March 2006

Aircraft Leasing and Financing into India

1. Introduction
This note summarises a number of the principal issues and considerations for non-Indian lessors and financiers of
aircraft to Indian lessees. It has been prepared by the aviation finance team at Clyde & Co. and is based on our
transactional experience in India, which extends to the leasing and/or financing of 35 passenger aircraft for a number
of Indian carriers in the last 5 years.

For the purposes of this note, we have assumed a transaction structure involving the leasing of an aircraft (on an
operating or finance lease basis) by a non-Indian lessor to an Indian lessee, the lessor’s acquisition being financed in
part by non-Indian lenders (except in relation to paragraph 6, which covers pre-delivery payments financing).

Despite the rapid growth of the Indian aviation market in recent years, the Indian legal, tax and regulatory
environment continues to represent a challenge for lessors and financiers of aircraft – both at state and national level.
A variety of issues will present themselves to any non-Indian lessor or financier of an aircraft to an Indian operator.
These issues will arise in the context of:

• the leasing of the aircraft

• the making of lease and guarantee payments
• the security package

and are often magnified by the lack of clear authority and precedent in India.

2. Typical Issues
A “typical” range of considerations for any inward lessor or financier is likely to include:

• the fact that a withholding tax exemption must be obtained from the Indian Ministry of Finance in relation to
lease rental payments
• the fact that exchange control approval from the Reserve Bank of India will be required in relation to certain
lease / lease-related and guarantee payments
• the fact that Indian statutory law does not make provision for mortgages over aircraft
• the fact that traditionally written assignments of insurances are likely to attract significant stamp duty costs
• the likelihood that Indian stamp duty will apply in relation to a variety of the transaction documents. The
amount of stamp duty will vary from state to state and can be charged on copy documents that are brought
into certain states

3. Leasing of Aircraft

3.1 Ownership Interest

Registration It is possible record a lessor’s proprietary interest as the owner of an aircraft with
the Indian Directorate General of Civil Aviation (the “DGCA”) and this will be reflected on the aircraft’s certificate of
registration. As with a number of other aircraft registries (such as the UK CAA), such recordation will not however in
itself act as conclusive evidence of the lessor’s title to the aircraft (i.e. the DGCA does not operate as a title registry).
Apart from the DGCA filing, it is not necessary to take any other steps with any other Indian public authority so as to
record and/or perfect an owner’s interest in an aircraft.

Registration documents The type of documents to be submitted to the DGCA in connection with any
transfer of title and/or the issuance of the certificate of registration will be determined by the nature of the transaction:
new delivery; sale and leaseback; or sale of aircraft subject to existing lease. As the DGCA does not operate as a
title register, neither the underlying aircraft purchase agreement nor the related bill of sale will need to be recorded
with the DGCA. This means that there will usually be no DGCA-driven execution formalities (such as notarisation or
legalisation) associated with the title transfer documents.

Registration fees No registration fees are payable to the DGCA in connection with the recordation of an
ownership interest, although a nominal fee of 1,000 Rupees is payable in relation to the issuance of a new certificate
of registration upon change in aircraft ownership.

DGCA approvals Depending on the nature of the transaction, a variety of DGCA approvals might
be required. In the context of a transfer of title (except on delivery from the manufacturer), these are likely to include
a formal approval in relation to the change of ownership and, in the case of domestic operators, a formal approval for
the aircraft to be flown out of Indian airspace at closing.

Effective title transfer Indian law will generally recognise as effective an English law title transfer
pursuant to an English law aircraft purchase agreement and an English law bill of sale.

Sales tax and VAT Sales tax or VAT will apply if the aircraft is located in India at the time of title
transfer. The rate of VAT in most Indian states (where VAT has been introduced) is 12.5%; where VAT has not been
introduced, sales tax (instead of VAT) would apply at a rate between 8% and 15%. As such, it will invariably be
necessary to locate the aircraft in international airspace or in another tax-friendly jurisdiction at the time of title
transfer (although, depending on the particular circumstances, this might not always work to eliminate the tax risk).
Although the issue is unlikely to be of any real concern in the context of new Airbus or Boeing deliveries, it will
represent a significant concern in any transaction involving a transfer of title when the aircraft is already in service.
The issue is invariably of greater significance in the case of domestic operators, whose aircraft might never normally
be in the desired location for title transfer.

