i INTRODUCTION

The transportation industry – aviation, shipping and rail – has been predominantly owned by government entities since India's independence in 1947. Historically, Air India and Indian Airlines (now merged into Air India Limited), both government-owned entities, ruled the skies. The Shipping Corporation of India Limited (SCI), established in 1961 and owned by the government, owned and operated around one-third of the Indian tonnage. All railway property has always exclusively been government-owned.

However, this trend has recently been changing. The recent government in India has taken up disinvestment through minority stake sale (i.e. retaining ownership of at least 51 per cent of the shareholding and management control) or even strategic sale of a substantial portion (50 per cent or more) of the government shareholding along with transfer of management control of certain identified central public sector enterprises. On 28 June 2017, the government of India announced the privatisation of Air India Limited. A committee has been set up to start the process. The government is also aggressively considering strategic disinvestment in the Shipping Corporation of India. In any case, with the constant and steady increase in the Indian fleet, and no new acquisitions by SCI, presently SCI only owns around 5 per cent of the total Indian fleet.

i The transport finance industry

Shipping and aviation are global industries, with cyclical ups and downs. Indian entrepreneurs, in the context of other industries, have not considered these sectors as 'safe havens' for their investments. Both are also dollar-based industries, and global banks tend to focus on large fleet-owners of aircraft and ships, which are rare in India. The financing costs of the Indian banks are not competitive in terms of global financing, as interest rates are quite high.

Owing to the vast difference in the costs of domestic borrowing and external commercial borrowing (ECB), Indian companies have for a long time obtained finance for the acquisition of ships and aircrafts from foreign banks and financial institutions such as DNB Bank ASA, ING Bank NV, BNS Asia Limited, Bank of America NA located predominantly in Singapore, Hong Kong and Dubai. Indian banks such as SBI, ICICI and Axis Bank also provide finance through their offshore branches. The regulations governing ECB are framed by the Ministry of Finance and the Reserve Bank of India (RBI), and ECB borrowed by Indian companies to finance the cost of acquisition of ships must be in accordance with the Foreign Exchange Management Act, 1999 and the rules, regulations, guidelines, notifications and circulars issued thereunder.

ii Recent changes

Under the ECB policy, as advanced from time to time, shipping companies can obtain loans from foreign banks and financial institutions, and suppliers of equipment, in addition to their foreign equity holders. In addition to loans, Indian entities can also acquire new ships on a supplier's credit (credit advanced by the overseas supplier) or buyer's credit (loan availed by the importer from foreign bank or financial institution) basis.

To improve the ease of doing business in India, the RBI, by its notification dated 16 January 2019, further rationalised the ECB framework and the Master Direction is in the process of being revised to reflect the changes brought in by this notification. The salient features of the new ECB framework are set out below:

  1. ECBs are now categorised under two broad heads, 'foreign currency denominated ECB' and 'rupee denominated ECB'.
  2. The eligibility criteria for an organisation to be able to avail ECB has now been expanded to include all entities eligible to receive foreign direct investment (FDI). Additionally, port trusts, units in special economic zones, Small Industries Development Bank of India, EXIM bank, registered entities engaged in micro-finance activities, registered not-for-profit companies, registered societies, trusts, cooperatives and non-government organisations can also borrow under this framework. Thus, a society or a trust registered in India and owning a ship can now avail ECB from a foreign lender.
  3. Similarly, the category of persons that can lend has also been widened. Multilateral and regional financial institutions, individuals and foreign branches or subsidiaries of Indian banks can also be lenders. The criteria for qualifying as a lender is that a person should be resident of a Financial Action Task Force or International Organization of Securities Commission compliant country.

II LEGISLATIVE FRAMEWORK

i Domestic and international law and regulation

Shipping

Flag or mortgage registration

The registration of Indian ships and mortgages is governed by:

  1. the Merchant Shipping Act, 1958 (MSA);
  2. the Merchant Shipping (Registration of Indian Ships) Rules, 1960, as amended from time to time; and
  3. notifications issued by the Ministry of Shipping and the Directorate General of Shipping (DGS) under the MSA from time to time.

The Merchant Shipping Bill, 2016 was introduced in the Lok Sabha on 16 December 2016 for replacing the MSA. Some of the proposed changes (to the existing law) under the Bill are as follows:

  1. For a vessel to be an Indian vessel or an Indian controlled tonnage, it should be substantially (i.e. more than 50 per cent of the shares of the vessel) owned by an Indian citizen or a body established under any Central Act or State Act of India.
  2. An Indian vessel can also be registered in a country other than India, subject to certain conditions, as may be prescribed.
  3. It seeks to repeal the Coasting Vessels Act, 1838 (under which non-mechanically propelled vessels are presently registered). Consequently, the new Merchant Shipping Act (if enacted) will deal with registration of all seagoing vessels, including rigs. It further permits creation of mortgages over the rigs, for which such mortgage over rigs would be subject to the same rights and obligations as any self-propelled ship or vessel.
  4. It will allow registration of the vessel chartered on a bareboat cum demise (BBCD) basis by an Indian charterer with the Indian registry. Such registration of vessels chartered on a BBCD basis will remain in force until the end of the charter period, provided any provisions of the Act (i.e. Merchant Shipping Bill once enacted) are not violated. The vessel chartered on BBCD, once registered under Chapter II of the new Merchant Shipping Act (i.e. Merchant Shipping Bill once enacted), shall become an Indian vessel and will be entitled to fly the Indian flag. However, such registration would not be mandatory.

Since July 2014, Indian shipping companies can own foreign-flagged ships subject to compliance with the DGS guidelines. The Indian-controlled tonnage scheme allows ship-owners based in India to acquire ships abroad and flag them in the country of their convenience – typically tax-friendly jurisdictions to help access competitive sources of funds – while achieving fiscal and cargo benefits available in India.

