Foreign Trade Policy 2015-20
The Foreign Trade Policy (FTP), 2015-20, is notified by Central Govt., in exercise of powers conferred
under Section 5 of the Foreign Trade (Development & Regulation) Act, 1992 (No. 22 of 1992).
Duration of FTP : 2015-20 FTP, incorporating provisions relating to export and import of goods and
services, came Into force w.e.f. 01.04.2015 and shall remain in force up to 31st March, 2020, unless
otherwise specified. All exports and imports made upto the date of notification shall, accordingly, be
governed by the relevant FTP.
Director General of Foreign Trade (DGFT) can, by means of a Public Notice, notify Hand Book of
Procedures, including Appendices and Aayat Niryat Forms or amendment thereto, if any, laying down
the procedure to be followed by an exporter or importer or by any Licensing/Regional Authority or by
any other authority for purposes
of implementing provisions of FT (D&R) Act, the Rules and the Orders made there under and provisions
of FTP.
IMPORTER EXPORTER CODE (IEC): No export or import can be made by any person without
obtaining an IEC number unless specifically exempted. Further, only one IEC is permitted against one
Permanent Account Number (PAN). If any PAN card holder has more than one IEC, the extra IECs is
disabled.
IEC : An IEC is a 10-digit number allotted to a person that is mandatory for undertaking any
export/import activities. The facility for IEC in electronic form or e-IEC has also been operationalised.
Exports from India Schemes: There are two schemes for exports of Merchandise and Services
respectively: (I) Merchandise Exports from India Scheme (MEIS).
(ii) Service Exports from India Scheme (SEIS).
Niryat Bandhu - Handholding Scheme for new Exporters / Importers: As per provisions of Foreign
Trade Policy 2015-20, DGFT is implementing the Niryat Bandhu Scheme for mentoring new and
potential exporter on the inbicades of foreign trade through counselling, training and outreach
programs.
Towns of Export Excellence (TEE): Selected towns producing goods of Rs. 750 cr or more may be
notified as TEE, based on potential for growth in exports. For TEE in Handloom, Handicraft, Agriculture
and Fisheries sector, threshold limit would be Rs.150
EOU, EHTP, STP, BTP: Units undertaking to export their entire production of goods and services (except
permissible sales in Domestic Tariff Area-DTA), may be set up under Export Oriented Unit (EOU)
Scheme, Eledronics Hardware Technology Park (EHTP) Scheme, Software Technology Park (STP)
Scheme or 1310-Technology Park (BTP) Scheme for manufacture of goods, rendering of services,
development of software, agriculture induding bio-tedinology. Trading units are not covered under
these schemes.
Export Promojion Capital Goods Scheme: (a) Scheme allows import of capital goods for pre-production,
production and post-production, at Zero customs duty. The Authorisation holder may also procure
Capital Goods from indigenous sources: Capital goods shall indude capital goods as defined in foreign
trade policy; (ii) Computer software systems; (iii) Spares, moulds, dies, jigs, fixtures, tools &
refractories and spare refractories; and (iv) catalysts for initial charge-i- one subsequent charge.
(b) Import of capital goods for Project Imports notified by CBEC.
Second hand capital goods are not permitted.
Interest Equalisation Scheme on Pre and Post Shipment Rupee Export Credit (December 4,
2015): The scheme is effective from April 1, 2015. (a) The rate of interest equalisation would be 3 percent
and will be available on Pre Shipment Rupee Export Credit and Post Shipment Rupee Export Credit; (b)
The scheme would be applicable w.e.f 01.04.2015 for 5 years. (c) The scheme will be available to all
exports under 416 tariff lines [at ITC (HS) code of 4 digit] and exports made by Micro, Small & Medium
Enterprises (MSMEs) across all ITC(HS) codes; (d) Scheme would not be available to merchant exporters;
(e) A study may be initiated on the impact of the scheme on export promotion on completion of 3 years of
the operation of the scheme. The study may be done through one of the IIMs
Export Refinance
1. Who will provide? Export Refinance is provided by RBI.
2. Maximum period of refinance is 180 days.
3. Extent of Refinance: 15% (w.e.f. 27.10.2009) of eligible export finance outstanding on the reporting Friday
of the preceding fortnight. Outstanding Export Credit for the purpose of working out refinance limits will be
aggregate outstanding export credit minus export bills rediscounted with other banks/Exim Bank/Financial
Institutions, export credit against which refinance has been obtained from NABARD/Exim Bank, pre-shipment
credit in foreign currency (PCFC), export bills discounted/rediscounted under the scheme of 'Rediscounting of
Export Bills Abroad', overdue rupee export credit and other export credit not eligible for refinance.