Stamp Duty As with a variety of other transaction documents, stamp duty might be payable in
relation to a sale and purchase agreement and/or bill of sale as a condition to its enforceability in India.

3.2 Lease Interest

Registration It is possible to record the lease agreement with the DGCA. Apart from the
DGCA filing, it is not necessary to take any other steps with any other Indian public authority so as to register a lease
agreement and/or record or perfect a lessor’s interest under an aircraft lease agreement.

Registration documents A copy of the lease agreement must be filed with the DGCA in New Delhi.
Although the copy document will not attract stamp duty in the State of Delhi, it will still be necessary to stamp the
lease agreement in the relevant state, being in all likelihood the state in which the airline is incorporated or has its
operational base (depending on the particular circumstances), prior to filing with the DGCA. Other than stamping,
there are no execution formalities (such as notarisation or legalisation) associated with the lease agreement as a
condition to its validity or enforceability. The DGCA will however often require that a notarised copy of the lease
agreement be filed with it (and the airline will usually arrange for this to be done).

Registration fees No registration fees are payable to the DGCA in connection with the filing of the lease
agreement, although a nominal fee of 1,000 Rupees is payable in relation to the issuance of a new certificate of
registration upon change in aircraft ownership.

DGCA approvals Depending on the nature of the transaction, certain DGCA approvals might be
required. In the context of the sale of an aircraft subject to an existing lease, these are likely to include a formal
approval in relation to the change of ownership and a formal approval for the continued leasing of the aircraft pending
the issuance of a new certificate of registration.

Stamping requirement Stamping is necessary so as to ensure that the lease agreement can be used in
the relevant Indian courts in case of need. Unless stamping is effected at lease commencement (with the lessee
agreeing to bear the related costs), a lessor or financier will inevitably only be agreeing to defer the cost to a date
when the lessee is unlikely to pay (e.g. when it is in default, in dispute or insolvent). Relying on the lessee’s covenant
to pay the stamp duty “as and when necessary” is likely to mean that the lessor’s or financier’s only option will be to
pick up the costs and tack them onto any judgment award. A possible solution may be to require a letter of credit or
increased cash security deposit to cover this risk.

Place of stamping Careful consideration will invariably need to be given to the right state or states in which to
stamp so as to balance the need to stamp against the cost of stamping. The provisions of the stamping legislation in
a number of the states relevant to Indian airlines are not necessarily clearly or consistently (as between states)
drafted, with the result that the applicable rate of stamp duty varies from state to state. The stamp duty cost is likely
to be manageable in certain states; in others (such as those which base the rate on the market value of the lease or
the market value of the aircraft), the cost is likely to be prohibitive and more inventive solutions will need to be found.
Alternative to stamping If the cost of stamping is prohibitive, a lessor or financier might decide to proceed
without stamping (especially if the airline operates internationally) on the basis that a judgment under an English law
lease agreement would be obtained in the English courts and then enforced (hopefully without the need for a
separate action) by the relevant Indian courts. In such circumstances, the lessor or financier would hope that the
Indian courts would not independently require the production of the lease agreement. It is separately to be noted that
Indian law will generally recognise as effective any choice of English law and any choice of English jurisdiction in a
lease agreement.

3.3 Cape Town Convention1

India has signed, but not yet ratified, the Cape Town Convention. Once ratified (and if India makes the relevant
declarations), lessors and financiers will be able to expect greater certainty in terms of recognition and registration of
their interests, the availability of self-help remedies (which Indian law does not currently permit), the ability to
repossess, the availability of interim relief and protection on airline insolvency. The transaction documents should if
possible nevertheless be drafted in an appropriate “Cape Town-compliant” manner.