Under India's stringent cabotage policy, no foreign ship could engage in coastal trade between two Indian ports except under a licence issued by the DGS. However, the cabotage policy has recently been relaxed on multiple occasions. In 2012, the cabotage policy was relaxed at the International Container Trans-shipment Terminal (ICTT) Vallarpadnam, Cochin for EXIM container cargos. This relaxation enabled foreign vessels to call at the ICTT. The ICTT is only 76 nautical miles from the main east–west shipping route, allowing the discharge of Indian cargo at Cochin rather than at neighbouring mainline trans-shipment ports such as Colombo or Singapore. In 2015, cabotage was relaxed for certain special vessels for five years, up to 2020. The cabotage policy was also relaxed to allow foreign-flagged vessels carrying passengers to call at more than one Indian port for a period of 10 years (i.e., from 6 February 2009 to 5 February 2019) without obtaining a licence from DGS. This relaxation period was further extended for a period of five years (i.e., up to 5 February 2024). In 2018, the cabotage policy has been further relaxed in relation to the foreign-flagged ships engaged in the following coastal activities:

  1. transportation of EXIM laden containers for transhipment and transportation of empty containers;
  2. carriage by sea of prescribed agricultural, fisheries, animal husbandry and horticultural commodities; and
  3. carriage by sea of fertilisers.

Such relaxation of the cabotage rules will attract more containerised cargo and result in the growth of the shipping industry, allowing India to compete internationally with other countries in terms of international shipments. Foreign shipping companies shall be able to take cargo directly from one port to another, which will allow them to accommodate more containers. EXIM containers transported by foreign-flagged vessels for trans-shipment at Indian ports in August 2018 exceeded the empty containers moved on by foreign vessels, providing sufficient indication that the policy shift has begun to benefit the industry. Relaxation has encouraged farmers to access a larger market, widen the range of goods and products and provide a greater distance for conducting domestic trade. Cabotage relaxation shall also help in acquiring a 5–7 per cent cost saving for the cotton and textile industry, as it will help export goods from domestic ports itself.

Admiralty proceedings

The recently enacted Admiralty (Jurisdiction and Settlement of Maritime Claims) Act, 2017 (Admiralty Act), which came into force on 1 April 2018, consolidates the existing laws relating to admiralty jurisdiction of courts, admiralty proceedings on maritime claims, arrest of vessels and stipulates the order of priorities for maritime claims/liens inter se as well as other claims and related issues. It also repeals five obsolete British statutes on admiralty jurisdiction in civil matters, namely:

  1. the Admiralty Court Act, 1840;
  2. the Admiralty Court Act, 1861;
  3. the Colonial Courts of Admiralty Act, 1890;
  4. the Colonial Courts of Admiralty (India) Act, 1891; and
  5. the provisions of the Letters Patent, 1865, applicable to the admiralty jurisdiction of the Bombay, Calcutta and Madras High Courts.

The Admiralty Act seeks to fulfil a long-standing demand of the legal fraternity. The Admiralty Act has a retrospective application and therefore all admiralty proceedings pending before commencement of the statute in the concerned High Courts, as well as all actions initiated, and even the by-laws, rules framed and notices issued under the repealed enactments will now be adjudicated by the provisions of the Admiralty Act, so long as they are not inconsistent with the provisions of the same.

The Admiralty Act confers admiralty jurisdiction on High Courts of coastal states. This jurisdiction extends up to Indian territorial waters. The central government is empowered to further extend, by notification, up to the exclusive economic zone or any other maritime zone of India or islands constituting part of the territory of India. The Admiralty Act covers every vessel irrespective of the place of residence or domicile of owner.

India has adhered to the 1952 Arrest Convention and 1999 Arrest Convention and accordingly under the Admiralty Act, arrest can be sought for all claims that have been included in the definition of the term 'maritime claims' under the 1999 Arrest Convention. Additionally, under the Admiralty Act, the following maritime liens are also treated as maritime claims for which an arrest can be sought:

  1. claims for wages and other sums due to the master, officers and other members of the vessel's complement in respect of their employment on the vessel, including costs of repatriation and social insurance contributions payable on their behalf;
  2. claims in respect of loss of life or personal injury occurring, whether on land or on water, in direct connection with the operation of the vessel;
  3. claims for reward for salvage services, including special compensation relating thereto;
  4. claims for port, canal and other waterway dues and pilotage dues and any other statutory dues related to the vessel; and
  5. claims based on tort arising out of loss or damage caused by the operation of the vessel other than loss or damage to cargo and containers carried on the vessel.

While determining maritime claims under the specified conditions, the courts may settle any outstanding accounts between parties with regard to the vessel. They may also direct that the vessel or a share of it be sold. With regard to a sale, courts may determine the title to the proceeds of such sale. Maritime liens are given the highest priority among all claims, followed by mortgages and all other claims. In the case of maritime claims, claim for wages is given the highest priority, followed by claims with regard to loss of life or personal injury, reward for services, port, canal and other statutory dues, and lastly by claims based on tort arising out of loss or damage caused by the operation of the vessel. Such claims shall continue to exist even with the change in ownership or registration or flag of the vessel.

Courts may exercise admiralty jurisdiction against a person with regard to maritime claims. However, the courts will not entertain complaints against a person in respect of a damage or loss of life or personal injury arising out of any of the following: (1) collision between vessels; (2) the carrying out of or omission to carry out, a manoeuvre in the case of one or more vessels; or (3)non-compliance on the part of one or more vessels, with the collision regulations made in pursuance of the MSA, unless (1) the cause of action, wholly or in part, arises in India; or (2) the defendant, at the time of commencement of the action by the High Court, actually and voluntarily resided or carried on business or personally worked for gain in India.

Further, courts will not entertain action against a person until any case against them with regard to the same incident in any court outside India has ended.

