Bare-Boat Charters To Stay For Now

The ministry of surface transport has turned down the Indian National Shipper Association's demand for immediate suspension of approvals for ship acquisition on a bare-boat charter-cum-demise method.

The association claims foreign shipping operators are taking advantage of this financing structure to corner domestic cargo preferences reserved for Indian shipping companies.

The import and export of petroleum and dry bulk goods are reserved for domestic carriers unless there is a shortage of vessels.

The bare-boat charter method of ship financing involves a structured lease, the terms of which specify that the shipowner relinquish all rights over the vessel during the lease period.

At the end of the lease period, the vessel is transferred to shipowner.

Shipping companies have adopted the bare-boat charter for many years, since it defers the huge payment for the vessel. The method entails floating a special purpose vehicle that charters the vessel.

The charter rentals, either on a voyage or on a time basis, then become the lease rental payments to the shipowner.

While rejecting the association's demand for an immediate freeze on bare-boat charter deals, ministry sources said here that the proposal would have to be examined in detail.

"We need feedback from companies that have resorted to bare-boat charters before taking a decision," sources said.

Around two months ago, the ministry had conceded an association demand that foreign equity stake should not be allowed to exceed 49 per cent in the special purpose vehicles floated for bare-boat charters.

Around 30 companies come under the Indian National Shipper Association.

The companies include Shipping Corporation of India, Great Eastern Shipping and Chowgule Steamships Ltd, and companies which own vessels like Reliance Industries and Larsen & Toubro.

The association, in a meeting with ministry officials last week, said despite tightening bare-boat charter guidelines, ownership is still ensured to foreign operators with as less as 26 per cent foreign equity, which allows the operator to block resolutions.

Even with this level of equity, foreign companies can still set up special purpose vehicles domiciled in India and avail of cargo preferences.

Shipping companies have also pointed out that bare-boat rental rates have come down because of a downturn in international shipping and crashing freight rates.

Therefore, foreign companies can offer bare-boat charter at lower rates to their domestic special purpose vehicles, as low as 100 basis points above the London Interbank Offered Rate (Libor) compared to 400 basis points for Indian companies.

Consequently, the charter rental rates offered by these special purpose vehicles are significantly lower than Indian companies in view of the low costs of vessel acquisition.

Several foreign companies, especially tanker companies and container transporters, have resorted to such bare-boat charter deals to take advantage of the domestic cargo reservation and getting into time charters with Indian shippers at low rates.

Several association members said that such methods of funding had actually led to an outflow of foreign exchange resources both as lease rental payments as well as dividend payments to foreign parents.