Trade Credit for Import under FEMA

Trade Credit for Import under FEMA

For the smooth running of business, working capital plays an important role as it is the capital of a business which is used in its day-to-day trading operations, calculated as the current assets minus the current liabilities. The credit period in relation to payment cycles plays a vital role in smooth running of business and in determining valuation of any business. In the dealings with an overseas market, payment cycle again plays a vital role as it in turn determines inflows and outflow of foreign exchange in and from the country respectively.

Under the provisions of FEMA, under Schedule II to the Notification No. FEMA.3(R)/2018-RB, provisions in relation to Trade Credit for Imports are outlined as under:

Importers are allowed to raise Trade Credit (‘TC’) from outside India, subject to terms and conditions as stipulated by the Reserve Bank from time to time, silent features of which are as under:

1. TC providers: The overseas supplier, bank, financial institution and other permitted recognised lenders for maturity;
2. Purpose: TC can be raised for the purpose of import of non-capital and capital goods as permitted under the extant Foreign Trade Policy of the DGFT and for purchase of non-capital and capital goods within a Special Economic Zone (‘SEZ’) or from a different SEZ.
3. Trade Credit Framework:

• Currency of borrowing: TC can be raised in any freely convertible foreign currency as well as in Indian Rupees or any other currency.
• Forms of TC: Buyers’ Credit and Suppliers’ Credit.
• Eligible Borrower: Person resident in India acting as an importer.
• Amount of borrowing: Importers can raise TC up to USD 150 million or equivalent per import transaction for oil / gas refining & marketing, airline and shipping companies. For import of other goods, including capital or non-capital goods, TC up to USD 50 million or equivalent.
• Recognised Lenders:
  • For suppliers’ credit: Supplier of goods located outside India.
  • For buyers’ credit: Banks, financial institutions, foreign equity holder(s) located outside India and financial institutions in IFSCs located in India. Note: Participation of Indian banks and non-banking financial companies (operating from IFSCs) as lenders will be subject to the prudential guidelines issued by the concerned regulatory departments of the Reserve Bank. Further, foreign branches/subsidiaries of Indian banks are permitted as recognised lenders only for FCY TC.
• Period of TC:
  • The period of TC, reckoned from the date of shipment, shall be up to three years for import of capital goods.
  • For non-capital goods, this period shall be up to one year or the operating cycle whichever is less.
  • For shipyards / shipbuilders, the period of TC for import of non-capital goods can be up to three years.
• All – in – cost ceiling per annum:
  • FCY denominated TC:
    • Benchmark Rate plus 350 bps spread: For existing TCs linked to LIBOR whose benchmarks are changed to ARR.
    • Benchmark rate plus 300 bps spread: For new TCs.
  • INR denominated TC: Benchmark rate plus 250 bps spread.
• Exchange rate:
  • FCY denominated TC: Change of currency of FCY TC into INR TC can be at the exchange rate prevailing on the date of the agreement between the parties concerned for such change or at an exchange rate, which is less than the rate prevailing on the date of agreement, if consented to by the TC lender.
  • INR denominated TC: For conversion to Rupee, exchange rate shall be the rate prevailing on the date of settlement.
• Hedging Provision:
  • FCY denominated TC: The entities raising TC are required to follow the guidelines for hedging, if any, issued by the concerned sectoral or prudential regulator in respect of foreign currency exposure. Such entities shall have a board approved risk management policy.
  • INR denominated TC: The overseas investors are eligible to hedge their exposure in Rupee through permitted derivative products with AD Category I banks in India. The investors can also access the domestic market through branches / subsidiaries of Indian banks abroad or branches of foreign banks with Indian presence on a back-to-back basis.
• Change of currency of borrowing:
  • FCY denominated TC: Change of currency of TC from one freely convertible foreign currency to any other freely convertible foreign currency as well as to INR is freely permitted.
  • INR denominated TC: Change of currency from INR to any freely convertible foreign currency is not permitted.

