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Trade Transactions –An Overview with Selected issues

CA Shabbir Motorwala18 March 2016BCAS – CTC Advance FEMA Conferences

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• Imports - Framework - Forms and Procedure- Purchase of Foreign exchange /Time limits - Advance against Imports- Proof of Imports / Special Imports - Merchanting Trade- Third party payments- Trade Credits

• Exports - Framework - Forms / Exemptions - Invoicing / Commission / Realization - Advance / Extension / Write-off - Establishment of offices abroad- Trade fairs / consignment Exports / overseas warehouse- Start-ups - Project Exports

Contents

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Imports

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Imports – Framework Overview

• Foreign Trade Policy / DGFT Guidelines

‒ IEC Code, Import License wherever applicable, etc.

• FEMA

‒ Section 2(p) & Section 5 of the FEMA 1999

‒ FEMA Current Account Rules 2000

‒ RBI Master Direction No. 17/2015-16 dated 1 January 2016 and Circulars from time to time

‒ RBI FAQs?

‒ All import matters are first generally handled by the Regional Office of the RBI

• Banking framework

‒ KYC Guidelines, Letter of Credit, Normal Trade Practice, etc.

• R & D Cess Act 1986

• Income Tax Act

‒ TDS Certificates, Undertaking / Declaration, etc.

• Indirect taxes

‒ Customs duty, declaration, etc.

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Imports – Forms / Procedure

• Section 2(p) of FEMA 1999

‒ Imports with its grammatical variation and cognate expressions, means bringing into India any goods or services.

• Forms

‒ Form A1 – Dispensed & AD Banks to obtain all requisite details [APD Circular 6 dt. 12.2.15]

‒ Form A 2- for all other overseas payments

• AD Banks can give Guarantee on behalf of Importers (replacement imports covered)

‒ For Import of services cap of USD 500,000 (for PSU with MoF approval exceeding USD 100,000)

• Purchase of foreign exchange for Imports

- To be used for payment for Imports or other permitted purposes

- Payment for Import can also be made by way of credit to non-resident account of the overseas exporter maintained with a bank in India

- AD to satisfy himself of bonafide of transaction and that goods of equivalent value of remittance have been imported

- In case of lost-in-transit, damaged, short supplied goods, fresh remittance for replacement permitted subject to conditions

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Imports – Forms / Procedure

Receipt of Import bills/documents

• Generally by the banker of importer from the banker of the supplier

• Possible by the AD banks directly from Overseas Supplier

‒ Financial standing / track record of importer customer relevant

‒ Report from overseas banker or credit agency of international supplier in cases where value of import bill exceeds USD 300,000

• Possible by the importer directly from overseas supplier subject to conditions

‒ Value of Import bill does not exceed USD 300,000

‒ Import bills received by WOS of Foreign Companies from their Principal

‒ JVs not covered?

‒ Import bills by Status Holder Exporters / EOU / SEZ / PSU

‒ Import bills by Limited companies including Private Companies

Note: AD Bank to follow up with Importers for Evidence of Imports and Report default to RBI

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Imports – Purchase of FX / Time limit of settlement

• Time limit for Import settlement

- Six months from date of shipment (of goods) except where amounts are withheld towards guarantee of performance, etc.

- Import of books allowed without time limit restriction

- AD to permit belated settlement due to financial difficulties, disputes, etc.

- Trade Credits i.e. Buyers & Suppliers Credit – as per prevalent provisions

• Interest on Import bills

- Payment of interest (@ Trade Credit Rate) allowed on delayed payments not exceeding three years

- Pre-payment of usance bills – only after reducing proportionate interest on unexpired portion of usance

• Selected issues

- Time limit for services?

- No specific provisions for write back - Whether the write back is permissible? In full or Part?

- What happens for damages or settlement if there is a dispute and court case?

- Whether remittances for import on operating lease permissible?

