With a massive investment of Rs 80,000 crore required by 2012 to replace their ageing fleets, shipping companies are considering new instruments to raise funds.
These include setting up a shipping trust and a new financial tool similar to what is being experimented in Germany.
These alternative sources were recently recommended by ICICI Bank, following a high-level meeting between Managing Director KV Kamath and representatives of various shipping companies last year.
Shipping being a cyclical business which requires huge capital investment with long gestation period, shipping companies are finding it difficult to raise equity capital to expand their fleets. This has necessitated the need for some alternative tools of financing that would provide investors various incentives and concessions.
“Although 100 per cent foreign direct investment has been permitted in the shipping sector, so far it has not resulted in any worthwhile investment on acquisition of ships,” said S Hajara, the chairman and managing director of Shipping Corporation of India.
The shipping trust, which is a very popular structure practised in Singapore, has the character of both debt and equity. The trust can be set up by a sponsor company which would raise a combination of equity (in units to investors) and debt to purchase vessels.
These vessels are given on charter to shipping companies. The operating cash flow received by way of charter income is distributed as dividend to investors and unit holders.
These units can be traded in the Singapore Stock Exchange and the income received by the trust and its unit holders are exempt from income tax in Singapore.
According to a senior executive of an Indian shipping company, such a trust will allow domestic shipping companies to unlock value in their existing fleet and free up cash for new investment or working capital.
Similarly, KG Ship Financing, one of the prime drivers of the growth of German Shipyard, is another popular financial tool suggested by ICICI Bank.
This involves setting up a limited liability partnership firm with a limited liability company as a general partner and private investors as limited partners.
This firm purchases vessels and charters them to shipping companies. This structure gives ship-owners the opportunity to enter into long-term charters at a lower rate than at the spot market rates which are normally very high.
Shipping companies said this will help them reduce the burden on their balance sheets as they don’t have to incur heavy capital expenditure in acquiring vessels.
These proposals are currently being evaluated by the Indian National Shipowners’ Association, which will submit its final recommendation to the Union shipping ministry shortly.
Though there are no regulatory hurdles to these proposals, shipping companies feel that a blueprint for the Indian environment needs to be worked out so as to give benefit to the investors in terms of incentives and concessions.
By 2012, the Indian shipping industry will have to scrap around 44 per cent of its existing fleet strength following the International Maritime Organisation guidelines.
These guidelines stipulate that all single hull tankers should be replaced with double hull tankers by 2010 and all the vessels above the age of 25 years will have to be scrapped.
As such, Indian fleet with an average age of 20 years will have to replace nearly 4 million gross tonnage out of its current fleet strength of 9 million gross tonnage.