Interest rate is Repo Rate. 5. Packing Credit in Foreign Currency is not eligible for export refinance
EXPORTS FROM INDIA
Export trade is regulated by DGFT under Govt. of India, which announces policies and procedures for
exports from India. AD-I banks conduct export transactions in conformity with the Foreign Trade Policy,
the Rules framed by the Govt. of India and the directions issued by RBI. Manner of receipt of export
proceeds: (i) The amount can be received through AD Banks in the form of (a) Bank draft, pay order,
banker's or personal cheques (b) Foreign currency notes/travellers' cheques from the buyer during his
visit to India. (c) Payment out of funds held in the FCNR/NRE account maintained by the buyer
(d) International Credit Cards of the buyer (e) Wef Jan 01, 2009, Asian Clearing Union participants can
settle their transactions in ACU Dollar or in ACU Euro (equivalent in value to one US Dollar and one
Euro, respectively). Payment can be received from 3rd parties named by exporters in EGF, subject to
compliance of certain conditions (RBI-Nov 08, 2013).
Time limits for realisation and repatriation of export proceeds:
(a) Units in SEZs, Status Holders, 100% Export Oriented Units and Units in EHTPs/STPsIBTPs: max 9
months
(b) Exported to a warehouse established outside India : Max 15 months from the date of shipment of
goods; and
(c) Other cases: Max 9 months.
Offices and Immovable Property for Overseas Offices: For setting up of the office, AD-I banks may
allow remittances towards initial expenses up to 15% of the average annual sales/income or turnover
during the last 2 financial years or up to 25% of the net worth, whichever is higher. For recurring
expenses, remittances up to 10% of the average annual sales/income or turnover during the last 2
financial years may be sent.
Advance Payments against Exports: The exporter shall ensure that -
i. the shipment of goods is made within one year (ADs can allow period above one year also w.e.f. 21.2.12 subject
to the condition that refund during the last 3 years is not more than 10% of advance payments received);
ii. the rate of interest payable on the advance payment does not exceed London Inter-Bank Offered
Rate (LIBOR) + 100 basis points.
(ADs to sent quarterly report to RBI, within 21 days, for delay in utilization of advance payments — 09.02.15)
LONG TERM EXPORT ADVANCE : RBI allowed (May 21, 2014) AD banks to permit exporters, having a
minimum of 3 years' satisfactory track record, to receive long term export advance up to a maximum
tenor of 10 years for execution of long term supply contracts for export of goods. The rate of interest
should not exceed LIBOR plus 200 basis points. Receipt of advance of USD 100 million or more should
be immediately reported RBI. Where AD banks issue bank guarantee (BG) / Stand by Letter of Credit
(SBLC) for export performance, BG / SBLC may be issued for a term not exceeding 2 years at a time
and further rollover of not more than 2 years at a time may be allowed subject to satisfaction with
relative export performance as per the contract.
Part Drawings /Undrawn Balances: Where it is the practice to leave a small part of the invoice
value (maximum of 10% of the full export value) undrawn for payment after adjustment due to
differences in weight, quality, etc. to be ascertained after arrival AD-I banks may negotiate the bills.
Opening / Hiring of Ware houses abroad: Banks may grant permission for opening / hiring
warehouses abroad if export outstanding does not exceed 5% of exports made during the previous
financial year and applicant has a minimum export turnover of USD 100,000/- during the last financial
year.
Supplier's Credit
Under supplier credit contracts the exporter supplier extends a credit to the buyer importer of capital goods. The
terms can be down payment with the balance payable in instalments. The interest on such deferred payments
will have to be paid on the rates determined at the time of entering Into such arrangement. The deferred
payments are supported by the promissory notes or bills of exchange often carrying the guarantee of importer's
bank. To finance the credit given to the Importer under such arrangement, the exporter raises a loan from his
banker under the export credit schemes in force. In general, the export credit insurance will be an inherent part
of the mechanism.