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Imports – Advance against Imports

• Advance against Import of Goods / Services

‒ Permissible without any ceiling but if advance exceeds USD 500,000 for services or USD 200,000 for goods then unconditional irrevocable standby LC or guarantee from International Bank of Repute situated outside India required (Guarantee of AD in India if basis a counter guarantee by International Bank)

‒ Non-PSUs importer can avail higher advance ceiling upto USD 5 Mn without aforesaid guarantee based on track record and bonafides in accordance with internal guidelines of the AD Bank.

‒ PSUs not satisfying above condition to obtain waiver from MoF if advance exceeds USD 100,000

‒ Physical Import within six months (three years in case of capital goods)

‒ If no Imports then advance to be repatriated back or utilized for other permitted purposes

‒ Advance to be given direct to Manufacturer (Supplier)

‒ Special provisions for advance remittance for Import of rough diamonds and for Aircrafts / Helicopter / Other Aviation Related Purchases

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Imports – Proof of Imports

• Physical Imports exceeding USD 100,000

‒ Exchange control copy of Bill of Entry for Home Consumption (warehousing for EOUs)

‒ Custom Assessment Certificate / Postal appraisal form for Import by Post / Courier Bill of Entry

‒ Exchange control copy of the ex-bond bill of entry or bill of entry issued by customs authorities for goods stored in FTWZ or SEZ units, customs bonded warehouses, etc.

‒ Delivery against acceptance – within 3 months from remittance except for delays as stipulated.

• CEO / Auditor Certificate in lieu of Bill of Entry

‒ Amount of remittance not exceeding USD 1,000,000 or its equivalent; or

‒ Importer is a Listed Company with Rs. 100 Cr Net worth (last audited B/Sh) or

‒ Importer is PSU or Government Company

‒ Autonomous body / scientific association whose accounts are audited by CAG

• Non-Physical Imports through internet / datacom channels / emails / fax, etc

‒ Certificate from CA that the software /design / drawing has been received by the Importer

‒ Custom authorities to be kept posted by the Importer

‒ How to verify the Import through internet?

‒ How to keep the custom authorities posted for internet Imports?

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Imports – Special Imports / Other cases

• Import of Gold

‒ 20:80 scheme of Import of gold withdrawn on November 28, 2014

‒ Nominated banks / agencies can Import on consignment possible for upfront sale

‒ STH/PTH can Import gold on Document against payment basis

‒ Import of gold coins and medallions permitted. Prohibition on sale by banks

• Import of Gold Jewellery - Suppliers and buyers credit not to exceed 90 days from shipment date

• Import of other precious metals

‒ Suppliers and buyers credit should not exceed 90 days from date of shipment

‒ Clean credit by Supplier should not exceed 180 days from date of shipment

‒ KYC, Anti-Money Laundering guidelines, credentials of supplier, close monitoring of transactionsenvisaged

• Import of platinum /silver on unfixed price basis

‒ Import on outright purchase basis subject to passing of ownership at the time of Import

‒ Price can be fixed later as when importer sells to customer

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Imports – Special Imports / Other cases

• Import of Equipment by BPO Companies

‒ General permission to install equipment overseas at international call centres

‒ Approval of Ministry of Communication and Information Technology / other authorities

‒ AD to make payment as per bonafide requirement directly to overseas supplier

‒ Certificate that the goods have been purchased / installed from CEO / Auditor of Importer Companies

‒ Entities other than Companies not eligible?

• Import payments by Online Payment Gateway Service Providers

‒ AD Bank to enter into standing arrangement with OPGSPs as stipulated guidelnes

‒ Payment for Imports of goods / software (online) not exceeding USD 2,000

• Settlement of Export/ Import transactions in currencies not having a direct exchange rate

‒ Recently permitted in Feb 16 subject to certain conditions

‒ Entitles the beneficiary to receive the payment in the currency of the Beneficiary

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Merchanting Trade – Provisions • Merchanting trade refers to offshore sourcing for offshore supply i.e.