3.4 Competing interests

The supremacy of a lessor’s (or a mortgagee’s) interest can be threatened for a variety of familiar reasons. These
will include:

• detention rights in favour of the Airports Authority of India for unpaid landing, parking, navigation and x-ray
charges
• arrest and sale rights in favour of the Customs Authority of India for unpaid import duties or for unpaid
inland air travel tax2
• governmental ability to detain and/or requisition aircraft under sections 6 and 8 of the Aircraft Act 1934 in
certain circumstances (e.g. if it is in the interests of public safety to do so)
• governmental ability to introduce legislation for the detention and/or requisition of aircraft under Article 352
of the Constitution in a state of emergency

Needless to say, it will be important for a lessor and/or financier to be able to agree appropriate monitoring provisions
with the lessee. This might include (a) a letter addressed by the airline to the Airports Authority authorising the
release of payment/account information to the lessor and/or financier (although there is no guarantee of a response
to any request made), (b) a similar letter addressed to the Customs Authority (although such a letter is only likely to
be or real value if inland travel tax is reintroduced) and/or (c) a regular certificate from the airline’s auditor confirming
that all relevant amounts have been paid in full within the applicable time limits (a lessee will often baulk at such a
request).

In terms of requisition risk, it will be advisable to assess whether or not state of registration risk is excluded from the
insurance coverage. Local advice might also be sought as to the level of compensation payable by the government
in the event of any state requisition.

3.5 Enforcement and Repossession

No self-help remedies In the absence of a consensual repossession of the aircraft following any lease
termination, an aircraft can only be repossessed through the courts - Indian law does not recognise self-help
remedies.

Foreign judgments A lessor or financier should if possible ensure that the lease agreement is
governed by a user-friendly law and that a familiar court system has jurisdiction (English law and English jurisdiction
being a common choice for leases to Indian airlines). The Indian courts will generally uphold any choice of English
law as the governing law of the lease agreement (and any related submission to English jurisdiction), unless the
choice is not made in good faith or is contrary to Indian public policy. The Indian courts will also generally recognise
a judgment obtained against an Indian lessee in the English courts, subject to the various familiar exceptions set out

1
Convention on International Interests in Mobile Equipment and the Protocol thereto on Matters Specific to Aircraft
Equipment (adopted in Cape Town on 16 November 2001), which came into force on 1 March 2006 in all of the
countries that have ratified the Convention to date (except Senegal).
2
The requirement that Indian airlines pay inland travel tax was suspended in January 2004; the legislation does
however allow its reintroduction and it is to be noted that the Customs Authority had a fleet-wide lien under the
suspended legislation.
in Section 13 of the Civil Procedure Code 1908 (the “CPC”). A viable mode of enforcement (especially if the airline
operates internationally) will therefore be for the lessor/financier to obtain a judgment in the English courts and have it
enforced (without the need for a separate action) by the relevant Indian courts.

Service of process The lessor and financier will need to ensure that any court proceedings can be
validly served on the lessee in the appropriate jurisdiction. This will, in the case of English proceedings, involve the
appointment of an agent to receive service of process on behalf of the lessee. Without a valid appointment, the
English courts would have discretion as to whether or not to accept jurisdiction. Although all participants are familiar
with process agent appointment letters in cross-border transactions, some care needs to be taken when selecting /
agreeing to the process agent.

Enforcement timeframe It is difficult to accurately predict the likely timeframe for the contested
repossession of an aircraft operated by an Indian airline. Observers suggest that it could take between 10 and 15
years to exhaust all legal avenues, including any rights of appeal. However, the usual yardstick for the granting of an
order for repossession (as a form of interim relief) is anything between 2 and 24 months.

Repossession It is likely that the following consents/approvals will be required so as to enable

the export of an aircraft from India following lease termination:

• an export permit from the DGCA

• an export certificate of airworthiness issued by the DGCA
• consent from the RBI
• consent from the Airports Authority of India
• consent from the Customs Authority of India

Even if the Indian courts were to grant a court order for repossession or enforce the judgment of an English court,
experience has shown that the relevant Indian authority might nevertheless refuse to issue the relevant consent or
approval. The DGCA, the Airports Authority and the Customs Authority would be more likely to be obstructive if there
are unpaid charges, duties or taxes (as detailed in paragraph 3.4). Refusals to consent are however open to
challenge by the affected lessor or financier, and have been successfully challenged in the Indian courts.

3.6 Other
As with any other jurisdiction, the airline and its operations will be regulated by the local aviation authority and other
relevant governmental bodies. The relevant civil aviation requirements will of course apply to the import, operation
and deregistration/export of the aircraft, but are beyond the scope of this note given that (generally speaking) the
regulations do not differ dramatically in nature and ambit from those applicable in other jurisdictions.