The courts may order the arrest of any vessel within their jurisdiction for providing security against a maritime claim that is the subject of a proceeding. They may do so under various reasons, such as:

  1. the owner of the vessel is liable for the claim;
  2. the demise charterer of the vessel is liable for the claim;
  3. the claim is based on the mortgage or charge of similar nature on the vessel;
  4. the claim relates to ownership or possession of the vessel; or
  5. the claim is against the owner, demise charterer, manager or operator of the vessel and is secured by a maritime lien.

With regard to appeals, any judgments made by a single judge of the High Court can be appealed against a division bench of the High Court. Further, the Supreme Court may, on application by any party, transfer an admiralty proceeding at any stage from one High Court to any other High Court. The latter High Court will proceed with the matter from the stage where it stood at the time of the transfer.

In addition, the Major Ports Authorities Bill, 2016 (the Bill) was introduced in the Lok Sabha on 16 December 2016. The Bill seeks to repeal the Major Port Trusts Act, 1963 and seeks to provide greater autonomy and flexibility to major ports. It provides for the creation of a board of major port authority for each major port. The Bill decentralises decision making and ensures transparency in operations. The Bill provides for the composition of the board and ensures that various stakeholders including railways, customs, revenue, local state governments and road authorities are adequately represented. The Bill defines public-private partnership projects as projects taken up through a concession contract by the board on a revenue or royalty-sharing basis. The appointed concessionaire will be free to fix the actual tariffs based on market conditions. It also envisages creation of an adjudicatory board for adjudication of disputes and looking into complaints received from port users.

Aviation

The civil aviation sector is regulated by:

  1. the Aircraft Act, 1934 and the Aircraft Rules, 1937;
  2. the Airports Authority of India Act, 1994;
  3. the Airports Economic Regulatory Authority of India Act, 2008;
  4. the Civil Aviation Requirements, issued from time to time;
  5. the Convention on International Interests in Mobile Equipment, 2001 and the Protocol to the Convention on International Interests in Mobile Equipment on Matters Specific to Aircraft Equipment, 2001 (Cape Town Convention);
  6. the Carriage by Air Act, 1972;
  7. the Aircraft (Carriage of Dangerous Goods) Rules, 2003;
  8. the Foreign Aircraft Exemption from Taxes and Duties on Fuel and Lubricants Act, 2002;
  9. the Tokyo Convention Act, 1975; and
  10. the Suppression of Unlawful Acts against Safety of Civil Aviation Act, 1982.

The Cape Town Convention was ratified by India in 2008 to protect the interests of the lenders and lessors involved in the financing of aircrafts. It provides for the repossession of aircraft or collateral in the event of financial default by the lessee of the aircraft or borrower. It is pertinent to note that although the Cape Town Convention has been ratified, the government of India, except for certain amendments to the Aircraft Rules, 1937 implementing relevant provisions of the Cape Town Convention relating to de-registration and export of aircrafts, has not enacted any legislation as of the time of writing for implementing the Convention. On 8 October 2018, India's Ministry of Civil Aviation opened a public consultation on the prospective wholesale adoption of the Cape Town Convention into Indian law and accordingly published a draft Cape Town Convention Bill on the ministry's website for consultation. The draft bill proposes to make India a full adopter of the Cape Town Convention, which standardises transactions involving movable property.

ii Specific practices

Real-time registration of mortgages over vessels cannot be done in India. Even if all documents required for registration of mortgage over a vessel are submitted to the Registry, registration of mortgages takes around 7–10 working days. Thus, lenders do not have registered mortgage (security) in their favour for this interim period. Having said that, once the mortgage documentation is submitted to the Registry, the mortgage will eventually be registered in favour of the mortgagee after the Registry has verified the documentation. Also, the mortgage shall be recorded in the order of time in which it was submitted for registration to the Registry.

Additionally, while the MSA permits enforcement of a mortgage by a sole mortgagee without intervention of the court, to gain a clean title to the vessel, free and clear of all claims, liens and encumbrances and to avoid mortgagee's exposure to claims from other parties as also to ensure cooperation of the master and crew, lenders are usually left with no choice but to enforce the mortgage through the admiralty courts.

Also, pursuant to the General Insurance Business Act, 1972, Indian entities are not allowed to insure any of their property in India, including any ship or aircraft registered in India, with insurers whose principal places of business are outside India, except with prior permission of the government. This restriction is not applicable in respect of types of insurance that are not offered by Indian insurance companies – for example, protection and indemnity insurance cover.

The Indian flag, although considered expensive, is still bankable with several international lenders, having lent funds to Indian shipowners, such as SCI, the Great Eastern Shipping Company Limited, Greatship (India) Limited and Mercator Limited.

iii FINANCIAL REGULATION

i Regulatory capital and liquidity

In accordance with the RBI guidelines, implementation of Basel III commenced on 1 April 2013 and was intended to be fully phased-in by January 2019. Of late, industry-wide concerns have been expressed about the potential stresses on the asset quality and consequential impact on the performance or profitability of the banks. This may necessitate some lead time for banks to raise capital within the internationally agreed timeline for full implementation of the Basel III Capital Regulations. Accordingly, the transitional period for full implementation of Basel III Capital Regulations in India has been extended to April 2020, instead of 31 March 2019. The RBI has fixed the minimum Tier 1 capital ratio at 7 per cent of risk-weighted assets (RWA), of which 5.5 per cent must be common equity. One of the key features of Basel III is that all non-common Tier 1 and Tier 2 instruments issued by the banks must allow such instruments to be either written off or converted into common equity by banks that have solvency issues. As per audited data of Public Sector Banks (PSBs) for the quarter ended December 2017, all PSBs met the regulatory norm for Common Equity Tier 1. In India, the RBI has not published the requirements on countercyclical capital buffers (zero to 2.5 per cent of RWAs), which aims to ensure that banking sector capital requirements take account of the macro financial environment in which banks operate.

