A global aviation leasing watchdog has for the second time cut India's compliance rating with international leasing laws and kept the country on a watchlist with a negative outlook amid a dispute between local airline Go First and its aircraft lessors. The move by the Aviation Working Group (AWG), a UK-based entity that monitors leasing and financing laws, comes as bankrupt budget carrier Go First is locked in a legal tussle with aircraft lessors seeking to repossess jets.

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The courtroom battle started after Go First was granted bankruptcy protection in May. Under Indian law, that prevented lessors from recovering 50-plus grounded Airbus planes. The lessors have complained that critical plane parts are now corroding or getting "robbed". The AWG said 130 days had passed since the lessors' request to repossess their aircraft, more than double the maximum waiting period of 60 days according to India's obligations under the Cape Town Convention, an international treaty protecting the repossession rights of lessors.

India has ratified the Cape Town Convention but has yet to pass a law resolving conflicts with the country's insolvency and bankruptcy code, which is backed by parliament.

"The prolonged failure to make remedies, including repossession and deregistration, available to creditors ... and provide for asset maintenance and value preservation ... negatively impact scoring," the AWG's notice said, warning of further rating downgrades.

The AWG, a not-for-profit entity co-chaired by Airbus and Boeing, has reduced India's score to 2 from 3.5 out of 5. The negative outlook from AWG is under what it calls the compliance index, which addresses whether requirements under the Cape Town Convention are met in practice. This is the second such downgrade by AWG, which first placed India on a watchlist in May and assigned the country a negative outlook for its failure to process lessors' plane repossesion applications before the freeze on Go First's assets.

The move could further hurt lessor confidence in the world's third-largest aviation market, warned AWG, whose members include major lessors and financial institutions such as Aircastle, BOC Aviation, SMBC Aviation Capital, Deutsche Bank, Goldman Sachs and Morgan Stanley. SMBC, the world's second-largest aircraft lessor, which also has some planes leased to Go First, warned in May that India's decision to block leasing firms from reclaiming the airline's jets would hit lessors' confidence in that market.