4. Lease and Guarantee Payments

4.1 Withholding Tax Exemption

Indian lessees currently benefit (under section 10(15A) of the Income Tax Act 1961) from a rental withholding tax
exemption issued by the Indian tax authorities, which is due to expire on 31 March 20063. Without the exemption,
withholding tax at a rate of up to 40% would apply in relation to lease rental payments to a non-Indian lessor (subject
to the terms of any applicable double tax treaties).

So as to benefit from the exemption, it is necessary to file the signed lease agreement with the Indian Ministry of
Finance, together with a letter requesting exemption under section 10(15A) of the Income Tax Act 1961. It is not
always possible to predict with any accuracy how long it will take to obtain the exemption, although waiting periods of
2-3 months are not uncommon. As a result, the parties will need to carefully plan the transaction timetable so as to
accommodate this potential time lag (unless the lessee is willing to take the risk associated with an application for
exemption following closing). Pending receipt of the exemption, the airline will have to deduct tax at the relevant rate
and pay it to the tax authorities (although this requirement might not always be consistent with practice).

3
T The exemption applies to all agreements executed before 1 April 2006 in relation to which an exemption is granted. The
exemption was renewed from its previous expiry date of 30 September 2005 and is likely to be further renewed (the Indian
Finance Minister indicated as much in his February 2006 pre-budget speech).
4.2 Exchange Control Approval
A lessor or financier will need to ensure that the lessee takes effective responsibility for the exchange control
approvals that are likely to be required from the Reserve Bank of India (the “RBI”) in relation to the lease agreement
and any payment guarantee that is provided by an Indian entity in the context of the transaction.
RBI exchange control approval is required for:

• any guarantee payments

• cash security deposits of more than US$1,000,000
• non-scheduled lease payments

and is not required for:

• rental and other scheduled lease payments

• cash security deposits of US$1,000,000 or less letters of credit in any amount

The relevant underlying legislation is the Foreign Exchange Management Act 1999 which regulates the payment of
foreign currency obligations in India.

Lease rental payments and L/Cs Subject to certain due diligence in relation to the relevant transaction (such as
confirming that all required DGCA approvals have been obtained), an “authorised dealer” in foreign exchange (being
in most cases the airline’s Indian banker) is permitted to allow a lessee to remit lease rental payments (and other
scheduled lease payments, such as maintenance reserve payments4) and open letters of credit in respect of aircraft
imported into India on an operating lease basis5. There is no limit on the amount of lease rentals that can be paid or
the amount in which a letter of credit can be issued without exchange control approval. It is to be noted that
approvals for finance leases must be sought on a case by case basis.

Cash security deposits Authorised dealers may permit airlines (other than certain public sector
companies and governmental entities) to remit up to US$1,000,000 per aircraft as a security deposit (for the payment
of lease rentals) to a non-Indian lessor in relation to the import of an aircraft / an aircraft engine on operating lease6.
If the cash security deposit exceeds US$1,000,000 per aircraft, then the lessor will have to provide the lessee with a
standby letter of credit or a guarantee issued by either (a) a foreign international bank or (b) an authorised dealer in
India supported by a counter-guarantee from a foreign international bank.

Other payments Without the permission of / a clarification from the RBI, an authorised dealer is
not permitted to allow a lessee to remit any other monies to a lessor (i.e. payments which are not specifically covered
by the Circulars referred to above). This will include (without limitation) the following non-scheduled payments which
are usually provided for in lease agreements: default interest, any amount payable pursuant to any gross-up provision
and any indemnity payments. We understand that RBI approval in relation to such payments can only be obtained at
the time the relevant payment becomes due (i.e. there can be no pre-approval).

Guarantees The approval of the RBI is also required for payments to be made under any
guarantee. It is to be noted that the guarantee cannot be executed until RBI approval has been obtained. To the
extent that the benefit of a guarantee executed in favour of the lessor is assigned by way of security to the financier,
the RBI approval must also cover the security assignment so as to enable guarantee payments to be made to the
financier.

