IndiGo has used Japanese equity financing to purchase two Airbus A320 family aircraft. This is being considered a sign of increasing confidence of global financiers in Indian laws and airlines. This is the first time an Indian carrier is financing planes with the support of Japanese equity funding, which is cheaper than other sources like debt. But it is difficult to take advantage of this because Japanese investors generally avoid taking too much risk. The Indian government recently enacted a law that is in accordance with the Cape Town Convention – an international agreement that allows lessors to easily repossess aircraft in the event of an airline’s bankruptcy.
What is JOLCO structure?
The transaction has been done through Gujarat International Finance Tech-City through a structure called JOLCO (Japanese Operating Lease with Call Option), which is a special economic zone where aircraft leasing entities get tax exemption. Under this model, Japanese investors such as enterprises and wealthy individuals fund aircraft with loans from Japanese banks. Then the planes are given on lease to the airline. Like any other finance lease, India’s largest airline IndiGo will have the right to purchase the aircraft at the end of the lease period.
Japanese law allows investors to claim depreciation allowance, which can be used to offset taxable profits. A person involved in the transaction said investors are willing to accept lower economic returns on their equity because a larger portion of their returns come from tax shields rather than purely from lease income. The person said that this arrangement allows airlines to get lower lease rates compared to traditional methods. IndiGo has launched a dedicated aircraft leasing company, InterGlobe Aviation Financial Services IFSC Pvt Ltd, at GIFT City.
These airlines have used JOLCO
JOLCO findings are typically only available to top-tier airlines, such as state-owned or high creditworthy airlines. British Airways, Singapore Airlines, Cathay Pacific, Qantas, Turkish Airlines and Air France are among the carriers that have used this route. For a long time, Indian Airlines was considered a risky bet by global lessors due to various bankruptcy and insolvency laws. This often increased lease premiums for airlines, increasing their operating costs.
Japanese investors got an opportunity
Ajay Kumar, managing partner of KLA Legal, a legal firm that advises global leasing companies, said in an ET report that JOLCO’s transaction through GIFT City has provided an excellent opportunity for Japanese investors to participate in India’s growing civil aviation sector. This also reflects reduced credit risk and increasing confidence in the GIFT City structure. Following GoFirst’s bankruptcy, which led to lengthy legal battles, leasing companies had described the country as a high-risk destination. In February, the government enacted new laws that allow airlines to repossess aircraft within 60 days of bankruptcy.
Jurisdictional risk significantly reduced
Experts said GIFT City solved the problem of the absence of a double-taxation treaty between India and Japan, which was seen as an obstacle for JOLCO to partner with an Indian airline. Lovejit Singh, partner at law firm Chandiok & Mahajan, said in an ET report that India’s full compliance with the Cape Town Convention has significantly reduced the jurisdictional risk and the strong credit profile of Indian Airlines has increased the possibilities for new methods of financing. GIFT City has been a facilitator for these new structures because earlier direct leasing from Japan to India was not very tax friendly.