On 31 March 2015, the RBI made several revisions to the Basel III regulations. Pursuant to the revised guidelines that came into effect on 1 April 2015, all new restructured loans must be classified as bad loans and provided for. Banks should accelerate the loan and take recovery action at the earliest opportunity or sell non-performing assets to asset reconstruction companies. This is broadly similar to the situation in US bankruptcy law. The Net Stable Funding Ratio (NSFR) and Liquidity Coverage Ratio (LCR) are significant components of the Basel III reforms. The LCR guidelines that promote short-term resilience of a bank's liquidity profile have been issued by RBI in 2014, whereas the guidelines pertaining to NSFR have been issued by the RBI in 2018. The objective of NSFR is to ensure that banks maintain a stable funding profile in relation to the composition of their assets and off-balance-sheet activities, which will in turn reduce the probability of erosion of a bank's liquidity position because of disruptions in a bank's regular sources of funding that would increase the risk of its failure and potentially lead to broader systemic stress. The NSFR limits overreliance on short-term wholesale funding, encourages better assessment of funding risk across all on- and off-balance-sheet items, and promotes funding stability. It has been hoped that NSFR guidelines would come into effect from 1 April 2020.

ii Supervisory regime

Under the ECB regulations, whether under the automatic route or under the approval route, Indian borrowers have to apply for and obtain loan registration numbers from the RBI. Monthly reporting of withdrawals, utilisation, repayment and other payments is required, including any revisions or modification in the ECB, such as an increase or reduction in the loan amount or revisions to the schedule of disbursements, repayments or interest payments. Thus, the RBI governs and regulates the borrowing of funds and security, and also monitors ECB until it is repaid, including enforcement of security.

Such stringent regulations have reassured foreign banks that borrowers' crucial activities are being overseen. On the other hand, restrictions on charging default interest, on mandatory repayments following a default event, and restrictions on the tenor make loans inflexible, which has put off some foreign lenders.

IV SECURITY AND ENFORCEMENT

The ECB guidelines permit Indian borrowers to grant security of their choice to foreign lenders. Primarily, ships and aircrafts for the acquisition of which the ECB is borrowed are secured in favour of the lenders. No approval is required from the RBI or authorised dealer for creation of a mortgage or charge over the ships and aircraft, as well as for the assignment of insurance, charter hire income of such ships and aircraft. Security over aircraft may also be created by way of hypothecation, fixed or floating charge, lien, pledge, retention of title, conditional sale and assignment.

Pursuant to the MSA, multiple mortgages can be created over a vessel, but the sole mortgagee of a vessel can enforce its rights over the vessel without the intervention of the court, whereas, in the case of multiple mortgages registered over a vessel, a mortgage can only be enforced by applying to the competent court.

i Financing of contracts

Under Indian law, a mortgage can only be created over a vessel that has been provisionally or permanently registered with the Registrar of Ships and cannot be created over a hull under construction. Hence, financing of newly built ships is secured by the assignment of the shipbuilding contract executed between the shipbuilder and the borrower (i.e., purchaser) and the refund guarantees issued by the banks of the shipbuilders in favour of the lenders until such time as the ship is constructed and delivered to the borrower and registered with the Registrar of Ships.

ii Enforcement

Shipping

A mortgage registered over an Indian vessel may be enforced in India or outside India. In India, a vessel can be arrested and sold through the admiralty courts in India by public auction, thereby vesting in the purchaser a clean title to the vessel, free and clear of all claims, liens and encumbrances. Port dues, admiralty marshal's costs and maritime liens ranking in priority, however, must be paid.

Under the MSA, the sole mortgagee may also enforce a mortgage by taking possession of the vessel and selling it to a third party without the involvement of the courts. Although in law a sole mortgagee has the right to proceed against and sell a vessel without the intervention of the court, in reality the cooperation of the master and crew is necessary. Also, a private sale does not clear the title of the vessel of all claims and encumbrances, and the buyer of the vessel has to acquire the vessel subject to such claims and encumbrances.

A mortgage registered over an Indian vessel can also be enforced outside India, provided the loan documentation permits such enforcement. If the mortgage is enforced outside India, the foreign lender who has obtained a decree from a court in a foreign country can approach an Indian court for enforcement of the decree under the Civil Procedure Code, 1908.

If a judgment has been obtained in any reciprocating territory, the same will be recognised and enforced by the courts in India without re-examination of the issues, provided the judgment is pronounced by a competent court and is on the merits and based on principles of international law, and not opposed to natural justice, or founded on fraud or a breach of any Indian law.

Aviation

The Cape Town Convention confers remedial rights on a lender when the facility has been charged and registered as per the Convention. The chargee can take possession of the aircraft from the lessee in the event of default. Because India is a signatory to the Cape Town Convention, the Directorate General of Civil Aviation (DGCA) will cancel the registration of the aircraft, thereby permitting the chargee to take possession of it.

In the event of financial default, the lessor may unilaterally terminate the agreement and repossess the aircraft or obtain an order from the district court having jurisdiction over the place at which the aircraft is located, for its repossession. The lessors are also required to get the aircraft deregistered from the DGCA prior to repossessing the aircraft. Unless there is an explicit provision in the Cape Town Convention requiring the chargee to seek leave of the court, India has declared that a chargee will not require leave of the court. This can be construed to imply that, even in the case of a bankruptcy of an Indian lessee, such chargee will not be required to obtain leave of the court to repossess the aircraft.