5. Security Documents
This section of the note details the key considerations that are likely to be relevant in the context of the security
package that is to be taken in the context of a particular transaction. For these purposes, the security package is
taken to include security over the aircraft, the lease agreement and the insurances / reinsurances and also a
guarantee and deregistration power of attorney.

4
Maintenance reserves will usually be categorised as “supplemental rent” so as to bring the payments squarely within the
wording of the RBI Circular.
5
By virtue of A.P. (DIR Series) Circular No.24 dated 1 March 2002.
6
By virtue of A.P. (DIR Series) Circular No.13 dated 27 September 2005.
5.1 Indian Law Aircraft Mortgage
Indian statutory law does not make provision for mortgages over moveable assets (including aircraft). As such, it is
not possible under statutory law to take an Indian law mortgage over an aircraft. Indian courts do however recognise
mortgages over moveable property.

The interest of a mortgagee cannot therefore be registered with the DGCA under the provisions of the Aircraft Act
and/or the related rules and regulations7. Accordingly, no annotation of the interest of a mortgagee can be made on
an aircraft’s certificate of registration under statutory law in India (subject to the comments made in the following
sentence). The DGCA has however historically in certain instances annotated the mortgagee’s interest on an
aircraft’s certificate of registration.
8
Pledges of moveable assets are possible as a matter of Indian law . It is therefore conceivable that a financier could
take an Indian law pledge over an aircraft and appoint the airline as its third party aircraft possessor. However, the
prevailing view is that such an arrangement would be likely to complicate, rather than facilitate, the security
arrangements, since it would in all likelihood usually be easier to obtain a judgment outside India in relation to an
English law aircraft mortgage and enforce that judgment in India (as opposed to seeking to obtain judgment in
relation to an Indian law pledge in India).

5.2 English Law Aircraft Mortgage

The Indian courts will generally recognise the effectiveness of an English law mortgage to create a security interest in
an aircraft in accordance with its terms and will generally recognise a judgement obtained against an owner in the
English courts, subject to Section 13 of the CPC.

As Indian statutory law does not contemplate mortgages over aircraft, the mortgage need not satisfy any Indian
(being the lex situs) legal requirements, except that the document might be liable to stamp duty if (a) executed in
India or (b) if, while the aircraft is located in India, executed outside India and subsequently brought into India. If the
aircraft were located in an Indian state at the time of execution of the aircraft mortgage, the rate of stamp duty would
be the rate applicable in that state. Stamp duty concerns relating to the aircraft mortgage represent another reason
for the parties to seek to ensure that the aircraft is located outside India at closing.

Any enforcement action against an owner under an English law aircraft mortgage will of course be subject to the
airline’s rights under the lease agreement – and (consistent with financings for other airlines) it is likely that the airline
would expect this to be recognised either in any required quiet enjoyment letter or in the notice / acknowledgement of
security assignment.

It is not possible to register an English law aircraft mortgage with the DGCA or any other public authority in India
under Indian statutory law (and, as such, no fees are payable in India in relation thereto). It will however be advisable
to ensure that notice of any English law aircraft mortgage is given to the DGCA - no particular form for such
notification is required. Although there is no legal basis for the annotation of the mortgagee’s interest on the
certificate of registration, the DGCA will sometimes make such an annotation. It will also invariably be advisable for
the rights of a mortgagee to be recorded as clearly as possible in the lease agreement so that constructive notice of
the aircraft mortgage can be given as effectively as possible (the lease agreement being of course the document that
is filed with the DGCA).

Stamp duty might be payable in India in relation to the English law aircraft mortgage as a condition to its
enforceability (as noted above). No other taxes are payable in India in relation to an English law aircraft mortgage or
as a condition to its enforceability.

5.3 Lease Security Assignment

For a financed aircraft, the security package will (assuming underlying English law rights and obligations) usually
include an English law security assignment in relation to, inter alia, the rights of the owner under the lease agreement
and any related lease document (such as any guarantee).

7
If moveable property (including aircraft) were owned by an Indian company, that company would be required to register any
mortgage over such moveable property with the Registrar of Companies under the provisions of Section 125 of the
Companies Act 1956.
8
Pledges of aircraft will be familiar to those who have financed aircraft in other jurisdictions such as Belgium.
As with an English law aircraft mortgage, the Indian courts will generally recognise the effectiveness of an English law
security assignment to create a security interest in relation to the lease agreement and any other relevant collateral in
accordance with its terms and will recognise a judgment obtained against the owner in the English courts, subject to
the exceptions set out in Section 13 of the CPC.

