Govt's divestment plan for Shipping Corp is not going to be easy sailing

An asymmetric tax policy and the Navaratna's own fleet quality could make potential buyers wary

In December last year, the government invited expressions of interest to divest 63.75 per cent in Shipping Corporation of India (SCI) by February 13, a deadline that was postponed to March 1. The extension was a result of the SCI management’s inability to appoint a consultant to demerge non-core assets and restructure the company. But once that is done, it is still not going to be easy for this 71-year-old Navaratna to find a new owner.  

The potential icebergs ahead are the ab­se­nce of a robust shipping policy — of which the tax regime is a crucial part — and the company’s not-so-attractive fleet quality.

Indeed, an asymmetric Goods & Services Tax (GST) policy that inadvertently favours foreign shipping companies could well sink SCI’s disinvestment.  “Discrimination in GST on outbound charters is one of the major hurdles and makes shipping services for Indian shipping companies expensive and uneconomical,” said Aditya Bhattacharya, joint partner, Lakshmikumaran & Sridharan Attorneys.

The problem is this. If an overseas consigner appoints an Indian shipping company for cargo imports, GST is levied at 5 per cent since the place of the supply of services is the destination of goods, which is in India. On the other hand, if the overseas consignor appoints a foreign shipping line for providing the same service, GST is not applicable as the shipping company is not registered in India for GST.

In the case of imports, though sales tax have been subsumed by GST, there are several pending law suits which involve the entire chain from shipping companies to agents to traders and other stake holders.

“Shipping companies coming to India with goods fear being attacked by the sales tax and customs department, delaying vessels at Indian shores which means costing them the trade,” said Bhattacharya.

So, foreign shipping firms that may be potential buyers will not just evaluate SCI’s assets, but also the policy environment. As a senior official of a French shipping line with a presence in India asked, “When there are tax havens such as the Bermuda, Singa­pore or Marshall Islands, why would any global shipping company come to India?”

“That’s not all. In India, the crew on an India-flagged ship is subject to income tax against the foreign-flagged vessel crew, which enjoys zero tax on its income. This makes hiring difficult on India-flagged vessels,” the official added.

Industry experts believe only a multinational will have the financial muscle to buy SCI. Although domestic shipping companies such as Great Eastern Shipping, Essar Shipping and Seven Islands have a sizeable presence in Indian waters, foreign players such as Maersk, DP World and France-based CMA-CGM have been trying to increase their presence in India for the last few years.

Although SCI accounts for the largest share of Indian shipping tonnage at 24.39 per cent, India is a small player. The country owns less than 2 per cent of global tonnage. Also, Indian fleets are old — Directorate General of Shipping figures show that about 42 per cent of the fleet is 20 years old and 12.5 per cent is 16-20 years old against a global average age of 15 per cent.

Low charter rates have also been impacting the company’s profitability in recent years principally owing to oversupply of vessels (see table). In its annual report, the company stated that reduced global economic activity may “destroy” oil demand for the near term since crude inventory build-ups could remain at high levels for a prolonged duration. The tanker business accounts for the bulk of SCI’s revenues — about 66 per cent in FY20. Of its fleet size of 60 vehicles, 20 are tankers and 13 are product vessels and one is a gas carrier.

The company's bulk segment too has been bleeding mainly because of the high supply of ship amid weak freight rates. According to SCI’s report, bulk revenue accounted for 13 per cent of standalone revenue of Rs 4,479.33 crore. Higher operating costs, weaker import demand in China and a supply-side influx adversely affected the dry cargo market, the annual report stated.

“Any company that already has a good fleet size and is willing to expand should look at SCI and not someone who is looking to foray into the shipping business via the SCI acquisition. Given that SCI’s bulk cargo segment is in bad shape, it does not make sense to enter the shipping business via the buy,” said a senior analyst with a rating agency, on the condition of anonymity.

SCI also operates in a relatively undeveloped domestic environment. “India does not have a vibrant shipping industry, and it has not been utilised to the full potential. A new buyer for SCI can play a major role in developing the shipping sector,” said Jagannarayan Padmanabhan, director at Crisil Infrastructure Advisory.

Coastal cargo, for instance, offers huge potential but just 3-4 per cent of freight uses this mode of transport. “Coastal cargo movement has the potential to grow to 10 per cent in just three to five year, provided ‘patient capital’ is invested,” said Padmanabhan.

This may change with the government making significant investments to increase the capacity of Indian ports. The government has identified 189 modernisation projects under the Sagarmala programme invo­lving an investment of Rs 1.42 trillion by 2035.

But the question of whether SCI can be the vessel for such ambitions remains. Rating firm ICRA recently stated that the company enjoys high financial flexibility due to its sovereign ownership, but its cash flow mismatches have led to an increase in reliance on short-term borrowings. This sovereign backing would no longer be there once the company is privatised.

Apart from the dramatically curtailed oil demand, another source of SCI revenues — coal imports — may also dry up. The declining cost of renewable energy, plus Coal India continuing its focus on increasing its domestic production, “might adversely affect the seaborne coal import trade to India”, the company said.

In short, the government’s divestment plan for SCI is not going to be easy sailing.