Rail Finance in India: Financing Rolling Stock and the Future of the Capetown Convention and Luxembourg Protocol










The Indian Railways (herein after referred to as the “IR”) has one of the world’s largest rail networks, maintenance and development of which, undoubtedly requires intensive capital. In the wake of the present BJP Government being re-elected into power, a 100-day agenda of the Government was proposed. The Ministry of Railways proposed certain items on its agenda, which included inviting private players to operate trains between destinations popular with tourists. This, as expected, led to an uproar from the railway trade unions, who feared that this would lay the foundation of privatisation of the IR.

Interestingly enough, inviting private players to participate in day to day activities is not a new concept for the IR. In the year 2017, the Ministry of Railways decided to develop and modernise 23 railway stations around India on a public – private partnership model. The response saw bidders not only from India but also from overseas, infact 100% foreign direct investment (“FDI”), via the automatic route (i.e. without RBI approval) has been permitted for railway infrastructure since the year 2014. However, one must bear in mind that the difference between the earlier privatization models and the present one (the 100-day agenda) is, that in the present proposal, investment in movable properties i.e. railway rolling stock is proposed. In other words, the Indian Railways is interested in exploring various ways to finance its movable assets i.e. rolling stock.

Present status of Indian Railways rolling stocks

In India, passenger rolling stocks are of two types ICF and LHB. ICF stands for “Integrated Coach Factory” and LHB stands for “Linke Hofmann Busch” (a German variant), both manufactured at the ICF. As of 31st March 2017, the IR had 353671 rolling stocks (11461 locomotives, 64223 passenger carriages and 2,77,987 freight wagons). Out of the 64223 passenger rolling stocks 10-15 % are LHB coaches, while the rest are ICF variant coaches. The IR has plans to replace the entire fleet of ICF rolling stocks with the German LHB variant. The manufacturing cost of one LHB rolling stock is around $ USD 0.3 million and replacement of the ICF with LHB would require a substantial public investment that would run into billions of $ USD. Moreover, with increasing freight demands, more and more freight rolling stocks would also be required by the IR. All this requires momentous capital expenditure (not to forget the huge capital outlay required for modernisation and augmentation of tracks and signal technology), and thus pose a challenge for the IR to fund and therefore it needs to devise innovative methods for financing. The Government has recently decided that ownership of the seven local rolling stock manufacturing factories in India will be owned by a holding company, which would be known as the “Indian Rolling Stock Company”, which will be a Public Sector Undertaking (“PSU”) under the Ministry of Railways

Financing of Rolling Stocks by the IR

The current structure in place for financing of rolling stock is a fairly interesting one. In the present system, a fully Government owned Corporation, i.e. the Indian Railway Finance Corporation (the “IRFC”) advertises publicly to raise funds from the market. Funds are then taken from the market and used to pay for the manufacture of the railway rolling stock. The rolling stock is therefore owned by the IRFC and is leased to the IR on a finance lease model for a term of 30 years.

Generally, the principal and the interest component are realised within the initial period of 15 years. After the expiry of lease term, the rolling stock asset is sold to the IR for a nominal price. The lease rentals are paid by the IR to the IRFC on a half yearly basis.

The IRFC retains the legal title over the rolling stock, whereas the maintenance of asset is solely the responsibility of the IR. This financing model has worked well, especially since the IR use budgetary resources and internal earnings for laying/doubling/interlocking of tracks and IRFC is used for financing the purchase of locomotives and rolling stock. However, as aspirations of the travelling public is rising, there is a growing demand for modern, efficient, safe and comfortable trains. This rising demand for better rolling stock is coupled with the necessity of developing and expanding the overburdened track network of the IR, puts pressure on the Ministry of Railways to increase investment and / or locate funding.

It is with this background, that there is an urgent need to allow private players to invest in rolling stock to be used by the IR. It will eventually have a two-fold benefit for the IR. Firstly, it will ease the immense financial burden on the IR and the IRFC; Secondly, it will ensure that rolling stock with state-of-the-art technology is deployed by the IR.

 In 2008, the Ministry of Railways had launched a “Wagon Leasing Scheme”, which was aimed at creating a leasing market for rail wagons (primarily freight) akin to aircraft. Although, the scheme was launched with high ambitions, it failed to garner much support from the industry because of strict and rigid conditions, which were imposed on the lessor under the scheme. To overcome this, in 2011, the scheme was liberalised (the net worth threshold was brought down from $ USD 36 million to $ USD 15 million) to making it more attractive for private players. The purpose of the scheme was to provide India with the latest wagons, which were at par with International standards. The scheme also allowed importing to of wagons into India. Unfortunately, due to various restrictions, the liberalized scheme has also failed to attract any major players.

It is therefore the need of the hour, that the IR relooks its scheme and comes out with a more attractive wagon leasing scheme, which covers not only freight wagons but also passenger coaches and also locomotives. However, before this can be done, it is imperative, that India puts in place a predictable and stable regulatory regime, which can come to the aide of foreign investors.

Need to Ratify Luxembourg Protocol

India has already ratified the Cape Town Convention and the Aircraft Protocol, and a Cape Town Convention bill is in the pipeline. Thus, if the IR can assure the investors or lessors that remedies available under the lease agreement would be honoured and in case of default, the remedies would be easily enforceable, the leasing scheme is bound for success. The immediate step, which India can take in this regard is to ratify the Luxembourg Rail Protocol to the Cape Town Convention on International Interests in Mobile Equipment. The Luxembourg Protocol makes financing of rolling stock by private players easier by creating an ecosystem, where the interests of the creditors can be registered and thus, provides a certainty to their rights over a particular asset. In-fact, the Ministry of Railways (for ratification of the Luxembourg Protocol) may work together with the Ministry of Civil Aviation, which already has experience with the Convention. This will eventually ensure development of a holistic “transport” leasing market in India, which shall ensure that India has the best transport equipment, both on land and in the air.

To contact the authors, please email:

Nitin@sarins.org or syed.tamjeed@sarins.org

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s