An increased trade and an unprecedented rise in freight charges may have brought a big bonanza for the India?s shipping sector. But the boom story can turn upside down anytime. The lack of ports capacity and hinterland connectivity, an unfriendly financing regime, coupled with competition from shipping companies set up in tax-free havens?offering much lower cargo charges?are likely to put the Indian shipping sector in a spot of bother.
India has about 500 ships and a little over 9 million gross tonnes (GT) of cargo at present. Even to meet a modest target of 10 million GT, an investment of Rs 35,000 crore would be required to buy additional 30 ships. If the target is 15 million GT, the investment required would be Rs 80,000 crore to buy additional 609 ships and replace some 500 existing vessels.
The government?s broad estimates show that the shipping sector would need at least Rs 72,000 crore in the next five years for various capital additions. Considering a debt-to-equity ratio of 70:30, the requirement of equity is to the tune of about Rs 21,600 crore and Rs 50,400 crore in borrowing. For most of the companies, raising the equity component would be the easy part, but it is the borrowing that will turn out to be a major headache. Companies wanting to borrow face an underdeveloped domestic market to finance shipping companies, tight exposure norms of commercial banks, and a higher cost of external commercial borrowings.
Tenure of commercial loans is one of the biggest problems faced by companies. The life of a ship is about 20-25 years and the tenure of borrowing is fairly long-term, not less than 10 years. In the domestic market, there are not many banks that can provide such long-term loans due to the inherent mismatch of asset and liability in their books.
There is an incidence of 20% withholding tax in India applicable on interest on external commercial borrowings. Lenders do not agree to bear the impact of such withholding tax and, therefore, the burden finally comes on the borrower. This raises the cost of borrowing substantially.
Shipping is known for its cyclical nature. A period of rise in freight rates is always followed by a trough. Therefore, lenders put emphasis on good revenue margins which will be able to stand against the worst of the cycles and provide enough cash flow to the lenders for recovery of their debt. The banking system should be ready to lend to shipping companies even during downturn, taking into account future revenue earning possibilities, like in the case of other maritime hubs like Hong Kong and Singapore . The development of a financing system that is in sync with the cyclical nature of the shipping industry is very important.
Government support to develop an easy financing set-up is significant, considering the fact that 90% of India?s external trade in volume is through sea and only 13% of cargo originating from domestic shores is carried by Indian ships. This is mainly due to the relatively old age of Indian ships, with 50% of the fleet being over 20 years old in the dry bulk sector and 44% in the oil tanker segment. Also, around 374 are likely to be scrapped over the next five years when they cross the 25-year age limit.
The regulatory regime should be reviewed to dismantle any overhang of the previous licence regime. The government should introduce regulations compatible with international codes and practices. In this regard, a quicker and more responsive regulatory mechanism is absolutely necessary. Another area, shipping companies are worried about is the availability of manpower as more Indian professionals are opting for foreign flags.
At any rate, until some urgent changes are made, the policy for coastal shipping and ‘right of first refusal’ for cross trade should not be reviewed. Or else, the trade will shift increasingly to foreign players.
bipin.chandran@expressindia.com