‒ Goods acquired should not enter the Domestic tariff area; and

‒ State of goods should not undergo any transformation

• Goods permissible for import / export under FTP – Genuine trade and not financial intermediaries.

• Both legs to be routed through same AD – ensure one-to-one matching case

• Entire deal to be completed within 9 months with no outlays of fx beyond four months

Commencement date - Earlier of date of shipment / Export leg receipt or Import leg payment

Completion date - Latter of date of shipment / Export leg receipt or Import leg payment

• Short term credit available to the extent not backed by advance remittance

• AD Bank to ensure advance against Export leg earmarked against payment for Import leg – short term deployment in interest bearing account stipulated

• Advance payment for Import leg on demand allowable – general guidelines to be adhered

• Payment of Import allowed from balance in EEFC account

• Selected issue – whether deal can be multiparty and whether trade can be in same country or different countries imperative?

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Imports – Third party payments

• Third party payments for Import transactions allowable by AD Bank as under:

‒ Firm irrevocable purchase order / tripartite agreement in place or mention in Invoice / Order

‒ AD bank satisfied with the bona fides of transaction (FATF, etc)

‒ Invoice contains narration related payment made to third party

‒ Bill of entry mentions name of shipper / narration contains payment to be made to third party

‒ Importer complies with extant regulations relating to Imports

• Selected issues

‒ Whether third party payments permissible for Import of services?

‒ Whether permissible to pay to central treasury group company?

‒ Whether third party payments permissible for Merchanting Trade

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Issue of shares – under FDI scheme against legitimate dues

• RBI Circular 31 dated 17 September 2014 – Issue of equity shares against legitimate dues

‒ Scheme over and above the issue of shares / convertible debentures to Non-resident against lump-sum technical know-how fee, royalty, ECB’s as stipulated and Import payables of capital goods, etc.

‒ Issue of equity shares against any other funds payable by the investee company remittance of which does not require permission of the Government of India or RBI

‒ The equity shares shall be issued in accordance with the extant FDI guidelines on sectoral caps, pricing guidelines, applicable tax laws etc.

‒ Key issues

• Issue of convertible preference shares/ debentures covered?

• Whether overdue current account payments covered?

• Whether in-principle approval from AD-Bank fine for issues of shares?

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Imports – Trade Credits

Others Non-Capital Imports

AD Bank permissionrequired

AD Bank permissionrequired

Up to USD 20 Mn perImport transaction

up to 1 year or operating Cycle from date of shipment

Whichever is less

Import transaction exceeding USD 20 Mn -

Prior RBI approval warranted (Terms of

approval not Stipulated)

• Buyers’ Credit = Overseas loans for payment of Imports into India arranged by the Importer from an Overseas Banks / Fis outside India

• Supplier Credit = Credit for Imports into India extended by the Overseas Supplier

Trade Credit Maturity Period

All-in-cost ceilings over 6 month LIBOR*

Up to 5 years 350 basis Points

* for the respective currency of credit or applicable benchmark

Import of Capital Goods (as per FTP)

Up to USD 20 Mn perImport transaction

with a maturityUp to 5 years

Select issue - Imports from SEZ to DTA – whether Trade credit permissible ?

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Exports

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Exports – FEMA 1999 and FEMA 23

• Foreign Trade Policy – DGFT Guidelines and IEC Code

• FEMA 1999

• Section 7 – Export of Goods and Services:

‒ Exporter of Goods under obligation to furnish to RBI:

Detailed declaration of Exports in prescribed form

Required information to ensure realization of Export proceeds

‒ Directions by RBI to Exporter of goods for ensuring receipt of Export proceeds

‒ Exporter of services obliged to furnish to RBI or other authority prescribed declaration

• Section 8 – All reasonable steps to realize and repatriate to India all foreign exchange due or accrued.

