Indian shipping firms are threatening to “flag out” and register in foreign territories if the government removes one of the last few protections that they still enjoy. Great Eastern Shipping and Shreyas Shipping —two of the largest private shipping lines in the country—are mulling the option of moving to more tax-friendly jurisdictions as the government gradually removes these benefits.
In May, a ministry of shipping order eased what is called the “cabotage” rule, which allowed only Indian shipping lines to carry export-import containers for trans-shipment on local routes. Now, foreign-flagged ships are also allowed to pick up containers along the Indian coast to a trans-shipment hub (like Singapore) or return empty containers to these ports without any restrictions.
The shipping industry has been informed by the ministry that it also intends to scrap the right of first refusal (RoFR) that is given to domestic fleet owners that ensures a supply of local export-import oil and bulk cargo to them at the lowest bid price.
The provision of RoFR gives Indian firms the opportunity to match the lowest rate offered by a foreign line to carry any cargo that needs to be shipped from an Indian port, either for coastal or exim shipping. The Indian carrier which bid the lowest is given an opportunity to match the lowest foreign bid.
While the RoFR is always available to the Indian line, it may not always exercised. For instance in 2017, only about a third of crude oil imports made by Indian PSUs were carried on Indian ships, despite the RoFR existing on 100% of the cargo.
Indian shipping lines argue that the RoFR provision ensures Indian ships had a supply of cargo while not compromising on the cost that the consumer had to pay.
Anjali Kumar, general manager, corporate finance and investor relations told, The Great Eastern Shipping Co. Ltd, said RoFR is not negative for either the charterer or the consumer, while offering a level of protection to local shippers. “It’s a form of cargo support. But all shipping companies were recently informed by the ministry that this is coming, though timelines have not been mentioned. If I have no support at all, we are going to keep my ships out, especially when we are also bound by hiring only Indian crew, we were subject to GST—these are restrictions that foreign carriers don’t face. We would rather flag out our ships and then bid in India as a foreign shipping line than remain flagged in India. This is not a decision we have taken yet, but this (abolition of RoFR) is important enough for us to think very hard about where we are flagged. “
The Great Eastern Shipping Co. Ltd owns 49 ships in India.
After the cabotage rules were eased, Shreyas Shipping & Logistics Ltd, India’s largest container ship operator, told media that it would consider flagging out its ships as well. Shreyas runs 11 container ships and carries 90% of exim transshipment along the Indian coast.
An industry expert who did not want to be quoted said the government appears to be making these changes because the local shipping industry has not really grown over the last decade. “We only have 3-4 big players. If the number of players is higher, then a charterer can transfer goods at lower costs. But the number of shipping lines is limited. How these changes will pan out, though, remains to be seen -- especially because shipping is a highly protected industry in even the most developed countries.” China and the US have the highest cabotage restrictions, with foreign-flagged ships not allowed to carry coastal cargo in these waters.
Anil Devli, CEO, Indian National Shipowners’ Association (INSA), the industry body that represents the interests of local ship owners, told that, “If you do a voyage cost analysis, operating costs for Indian lines are 19% higher than for foreign lines, because of the higher cost of financing, bunker fuel, training costs, tax on seafarers’ wages, GST etc. Despite this difference, we operate in India because of the RoFR benefit.”
“In fact, we have data from 2017 that shows that for crude oil cargo, freight rates were far lower because of the presence of an Indian flag. A foreign flag was forced to bid lower (making it unsustainable for an Indian flag to exercise RoFR) even if it meant a smaller margin for them. The presence of a national fleet ensures that you have better freight rates. We have no data if doing away with RoFR will make freight rates lower. And regarding competition, 92% of all Indian freight is already carried by foreign flags—how many more do you need to bring in? It’s not like in China where you only have access to Chinese cargo under a Chinese flag,” he added.
INSA represent 42 shipping lines and members have assets worth 68,000 crore, Devli said. “We’ve raised this issue with shipping minister, because we had earlier been assured that nothing would be done to harm our interests. We have written to the PM; our unions have written to the ministers as well and sought meetings because their job prospects will be hampered.”