Trade Credits - FEMA Ready Reckoner - FEMA

Trade Credits Background Transaction on account of Trade Credit (TC) and structured Obligation is a capital account transaction and hence is not freely permissible. It is regulated by RBI under powered conferred vide Section 6(3)(d) of FEMA Act, 1999. FEM (Borrowing and Lending ) regulation, 2018 and FEM (Guarantees) Regulation, 2000 are issued by RBI for this purposes. RBI FED Master Direction No. 5/2018-19 dated 26-03-2019 on External Commercial Borrowing, Trade Credit and structured Obligations Consolidated RBI Directions on this issue. Reporting Instruction are in Master Direction No. 18/2015-16 dated 01-01-2016 on reporting 1. Introduction: Trade Credits (TC) refer to the credits extended by the overseas supplier, bank, financial institution and other permitted recognised lenders for maturity, as prescribed in this framework, for imports of capital/non-capital goods permissible under the Foreign Trade Policy of the Government of India. Depending on the source of finance, such Trade Credits include suppliers credit and buyers credit from recognised lenders. [ Para 13 of RBI FED Master Direction No. 5/2018-19 dated 26.03.2019 ] 2. Trade Credits Framework [ Para 14 of RBI FED Master Direction No. 5/2018-19 dated 26.03.2019 ] Trade Credit (TC) for imports into India can be raised in any freely convertible foreign currency (FCY denominated Trade Credits) or Indian Rupee (INR denominated Trade Credits), as per the framework given in the table below: Sr. No. Parameters FCY denominated Trade Credits INR denominated Trade Credits I Forms of Trade Credit Buyers Credit and Suppliers Credit. ii Eligible borrower Person resident in India acting as an importer. iii Amount under automatic route (i) Up to USD 150 million or equivalent per import transaction for oil/gas refining marketing, airline and shipping companies . (ii) For others than (i) , up to USD 50 million or equivalent per import transaction. iv Recognised lenders 1. For suppliers credit: Supplier of goods located outside India. 2. 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 Trade Ccredit. V Period of Trade Credit a) For Capital Goods :- The period of Trade Credits, reckoned from the date of shipment, shall be up to three years for import of capital goods. b) For non-capital goods:- this period shall be a) up to one year or b) the operating cycle whichever is less. c) For shipyards / shipbuilders , the period of Trade Credit for import of non-capital goods can be up to three years . Vi All-in-cost ceiling per annum (i) Benchmark Rate plus 350 bps spread: For existing Trade Credits linked to LIBOR whose benchmarks are changed to ARR. (ii) Benchmark rate plus 300 bps spread: For new Trade Credits . Benchmark rate plus 250 bps spread. Vii Exchange rate Change of currency of FCY Trade Credits into INR Trade Credits 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 Trade Credit lender. For conversion to Rupee, exchange rate shall be the rate prevailing on the date of settlement. viii Hedging provision The entities raising Trade Credits 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. The overseas investors are eligible to hedge their exposure in Rupee through permitted derivative products with Authorised Dealer 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. ix Change of currency of borrowing Change of currency of Trade Credits from one freely convertible foreign currency to any other freely convertible foreign currency as well as to INR is freely permitted. Change of currency from INR to any freely convertible foreign currency is not permitted. 3. Trade Credits in SEZ/FTWZ/DTA [ Para 15 of RBI FED Master Direction No. 5/2018-19 dated 26.03.2019 ] 1. Trade Credits can be raised by A unit or a developer in a SEZ including FTWZ for purchase of noncapital and capital goods within an SEZ including FTWZ or from a different SEZ including FTWZ subject to compliance with parameters given at paragraph 2 above. An entity in DTA is also allowed to raise Trade Credit for purchase of capital / non-capital goods from a unit or a developer of a SEZ including FTWZ. 2. Date of Trade credit Trade Credits 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 Trade Credit transactions related to SEZ, date of transfer of ownership of goods will be treated as Trade Credits 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. 