• Section 9 – Exemption from realization and repatriation in certain cases

• FEMA No. 23 (R)/ 2015 -RB dated January 12, 2016 – FEMA (Export of Goods and Services) Regulations, 2015 and other Regulations

• RBI Master Direction No. 16 dated 1 January 2016 and Circulars & Master Direction No. 18 dated 1 January 2016 for reporting under FEMA

• RBI FAQs?

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Exports – Definitions

• Under Section 2(l) of FEMA 1999

“Export", with its grammatical variations and cognateexpressions, means-

(i) the taking out of India to a place outside India anygoods,

(ii) provision of services from India to any person outsideIndia;

• Under Regulation 2(iv) of FEMA 23 (R)

Exports includes the taking or sending out of goods byland, sea or air, on consignment or by way of sale, lease,hire-purchase, or under any other arrangement bywhatever name called, and in the case of software, alsoincludes transmission through any electronic media

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Exports – Declaration for Exports

• Form EDF – For Export of Goods / software from Non-EDI ports – No minimum limit

‒ To be submitted in duplicate to the Commissioner of Customs

‒ For goods to be sent by post, EDF form to be countersigned by AD Bank and then postal authorities will allow Export

‒ Form can now be obtained online

• Requirement for submission of Form SDF for Exports through EDI ports dispensed – declaration subsumed in the Shipping Bill

• Custom to certify / assess the Exports value

• Form SOFTEX – For all Exports of software

‒ To be filed with STP / EPZ / SEZ Authorities not later than 30 days from date of last invoice raised in the month for certification by designated officials

‒ A common form for single as well as bulk Exports

‒ Form can now be obtained online

‒ Key issues – Amendment in invoice value post realization?

• No form for Exports of services

• Realizable Value of Exports is basis the specified declarations Form

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Exports – Exemption from declaration• Section 9 of FEMA 1999

‒ Trade samples of goods and publicity material supplied free of payment

‒ Personal effect of travelers

‒ Ship stores / trans-shipment cargo and goods supplied under Government / Military Orders

‒ Gifts value of which not more than INR 5 lakhs

‒ Aircrafts / aircraft engines /spare parts for overhauling / repairs subject to re-import in 6 Months

‒ Goods imported free of cost on re-export basis

‒ Following goods exported by units in EPZ / SEZ/ EHTP / STP / FTZ with relevant approval

Defective goods or Goods imported on loan basis or imported goods found surplus in production

‒ Replacement goods exported FOC per EXIM Policy

‒ Goods sent for testing subject to re-import or for repair and re-import

‒ On approval from RBI

• Waiver of EDF by AD Bank in specified cases for Export of goods free of cost / sales promotion

‒ 2% average annual Exports in 3 preceding financial years subject to Rs. 5 Lakhs ceiling

‒ Higher of 2% average annual Export realization in 3 preceding licensing years or Rs. 10 Lakh

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FEMA Exports –Others

• Exports requiring prior RBI approval ‒ Export of goods on hire purchase, lease, etc.

‒ Export on Elongated credit terms

• Job work by SEZ Unit in foreign country and exports therefrom generally permissible through AD Bank subject to conditions

• RBI may consider application in Form EFC from exporters having good track records for opening foreign currency account in and outside India

• Re-export of Unsold rough diamonds from SNZ of Customs without declaration in Form EDF‒ Entry of such diamonds is not permitted into DTA

• AD Bank may provide EDF approval for Export of goods for re-imports after repairs , testing etc.

• AD Bank may provide guarantee on account of Exports from India

• Other cases covered in Policy

• Short shipment / Shut Out Shipment

• Counter Trade Arrangements

• DTA units to purchase goods / services from SEZ units in FX

• Exports to Overseas JV / WOS of Indian Party against financial commitment / shares

• Mid-sea transshipment, etc.

