IndiGo taps Japanese financing for aircraft in a first for Indian aviation

India's largest airline IndiGo has become the first Indian carrier to tap Japanese equity financing to fund two Airbus A320 family aircraft, marking a significant milestone for aircraft financing in India. Japanese equity financing is cheaper than conventional debt financing, and aviation financiers and lawyers say the transaction signals growing confidence in the creditworthiness of Indian airlines and the country's laws. Japanese investors are known to be highly risk-averse and have traditionally stuck to top-tier carriers — state-owned airlines or those with the strongest credit profiles. British Airways, Singapore Airlines, Cathay Pacific, Qantas, Turkish Airlines and Air France are among the few carriers that have previously accessed JOLCO financing. The deal was structured through a Japanese Operating Lease with Call Option (JOLCO), routed via Gujarat International Finance Tec-City (GIFT City) a special economic zone where aircraft leasing entities registered under the IFSC enjoy tax benefits. IndiGo has set up a dedicated aircraft leasing company, InterGlobe Aviation Financial Services IFSC Private Limited, for this purpose. Under the JOLCO model, Japanese investors like corporates or high-net-worth individualsco-fund the aircraft alongside debt from banks, which is then leased to the airline. As with any finance lease, IndiGo retains the right to purchase the aircraft at the end of the lease term. Japanese law allows investors to claim depreciation allowances to offset taxable profits, reducing the return they need from lease income alone. Live Events "The investors are willing to accept a lower economic return on their equity because a significant portion of their return comes from the tax shield rather than purely from the lease income — which allows airlines to get lower lease rates than conventional methods," said a person involved in the transaction. For years, Indian airlines were considered a risky bet by global lessors, owing to a string of airline bankruptcies and weak insolvency laws that made it difficult to repossess aircraft in default. The collapse of Go First triggered protracted legal battles with lessors, who flagged India as a high-risk jurisdiction. In February, the government enacted new legislation aligning India with the Cape Town Convention, an international treaty allowing lessors to repossess aircraft within 60 days of a bankruptcy. GIFT City has also resolved a long-standing structural barrier: the absence of a double taxation treaty between India and Japan, which had previously made direct JOLCO structures with Indian airlines unviable. "JOLCO transactions through GIFT City provide an excellent opportunity for Japanese investors to participate in India's growing civil aviation sector. It also reflects the lowering credit risk and increasing confidence in GIFT City structures," said Ajay Kumar, Managing Partner, KLA Legal, which advises global lessors. "Full compliance with the Cape Town Convention has considerably reduced jurisdictional risk, and the strong credit profile of Indian airlines has opened up new financing avenues. GIFT City has been an enabler for these new structures, as direct leasing from Japan into India was not very tax-friendly earlier," said Lovejeet Singh, Partner at law firm Chandhiok and Mahajan. (You can now subscribe to our Economic Times WhatsApp channel) (Catch all the Business News, Breaking News and Latest News Updates on The Economic Times.) Subscribe to The Economic Times Prime and read the ET ePaper online. ...moreless (You can now subscribe to our Economic Times WhatsApp channel) (Catch all the Business News, Breaking News and Latest News Updates on The Economic Times.) Subscribe to The Economic Times Prime and read the ET ePaper online. ...moreless