India’s Aviation Revolution: Cape Town Convention and the Future of Aircraft Leasing

Introduction

The recent aviation disaster involving Air India flight 171 in Ahmedabad has reignited discussions about India’s aviation safety standards, but it has also cast a spotlight on the broader ecosystem of aircraft leasing and financing a critical yet often overlooked pillar of commercial aviation. India’s aviation sector is experiencing unprecedented growth, with passenger traffic surging and the fleet size projected to expand exponentially over the next two decades. To sustain this momentum, the country has taken a decisive step by enacting the Protection of Interests in Aircraft Objects Act, 2025 (Cape Town Act), which fully implements the Cape Town Convention (CTC) and its Aircraft Protocol. This legislative overhaul aims to align India’s legal framework with global standards, offering robust protections to lessors and financiers while addressing long-standing inefficiencies in aircraft repossession and deregistration.

The significance of this reform cannot be overstated. India’s heavy reliance on leased aircraft, nearly 80% of its fleet, compared to the global average of 50%, has historically exposed vulnerabilities in the enforcement of lessor rights. The Go First insolvency case (2023) laid bare these gaps when lessors were barred from repossessing their aircraft due to a moratorium under the Insolvency and Bankruptcy Code (IBC), triggering alarm among international leasing communities. The Cape Town Act seeks to rectify these challenges by creating a predictable, creditor-friendly environment, thereby reducing leasing costs and bolstering investor confidence.

The Cape Town Act: A New Era for Lessor Rights and Enforcement

The Cape Town Act represents a watershed moment for India’s aviation sector, introducing sweeping changes to the legal and regulatory landscape. At its core, the Act overrides conflicting provisions in domestic laws, including the IBC, ensuring that lessors can swiftly deregister and repossess aircraft in cases of default or insolvency. This is a stark departure from the past, where lessors faced protracted legal battles and uncertainty. The Act designates High Courts as the competent authority for disputes, streamlining enforcement and reducing judicial delays.

One of the most critical features of the Act is its adoption of Alternative A under the Aircraft Protocol, which mandates that insolvency administrators return aircraft to lessors within two months unless defaults are cured. This provision eliminates the ambiguity that plagued cases like Go First, where lessors were left in limbo for months. Additionally, the Act introduces stringent transparency measures, requiring debtors to maintain detailed records of dues and submit them to the Directorate General of Civil Aviation (DGCA). This ensures that creditors have access to accurate information, expediting the resolution of disputes.

The economic implications of these reforms are profound. Historically, India’s weak enforcement mechanisms contributed to leasing costs that were 8–10% higher than in other jurisdictions. The Cape Town Act is expected to narrow this gap, making India a more attractive destination for global lessors. Furthermore, the Act positions India to potentially qualify for a 10% discount on aircraft financing under OECD norms, a benefit currently enjoyed by other signatories of the Cape Town Convention. This could translate into significant savings for Indian airlines, enabling them to reinvest in safety upgrades and fleet expansion.

GIFT City: India’s Ambition to Become a Global Leasing Hub

While the Cape Town Act addresses legal hurdles, India is also leveraging GIFT City (Gujarat International Finance Tec-City) to position itself as a competitive hub for aircraft leasing. Designed to rival established centers like Dublin and Singapore, GIFT City offers tax incentives and a regulatory framework tailored for aviation financing. Early transactions, such as Axis Bank’s financing of 34 training aircraft for Air India, demonstrate the potential of this initiative. However, challenges remain, particularly in attracting large-scale participation from global lessors and Indian banks.

The preferred structure for transactions in GIFT City has been the finance lease model, where an Irish SPV owns the aircraft and leases it to a GIFT City entity, which then sub-leases to Indian airlines. While this model provides flexibility, it also highlights the lingering dependence on foreign jurisdictions. To truly compete with global hubs, GIFT City must address concerns around tax scrutiny, such as the ongoing disputes with Irish lessors under GAAR and expand the role of Indian financiers in large-ticket transactions.

Despite these hurdles, GIFT City represents a strategic step toward reducing India’s reliance on foreign lessors. The introduction of orphan structures and JOLCO (Japanese Operating Lease with Call Option) transactions could further enhance its appeal, provided regulatory clarity improves. If successful, GIFT City could transform India from a leasing consumer into a key player in the global aviation finance market.

Conclusion

The enactment of the Cape Town Act and the rise of GIFT City mark a turning point for India’s aviation sector. By aligning its legal framework with international standards, India has taken a giant leap toward resolving the systemic issues that once deterred lessors and financiers. These reforms promise to lower costs, enhance safety, and foster sustainable growth in one of the world’s fastest-growing aviation markets.

Yet, the journey is far from over. The true test lies in the implementation of these laws and the ability to address lingering challenges, such as tax disputes and the need for greater domestic financing. If India can navigate these complexities, it will not only strengthen its position as a global aviation leader but also ensure that tragedies like the Air India flight 171 disaster serve as catalysts for progress rather than reminders of past failures. The skies ahead are filled with opportunity and India is finally clearing the runway for takeoff.