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Exports – Invoicing / Commission

• Export invoicing for software:

‒ At least once a month or milestone as specified by Contract

‒ Last invoice bill should not be raised later than 15 days from date of completion of contract

‒ “One shot operation’ – 15 days from date of transmission

‒ Valuation as per declaration in SOFTEX

• Agency Commission on Exports

‒ Permissible - no ceiling subject to declaration in EDF / SOFTEX / valid agreement

‒ Shipments has been made

‒ Remittance / adjustment from invoice value

‒ Specific conditions for counter trade arrangements through escrow a/c in USD

‒ Key issues

• Where agency commission can be paid on receipt of advance remittance?

• Whether payment of commission permissible before shipment of goods?

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Exports – Dispatch of Documents

• Export documents to be submitted to AD within 21 days from date of Export or date of certification of SOFTEX form

• AD Bank to normally dispatch shipping documents to their overseas branches / correspondent

• AD Bank can submit direct documents to consignees or their agents

‒ Cases of advance payment or irrevocable LC

‒ Case of Regular Exporter on the basis of standing, track record and realization arrangements

• AD Bank to permit Status Holders Exporters / SEZ units to dispatch Export documents to the consignee outside India subject to certain basic conditions

‒ AD Bank can regularize direct dispatches for Exports up to USD 1 Million per Export shipment

• if the Exports have been realized in full

• Exporter is Regular Customer of bank for minimum 6 months

• KYC compliance, bonafide transaction, etc.

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Exports – Realization

• Invoice can be in Rupees / freely Convertible Currency and realization to be as specified

• Realization to be in freely convertible foreign exchange or Indian rupees (specific Exports) through Banks or other permissible forms as specified e.g. International Credit Card, etc.

‒ Recent liberalization in Feb 16 for settlement in currencies not having direct exchange rate

• Realisation in Gold, Silver, Precious metals, etc. by Gem & Jewellery units in SEZ and EOU

• Exporter not to take actions resulting in realization delay or Exports value not being realized

• Third party realization for Exports – Similar to imports (Slide 10)

• Time frame stipulated by RBI in consultation with Government

‒ All Export of goods / software / services – within 9 months from date of Exports

‒ Exports to warehouse outside India– within 15 months from date of shipment

‒ Date of Export explicitly clarified for software as date of invoice

‒ Can similar inference be drawn for services?

• Netting off of Export realization permissible against Import payables for goods if Same Party & SEZ units for goods as well as Services

‒ Netting off permissible for services to entities other than SEZs?

‒ Netting off when Import and Exports are with different entities in the same group?

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Exports – Realization

• Receipt of Exports in Foreign Currency Account

‒ EEFC – 100% of Export

‒ Special Account by SEZ unit – 100% of Export

‒ Diamond Dollar Account Scheme

‒ RFC (D) – consultancy and other receipts by Individuals

• Online Payment Gateway service Providers (OPGSPs)

‒ through AD for small values not exceeding USD 10,000

• Export to Sanctioned countries

‒ Payments received from an open cover country shall be permitted third party payments

‒ Delay in realization of Export proceeds permitted subject to satisfaction of AD Bank

• Re-import into India within the stipulated period deemed to be full realization

• Export factoring on non-recourse basis with AD Bank subject to conditions

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Export – Realization in EEFC Account

History

• Prior to 30 November 2006 – Only 50% of foreign exchange earnings permitted to be credited to EEFC account (100% for Status Holder Exporter, individual professionals, 100% EOU in EPZs, STPs, EHTPs)

• From 30 November 2006 till 9 May 2012 – All categories of foreign exchange earners to credit up to 100% of their foreign exchange earnings

• From 10 May 2012 – All exchange earners eligible to retain only 50% in EEFC accounts. The balance 50% shall be surrendered for conversion to rupee balances.

• Conversion stipulated citing India is not fully convertible on capital account transactions

Current Position (Since 31 July 2012)

• Eligible to credit 100% of foreign exchange earnings subject to conditions

‒ Total accruals during a calendar month should be converted into Rupees on or before the last day of the succeeding calendar month after adjusting for utilization of the balances for approved purposes or forward commitments

‒ What is meant by forward commitment ?

