Lovejeet Singh
Partner, Chandhiok & Mahajan, Delhi
lovejeet.singh@chandhiok.com

Abhay Goya
Senior Associate, Chandhiok & Mahajan, Delhi
abhay.goyal@chandhiok.com

India's aviation sector has witnessed remarkable growth over the past decade, driven by a combination of economic expansion, rising disposable income, and a proactive policy environment. The country's aircraft fleet, which stood at approximately 800 aircraft, is projected to grow multifold within the next 20 years to meet increasing demand. Passenger traffic has surged in tandem, supported by the government's commitment to improving regional connectivity and expanding aviation infrastructure. Notably, the number of operational airports in India has more than doubled from 74 in 2014 to 159 in 2024.¹

Against this backdrop of rapid development, aircraft leasing and financing have emerged as critical pillars supporting the future growth and sustainability of the Indian aviation industry. The following Q&A explores key developments and regulatory reforms in this evolving landscape.

What is the status of full implementation of the Cape Town Convention and Aircraft Protocol?

The Indian Parliament has enacted the Protection of Interests in Aircraft Objects Act, 2025 (the ‘CTC Act’) effective 1 May 2025 to fully implement the Convention on International Interests in Mobile Equipment and the Protocol to the Convention on International Interests in Mobile Equipment on Matters Specific to Aircraft Equipment, both signed in Cape Town on 16 November 2001 (together the ‘Cape Town Convention’).

This legislation had been a long-standing demand of the international aircraft leasing community. One of its key features is that it overrides conflicting provisions of existing domestic laws, including the Insolvency and Bankruptcy Code 2016, thereby ensuring better protection of the rights and interests of aircraft lessors and creditors in India.

Will there be any change in the enforcement scenario after passing of the CTC Act?

Given that the CTC Act is a special legislation, and it overrides existing conflicting laws, enforcement of lessors’ rights should be an expedited process, in case lessors have to approach courts in a dispute scenario. Further, the CTC Act has designated High Courts (which are senior courts in the Indian judicial system) having territorial jurisdiction to be the relevant court for the purposes of Article 53 of the Cape Town Convention.

It may be noted that in the case of Go First’s insolvency, the order for returning the aircraft to the lessors and their de-registration was ordered by the High Court of Delhi.

Will the CTC Act streamline the aircraft deregistration and repossession process in India?

Yes. It may be noted that section 5 of the CTC Act requires debtors/lessees to maintain records of dues related to aircraft ownership or use and submit it to the Directorate General of Civil Aviation (DGCA) in a prescribed form. There was no such requirement previously. This information will help in expediting the processes in case the creditor has to notify a default as the information relating to dues will be readily available.

Additionally, the creditors are obligated to notify the DGCA before exercising any remedies under the Cape Town Convention.

The detailed rules under this section are awaited. Once finalised, these rules are likely to further streamline the process for deregistration, repossession, and export of aircraft.

With the implementation of the CTC Act, could any other claims have priority over the claims of the lessor?

Yes. India has made a declaration under Article 39(1)(a) of the Cape Town Convention, specifying certain categories of non-consensual rights or interests that take priority over registered international interests, both in and outside insolvency proceedings. These are:

• liens in favour of airline employees for unpaid wages arising after a declared default under a financing or leasing contract;
• liens or other rights of Indian authorities for taxes or unpaid charges related to the use of an aircraft object, arising after a default by the owner or operator under a financing or leasing contract; and
• liens in favour of repairers in possession of an aircraft object for services performed or value added to the aircraft object.

To what extent GIFT City has been able to promote aircraft leasing?

Gujarat International Finance Tec-City (‘GIFT City’) is gradually emerging as a hub for aircraft leasing activities. However, the presence of overseas lessors remains limited at this stage. One of the key concerns among the global leasing community has been the limited participation of Indian banks in aircraft financing. There is a general expectation that Indian banks should actively provide financing facilities. This will also enable global lessors to avail financing locally if they incorporate a GIFT City entity.

It may be noted that there is a noticeable shift among Indian banks toward asset-backed financing for aircraft and engine acquisitions – moving away from the traditional facility-based financing typically offered to airlines.

Axis Bank at GIFT City recently became the first Indian bank to execute an aircraft financing transaction. The deal involved a long-term USD denominated loan extended to AI Fleet Services IFSC Limited (a subsidiary of Air India) for the purchase of 34 training aircraft. These aircraft will be deployed to establish a flying training organisation in Amravati, Maharashtra.