Similarly, any enforcement action against the owner under an English law security assignment would be subject to
the airline’s rights under the lease agreement – and it is likely that the airline would expect this to be recognised
either in any required quiet enjoyment letter or in the notice / acknowledgement of security assignment.

It is not possible to register an English law security assignment with the DGCA or any other public authority in India
(and, as such, no fees are payable in India in relation thereto). However, it is recommended that notice of the
security assignment be given to the DGCA – there is no particular form for any such notification.

Stamp duty might be payable in India in relation to an English law security assignment or as a condition to its
enforceability in India. However, if the airline (and each other relevant Indian counterparty) acknowledges the rights
of the assignee under a separate acknowledgement letter (as would usually be the case in the context of a security
assignment), such letter would be liable to nominal stamp duty and in all probability the security assignment would
not have to be brought into India for enforcement purposes and would not have to be provided to the airline (and
each other relevant Indian counterparty). There are no particular legal requirements as to the form of such
acknowledgement letter.

5.4 Insurance Security Assignment

For a financed aircraft, a conventional security package would usually include an English law security assignment in
relation to certain of the airline’s rights in relation to the insurances and/or reinsurances.

The lessor’s and financier’s aim will of course be to ensure, through appropriate registration against the relevant
debtor, that the security is creditor- and insolvency-proof if at all possible. An assignment of insurances is registrable
against an Indian airline with the Registrar of Companies in the airline’s state of registration. As a condition to
registration, the assignment of insurances must however be stamped.

Subject to state by state variations, the amount of stamp duty is likely to be high if the assignment of insurances
operates as a mortgage (which would be the case for a traditionally drafted English law assignment of insurances,
which operates to transfer all of the airline’s legal title to the insurances subject to the airline’s equity of redemption)
or relatively low if the assignment operates as an absolute assignment or as a hypothecation (as categorised by
Indian law).

A hypothecation is the rough equivalent of what an English lawyer would call a legal charge, which is a security
interest over the asset that does not involve a transfer of title but which restricts the chargor’s ability to deal with the
asset and gives the chargee various remedies on enforcement.

The exception to the observation that an absolute assignment is likely to attract relatively low stamp duty is that an
absolute assignment of requisition proceeds might be treated as a conveyance and attract a much higher rate of
stamp duty (subject to legal debate as to the ascertainability of the future value of requisition proceeds).

In light of these considerations, it will in all likelihood be necessary to ensure that the assignment of insurances is
written either as an English law legal charge or as an Indian law hypothecation – either type of document would
generally be effective from the Indian law perspective.

There is no Indian law requirement that a percentage of the insurances be retained locally and not reinsured in the
international markets, although the Insurance Regulatory Development Authority does have a statutory power to
require that a minimum amount of the insurance cover is retained locally.9 We are not aware that such power has
been exercised. However, it is typical for a percentage of the insured risk to be retained by the Indian insurers (the
retained percentage varying but being typically between 10% and 20%). As a related point, it is to be noted that it is
currently not customary / market practice to require assignments of reinsurances from Indian insurers.

9
By virtue of the Insurance Regulatory Development Authority (General Insurance-Reinsurance) Regulations 2000.
5.5 Deregistration Power of Attorney
The DGCA has in most (if not all) instances refused to recognise the exercise of powers under deregistration powers
of attorney. The Civil Aviation Requirements also provide that, in the case of a dispute, the DGCA will only deregister
an aircraft pursuant to a court order.

It is however customary for the lessor/financier to require that the airline execute a deregistration power of attorney in
favour of the lessor and the financier as several attorneys. This (Indian law) document would have to be executed
under the airline’s company seal, notarised and stamped (nominal stamp duty of 100 Rupees will apply). It is
recommended that a copy of the deregistration power of attorney be filed with the DGCA. Once India has ratified the
Cape Town Convention (and opted in to the relevant deregistration provisions), deregistration powers of attorney that
are “Cape-Town compliant” will of course enable a lessor or financier to deregister and export an aircraft without
DGCA or other interference.