Buyer's credit
In a buyer credit transaction, the buyer importer raises a loan from a bank in the exporter's country under the
export credit scheme in force on the terms conforming to the OECD consensus. The loan Is drawn to pay the
exporter in full and thus for the exporter, the transaction is a cash sale. Another form of the buyer credit
arrangement is, for a bank in the exporter's country, to establish a line of credit in favour of a bank or financial
institutions, in the importing country. The later makes available, loans under the line of credit to its importer
clients for the purchase of capital goods from the credit giving country. In India BUM Bank makes available
supplier/buyer credits and also extends line of credit to foreign financial institutions to promote exports of capital
goods from India.
Export Credit Guarantee Corporation of India Ltd. (ECGC)
Export Credit Guarantee Corporation of India Ltd. (ECGC) is a Government of India Enterprise
which provides export credit insurance facilities to exporters and banks in India. It functions under
the administrative control of Ministry of Commerce & Industry, and is managed by a Board of
Directors comprising representatives of the Government, Reserve Bank of India, banking, insurance
and exporting community. Over the years, it has evolved various export credit risk insurance
products to suit the requirements of Indian exporters and commercial banks. ECGC is the seventh
largest credit insurer of the world in terms of coverage of national exports. Its present paid up
capital is Rs. 1200 Crores and the authorized capital is Rs. 5000 Crores.
ECGC is essentially an export promotion organization, seeking to improve the competitive
capacity of Indian exporters by giving them credit insurance covers comparable to those available
to their competitors from most other countries. It keeps it's premium rates at the lowest level
possible Provides a range of credit risk insurance covers to exporters against loss in export of goods
and services Offers export credit insurance cover to banks and financial institutions to enable
exporters to obtain better facilities from them Provides Overseas Investment Insurance to Indian
companies investing in joint ventures abroad in the form of equity or loan
How ECGC helps exporters
• Offers insurance protection to exporters against payment risks
• Provides guidance in export-related activities
• Makes available information on different countries with its own credit ratings
• Makes it easy to obtain export finance from banks/financial institutions
• Assists exporters in recovering bad debts
• Provides information on credit-worthiness of overseas buyers.
TAKE-OUT FINANCING
Take-out financing is a method of providing finance for longer duration projects (say of 15 years) by
banks by sanctioning medium term loans (say 5-7 years).
It is understanding that the loan will be taken out of books of the financing bank within pre-fixed period, by
another institution thus preventing any possible asset-liability mismatch. After taking out
the loans from the banks, the institution could off-load them to another bank or keep it.
Under this process, the institutions engaged in long term financing such as IDFC, agree to take out the loan
from books of the banks financing such projects after the fixed time period, say of 5 years, when the project
reaches certain previously defined milestones. On the basis of such understanding, the bank concerned
agrees to provide a medium term loan with phased redemption beginning after, say 5 years. At the end of
5 years, the bank could sell the loans to the institution and get it off its books.
Prudent guidelines on NPA are applicable. Benefits - This ensures that the project gets longterm
funding though various participants.
Process of Take Out Financing
The original lender participates in a long term project (say 15-20 years) by granting a medium term
loan (of say 5-7).
On completion of the pre-decided period, this loan is taken over by another institution subject to
fulfillment of the conditions stipulated in .the orignal arrangement
Original lender receives the payment from the 2" lender who has taken over the loan
FACTORING
The arrangement in which short term domestic receivables on sale of goods or services are sold to a
company (known as a FACTOR), is called, factoring which was introduced during 1991 on the Report of
Kalyanasundrama Committee. Funcions : The FACTOR performs the functions such as (1) purchase of
receivables, (2) maintaining the sales or receivables ledgers, (3) submitting sales account to the creditors,
(4) collection of debt on due dates, (5) after collection, to return the reserve money to seller and provide
consultancy services to customer. Advantages of factoring are:
a: Sales practically become cash sales
b: Money blocked with debtors becomes available for business.
c: The seller also gets rid of collection of the receivables
d: His working capital management becomes efficient which also reduce his cost and in turn improve
the possibility of better profits. Process of Factoring
1. Seller sells goods on short term credit basis.
2. Buyer accepts the bills raised by seller.
3. Seller discounts these receivables with a FACTOR by assigning the receivables.
4. FACTOR purchases the receivable on with or without recourse basis.
5. FACTOR recovers the amount from buyer on due date.
With or without recource : If non payment loss is borne by the factor it is called without recourse
factoring. If risk can be transferred back to seller, it is called with recourse factoring.
