Asialaw - Clarity for Corporate Counsel


Cabotage Regulations and India's Shipping Industry


Date: April 2007

 

India is a significant maritime nation: it has the largest shipping fleet amongst developing countries and ranks fifteenth worldwide in terms of tonnage. With approximately 95% of India's international trade by volume and 68% by value being conducted by sea, the presence of a strong national fleet exerts a moderating influence on the freight rates for export-import cargo, ensuring a competitive edge for Indian exports to the global markets.

A new shipping policy was initiated in 1990-91 to promote Indian shipping, with the objective of:

(i) reducing dependence on foreign shipping services;

(ii) safeguarding imports of essential supplies for India's economy;

(iii) reserving 100% coastal trade for Indian flag-bearing ships;

(iv) ensuring adequate shipping services to meet India's requirements for coastal trade, and

(v) improving the balance of payments position through import substitution and export of shipping services.

Policy reforms have been implemented in conformity with India's economic liberalization programme. Automatic approval is available for ship acquisitions, permitting shipping companies to retain the proceeds of sales of Indian ships overseas for new acquisitions. To promote greater coastal shipping, India's government has also relaxed the cabotage laws for container ships and lash barges, provided greater freedom to time-charter Indian ships to foreign shipowners and reduced the controls on freight.

Coastal trade

Under India's cabotage regulations, movement of coastal trade is reserved for Indian flag-bearing vessels. The opportunity for Indian vessels is significant, since the Indian peninsula has long coastlines and natural deep draft harbours. India has 12 major ports and 184 minor/intermediate ports, which are administered by the central government and state governments respectively. Coastal transportation of bulk and oil cargo through low-cost, safe and speedy vessels contributes significantly to India's economic growth.

Cabotage regulations

India's cabotage regulations, which restrict the operation of foreign vessels in Indian waters, are provided under the Merchant Shipping Act, 1958 (MSA).

Though Indian flag-bearing vessels must be owned only by Indian entities, foreign entities are permitted to invest up to 100% in Indian ship-owning and ship-operating companies, thus enabling foreign investors to obtain the privileges granted to Indian shipping companies. Since foreign investors can acquire shareholdings in Indian companies owning ships which fly the Indian flag, 100% overseas debt/equity financing will enable 100% control by foreign operators of Indian coastal trading companies.

The current trend is for foreign companies to acquire Indian subsidiaries of shipping companies, which buy Indian flag-bearing vessels. Such acquisitions are funded by the foreign holding company or the ships are transferred to the Indian subsidiary on the credit sale.

Indian regulations require Indian ships and foreign ships chartered by Indian shipowners to acquire trading licenses from the director-general of shipping (DG) before proceeding to sea.

Control is exerted over Indian ships by a licensing system which envisages that Indian ships or ships chartered by Indian citizens/companies are not permitted to be taken to sea from a port or place in India except with a license granted by the DG, and by issuing executive orders restraining the movement of ships. The DG may revoke or modify any license granted, subject to the licensee being given an opportunity to represent against such revocation or modification of the license.

Although by law a vessel owned by a foreign company may operate in India under a license granted by the DG, in practical terms, attaining a license is difficult inasmuch as the foreign company must establish that no Indian flag-bearing vessel is available which meets the specifications of the foreign vessel seeking the license. Moreover, the license is usually for a year or two and would have to be renewed, with similar conditions.

Assessment

The DG currently seems to be taking a liberal approach to granting licences to Indian shipping companies to charter high-tech vessels (such as liquefied natural gas carriers) and fly foreign flags to take advantage of the coastal trade in India. Initially such licenses were granted for a period of only one year, with a maximum of another year on a case-by-case basis.

Indian companies with a need to learn the technical operations of such high-tech vessels from foreign ship operators and managers have approached the DG for licences for a higher period, extending to almost 25 years. The DG now grants approvals of up to 10 years, subject to certain conditions.

The development of coastal shipping in India has been measured. Ship owners are reluctant to acquire dedicated coastal vessels due to impediments such as complex customs procedures, time-consuming port clearances, high manning scales at par with overseas shipping and poor port infrastructure.

The following policy measures need to be considered to develop coastal shipping in India:

(i) continuation of cabotage law supported by suitable fiscal and financial incentives;

(ii) earmarking of exclusive ports for shipping along India's coasts;

(iii) less stringent construction, survey, loadlines and safety requirements for coastal vessels;

(iv) review of minimum manning scales, and

(v) customs duty exemptions.

When properly implemented, India's regulations provide safe, reliable and cost-effective transportation options to shippers. Trade requirements demand that the laws be relaxed to periodically permit foreign flag-bearing vessels to conduct coastal trade in the absence of Indian vessels' availability. At the same time, an excessive relaxation of cabotage regulations could threaten domestic tonnage insomuch as it would open the door for foreign flag-bearing vessels to carry coastal cargoes and enter a market generally closed by most countries.

Cruise shipping

At the conclusion of the Indian government's ninth five-year plan in 2002, the prevalent market conditions for liner trade were depressed, necessitating the induction of tonnage into the liner sector. Subsequent to the adoption of the tenth five-year plan in 2003, the DG announced a five-year relaxation of India's cabotage regulations.

To promote cruise tourism, in the absence of Indian cruise ships, the shipping ministry has permitted foreign flag-bearing cruise vessels to call at more than one Indian port to sail without obtaining permits or licences from the DG, opening up the passenger liner sector to commercial development.

About the author

Shardul Thacker is a partner at Mulla & Mulla & Craigie Blunt & Caroe in India. He has extensive admiralty and corporate finance experience, having been involved in over 60 ship financing transactions, including for LNG vessels.

· India correspondent, Lloyd's Maritime and Commercial Law Quarterly.

· Contributes "India section" of:

­ International Maritime Law Handbook, (Kluwer)

­ Limitation of Liability (Griggs & Williams)

­ Admiralty Law (Martindale Hubbell Law Digest)

­ Time Bar in Reinsurance ­ "an International comparison" (Clyde & Co)

­ Cross-Border Security (Norton Rose/Buttorworths)