In addition, practice dictates that a lessor/financier will often request that the airline issue in its favour a letter
consenting to the deregistration of the aircraft in the relevant circumstances, which letter should be filed with the
DGCA. It is expected that this requirement will fall away once India has ratified the Cape Town Convention and
opted into the relevant deregistration provisions. Although currently of little or no legal effect, this letter and the
deregistration power of attorney are regarded as being of potentially persuasive value before the Indian courts.

5.6 Guarantee
The lessee’s obligations under the lease documents might be supported by a parent or other third party payment and
/ or performance guarantee. As noted at paragraph 4.2, the main guarantee-related issue will invariably be the
requirement for RBI exchange control approval prior to execution.

Documentary formalities also apply to guarantees executed by Indian entities – the guarantee must be stamped (at a
rate of 100 Rupees) and notarised so as to be enforceable against the guarantor.

5.7 Competing interests

The comments made at paragraphs 3.4 and 3.5 similarly apply in relation to a financier’s interest as mortgagee
and/or security assignee.

6. PDP Financing

6.1 RBI Exchange Control Approval

Although it is possible for a PDP financing to qualify for automatic exchange control approval under the RBI’s
Guidelines on External Commercial Borrowings (the “ECB Guidelines”), it is unlikely since a PDP financing will
normally not satisfy the following criteria for automatic approval:

• the term of the loan must be more than 3 years (for loans of less than US$20m) and more than 5 years (for
loans of more than US$20m)
• the “all-in-cost” (which includes interest, fees and expenses) must not exceed 200bps (for loans of less than
US$20m) and 350bps (for loans of more than US$20m), in each case above 6-month US$ LIBOR

It is to be noted that there are various other criteria set forth in the ECB Guidelines, and that a PDP financing might
not satisfy one or more of such other criteria. As a result, exchange control approval from the RBI will normally be
required in relation to a PDP financing.

If RBI exchange control approval is required, the parties will need to factor this into the timeline of the transaction,
including of course the anticipated timing of the payments to be financed under the manufacturer purchase contract.

It is to be noted that the RBI might attach certain conditions to any approval (including for example limitations as to
the amount of the all-in-cost).
6.2 Withholding Taxes
Further information
Withholding tax will normally apply in relation to interest payments made by an Indian airline
to a non-Indian lender. It will therefore invariably be necessary to analyse the provisions of If you would like to have further
any applicable double tax treaties so as to establish whether the requirement to withhold can information on any issue raised in this
be minimised or eliminated. update please contact:

Gavin Hill
6.3 PDP Security
gavin.hill@clydeco.com
A key element of any PDP security package is likely to be the security assignment by the
Siva Subramaniam
airline to the financier of its relevant rights under the manufacturer purchase contract.
siva.subramaniam@clydeco.com
As with any other security granted by the airline, the financier’s aim should be to ensure,
Philip Perrotta
through appropriate registration against the airline, that the security is creditor- and
philip.perrotta@clydeco.com
insolvency-proof. A PDP security assignment would usually be registrable against the
airline with the Registrar of Companies in the airline’s state of registration. As a condition to
Jim Edmunds
registration, the PDP security assignment must however be stamped.
james.edmunds@clydeco.com
Subject to state by state variations, the amount of stamp duty can be prohibitive for PDP
aircraftfinance@clydeco.com
security assignments. As a result, alternative and innovative structures will in many cases
have to be adopted.
Clyde & Co
51 Eastcheap
7. Further Information London EC3M 1JP

This note is intended as a guide to assist in the development of your business with Indian Tel: +44 (0) 20 7623 1244
airline customers and summarises our experiences when leasing and financing aircraft into Fax: +44 (0) 20 7623 5427
India. The note should of course not be considered as a substitute for detailed advice from
your English and Indian lawyers and other advisers (especially tax advisers) in the context of
each given transaction.

All of our aviation finance partners have experience of leasing and/or financing aircraft to
Indian airlines. Please feel free to contact any of us if you have any questions related to this
note. If you would like to receive a copy of any of our other jurisdictional summaries or any
of our other aviation finance publications, please get in touch with your usual Clyde & Co.
aviation finance contact or e-mail us at aircraftfinance@clydeco.com.

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