The ministry of surface transport (MoST) has ordered investigations for possible violations of the bare boat charter guidelines by some domestic shipping companies. Official sources said some domestic shipping companies had sold vessels to Special Purpose Vehicles based in Mauritius and, in turn, leased them back through bare boat charters.
The bare foot charter is permitted only for acquiring tonnage on a deferred payment basis, the sources said.
Instead, some of the shipping companies had actually sold the domestic tonnage to shell companies based in Mauritius and entered into bare boat charter arrangements with these shell companies. The bare foot charter is basically a lease arrangement in which the vessel acquisition is paid for through rentals earnings, just like lease rentals. By resorting to these kinds of deals, the vessel owners benefited from the domestic manning scales.
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However, instead of increasing domestic vessel tonnage, these companies were actually contributing to their decrease.
These vessels are usually deployed on coastal routes and benefit from the preferential cargo reservations allowed for domestic owned vessels, mostly through time charters with government agencies both for tankers and dry bulk carriers.
This is despite the fact that during the tenure of the bare foot charter, the vessels fly the flag of the lessor. The vessels are allowed to fly the flag of the lessee only at the end of the bare boat charter period. Besides, sources said, these shipping companies were causing an outflow of foreign exchange through charter rentals, whereas shipping companies are supposed to serve as foreign currency earners. These shipping firms were also indulging in arbitraging in foreign currency through such methods.
This is because these firms, by setting up shell firms, were able to bypass the country's external commercial borrowing (ECB) guidelines, which have a minimum maturity profile of five years. Through the shell companies, the shipping companies were able to raise funds at shorter maturities and also at lower rates. The bare boat charter period was above five years , which conformed to the five year tenor prescribed.
The difference between the original rates and the bare foot rental rates accounts for the profits of the shipping companies.
ECBs are now available to firms based outside the country at rates lower than those for domestic companies. Domestic firms' ECB/ bare boat rentals are 400-450 basis points above the London Inter Bank Offered Rates (LIBOR). One of the reasons MoST is banning foreign flag vessels from operating on coastal routes is to tighten the application Section 406 and Section 407 of the Merchant Shipping Act, 1958. Under these sections, the director-general of shipping's permission is mandatory for chartering vessels for operation from a domestic port to a foreign port.