvency proceedings has left aircraft lessors apprehensive about the extended time frames and potential depreciation of their assets. Grounded aircraft remain unleased during the long-drawn insolvency process, making them white elephants in their inventory. The National Company Law Tribunal ordered the resumption of operations using such aircraft to keep the insolvent Go first as a “going concern” during the moratorium period, mainly to preserve employment. Still, such actions fail to instil confidence, as lessors could neither conduct inspections and curate MRO nor successfully deregister and reclaim their assets.
Furthermore, lessors are concerned about other creditors, such as oil companies or airport operators, seizing the aircraft to recover their outstanding dues from the airline. In extreme cases like liquidation, lessors might not receive compensation. These concerns are not unfounded, as lessors have previously suffered substantial losses during the Kingfisher Airlines and Jet Airways episodes. In Jet Airways' insolvency case, lessors claimed over INR 14,400 crore, with only INR 2,290 crore admitted and still unpaid. Go First reportedly owes over INR 2,660 crore to aircraft lessors seeking to deregister the aircraft. Lessors of SpiceJet, the latest airline to face financial turbulence, have also requested aircraft deregistration. These experiences may prompt lessors to impose a high-risk premium, increasing airline lease rentals.
CTC’s inconsistencies with Indian laws
CTC and its protocol are global legal frameworks that protect ‘interests’ in mobile ‘aircraft objects’ like airframes, aircraft engines, and helicopters. Its registration system and framework become operational when an entity (debtors or lessee airlines) in India establishes interest in an international aircraft object or when it (the aircraft object) is registered with the Directorate General of Civil Aviation (DGCA). They provide creditors (in most cases, lessors) a relief mechanism upon exhausting a waiting period by enabling requests for deregistration, transfer, or export to claim possession of the aircraft object.
CTC and its protocol are global legal frameworks that protect ‘interests’ in mobile ‘aircraft objects’ like airframes, aircraft engines, and helicopters.
The most prominent inconsistency arises between the CTC and the Indian Insolvency and Bankruptcy Code, 2016 (IBC). The IBC's moratorium, lasting up to 330 days, prevents asset repossession during the Corporate Insolvency Resolution Process (CIRP). Conversely, the CTC mandates returning possession of aircraft to lessors within 60 days of an insolvency event.
India acceded to CTC in 2008, but its tangible enforcement awaits legislation. This lacuna aggravates CTC’s conflict with national laws like the Specific Relief Act (1963), Companies Act (2013), and IBC. The Draft CTC Bill of 2018, which is still pending parliamentary approval, acknowledges this discrepancy.
Harmonising Inconsistencies: The Draft Protection and Enforcement of Interests in Aircraft Objects Bill
In May 2022, the Ministry of Civil Aviation revised the 2018 bill and sought public comments on the draft Protection and Enforcement of Interests in Aircraft Objects Bill 2022, which continues to be known as the CTC Bill. This revised bill, yet to be tabled in the parliament, aims to enforce obligations outlined in the convention. It sets a priority framework acknowledging international interests in aircraft objects requiring registration. When enacted, it will have precedence over other conflicting regulations.
During insolvency, the airline must transfer possession of the aircraft to the creditor within two months of the commencement of the insolvency proceedings or the creditor’s entitlement date.
In default cases, the creditor can arrange for the aircraft's deregistration and export from its current location within five working days of filing for deregistration with DGCA. The creditor, backed by evidence of default, can also seek interim relief from the respective High Courts.
During insolvency, the airline must transfer possession of the aircraft to the creditor within two months of the commencement of the insolvency proceedings or the creditor’s entitlement date. Failure to adhere to timelines by the administrator (resolution professional in charge of assets of an insolvent company undergoing resolution) can lead to the stipulated self-help remedies, empowering the chargee to take control, sell, lease, or receive profits from the aircraft object.
MCA notification: A vital but insufficient measure
In October 2023, the Ministry of Corporate Affairs notified an exemption from IBC’s moratorium provisions for transactions involving aircraft objects under the CTC. This step partially mirrors the CTC Bill, allowing the lessors to reclaim the possession of their leased aircraft/equipment from a corporate debtor during a moratorium.
The MCA notification signals a potential reduction in leasing costs and restored legal confidence, yet uncertainties persist in its application to ongoing insolvency cases.
However, whether this exemption will apply to current insolvency proceedings already subjected to a moratorium remains uncertain. For instance, it excludes international interests under the CTC from registration of charges under the Companies Act. This notification is thus a response to the backlash from the GoFirst insolvency litigations, where lessors argued that IBC-induced moratoriums hindered their rights under the CTC. There is thus a distinct need for more fine-tuned measures, including the speedy tabling in parliament of the Draft CTC Bill, which addresses the broader concerns for aviation debts and insolvencies.
The MCA notification signals a potential reduction in leasing costs and restored legal confidence, yet uncertainties persist in its application to ongoing insolvency cases. Harmonising legal frameworks and proactive measures are vital to reduce airlines’ leasing expenses while cultivating a resilient domestic leasing landscape.
Dharmil Doshi is a Research Intern with the Observer Research Foundation
The views expressed above belong to the author(s). ORF research and analyses now available on Telegram! Click here to access our curated content — blogs, longforms and interviews.