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Exports – Advances / Reduction of Value

Advance against Exports permissible

• Goods to be exported / shipment made within 12 months from date of advance else refund requiresprior RBI approval - exception Export agreement provides terms otherwise

• RBI approval required for exports beyond 12 months

• AD Bank permitted to allow Exporters to receive advance beyond 12 months for goods which takemore than a year to manufacture subject to conditions

• Long Term Export advance up to maximum tenure of 10 years to be utilized for execution of long termsupply contract subject to conditions (3 years track record, capacity, rupee loan cant be repaid, etc)

• Interest can be paid on such advance within permissible ceiling (LIBOR + 100 BPS)

Reduction of Invoice value

• Prepayment of usance bill – cash discount - permissible as per agreement or to extent ofproportionate Interest at prime rate / LIBOR for unexpired period

• Other cases with stipulated conditions - Permissible through AD up to 25% of the invoice value orhigher value within parameters stipulated

• AD to allow undrawn balance for difference in weight, quanitty, etc upto 10%

• Key issues: IT / Ites who are billing on cost plus basis –can excess on billing if any can be refundedwithout RBI approval?

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Exports –Extension of Time

Extension of time by the AD for Exports realization

• Post 9 months up to 6 months at a time where exporter not able to realise Export proceeds for

reasons beyond his control and other key conditions as under

• Exporter should not under investigation

• Exporter to declare that Exports will be realized within extended period

• For extension beyond one year from date of Export, additionally:

‒ Total outstanding does not exceed USD 1 Mn or 10% of Average Export Realization during

preceding three years whichever is higher

• If suit is filed against buyer then extension irrespective of the amount involved / outstanding

Cases to be referred to RBI

• Exporter expects to realize the proceeds

• Cases not covered under general permission

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Exports –Extension of Time / Write-off

Write-off (Goods / software)

• Limits wrt to total Exports proceeds realized during the previous calendar year

‒ 10% for Status Holder Exporter for self write-off

‒ 5% for all others Expoters for self write-off

‒ 10% for all Exporters with prior AD Bank approval

‒ All other cases require prior RBI approval

• Selected conditions for write-off

‒ Outstanding for a year or more and all efforts for realization made

‒ Overseas Party not traceable or declared insolvent

‒ Goods destroyed by Importing Country authorities for regulatory reasons

‒ Undrawn balance of an Export Bill not exceeding 10% of Invoice Value

‒ Cost of legal action is disproportionate

• Self write - CA Certificate for Export realization in preceding year + surrender of Export benefits + ADBank Intimation

• Is write off on Export of services allowable?

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Exports – Establishment of offices abroad• Indian Entities can set up Branch or Representative Office abroad subject to ceilings

• Remittance for Initial Expenses higher of (a) 15% on average annual sales/ income or turnover during last two financial years or 25% of Net worth

• Remittance for Recurring Expenses - 10% on average annual sales/ income or turnover during last two financial years for normal business operations (trading / non-trading) subject to following:

‒ Set-up for normal business activities of Indian entity / posting of Representative

‒ Not enter into any contract / agreement in contravention of FEMA

‒ Not create any financial liabilities (including contingent) for head office in India

‒ Surplus funds abroad to be repatriated to India – no overseas investments allowed without prior approval of RBI

• Immovable property can be acquired for business / residential purposes of staff within above ceilings

• Reporting to AD - Opening of Overseas Bank account and Audited yearly prescribed statements

• Key issues:

‒ Can Branch acquire any intangibles e.g. Brands, etc.

‒ Can Indian entities pay directly to overseas vendors on behalf of overseas branch?

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Exports – Trade Fairs / Consignment Exports / Overseas Warehouse

• Participation in Trade Fairs Abroad

‒ Permissible per compliance framework including fx account overseas, EDF waiver, etc.