FORFAITING
Forfeiting represents the purchase of obligations, which fall due at some future date and arise from delivery of goods
(or services) in export transactions, without recourse to the previous holder of the obligation.
Under forfeiting, the forfeiter deducts interest in advance for the whole period of credit and disburses the net proceeds to
the exporter. The sole responsibilities of the exporter is to manufacture and deliver the goods to the importer, which
creates a valid payment obligation of the importer.
Forfeiting and Factoring : Factoring is suitable for financing smaller and short term receivables with credit period
between 90 to 180 days, whereas forfeiting is used to finance capital goods' exports with credit terms between a few
months to 10 years. Factoring covers the commercial risk, whereas forfeiting additionally covers the political and
transfer risk.
Process of forfeiting:
•The exporter approaches the forfaitor, willing to undertake forfeiting.
• The transaction covers the export, the price of which is receivable over a medium term and it is covered by a bank
guarantee or aval.
•The forfaitor stipulates an expiry date during which the exporter will make the shipment, prepare the documents and
present the documents.
•The exporter gets payment immediately on presentation of documents.
•The forfaitor recovers the interest for the money, the charges for political, commercial and country risk and other
incidental costs.
•The importer becomes liable for the cost of contract and receives the credit from forfaitor for a given no. of years, at a
given interest rate.
•The importer's obligation is guaranteed by a bank guarantee or aval (guarantor).
Security for forfaiting: The drafts (In the form of promissory notes or accepted bills of exchange) covering the
transaction, are guaranteed by a bank aval (co-acceptance of bills of exchange or of promissory notes by the bank) or a
bank guarantee (as a separate guarantee bond), promising to pay the amount on the given date, in the event of nonpayment
by the original debtor (i.e. importer). The guarantor is usually an internationally active bank,
resident in the importer's country which can ascertain the importer's creditworthiness first-hand. Repayments : The
repayments are by periodic instalments, usually on 6 months intervals. The total period may range up to 7-10 years.
Advantages of Forfaiting: 1.100 % risk cover as the forfaiter covers the (a) country risk (b) currency risk
(c) commercial risk (d) interest rate risk. 2. Instant Cash : The forfaitor generates instant cash for the
exporter that relieves his balance sheet and improves liquidity
TReDS - Receivable Finance System
RBI issued the guidelines on Dec 03, 2014, for setting up and operating the trade receivables system u/s 10(2) and Sec
18 of Payment & Settlement Systems Act, 2007.
Objective : To facilitate discounting of invoices and bills of exchange. TReDS can deal with (i) receivables factoring and
(ii) reverse factoring. The transactions will be "without recourse" to the sellers.
Participants: Sellers (MSMEs), corporate, other buyers, Government Departments, PSUs, financiers (banks and NBFC
factors). The TReDS provides a platform for uploading, accepting, discounting, trading and settlement of the invoices /
bills of sellers.
Generation of reports : In order to ensure a smooth process of payments, the TReDS would provide various types
of MIS report such as intimation of total receivables position, financed and unfinanced (to sellers); intimation of
outstanding position, financed and unfinanced with details of beneficiaries and beneficiary accounts to be credited (for
buyers); total' financed position for financiers; etc. The system will also generate due date reminders to relevant
parties, notifications to be issued to bankers when a factoring unit is financed, notifications to be issued to buyers once
a factoring unit related to their transaction is traded in the secondary segment, etc.
Access to TReDS : TReDS would put in place a standardized mechanism / process for on-boarding of buyers and
sellers on the TReDS. Access would be through IDs / Passwords for TReDS participants. Participation would be accepted
after submission of all KYC related documents to the TReDS, along with resolutions / documents.
Regulatory framework for TReDS
The TReDS, undertaking clearing and settlement activities, would be governed by RBI's regulatory framework under
Payment and Settlement Systems Act 2007 (PS5 Act) and function as an authorised payment system under the PSS Act
2007.
