India’s maritime regulator is set to suspend Varun Shipping Co. Ltd’s licence to operate Indian-registered ships after it failed to come up with a credible financial package to pay several months of wage arrears for its crew and for the mandatory dry-docking of its ships for safety surveys.

The directorate general of shipping is weighing a proposal to suspend the so-called document of compliance (DoC) of Varun Shipping, which runs one of the world’s largest liquefied petroleum gas (LPG) carriers, an official at the directorate said.

“We are moving towards suspending the DoC of Varun Shipping for a certain period,” the DG Shipping official said, declining to be identified. “We are moving cautiously on this because Varun is a leading Indian shipping company, owning ships registered in India. At the same time, we are concerned about the safety of the ships and welfare of crew.”

“Varun was asked to take remedial action as per rules and regulations of the Merchant Shipping Act,” a spokesman for the shipping ministry said. “If they don’t comply, further action will be taken.”

Mumbai-listed Varun Shipping is the fifth-largest in the world by the size of its fully refrigerated LPG carriers and seventh-biggest overall LPG ship operator by cargo-carrying capacity. Its LPG carrier fleet is the largest in India by fleet size and cargo-carrying capacity.

A DoC certifies a ship-owning company is compliant with the requirements of the International Management Code for the Safe Operation of Ships and for Pollution Prevention (ISM Code) of the International Maritime organization (IMO), the global maritime authority.

The document is issued by the maritime administration where the ship is registered, which in this case is DG Shipping. Failure to confirm to the rules could lead to suspension or withdrawal or cancellation of DoC.

To be sure, the suspension of DoC, if and when it happens, will involve only Varun’s Indian-registered ships because DG Shipping has jurisdiction only over Indian flag ships.

Varun Shipping has a fleet of 20 ships comprising 10 LPG carriers, three crude oil tankers and seven so-called anchor handling, towing and supply vessels, or AHTSVs, that are used to support offshore oil exploration activities.

Between 2010 and 2012, it transferred 12 ships—four LPG carriers, three crude tankers and five AHTSVs—to overseas subsidiaries as part of a plan to reorganize debt.

Now, only eight ships—six LPG carriers and two AHTSVs—are registered in India and fly the Indian flag. Of the four other LPG carriers, one each is registered in Singapore, Cyprus, Indonesia and Marshall Islands. The three crude tankers are registered in Singapore and the remaining five AHTSVs in Cyprus.

About 300 crew including officers and general purpose staff working on these eight ships have not been paid salaries for the past eight-nine months, said Abdulgani Y. Serang, general secretary of the National Union of Seafarers of India (NUSI), which has a membership of some 70,000 ratings (general purpose staff working on board Indian ships).

The Indian-registered LPG ships of Varun are laid-up for at least two months because their safety certificates have lapsed and, hence, cannot be run. The two AHTSVs are in operation, according to the maritime regulator.

Statutory safety surveys, particularly expensive dry-dock repairs, have to be done twice in a span of five years on a ship, with intervals between them not exceeding 36 months, according to rules.

In October, the maritime regulator had issued a notice to Varun Shipping seeking explanation why its DoC should not be suspended for not complying with rules and regulations under India’s maritime law. Varun was also asked to produce a financial package to meet backlog of crew wages and dry-docking commitments.

Yudhishthir Khatau, chairman and managing director of Varun Shipping, said the company was operating at a reduced level because a number of its ships are in the process of being dry-docked. “We are in the process of finalizing a working capital loan to pay for dry-docking of our ships. We are hopeful that our ships will be put in dry-dock in December and resume full operations in January.”

Khatau said DG Shipping had issued a show cause notice to the company seeking details on creditors’ payments and crew payments. “We are making our interest payments and loan repayments regularly to banks. The company has not gone for a corporate debt restructuring. We are also trying to make certain payments to crew shortly,” he said.

“Varun has told DG Shipping that it will clear all dues of crew till July this year by the end of November,” Serang said.

Varun Shipping reported a loss of Rs.54.94 crore for the July-September quarter compared to a loss of Rs.116 crore a year earlier.

A decision on the suspension of DoC is expected to be taken after the director general of shipping Gautam Chatterjee returns on 2 December from a meeting of the IMO in London, the DG Shipping official mentioned earlier said.

An immediate fall-out of a DoC suspension is Varun’s Indian ships will lose insurance cover, according to a Mumbai-based shipping consultant who declined to be named.
“Ships without a DoC will not be able to trade,” said Serang of NUSI. “Cargo owners will have second thoughts on hiring such ships.”

Shipping industry executives are puzzled by the crisis at Varun particularly because the company was running LPG carriers, which is considered a niche sector and largely unaffected by the downturn in shipping that began in late 2008. A niche market is characterized by few fleet owners and charterers where vessel requirements and designs are relatively specific to the trade involved.

“Varun has hot assets,” said an executive at a rival shipping company based in Mumbai. “The company is in the right place but not doing the right thing.”
India is the fourth-largest consumer of LPG after the US, China and Japan.

Though the shipping industry was going through difficult times globally, Khatau admitted that the “LPG shipping business was doing very well”.

“LPG ships are earning very good charter rates; there is huge demand for LPG carriers,” he said.

Besides, India gives cargo protection to Indian-registered ships in the form of a so-called right of first refusal to carry cargo imported into the country by its state-run oil firms. This enables local ship owners to ensure better utilization of its vessels in Indian trade.

Ship brokers are optimistic about the long-term potential for shipping LPG.

“What we can clearly say about the LPG shipping market, compared with other shipping sectors is that it has good positive dynamics and future prospects, it is not saturated, has few serious owners, does not suffer from heavy new-building orders and also has small freight volatility with adequate positive returns that macroeconomic expectations say can become better over the next 15 years or so,” Athens, Greece-based Intermodal Shipbrokers Co., said in a recent report.