4. Security for Trade Credit [ Para 16 of RBI FED Master Direction No. 5/2018-19 dated 26.03.2019 ] The provisions regarding security for raising Trade Credits are as under: 1. Bank guarantees may be given by the Authorised Dealers, on behalf of the importer, in favour of overseas lender of Trade Credits not exceeding the amount of Trade Credits. Period of such guarantee cannot be beyond the maximum permissible period for Trade Credits. Trade Credits may 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 Regulation Master Circular No.DBR.No.Dir.BC.11/13.03.00/2015-16 dated July 1, 2015 on Guarantees and Co-acceptances , as amended from time to time. 2. For the purpose of raising Trade Credits, the importer may also offer security of movable assets (including financial assets) / immovable assets (excluding land in SEZs) / corporate or personal guarantee for raising trade credit. Authorised Dealers may permit creation of charge on security offered / accept corporate or personal guarantee, duly ensuring that: i. 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; ii. No objection certificate, wherever necessary, from the existing lenders in India has been obtained; iii. such arrangement is co-terminus with underlying Trade Credits; iv. In case of invocation, the total payments towards guarantee should not exceed the dues towards trade credit; and v. 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.6 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. 5. Reporting requirements [ Para 17 of RBI FED Master Direction No. 5/2018-19 dated 26.03.2019 ] Trade Credits transactions are subject to the following reporting requirements: 1. Monthly reporting: Authorised Dealer Category I banks are required to furnish details of Trade Credits like drawal, utilisation, and repayment of Trade Credit approved by all its branches, in a consolidated statement, during a month, in Form Trade Credits to the Director, Division of International Trade and Finance, Department of Economic Policy and Research, RBI, Central Office, Fort, Mumbai 400 001 (and in MS-Excel file through email) so as to reach not later than 10th of the following month . Each Trade Credit may be given a unique identification number by the Authorised Dealer bank. Format of Form Trade Credit is available at Annex IV of Part V of Master Directions Reporting under Foreign Exchange Management Act dated January 1, 2016 , as amended from time to time. 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 Authorised Dealer banks . Further, permissions granted by the Authorised Dealer banks/Regional offices of Reserve Bank for settlement of delayed import dues in terms of paragraphs B.5 and C.2 of the Master Direction on Import of Goods and Services dated January 1, 2016, as amended from time to time, should also be reported by the Authorised Dealer banks as per the aforesaid procedure. 2. Quarterly reporting: Authorised Dealer Category I banks are also required to furnish data on issuance of bank guarantees for Trade Credits by all its branches, in a consolidated statement, at quarterly intervals on the XBRL platform . For the above purpose Authorised Dealer banks may login to the site https://secweb.rbi.org.in/orfsxbrl/ using their User name, Password and Bank code. For downloading the relevant form, Authorised Dealer banks may follow the link Download Returns Package and download the form. After following the successive steps , Authorised Dealer banks may upload the file. For User name and Password, Authorised Dealer banks may write at [email protected] along with contact details. Clarification required, if any, may also be sent to the aforesaid email of the Reserve Bank and/ or may be communicated at Telephone No. 022-22601000 (extension2715). Guide for using XBRL website is also available under the Help option on the same page. Format of this statement is also available at Annex V of Part V of Master Directions Reporting under Foreign Exchange Management Act dated January 1, 2016, as amended from time to time. 6. Role of Authorised Dealers [ Para 18 of RBI FED Master Direction No. 5/2018-19 dated 26.03.2019 ] The primarily responsibility of ensuring adherence to the Trade Credit policy lies with the importer , the Authorised Dealers 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 Trade Credit arrangements / loan agreements are to be documented , Authorised Dealers may consider any document to satisfy themselves with the underlying Trade Credits arrangement. Authorised Dealers 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. Authorised Dealers should also ensure that for import of non-capital goods, the period of Trade Credit, as applicable, is lower of operating cycle or one year (three years for shipyards / shipbuilders). 7. Period of Trade Credit The period of trade credit reckoned from the date of shipment shall be as under: i. For import of non-capital goods Maximum period of up to one year and linked with the operating cycle, or for a period as per the guidelines issued by the Reserve Bank from time to time for any import of any goods / for import by any specific sector. ii. For import of capital goods Maximum period of three years or for a period as per the guidelines issued by the Reserve Bank from time to time. [ Schedule II para 4 of FEM (Borrowing and Lending) Regulation, 2018 ]