The DGCA requires the consent of the lessee to deregister the aircraft. It may also receive objections to such cancellation from government departments if they are owed money by the defaulting airlines. Moreover, even after deregistration of the lessor's aircraft by the DGCA, the Airports Authority of India may impose a lien on the aircraft for unpaid dues by way of ground rent, landing charges, etc., and has the right to detain the aircraft. Also, the aircraft are sometimes impounded by the custom authorities for non-payment of custom duties, which can be a problem in the repossession of an aircraft by lessors.

The power to detain aircraft and other assets is derived from Section 142(c)(ii) of the Customs Act, 1962 and Section 87(c) of the Finance Act, 1994 (the Finance Act), which allows attachment of 'any movable or immovable property belonging to or under the control' of a defaulter. In a matter brought by the service tax authorities, relating to the attachment of engines belonging to Natixis, the High Court rejected the lien exercised by the service tax authorities. In another similar matter, the International Lease Finance Corporation challenged the attachment order passed under Section 87(c) of the Finance Act by the service tax authorities – the engines have now been redelivered. In the Natixis decision, the court held that property owned by a third party cannot be attached for the dues payable by Kingfisher Airlines.

In the case of Aer Lingus Limited v. Airport Authority of India, the Bombay High Court held that if dues are owed by the airline operator to the Airport Authority of India, the owner of such an aircraft cannot be deprived of deregistering and repossessing its aircraft in circumstances where the lessee has outstanding airport parking fees. However, this case is very different from the Kingfisher case.

iii Arrest and judicial sale

On 21 September 2016, the Union Cabinet gave its approval to the proposal of Ministry of Shipping to enact The Admiralty (Jurisdiction and Settlement of Maritime Claims) Bill 2016 and to repeal five archaic admiralty statutes.

In Notification No. 675 issued on 22 February 2018, the Ministry of Shipping announced that The Admiralty (Jurisdiction and Settlement of Maritime Claims) Act, 2017 (the Admiralty Act) would come into force on 1 April 2018. Through the Admiralty Act, the application in India of the following enactments have been repealed:

  1. the Admiralty Court Act, 1840;
  2. the Admiralty Court Act, 1861;
  3. the Colonial Courts of Admiralty Act, 1890;
  4. the Colonial Courts of Admiralty (India) Act, 1891; and
  5. the provisions of the Letters Patent, 1865 insofar as they apply to the admiralty jurisdiction of the Bombay, Calcutta and Madras High Courts.

Prior to the coming into force of the Admiralty Act, India followed the Admiralty Act, 1840 read with the Admiralty Courts Act 1861. These two acts defined the jurisdiction of the Admiralty Courts to arrest vessels. In light of this, the Bombay High Court enjoyed pan-India jurisdiction by virtue of the decision of the Appeal Court in Kamla Kant Dubey v. MV Umang.2 As a consequence of this decision, it was possible to approach the Bombay High Court to arrest a vessel lying in Chennai, Kolkata or any other port in India.

Section 3 of the Admiralty Act, however, states that the jurisdiction of all maritime claims under the Act shall vest in the respective High Courts and can be exercised up to and within their respective territorial jurisdiction. Thus, the Bombay High Court has now lost the pan-Indian jurisdiction.

Courts may, under the Admiralty Act, order the arrest of any vessel within their jurisdiction for providing security against a maritime claim that is the subject of a proceeding. The Act sets out a list of maritime claims that is similar to Article 1 of the Arrest Convention, 1999. The Admiralty Court also incorporates the following additional claims as maritime claims in relation to which a vessel can be proceeded against and arrested. The claims are related to:

  1. port or harbour dues, canal, dock or light tolls, waterway charges and such like;
  2. particular average claims;
  3. claims by master or crew or their heirs or dependents for wages, cost of repatriation or social insurance contributions;
  4. insurance premiums, mutual insurance calls;
  5. commission or brokerage agency fees payable by vessel owner or demise charterer;
  6. environment damage claims or threat thereof; and
  7. wreck removal claims.

For admiralty actions, a ship must be in Indian territorial waters. The prerequisite for an admiralty action for enforcing in rem rights is that the claimant must demonstrate that the res – the ship – is in Indian waters; hence, no action can be filed in anticipation of a ship that is yet to arrive. A substantive admiralty suit must be filed, unlike in other jurisdictions where only a writ need be entered. Further arrest of bunkers is not permissible in India. As per Indian law, bunkers are not considered to be maritime property. Therefore, the courts exercising admiralty jurisdiction do not permit the arrest of bunkers.3 The Division Bench of the Bombay High Court in Mansel Limited v. The bunkers on board the Ship m.v. Giovanna Luliano & Ors4 did not accept the contentions of the arrestor that even in England, an admiralty court in exercise of its admiralty jurisdiction can order arrest of bunkers on board a vessel. The Division Bench upheld the view in the matter of Peninsula Petroleum Limited v. Bunkers on Board the vessel m.v. Geowave Commander Ltd. Although the matter has been carried on appeal to the Supreme Court of India, the judgment of the Division Bench of the Bombay High Court, however, has not been stayed.

The suit must be filed in the admiralty division of the High Court by submitting a complaint with full documentation. The High Court will schedule a hearing to consider the merits of the claim for arrest. The arrest warrant is issued by the sheriff's office, and is served on the vessel or the master, ports agent and the customs authorities. A court sale is by public auction conducted by the sheriff, inviting offers through advertisements in leading shipping papers such as Lloyd's List or Tradewinds. If the borrower contests the mortgage claim or other creditors apply to intervene in the proceedings, additional hearings are scheduled and the priorities of claim determined. The order of maritime claims determining the inter se priority in an admiralty proceeding is determined under Section 10 of the Admiralty Act.

With regard to appeals, any judgments made by a single judge of the High Court can be appealed against a division bench of the High Court. Further, the Supreme Court may, on application by any party, transfer an admiralty proceeding at any stage from one High Court to any other High Court. The latter High Court will proceed with the matter from the stage where it stood at the time of the transfer.