Eligibility criteria to set up/operate the TReDS There is a 3-dimension criteria as under:
(a) Financial Criteria
(i) Minimum paid up equity capital shall be Rs. 25 crore.
(ii) Entities, other than promoters, cannot have
shareholding In excess of 10% of the equity capital.
(b) Due diligence of promoters :RBI would assess the 'fit and proper' status on the basis of past record
of sound credentials and integrity; financial soundness and track record of at least 5 years in running their
businesses.
(c) Technological capability : The TReDS should have sound technological basis to support its
operations.
LEASING
A lease is a contract where the owner of the assets transfers the right to another person to use the assets
against, payment of fixed lease rentals. There are two parties in a lease contract i.e. lessor or the owner
and the lessee or user. The lesser remains owner and the leased property remains in the possession of
the lessee.
Leasing activity by banks : During March 1994, RBI permitted banks to undertake business of leasing
and hire-purchase but not beyond 10% of their total advances.
Period of lease: Lease is generally of fixed period. After expiry of the period, the lessee may purchase
the leased assets as per agreement. The lease contract is generally not cancelled.
Rental :The lease rentals are decided in advance for the entire lease period. The accelerated lease
rentals in leasing mean low in the beginning but gradually increase later on.
Lease and Hire-purchase : A lease (governed by Indian Contract Act 1872) is different from hirepurchase
which is a contract of owner-hirer and after the contract the ownership is passed to the hirer
on payment of the amount. The assets in hire-purchase appear in the balance sheet of the hirer and he
also claims depreciation. The instalment is partly treated as capital repayment and balance as interest
expenditure. Only the amount of interest is considered for tax benefits
Terms in leasing
Lessor A person who under an agreement, conveys to another person (the lessee) right to use, in return
for rent, an asset for an agreed period.
Lessee A person, who obtains from another person (the lessor) the right to use, in return for rent, an
asset for an agreed period of time.
Lease An agreement whereby the lessor conveys to the lessee, in return for rent, the right to use an
asset for an agreed period of time.
Finance lease A lease Is dassified as finance lease if it secures for the lessor, the recovery of his capital
outlay plus a return on the funds invested during the lease term. Such a lease is normally non-cancellable
and the present value of the minimum lease payments at the Inception of the lease exceeds or is equal to
substantially the whole of the fair value of the leased assets.
Operating lease A lease is classified as operating lease If It does not secure for the lessor the recovery of his
capital outlay plus a return on the funds invested during the lease term.
Sale and lease back A sale and lease back
transaction involves the sale of an asset by the vendor and the leasing of the same asset back to the
vendor. The rentals and sale price are usually Inter-dependent as they are negotiated as a package
and may not represent fair values.
VENTURE CAPITAL
Venture capital is a source of funds used to finance new proposals/ideas involving new technology or
products which are risky but with a potential of high returns. It is a capital committed in the form of
share-holding for the formation and setting up of a firm, specialising in new ideas or technologies. In
other words, it is a long term fund in equity or semi-equity form, to finance high-tech projects
involving high risks and yet having strong potential of high profitability.
In India, the venture capital has largely been sponsored by financial institutions.
Kinds of venture capital:
a Risk capital - representing financial investment in a highly risk proposition in the hope of earning
high rate of return
b Start-up capital, seed capital, initial capital
c Equity capital Advantages
• It makes contribution to technological innovations and promotion of entrepreneurship.
• It helps the industrialisation, technological development, generate employment and help develop
entrepreneurial skills.
• It benefits the investors when they are invited to invest only after organisation starts earning profit,
when risk is low and growth is healthy. Exit from project The investors can exit on success of the project,
by off loading their shareholding/ investment.
The Foreign Trade Policy (FTP), 2015-20, is notified by Central Govt., in exercise of powers conferred
under Section 5 of the Foreign Trade (Development & Regulation) Act, 1992 (No. 22 of 1992).
Duration of FTP : 2015-20 FTP, incorporating provisions relating to export and import of goods and
services, came Into force w.e.f. 01.04.2015 and shall remain in force up to 31st March, 2020, unless
otherwise specified. All exports and imports made upto the date of notification shall, accordingly, be
governed by the relevant FTP.
