• PAGE ONE
• INDEX
• HOME

Flag conversion clause for Petronet LNG shipping deal -- Bankers seek norm relaxation

P. Manoj

NEW DELHI, Feb. 21

GLOBAL investment banks looking at funding the proposed $400 million LNG ship building deal for Petronet LNG Ltd (PLL) have said that `one year post-introduction of tonnage tax' would be an impossible time frame for converting the vessels from foreign fl ag to Indian flag.

PLL had stipulated in the bid documents that the shipping consortia owning and operating two LNG tankers for transporting 7.5 million tonnes per annum of LNG purchased by PLL from Qatar's RasGas would have to convert their vessel flag from foreign to Ind ian flag within one year of the introduction of the tonnage tax, which is currently under the consideration of the Centre.

The stipulation was in line with the proposed draft LNG shipping policy which recommended the registration of the LNG tankers under Indian flag as per the provisions of the Merchant Shipping Act, 1958, within one year from the date when the tonnage tax c oncessions were introduced.

However, bankers are of the opinion that this stipulation to switch over to Indian flag by a back-stop date of one year from the applicability of the tonnage tax should be further made subject to lender and regulatory approvals coming through.

ANZ Investment Bank has fired the first salvo in this regard by drawing the attention of the Government to the impracticability of complying with such a condition.

It has also submitted a request to PLL for relaxing this clause, Government sources said.

In the absence of specific fiscal incentives to promote LNG shipping in the country, PLL has allowed the successful shipping consortia to initially register the vessels overseas under a foreign flag and then switch over to Indian flag within a year of th e introduction of the tonnage tax as and when it is notified by the Union Government.

The flag conversion clause implies that the ship owning and operating company registered abroad would have to set up a new company in India that would take over the assets and liabilities of the foreign company.

Bankers feel that the transfer of equity held by a foreign company into an Indian company would require the approval of the Foreign Investment Promotion Board (FIPB) as well as the Reserve Bank of India (RBI).

Similarly, the transfer of debt from a company registered overseas into an Indian company would need clearances from the External Commercial Borrowings (ECB) division in the Finance Ministry and the RBI.

The bankers apprehend that the flag conversion clause may be difficult to comply with since all these approvals may take more than a year to come through, or worse, it may not come at all if it is not in line with the policy of the Government relating to these issues.

The lenders have, therefore, suggested that the one year time frame set by PLL for converting the vessel flag should be removed and made subject to all approvals falling in place.

A clarity on this issue is also crucial for PLL to ensure that there are no hiccups arising from lender/regulatory approvals during the flag transition period that would challenge seamless continuation of the charter party agreement between the ship owne rs and operators and PLL.

PLL would hire two LNG tankers of 138,000 cubic metre capacity each on time charter basis from the shipping consortia for transporting the LNG cargo from Qatar for 25 years for its regasification terminal proposed to be set up at Dahej in Gujarat.