A proposed move by the Centre to abolish the Right of First Refusal (ROFR) clause for transportation of Indian cargo by Indian-flagged vessels — the only benefit available to Indian shipping companies — is threatening the existence of the domestic shipping industry.
Anticipating a bleak future, Indian shipping companies — which have a combined fleet of 1,372 ships with a total capacity of 12.35 million Gross Tonnage (GT) — are mulling over de-registering their vessels from India and flag them in tax havens of Panama and Bahama to survive and compete with foreign lines.
Having recently relaxed norms benefiting foreign shipping lines, the government is now preparing ground to do away with the ROFR clause which ensures Indian-registered ships carry Indian bulk dry/liquid cargo of Indian public and private sector companies at the lowest rate quoted by a foreign shipping line by matching the price. Thus, while it does not add any extra cost to the importer or exporter, it provides assured business to the national fleet at a rate quoted by a foreign line.
Multiple taxes
Currently, 92% of India’s export import trade is carried by foreign flag ships. And the 8% that is assured to Indian ships is likely to go if the ROFR is scrapped. This benefit is provided since foreign flag vessels do not pay any tax in India while Indian companies are costlier since they have to pay multiple taxes.
In 2017 alone, Indian shipping companies have made investments of around ₹4,700 crore in assets in anticipation of business. All this investment is at stake, said ship owners.
Recently, the Union Shipping Ministry issued orders that permitted foreign flag vessels to transport export import-laden containers, agri products, horticulture, fisheries, animal husbandry commodities and fertilizers between two or more Indian ports without obtaining a licence from the Directorate General of Shipping. All this means is that an Indian flag vessel, if available, has lost the opportunity of doing this business.
Indian shipping companies said this move is being contemplated without any consultative process.
Also, the integrity and security of transportation of critical cargo in times of war or economic sanctions seem to have been completely ignored, they said.
“The proposal to remove ROFR is not only retrograde but also flies in the fact of data which shows that such a policy has aided growth of Indian flag tonnage with beneficial freight rates to consumers – after all, Indian vessels only match the lowest rate of the foreign flag,” Anil Devli, director-general, Indian National Shipowners’ Association, said.
“It is sad that an industry which employs close to 30,000 persons with assets of approximately ₹68,000 crore and whose contribution to the exchequer is in excess of ₹8,000 crore in a year is being forced to shut down needlessly,” he added.
“The right of first refusal is the only incentive to the Indian flag, which suffers from many disadvantages versus foreign flags. It is also an incentive that comes at no cost to anyone. Removal of ROFR will strike at the very foundations of Indian shipping,” said G. Shivakumar, executive director, The Great Eastern Shipping Company Ltd.
The government’s move to deny Indian shipping companies the ROFR will put the already-battered firms at a disadvantageous position against foreign liners, said Ranjit Singh, executive director & CEO, Essar Shipping.
Mr. Singh added: “This untoward move will push Indian ship owners to immediately plan for de-register their ships from Indian Register and flag them out of India as it would reduce their cost of operations.”
‘Strategic blow’
Analysts said de-registering of vessels from the Indian flag will be a strategic blow to Indian security as merchant naval fleet always acts as a second line of defence for coastal security.
However, some experts feel the objective of the government is to shift cargo movement from railways and roadways to the waterways to reduce logistics costs and ensure faster movement of cargo, which the domestic lines have failed to deliver.
“This move should not be looked at in isolation. The government wants to build volumes and see a large-scale shift of cargo movement to waterways which foreign lines can provide as we do not have a strong domestic shipping industry,” said Jagannarayan Padmanabhan, director, CRISIL Infrastructure Advisory.