‒ Sale at discount also possible + Unsold goods can be sold in third country

‒ Gift of unsold goods also possible (USD 5,000 per exhibition / per fair)

• Consignment Exports

‒ Permissible as per compliance framework / undertaking by Consignment Agent stipulated for realization of Exports within stipulated timeframe

‒ Freight / Marine Insurance must be arranged in India

‒ Agents can deduct their expenses / remuneration and remit net proceeds – original bills / receipts requirement stipulated

‒ Key issues – can realization be lower or higher than declared value at the time of Export?

• Overseas warehouse

‒ Permissible through AD per compliance framework - initially for one year plus renewal thereafter

‒ Export outstanding not more than 5% of Exports during the year

‒ Minimum Export turnover of USD 100,000

‒ Period of realisation should be applicable

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Start-ups

• Definition by DIPP - . Any entity incorporated / registered in India is considered as start-up if:

‒ Up to 5 years

‒ If turnover for any of financial year has not exceeded 25 crores, and

‒ Working towards innovation, development deployment or commercialization of new products,processes or services driven by technology or intellectual property

• RBI Circular No. 51 of Feb 16 – Dealing with overseas subsidiaries:

‒ Start-ups with overseas subsidiaries permitted to open a Foreign currency account abroad (FCA)to pool earnings out of exports/sales made

‒ Start-ups’ overseas subsidiary also permitted to pool the receivables into FCA

‒ Balances for Exports by start-ups due in FCA repatriated into India within 9 months

‒ Permitted to avail facilities provided by online payment gateway service providers for value notexceeding USD 10,000

‒ Appropriate contractual agreement between startup, overseas subsidiary and concernedcustomer necessary.

‒ Key issues – Are there any rules / restriction for utilization of pooled money?

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Project & Services Exports - Background

• Project Exports

‒ Export of Engineering goods (as stipulated) on deferred payment terms

‒ Execution of turnkey projects abroad

• Rendering of services like designing, civil construction and erection / commissioning of plant / factory along with supply of machinery, equipment and materials

‒ Execution of civil construction contracts abroad

• Erection and civil construction contract and supply of construction material / equipment going into the civil works

• Service Exports

‒ Management and technical consultancy where execution involves execution of fund based/ non-fund based facilities from Indian banking system or deferred payments terms

• Nature of Project & Services Exports

‒ High Value, need to offer competitive credit terms and face stiff international competition

• FEMA No. 23(R) also applicable along with Memorandum of Instruction of Project & Service Exports (PEM) July 2014 read with RBI AP Dir Series Circular No. 39 dated 14 January 2016 and other circulars issued from time to time

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Project & Services Exports – Key Criteria for consideration / approval

Export of Engineering Goods & Turnkey / Civil Construction • Period of deferred credit offered vis-à-vis foreign competition, moratorium, rate of interest, advance /

down payment, fx requirement and overall economics (life of goods, etc)

• Security from the foreign buyer and bonds / guarantee to be offered by Exporter

• Nature of price escalation, force majeure and arbitration clause

• Fund / Non-Fund based facilities in India including pre or post shipment credit / bridge finance

• For turnkey projects abroad - Economic and technical viability & Special features relating to erection, supervision and commissioning

• In respect of civil construction contracts

‒ Only contractors approved by Ministry of Commerce & Industry

‒ Infrastructure facilities in importer country (transport, water, etc)

‒ Estimated monthly / quarterly cash flows

‒ Need for bridge finance facility abroad

‒ Arrangements between prime and associate / sub-contractors

Export of Services• Overall economic condition of the importer country

• Potential / prospect for future Export of services, goods or turnkey project from India

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Project Exports – Approving Authorities and procedure• AD or EXIM Bank (directly or through AD) are authorized to approve Project Exports

‒ Prior clearance from EXIM bank for its financial participation / guarantee

• Consultation with ECGC if its counter guarantee is required

• Indian sub-contractors of prime contractors also eligible to participate and any change in such sub-contractors requires compliance / approval

• No application required at bid stage which can be given subject to conditions in PEM

• Application post award to be within 15 days of execution of contract (6 sets) (Forms DPX 1 / PEX1 / TCS1)

‒ What if application submitted beyond 15 days?

