Hamburg investor looks to set up India-focused shipping fund

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31 Oct 2008

German shipping investment firm Konig and Cie GmbH and Co. KG is likely to establish a fund focused on India, where shipping lines need to invest some $20 billion (Rs99,600 crore) to replace old vessels and acquire new tankers in line with changes in global norms. “We are looking to set up a shipping-focused fund for India. The size of the fund could be as much as $500 million,” Tobias Konig, managing partner of the Hamburg-based Konig and Cie, said in an interview during a recent visit to Mumbai. With money from traditional sources such as European banks hard to come by for Indian shipping firms in the wake of the global financial turmoil, speciality investment companies are coming up with focused funds to tap a potentially lucrative opportunity.
For instance, HSH Nordbank AG, the world’s biggest ship financier, which recently open-ed a Mumbai office, is setting up a fund to invest in maritime-related sectors, said a person familiar with the matter, and who didn’t want to be named. He declined to elaborate.
However, unlike HSH Nordbank, which is looking at a wider portfolio of projects to invest in, Konig and Cie will focus mainly on ships and invest in assets such as dry bulk carriers, oil tankers and even dredgers, said Rajeev Kashikar, managing director at the firm’s Asia unit, Konig and Cie Asia Advisors Pvt. Ltd.
Konig and Cie would raise money for the fund from both retail and institutional investors, a model it has followed to launch at least 75 funds in Germany that together invest some €4 billion (Rs25,360 crore), most of it in ships, Konig said. It is yet to decide whether to locate the India-focused fund within the country or offshore.
Setting up local shipping funds could also help promote use of the rupee for shipbuilding, a business where Indian yards are just beginning to make a mark.
Though Asian banks lacked the expertise required to finance ships, countries such as South Korea and China are promoting their own currency for shipbuilding, said Paul Chang, Hong Kong-based head of shipping in Asia for HSH Nordbank.
This will also help local firms to raise money as overseas funds have become costlier. “It has become difficult to do business because of the liquidity problems… Cost of funds are increasing,” said Goh Mei Lin, a partner at London-based maritime law firm Watson, Farley and Williams Llp.
According to industry lobby group Indian National Shipowners Association (Insa), companies such as Great Eastern Shipping Co. Ltd, Mercator Lines Ltd, Varun Shipping Co. Ltd and the state-run Shipping Corp. of India Ltd (SCI) need to invest close to $20 billion in five years to replace older, ageing ships and buy double-hull tankers, as mandated by global maritime regulator International Maritime Organization (IMO).
IMO wants all liquid carriers to be double-hulled by 2010 in an attempt to prevent spillage of commodities such as oil in case of accidents and thus avoid expensive clean-up jobs.
Currently, Indian ships, with a cargo carrying capacity of close to 9 million tonnes (mt), carry some 12% of the 723mt of cargo that is headed into or out of the country in a year. The total cargo capacity is expected to rise to 1 billion tonnes in the next four-five year and 2 billion tonnes by 2017, according to estimates by the shipping ministry.
“Indian shipowners will have to acquire ships with an additional cargo carrying capacity of 15mt over the next four-five years to maintain the share of 12%,” said S. Hajara, chairman and managing director of SCI, India’s biggest shipping firm.
Indian shipowners have together set aside more than $600 million that would only be used for buying ships, as required by the Tonnage Tax Act, which mandates shipowners to set aside 20% of their book profits in a year in a reserve account earmarked to buy ships.
The government introduced the tonnage tax system for Indian shipping from April 2004, following a norm prevalent in other parts of the world.
Tonnage tax is a levy based on the cargo carrying capacity of a ship that replaces the traditional corporate tax system.
Firms accounting for at least 90% of the cargo shipped globally every year operate on a tonnage tax basis. In tonnage tax, the incidence of tax is 1-2%, compared with the prevailing 30.9-33.9% corporate tax rate for Indian companies.

Source: Live Mint