4. Trade Credits in SEZ/FTWZ/DTA:
   • TC can be raised by a unit or a developer in a SEZ including FTWZ for purchase of non-capital and capital goods within an SEZ including FTWZ or from a different SEZ including FTWZ subject to compliance with parameters given above. Further, an entity in DTA is also allowed to raise TC for purchase of capital / non-capital goods from a unit or a developer of a SEZ including FTWZ.
   • TC transactions in respect of SEZs and DTAs as permitted above should also be in compliance with applicable provisions of SEZ Act, 2005 as amended from time to time. For TC transactions related to SEZ, date of transfer of ownership of goods will be treated as TC date. As there will be no bill of entry for sale transactions within SEZ, the inter unit receipt generated through NSDL can be treated as an import document.

5. Security for Trade Credit: The provisions regarding security for raising TC are as under:
   • Bank guarantees can be given by the ADs, on behalf of the importer, in favour of overseas lender of TC not exceeding the amount of TC. Period of such guarantee cannot be beyond the maximum permissible period for TC. TC can also be secured by overseas guarantee issued by foreign banks/overseas branches of Indian banks. Issuance of such guarantees i.e. guarantees by Indian banks and their branches/subsidiaries located outside India will be subject to compliance with the provisions contained in Department of Banking Regulations[1]. For detailed understanding, refer article ‘Guarantees and Co-acceptances’.
   • For the purpose of raising TC, the importer can also offer security of movable assets (including financial assets) / immovable assets (excluding land in SEZs) / corporate or personal guarantee for raising TC. ADs can permit creation of charge on security offered / accept corporate or personal guarantee, duly ensuring that:
     1. There exists a security clause in the loan agreement requiring the importer to create charge, in favour of overseas lender / security trustee on immovable assets / movable assets / financial securities / issuance of corporate and / or personal guarantee;
     2. No objection certificate, wherever necessary, from the existing lenders in India has been obtained;
     3. such arrangement is co-terminus with underlying TC;
     4. In case of invocation, the total payments towards guarantee should not exceed the dues towards trade credit; and
     5. Creation/ enforcement / invocation of charge shall be as per the provisions contained in Foreign Exchange Management (Acquisition and Transfer of Immovable Property in India) Regulations, 2018 and Foreign Exchange Management (Transfer or Issue of Security by a Person Resident Outside India) Regulations, 2017, as amended from time to time, or any other relative Regulations framed under the Foreign Exchange Management Act, 1999 and should also comply with applicable FDI/FII/SEZ policy/ rules/ guidelines.

Note: The directions on issuance of corporate or personal guarantee mentioned under this provision shall come into force from the date of publication, in the Official Gazette, of the relative Regulations issued under FEMA.

6. Reporting requirements: TC transactions are subject to the following reporting requirements:
   • Monthly reporting: AD Category I banks are required to furnish details of TCs like drawal, utilisation, and repayment of TC approved by all its branches, in a consolidated statement, during a month, in Form TC to the Director, Division of International Trade and Finance, Department of Economic Policy and Research, RBI, so as to reach not later than 10th of the following month. Each TC can be given a unique identification number by the AD bank.

Note: Suppliers’ credit beyond 180 days and up to one year/three years from the date of shipment for non-capital/capital goods respectively, should also be reported by the AD banks. Further, permissions granted by the AD banks/Regional offices of Reserve Bank for settlement of delayed import dues should also be reported by the AD banks as per the aforesaid procedure.

6. • Quarterly reporting: AD Category I banks are also required to furnish data on issuance of bank guarantees for TCs by all its branches, in a consolidated statement, at quarterly intervals on the XBRL platform.
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7. Role of ADs:

   While the primarily responsibility of ensuring adherence to the TC policy lies with the importer, the ADs are also expected to ensure compliance with applicable parameters of the trade credit policy / provisions of Foreign Exchange Management Act, 1999 by their constituents. As the Reserve Bank has not prescribed any format or manner in which TC arrangements / loan agreements are to be documented, ADs may consider any document to satisfy themselves with the underlying TC arrangement. ADs should ensure that there is no double financing on account of these transactions between a unit or a developer in a SEZ including FTWZ for purchase of non-capital and capital goods within an SEZ including FTWZ or from a different SEZ including FTWZ. ADs should also ensure that for import of non-capital goods, the period of TC, as applicable, is lower of operating cycle or one year (three years for shipyards / shipbuilders).

[1] Master Circular No. DBR.No.Dir.BC.11/13.03.00/2015-16 dated July 1, 2015 on “Guarantees and Co-acceptances”

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