To protect owners or demise charterers of the arrested vessel from possible vexatious and frivolous claims, the High Court may, as a condition of arrest of the vessel, require the arrestor (the claimant) to provide an unconditional undertaking to pay damages or provide security for an amount to be determined by the Court for any loss or damage that the owner or demise charter may suffer as a result of the arrest, should the arrest subsequently be found to be wrongful or if the claimant demanded excessive security.

v CURRENT DEVELOPMENTS

i Recent cases

Shipping

Very recently, the Bombay High Court in Siem Offshore Redri AS v. Altus Uber5 decided that Section 5(2) of the Admiralty Act, 2017 provides for arrest of any other vessel in the hands of a bareboat charterer in lieu of the vessel against which a maritime claim has been made. Currently the order has been taken up in appeal; however, as of the date of writing, no stay has been granted.

The Bombay High Court recently also determined the time for filing a suit for wrongful arrest as one year from the date of arrest of the vessel. However, where a plaintiff has provided an undertaking to pay damages for wrongful arrest, the one-year limitation period for enforcing such undertaking by way of a counter claim or a notice of motion in the same suit will begin to run from the date the order of arrest is vacated (MV Tongli Yantai v. Great Pacific Navigation (Holdings) Corporation Ltd).6

The Kerala High Court in a recent application for detention of a foreign vessel under Section 443 of the MSA ('Power to detain foreign ship that has occasioned damage') held that 'when a foreign vessel is berthed in a port which is within the jurisdiction of another High Court, it cannot be said that the vessel is within the territorial waters of this High Court'. The Court further opined that if the argument advanced by the petitioner is accepted, the High Courts in India will have concurrent jurisdiction to exercise the power under Subsection 1 of Section 443 of the Act. The scheme of Section 443 does not indicate that exercise of concurrent jurisdiction by different High Courts (Anthoniyarpicha v. MV Mayuree Naree).7

In 2017, the Bombay High Court in the matter of Pacific Gulf Shipping (Singapore) Pte Ltd v. SRK Chemicals Ltd & Anr (Notice of Motion (L) No. 74 of 2017), held that an admiralty court does not have jurisdiction to arrest cargo on board a ship for an unrelated claim.

In 2016, the Supreme Court of India in the case of CIT v. Trans Asian Shipping Services (P) Ltd,8 observed that whenever there is a question of a tonnage of ship and the said tonnage is to be determined, it has to be in accordance with the valid certificate indicating its tonnage and it is a compulsory obligation of the taxpayer to produce such a certificate. Nonetheless, the arrangement pertains only to purchase of slots, slot charter and the sharing of the break-bulk vessel. The requirement of producing a certificate does not apply when the entire ship is not chartered. Allowing the benefit of a tonnage tax scheme to the taxpayer, this Supreme Court decision may help the shipping companies to claim the benefit of a tonnage tax scheme for slot charter arrangements.

In 2016, in the case of Union of India v. Sancheti Food Products Ltd, the Supreme Court,9 within the short compass of facts, justified the award of compensation for damage suffered by the vessels in question. This was because of the following contradicting and conflicting stands that delayed the registration of the vessel: Part XVA of the Act that deals with the registration of 'fishing boats' was brought into the statute book in 1982 (to include seagoing shipping vessels) and was pursuant to the exercise of fresh legislation for the registration of vessels; whereas the Rules of 1960 that governed the parameters of registration were not substituted by this amendment made to the MSA – the relevant statute dealing with registration of vessels.

In 2015, in the case of Petromarine Products Ltd v. Ocean Marine Services Co Ltd,10 the Supreme Court held that when a suit is filed before court having jurisdiction over the vessel in question and that court passes order for arrest and sale of the vessel pursuant to which sale is effected, vessel and sale proceeds become custodial legis of that court and no subsequent proceedings by any other person interested can be maintained before another court without leave of jurisdictional court (Section 3(15) of the MSA). Because the vessel was berthed at Madras Harbour, the Madras High Court alone had the jurisdiction to enter any claim against the subject vessel as per the aforementioned Section. The arrest of the vessel by the Madras High Court being the first arrest, the vessel and the sale proceeds are custodia legis of the said court.

Aviation

In March 2015, in the matter of Awas 39423 Ireland Ltd and Ors v. Directorate General of Civil Aviation and Ors, the Delhi High Court ordered the latter to deregister six of SpiceJet's Boeing 737 planes, following the termination of lease agreements. Babcock and Brown Aircraft Management had also sought the return of six Boeing B737 aircraft and a payment of US$100 million from SpiceJet for unpaid rent and maintenance costs. The court observed that the DGCA was obliged to deregister planes on receiving a request from a leasing company in accordance with the Cape Town Convention.

ii Developments in policy and legislation

Shipping

The highly ambitious 'Sagarmala' project, which was conceptualised in 2015, aiming to promote port-led direct and indirect development and to provide infrastructure to transport goods along the long coastline and the inland waterways to and from ports, quickly, efficiently and cost-effectively, has now been implemented.

As part of the Sagarmala project, more than 400 projects have been identified for implementation between 2015 and 2035 across the areas of port modernisation and new port development, port connectivity enhancement, port-linked industrialisation and coastal community development. Out of these, 199 focus projects are phased out up to 2019.

Some of the key initiatives already implemented under the Sagarmala project include:

  1. port community system (PCS): PCS is a centralised single window platform, which serves as a message exchange gateway for port community stakeholders. It not only serves the purpose of improving efficiency of ports, but also provides a secure data exchange medium between ports and various related stakeholders. All the 12 major ports have been integrated with PCS;
  2. replacing manual forms with web-based e-forms;
  3. installation of scanners and radio-frequency identification (RFID) for gate automation;
  4. introduction of direct port delivery at select ports as a pilot project, which reduces dwell time of containers and improves cost efficiency; and
  5. automatic issue of delivery orders and launch of single-window interface for facilitating trade.