Director General of Foreign Trade (DGFT) can, by means of a Public Notice, notify Hand Book of
Procedures, including Appendices and Aayat Niryat Forms or amendment thereto, if any, laying down
the procedure to be followed by an exporter or importer or by any Licensing/Regional Authority or by
any other authority for purposes
of implementing provisions of FT (D&R) Act, the Rules and the Orders made there under and provisions
of FTP.
IMPORTER EXPORTER CODE (IEC): No export or import can be made by any person without
obtaining an IEC number unless specifically exempted. Further, only one IEC is permitted against one
Permanent Account Number (PAN). If any PAN card holder has more than one IEC, the extra IECs is
disabled.
IEC : An IEC is a 10-digit number allotted to a person that is mandatory for undertaking any
export/import activities. The facility for IEC in electronic form or e-IEC has also been operationalised.
Exports from India Schemes: There are two schemes for exports of Merchandise and Services
respectively: (I) Merchandise Exports from India Scheme (MEIS).
(ii) Service Exports from India Scheme (SEIS).
Niryat Bandhu - Handholding Scheme for new Exporters / Importers: As per provisions of Foreign
Trade Policy 2015-20, DGFT is implementing the Niryat Bandhu Scheme for mentoring new and
potential exporter on the inbicades of foreign trade through counselling, training and outreach
programs.
Towns of Export Excellence (TEE): Selected towns producing goods of Rs. 750 cr or more may be
notified as TEE, based on potential for growth in exports. For TEE in Handloom, Handicraft, Agriculture
and Fisheries sector, threshold limit would be Rs.150
EOU, EHTP, STP, BTP: Units undertaking to export their entire production of goods and services (except
permissible sales in Domestic Tariff Area-DTA), may be set up under Export Oriented Unit (EOU)
Scheme, Eledronics Hardware Technology Park (EHTP) Scheme, Software Technology Park (STP)
Scheme or 1310-Technology Park (BTP) Scheme for manufacture of goods, rendering of services,
development of software, agriculture induding bio-tedinology. Trading units are not covered under
these schemes.
Export Promojion Capital Goods Scheme: (a) Scheme allows import of capital goods for pre-production,
production and post-production, at Zero customs duty. The Authorisation holder may also procure
Capital Goods from indigenous sources: Capital goods shall indude capital goods as defined in foreign
trade policy; (ii) Computer software systems; (iii) Spares, moulds, dies, jigs, fixtures, tools &
refractories and spare refractories; and (iv) catalysts for initial charge-i- one subsequent charge.
(b) Import of capital goods for Project Imports notified by CBEC.
Second hand capital goods are not permitted.
Interest Equalisation Scheme on Pre and Post Shipment Rupee Export Credit (December 4,
2015): The scheme is effective from April 1, 2015. (a) The rate of interest equalisation would be 3 percent
and will be available on Pre Shipment Rupee Export Credit and Post Shipment Rupee Export Credit; (b)
The scheme would be applicable w.e.f 01.04.2015 for 5 years. (c) The scheme will be available to all
exports under 416 tariff lines [at ITC (HS) code of 4 digit] and exports made by Micro, Small & Medium
Enterprises (MSMEs) across all ITC(HS) codes; (d) Scheme would not be available to merchant exporters;
(e) A study may be initiated on the impact of the scheme on export promotion on completion of 3 years of
the operation of the scheme. The study may be done through one of the IIMs
Export Refinance
1. Who will provide? Export Refinance is provided by RBI.
2. Maximum period of refinance is 180 days.
3. Extent of Refinance: 15% (w.e.f. 27.10.2009) of eligible export finance outstanding on the reporting Friday
of the preceding fortnight. Outstanding Export Credit for the purpose of working out refinance limits will be
aggregate outstanding export credit minus export bills rediscounted with other banks/Exim Bank/Financial
Institutions, export credit against which refinance has been obtained from NABARD/Exim Bank, pre-shipment
credit in foreign currency (PCFC), export bills discounted/rediscounted under the scheme of 'Rediscounting of
Export Bills Abroad', overdue rupee export credit and other export credit not eligible for refinance.