While the Axis Bank transaction involved smaller training aircraft, we understand that other major Indian banks such as HDFC Bank and the State Bank of India are actively exploring similar opportunities, including financing for commercial aircraft.

What is the typical structure for a transaction which has been followed in GIFT City so far?

For commercial aircraft transactions from GIFT City, the preferred structure so far has been a finance lease arrangement. Under this structure, the financier establishes a special purpose vehicle (SPV) in Ireland, which acts as the owner/lessor of the aircraft. The SPV then leases the aircraft on a finance lease basis to the GIFT City entity, which in turn enters into a back-to-back finance lease with the Indian lessee/airline.

Security documents, including the Irrevocable De-registration and Export Request Authorisation (IDERA), are obtained in favour of the SPV, as the SPV is recorded as the owner of the aircraft on the Certificate of Registration (CoR), and the GIFT City entity is designated as the lessor. Additionally, a mortgage in favour of the SPV/financiers is created pursuant to the executed mortgage agreement. All rights of the GIFT City lessor are assigned to the SPV.

Is there any ‘substance’ requirement for SPV setup in GIFT City?

Yes. An entity in the GIFT City is required to mandatorily appoint two designated officers and have few employees. In addition, the entity is required to obtain an office space in GIFT City. As several co-working spaces are available in GIFT City, an entity can also opt for a space with limited seats in a co-working space. Further, group entities are permitted to share the office space, subject to prior approval of GIFT authority.

What is the status of action taken by the Indian tax authorities against several Ireland-based lessors?

Indian tax authorities have issued notices to several lessors in Ireland in relation to inappropriate availing of tax benefits with the argument that their SPVs in Ireland do not have ‘substance’, and these structures primarily aim to avoid tax on lease rentals earned from Indian airlines and violate the General Anti-Avoidance Rules (GAAR). The lessors have filed appeals against such notices.

Any adverse outcome in such notices may also impact the airlines as typically there is an obligation on the lessee for grossing-up of tax payments under the lease.

Can a GIFT City entity act as an operator of the aircraft?

A GIFT City entity can act as an operator of the aircraft in limited situations. In the event an aircraft is de-registered from a lessee’s air operator permit either due to a lessee’s default or expiry of lease, the GIFT City entity (being a lessor) can have the aircraft temporarily registered in its name for the purposes mentioned below until the time the aircraft is re-leased to another lessee.

The DGCA permits a leasing company to be registered as the operator strictly for the purpose of preserving and maintaining the aircraft. The company is allowed to undertake only non-commercial flights, such as maintenance check flights, demonstration flights, or positioning flights, and only upon obtaining a special flight permit from the DGCA.

How are finance leases treated under Indian law, and what are the regulatory and legal implications for lessors?

In India, finance leases are treated as a form of External Commercial Borrowing (ECB) and regulated by the Reserve Bank of India (RBI). With economic liberalisation, many foreign exchange transactions, including finance leases, are now handled by Authorised Dealer (AD) banks. Structurally, finance leases involve payments covering both principal and interest, enabling the lessee to build equity in the asset.

Legally, finance lessors are classified as financial creditors under Indian insolvency law, giving them priority over operating lessors (classified as operational creditors) in insolvency proceedings.

Are GIFT City entities insolvency remote? What could be the implication on a GIFT City entity if the Indian parent goes under insolvency?

The consolidation of insolvency proceedings for group companies is not expressly addressed in the Indian Insolvency and Bankruptcy Code, 2016. However, in our view, consolidation of the Gift entity in the case of insolvency of an Indian parent entity might be possible only in limited circumstances.

In the past, courts allowed consolidation in instances where common control, shared directors, interdependence, coexistence for survival, intertwined accounts, interloping of debts, and common financial creditors was established.

Can Japanese Operating Lease with Call Option (JOLCO) transactions be structured through GIFT City?

Yes, we do not foresee any impediment in structuring JOLCOs through GIFT City.

Is it possible to create an orphan structure in GIFT City?

While creation of a trust is permitted under GIFT City aircraft leasing framework, there are still several nuances to be addressed to enable orphan trust structures through GIFT City. We understand that the GIFT authority is in the process of addressing these concerns and such structures may be possible through GIFT City soon.

Notes

1   See https://pib.gov.in/PressNoteDetails.aspx?NoteId=154323&ModuleId=3®=3&lang=1.

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Disclaimer: The aforesaid content is intended to provide a general guide to the subject matter and the views of the authors are personal. Specialist advice should be sought in case of specific circumstances.