Shipyards have been accorded 'infrastructure' status, and accordingly, shipbuilders can now avail cheaper long-term financing for Indian shipbuilding and ship repair industry. Additional incentives such as income tax exemption for infrastructure development including ports and a 10-year tax holiday to enterprises engaged in developing ports have also been introduced. A 70 per cent abatement of service tax on coastal shipping brings the fares at par with road and rail. Additionally, central excise duty has been exempted on capital goods, raw materials and spares used for repair of ocean-going vessels. New shipbuilding, breaking and repair policy, in line with the international ship breaking code is expected to significantly increase the size of the shipping industry.

India and South Korea partnered up for the Maritime Summit 2018 held in Mumbai. The launch of the summit was in relation to the development of the shipping industry in India, including a focus on the idea of setting up new ports in India, coastal shipping etc. to promote the industry as well as to take better advantage of India's geographical location. In addition to the promotion of the shipping industry and the various opportunities in the Indian shipping and maritime sector, discussions between India and South Korea to initiate a partnership in relation to LNG development also took place during the 2018 summit.

The India Dry Bulk Cargo Summit has been scheduled for June 2019 in Mumbai. The conference is to focus on the economic development in relation to Dry Bulk Cargoes such as Coal, Iron Ore, Grain, Fertilisers, etc.

Inland waterways

India has a vast riverine system that lies underdeveloped and is underutilised for transportation of cargo. The Indian government has realised the potential of the inland waterways and has directed the Inland Waterways Authority of India (IWAI) to make riverine transportation in India a reality. There is an enormous focus on the development of 'inland waterways', and the IWAI is going full throttle on reviving the inland waterways. The development of these waterways opens up new opportunities for business, such as:

  1. supplying dredgers;
  2. barges and cargo-handling equipment;
  3. construction and management of terminals; and
  4. hydrographic services.

The India and Asian Development Bank (ADB) have signed a US$375 million pact for the first phase of a planned 2,500-km East Coast Economic Corridor. The grant is in addition to US$631 million in loans and grants that was approved by the ADB in September 2016 for the industrial corridor.

The Central Road Fund (Amendment) Bill, 2017 was introduced in the Lok Sabha on 24 July 2017 by the Minister of Road Transport and Highways, Mr Nitin Gadkari. The Bill seeks to amend the Central Road Fund Act, 2000. Under the 2000 Act, the fund can be utilised for various road projects including: (1) national highways; (2) state roads including roads of inter-state and economic importance; and (3) rural roads. The Bill provides that in addition to these the fund will also be used for the development and maintenance of national waterways. The Bill defines national waterways as those that have been declared as 'national waterways' under the National Waterways Act, 2016. Currently, 111 waterways are specified under the 2016 Act as national waterways. The Bill is not currently in force and would only come into force after receiving presidential assent.

In 2018, the inland waterways Jal Marg Vikas Project, which was approved by the Cabinet Committee on Economic Affairs, was implemented with the investment and assistance of the World Bank to create the first waterway stretch, the National Water 1 (NW1). The completion of the project is expected to be in March 2023. This project is in relation to a fairway covering major districts along the Ganga River in India, which would enable better commercial navigation in a cost effective and environment friendly manner.

The National Institution for Transforming India (NITI Aayog) has made recommendations to streamline the regulatory structure in relation to the Inland Waterways. The recommendations are in relation to maintaining and developing deeper stretches of river for year-round navigation, as well as to relax restrictions for vessels in relation to river–sea movement. In addition, the recommendations also include better facilitation with regard to the movement of goods to neighbouring countries.

Port-led developments

In March 2018, a revised Model Concession Agreement was approved to make port projects more investor-friendly and make investment climate in the sector more attractive. In terms of maritime cargo handled in the country, major ports registered a growth of 4.77 per cent during FY18 at 680 million tonnes.

Project UNNATI has been started by the government of India to identify the opportunity areas for improvement in the operations of major ports. Under the project, 116 initiatives were identified out of which 89 initiatives have been implemented as of August 2018.

The Ministry of Shipping has initiated 'Project Green Ports', which focuses on sustained growth from an environmental perspective. It aims to install 160.64 megawatts of solar and wind-based power systems at all the major ports across the country.

To improve port–rail connectivity, the Ministry of Shipping set up the Indian Port Railway Corporation Limited (IPRCL) to link all ports to the railway network across the country. The IPRCL is currently conducting a feasibility study for implementation of seven projects connecting various ports. The projects are deemed to be implemented by relevant central ministries, state governments, ports and other agencies through public–private partnerships. Around 20 projects were taken up for consideration across eight major ports, out of which 11 projects total US$1.13 billion.

India has also moved towards using technology and other digital platforms to simplify processes. Transfer of conventional activities to digital platforms, use of technology for moving cargo and simplification of processes have been done to promote business and facilitate ease of doing business. Steps taken include the following:

  1. RFID system installed in 11 major ports to enhance security, remove bottlenecks for seamless movement of traffic across Port gates. The RFID system automatically identifies the trucks and drivers without the need to stop at the port gates for manual checking.
  2. DMICDC's logistics databank system for tracking and tracing movement of EXIM containers in the major ports, thereby enabling the consigners and consignees to track the movement of the containers from portal.
  3. Direct port delivery and direct port entry enable direct movement of containers from factories or port without intermediate handling requirements, thus saving costs and time.
  4. Installation of drive-through container scanners to save time at major ports.
  5. Reducing paperwork through issuance of e-delivery orders, e-invoice and e-payment across all the major ports. Digitisation of processes has considerably reduced the processing time.
  6. Upgradation of the centralised, web-based PCS to provide global visibility and access to the central database to all its stakeholders through internet-based interfaces.

