Nov 27, 2020

International Financial Services Centre – Opportunities for Aviation Financing

International Financial Services Centre – Opportunities for Aviation Financing

The International Financial Services Centres Authority Act, 2019 (the “Act”) was notified by the Central Government on December 19, 2019 with an aim to provide for establishment of an authority to develop and regulate the financial services market in the International Financial Services Centres in India.

The Ministry of Finance, Department of Economic Affairs by way of notification dated April 27, 2020 established the International Financial Services Centres Authority (“IFSCA”) with Gandhinagar, Gujarat being notified as the place of head office for IFSCA.

All sections of the International Financial Services Centres Authority Act, 2019 have been brought into effect by way of notifications in 2020.[1]

Aircraft leasing as ‘financial product’

The Ministry of Finance by its notification dated October 16, 2020 (“Aircraft Notification”) designated aircraft lease, including operating leases, financial leases, and hybrid of operating and financial leases of aircraft, helicopters or engines or any other parts as ‘financial product’ under the Act. The same notification also notified Global In-House Centres as financial service to provide services relating to financial products in IFSC.[2] Units set up in IFSC can provide services through financial products which now also includes ‘aircraft leasing’.

The inclusion of aircraft leases as financial products creates huge opportunities for the aviation sector, and is the first step towards implementation of the recommendations of the Ministry of Civil Aviation – Working Group on Project Rupee Raftaar which suggested multiple reforms required to facilitate establishing a viable aircraft leasing market in India, especially in the IFSC.

Setting up units in IFSC

Units in IFSC can be set up and approved in accordance with the Special Economic Zones Rules, 2006 read with guidelines notified by the Reserve Bank of India (“RBI”), the Securities and Exchange Board of India and the Insurance Regulatory and Development Authority of India in this regard. The provisions of the Special Economic Zones Act, 2005 and the Special Economic Zones Rules, 2006 and the regulations made thereunder needs to be complied by IFSC units. Pursuant to the Aircraft Notification, financial institutions (as defined in the Act) set up in IFSC can now undertake aircraft leasing activities.

The Gujarat Stamp Act, 1958 has been amended to exempt IFSC units from paying stamp duty for incorporation, setting up, availing or providing services or acquisition of movable / immovable property in relation to aircraft / engine / helicopter leasing for 10 years from August 2020.

Applicability of FEMA

The Act prescribes that the powers of the RBI will be exercised by the IFSCA in so far as regulation of financial products, financial services and financial institutions that are permitted in IFSC are concerned.

RBI issued that Foreign Exchange Management (International Financial Services Centre) Regulations, 2015 (“FEMA IFSC Regulations”), which treats financial institutions[3] or their branches set up in IFSC. and permitted / recognised as such by the government of India or appropriate regulatory authority. as person resident outside India. Since financial institutions include companies and NBFCs, the benefit of the FEMA IFSC Regulations should also be available to IFSC units of Indian companies and NBFCs.

All such financial institutions are required to conduct business in manner as determined by the applicable regulator.

Pursuant to FEMA IFSC Regulations, the RBI also issued a scheme for setting up of IFSC Banking Units (“IBUs”) by Indian banks and foreign banks already having presence in India, which prescribes the broad contours and requirements for setting up IBUs in IFSC (“RBI IBU Scheme”). Prior permission of the RBI is required for setting up an IBU, which for regulatory purposes are treated at par with foreign branch of Indian banks. We believe airlines in India could explore possibilities for PDP financing through IFSC units, subject to end-use restrictions and applicable minimum average maturity period, prescribed for external commercial borrowings.

On November 18, 2020, the  the International Financial Services Centre Authority (Banking) Regulations, 2020 was issued to regulate various aspects of banking activities permissible in the IFSC which includes  inter alia, purchase of portfolios, factoring and forfaiting of export receivables and undertaking equipment leasing, including aircraft leasing. Therefore, clarity has been provided that banking institutions (Indian and foreign) can engage in aircraft leasing business through IBUs. With the benefits available to units set up in IFSC, this provides opportunities for Indian banks for trading and securitization of high value equipment like aircraft.


With exemption under section 10AA of the Income-tax Act, 1961 withdrawn for units set up in SEZ post 1 April 2020, IFSC units should get tax benefits including deduction under section 80LA  (100% of profits for 10 consecutive years out of a period of 15 years, beginning with the year in which the requisite permission for the operation of the IFSC unit was obtained) for income from aircraft leasing business.

The prospects of an aircraft leasing business in India are expected to be huge for a market which has nearly 1000 deliveries pending for scheduled operators. The synergies created by Indian lessor and Indian operators are likely to create mutually beneficial aircraft leasing structures.

Recommendations to further incentivize aircraft leasing business by IFSC units:

Implementation of Cape Town Convention (“CTC”):

The CTC has been ratified by India and entered into force on July 1, 2008, however it has not been fully implemented through domestic legislation. India has taken certain steps to implement the CTC provision which would permit an aircraft owner, lessor or lender to successfully de-register their aircraft by an “IDERA” within 5 days of making the application to the Directorate General of Civil Aviation, however due to lack of domestic legislation other provisions of the CTC may be subject to existing or future laws enacted by the Parliament. IDERA provisions will be applicable for units in IFSC as well. Implementation of CTC will be pivotal in the success of creating ease of business for aircraft lessors and financial institutions.

Stronger direct enforcement rights:

Currently, the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (“SARFAESI”) does not apply to any security interest created over an aircraft or any lease interest over an aircraft.[4] Therefore banks, lessor and financial institutions cannot use enforcement of security rights conferred by SARFAESI. Further, the concept of ‘self-help’ remedies recognised under New York law or English law does not exist in India and therefore, any hostile repossession of aircraft will need to intervention of courts. In order to create credit confidence for an Indian leasing market, implementation of stronger enforcement rights are recommended.


The amendment to the IFSC regulations are commendable and gives the necessary boost required for ease of doing business. There are a few legislations which need to be further strengthened in order to create creditor friendly regulatory environment which would promote a viable aircraft leasing and financing market in India.


Anand Shah, Senior Partner
Rishiraj Baruah, Senior Associate


[1] The notifications are dated April 27, 2020, August 21, 2020, and October 1, 2020.
[2] Global In-House Centres and its ambit of permissible activities are defined in International Financial Services Centres Authority (Global In-House Centres) Regulations, 2020. GICs can provide support services to non-resident entities only.
[3] Financial Institution includes (i) a company or (ii) a firm (iii) an association of persons or body of individuals whether incorporated or not, (iv) any artificial judicial person engaged in providing financial services or carrying out financial transactions. Explanation: ‘financial institutions’ also include banks, NBFCs, insurance companies, brokerage firms, merchant banks, investment banks, pension funds, mutual funds, trusts, exchanges, clearing houses,  or other entities by the Government or RBI.
[4] Section 31 (c) and (e), the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002.





These are the views and opinions of the author(s) and do not necessarily reflect the views of the Firm. This article is intended for general information only and does not constitute legal or other advice and you acknowledge that there is no relationship (implied, legal or fiduciary) between you and the author/AZB. AZB does not claim that the article's content or information is accurate, correct or complete, and disclaims all liability for any loss or damage caused through error or omission.