• AD / EXIM Bank to deal expeditiously the approval application post award

• Application to AD / EXIM Bank with an undertaking (Form PEX 2) for reimport of equipment exported outside India for execution of contracts

• Service Exports - No prior approval for facilities for contracts undertaken on ‘cash terms’ basis

‒ Approval of AD / EXIM Bank will be required for contracts requiring facilities like opening foreign currency bank account , site office abroad, etc.

• No approval for pure supply of goods contracts (at least 90% proceeds realized within six months and balance in maximum two years and no fund / non-fund facility from the AD)

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Project Exports – Key facilities and compliances

Key Facilities

• Bid Bond / Guarantee by AD

• Corporate Guarantee

• Opening of Foreign Currency BankAccounts abroad / in India subject toconditions

• Establishment of site / liaison offices

• Fund based facility in India / abroad andGuarantees in connection with same

• Third country purchases

• Inter-project transfer of machinery/ funds

• Deployment of temporary cash surpluses

• Payment of overseas agency commission

• Export of Construction Equipment fromIndia

Key Compliances

• Declaration of the Exports / consumables–EDF/SDF forms (FEMA 23 applies to projectExports)

‒ Approval number and date to bementioned

• Half yearly progress reports (June andDecember) within 1 month to approvingauthority – Form DPX-2

• Quarterly reporting (Form AB) within 10 days

‒ Total value of shipment effected andadvance payment / deferred installmentsreceived

• Details of own Corporate Guarantee to bereported to AD / EXIM Bank within 15 daysfrom issue of such guarantees

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Project Exports – Nature of Credits permissible

• Supplier’s Credit

‒ Exporter extends credit facility to Buyer

• Buyer’s Credit

‒ Credit extended to Foreign Buyer by AD / Banks or Financial Institutions or EXIM in India

‒ Exporters to realize the Export value in rupees from AD / Bank or Fis

‒ EXIM bank itself has ‘Buyer’s Credit Scheme

• Competence and capability of Exporters

• Commercial justification / Economic viability of the overseas projects

• Creditworthiness of foreign borrower and economic conditions of buyers country

‒ Buyers Credit by AD-Bank(s)

• Application to RBI for extending buyers credit in connection with Export of capital goods fromIndia (Form DPX 3)

• PEM envisages Advisory role of ECGC and Exim Bank for such arrangements

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Project Exports – Compliances on completion• Reporting within one month of completion to the approving authority (Form DPX 2)

• Steps

‒ Close foreign currency accounts and transfer the balances to India

‒ Recover and repatriate any other funds in India

‒ Wind up site & liaison offices opened abroad

‒ Ensure performance guarantees, etc. are cancelled and returned to exporters

‒ Liquidate fully overseas borrowings/overdrafts and cancel counter-guarantees

‒ Dispose of equipment, machinery, vehicles, etc. purchased abroad and / or arrange to Import into India

• Report of steps undertaken along with following documentation required

‒ Completion or final handing over certificate

‒ Certificate from foreign bank regarding closure of account with it

‒ Statement of remittances and Bank Certificates about repatriation of funds to India

‒ Tax clearance certificate / No tax liability certificate about project

‒ Bills of Entry for re-import of machinery, etc.

‒ Statements of Income & Expenditure / Profit & Loss of project certified by a CA / Project Manager

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Thank You

The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavour to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation.

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The views in this presentation are personal views of the Presenter. Further, the information contained is of a generalnature and is not intended to address the circumstances of any particular individual or entity. Although, the endeavor isto provide accurate and timely information, there can be no guarantee that such information is accurate as of the dateit is received or that it will continue to be accurate in the future. No one should act on such / this information withoutappropriate professional advice which is possible only after a thorough examination of facts / particular situation.