Aviation

The civil aviation industry in India has emerged as one of the fastest growing industries in the country during the last three years. India is currently considered the third largest domestic civil aviation market in the world and is expected to overtake the UK to become the third largest air passenger market by 2024. India's passenger traffic grew at 16.52 per cent year on year to reach 308.75 million in FY18.

Recently, the FDI regulations have been relaxed to permit foreign airlines to invest up to 49 per cent in the paid-up capital of Air India. Such investment should however be subject to, among others, the condition that the investment should be made under the government approval route and the 49 per cent limit will subsume FDI and Foreign Institutional Investor's or Foreign Portfolio Investor's investment.

The first Global Aviation Summit 2019 was held by the Ministry of Civil Aviation in collaboration with the Federation of Indian Chambers and Commerce Industry on 15–16 January 2019 in Mumbai, Maharashtra. The Summit focused on the celebration of 'Flying for All' and to provide a platform to the aviation fraternity to showcase the challenges of the sector in the newly developing growth spots, as well as to understand how the technology-driven innovations will change air travel in the future.

iii Trends and outlook for the future

Shipping

The government of India aims to make the country the first in the world to operate all 12 major domestic government ports on renewable energy. The government plans to install almost 200 MW wind and solar power generation capacity by 2019 at the ports. The energy capacity could be ramped up to 500 MW in future years.

Increasing investments and cargo traffic points towards a healthy outlook for the Indian ports sector. Providers of services such as operation and maintenance, pilotage and harbouring and marine assets such as barges and dredgers are benefiting from these investments.

Coastal shipping is being encouraged by the government as it is expected to drastically reduce the cost of logistics. Coastal shipping has been growing faster than overseas trade shipping and is expected to continue its growth voyage over the next five years. As per government data, Indian ports handled 234 million tonnes of coastal trade cargo in 2017–18, recording a growth of 16 per cent over the previous year. The coastal trade cargo has grown at an average of 14.2 per cent annually between 2014 and 2018. Benefits offered to coastal shipping currently are:

  1. reduced GST on bunker oil for vessels used for coastal trade;
  2. 40 per cent discount on cargo and vessel related charges;
  3. 80 per cent discount given on vessel and cargo related charges for two years to Ro-Ro vessels used for transportation of vehicles;
  4. priority berthing of coastal ships without any charge with the introduction of green channel clearance for faster evacuation of coastal cargo at major ports;
  5. allowing the reimbursement of freight subsidy on primary movement of subsidised urea; and
  6. development of coastal shipping is dependent on last-mile connectivity for efficient movement of cargo from ports to the industrial units. Measures being taken under Sagarmala project are expected to address these issues.

The cruise industry is expected to generate both employment and foreign exchange if the right infrastructure is provided to this sector. The government has introduced the following steps to attract cruise ships to Indian shores:

  1. port charges have been reduced to US$0.35 per Gross Registered Tonnage for first 12 hours of stay, and these charges will stay until 3 November 2020;
  2. foreign flag cruise ships carrying passengers can call at Indian ports without obtaining a licence from the DGS until 5 February 2024; and
  3. cruises with Indian ports as their home port will not be levied charges for priority, ousting and shifting.

As a result, the number of cruise vessels visiting the five major ports (Mumbai, Goa, Mangalore, Cochin and Chennai) has increased by 75 per cent in 2017–18 versus 2014–15. The number of cruise passengers has increased from INR 82,600 in 2013–14 to INR 190,000 in 2017–18.

Aviation

In a recent International Air Transport Association report, India has been appraised for being the world's fastest growing domestic aviation market. As per the report, India is expected to be the third largest aviation market by 2025, in volume. It has been predicted that the Indian market would be catering for nearly 478 million passengers by 2036, which would bring the sector into its booming stage. Such trajectory growth has mostly been fuelled by favourable government policies and initiatives such as UDAN and NextGen Airports for Bhasat (NABH) Nirman, which aim to connect 56 unserved airports and 31 unserved helipads. However, in contrast to such encouraging predictions, the Centre for Asia Pacific Aviation has predicted a consolidated industry loss of approximately US$460 million in financial year 2019. Some of the major airlines in India such as Indigo and Jet Airways have been found to be struggling in debt reduction and have reported losses in multiple quarters of the financial year. Various airlines have also been delaying accepting possession of new fleet and have reported higher interest payments for such rescheduling.

India's aviation industry is largely untapped, with huge growth opportunities, considering that air transport is still expensive for the majority of the country's population, of which nearly 40 per cent is the upwardly mobile middle class. The industry stakeholders should engage and collaborate with policy makers to implement efficient and rational decisions that would boost India's civil aviation industry. With the right policies and relentless focus on quality, cost and passenger interest, India would be well placed to achieve its vision of becoming the third-largest aviation market by 2025.


Footnotes

1 Shardul J Thacker is a partner at Mulla & Mulla & Craigie Blunt & Caroe.

2 2002 Supp 2 Bom CR 864.

3 Peninsula Petroleum Ltd v. Bunkers on Board the Vessel, M.V. Geowave Commander 2015(3) Bom CR 693.

4 Appeal No. 319 of 2015 by an Order of 5 May 2017.

5 Commercial Notice of Motion (L) No. 1392 of 2018 in Commercial Admiralty Suit (L) No. 20 of 2018 – Order dated 25 September 2018.

6 Bombay High Court 17 September 2018.

7 SP.JC 1 of 2018 – 10 August 2018 – Kerala High Court.

8 CIT v. Trans Asian Shipping Services (P) Ltd (2016) 8 SCC 604.

9 Union of India v. Sancheti Food Products Ltd (2016) 3 SCC (Civ) 390.

10 Petromarine Products Ltd v. Ocean Marine Services Co Ltd (2015) 7 SCC 229.