Interest rate is Repo Rate. 5. Packing Credit in Foreign Currency is not eligible for export refinance
EXPORTS FROM INDIA
Export trade is regulated by DGFT under Govt. of India, which announces policies and procedures for
exports from India. AD-I banks conduct export transactions in conformity with the Foreign Trade Policy,
the Rules framed by the Govt. of India and the directions issued by RBI. Manner of receipt of export
proceeds: (i) The amount can be received through AD Banks in the form of (a) Bank draft, pay order,
banker's or personal cheques (b) Foreign currency notes/travellers' cheques from the buyer during his
visit to India. (c) Payment out of funds held in the FCNR/NRE account maintained by the buyer
(d) International Credit Cards of the buyer (e) Wef Jan 01, 2009, Asian Clearing Union participants can
settle their transactions in ACU Dollar or in ACU Euro (equivalent in value to one US Dollar and one
Euro, respectively). Payment can be received from 3rd parties named by exporters in EGF, subject to
compliance of certain conditions (RBI-Nov 08, 2013).
Time limits for realisation and repatriation of export proceeds:
(a) Units in SEZs, Status Holders, 100% Export Oriented Units and Units in EHTPs/STPsIBTPs: max 9
months
(b) Exported to a warehouse established outside India : Max 15 months from the date of shipment of
goods; and
(c) Other cases: Max 9 months.
Offices and Immovable Property for Overseas Offices: For setting up of the office, AD-I banks may
allow remittances towards initial expenses up to 15% of the average annual sales/income or turnover
during the last 2 financial years or up to 25% of the net worth, whichever is higher. For recurring
expenses, remittances up to 10% of the average annual sales/income or turnover during the last 2
financial years may be sent.
Advance Payments against Exports: The exporter shall ensure that -
i. the shipment of goods is made within one year (ADs can allow period above one year also w.e.f. 21.2.12 subject
to the condition that refund during the last 3 years is not more than 10% of advance payments received);
ii. the rate of interest payable on the advance payment does not exceed London Inter-Bank Offered
Rate (LIBOR) + 100 basis points.
(ADs to sent quarterly report to RBI, within 21 days, for delay in utilization of advance payments — 09.02.15)
LONG TERM EXPORT ADVANCE : RBI allowed (May 21, 2014) AD banks to permit exporters, having a
minimum of 3 years' satisfactory track record, to receive long term export advance up to a maximum
tenor of 10 years for execution of long term supply contracts for export of goods. The rate of interest
should not exceed LIBOR plus 200 basis points. Receipt of advance of USD 100 million or more should
be immediately reported RBI. Where AD banks issue bank guarantee (BG) / Stand by Letter of Credit
(SBLC) for export performance, BG / SBLC may be issued for a term not exceeding 2 years at a time
and further rollover of not more than 2 years at a time may be allowed subject to satisfaction with
relative export performance as per the contract.
Part Drawings /Undrawn Balances: Where it is the practice to leave a small part of the invoice
value (maximum of 10% of the full export value) undrawn for payment after adjustment due to
differences in weight, quality, etc. to be ascertained after arrival AD-I banks may negotiate the bills.
Opening / Hiring of Ware houses abroad: Banks may grant permission for opening / hiring
warehouses abroad if export outstanding does not exceed 5% of exports made during the previous
financial year and applicant has a minimum export turnover of USD 100,000/- during the last financial
year.
Supplier's Credit
Under supplier credit contracts the exporter supplier extends a credit to the buyer importer of capital goods. The
terms can be down payment with the balance payable in instalments. The interest on such deferred payments
will have to be paid on the rates determined at the time of entering Into such arrangement. The deferred
payments are supported by the promissory notes or bills of exchange often carrying the guarantee of importer's
bank. To finance the credit given to the Importer under such arrangement, the exporter raises a loan from his
banker under the export credit schemes in force. In general, the export credit insurance will be an inherent part
of the mechanism.
Buyer's credit
In a buyer credit transaction, the buyer importer raises a loan from a bank in the exporter's country under the
export credit scheme in force on the terms conforming to the OECD consensus. The loan Is drawn to pay the
exporter in full and thus for the exporter, the transaction is a cash sale. Another form of the buyer credit
arrangement is, for a bank in the exporter's country, to establish a line of credit in favour of a bank or financial
institutions, in the importing country. The later makes available, loans under the line of credit to its importer
clients for the purchase of capital goods from the credit giving country. In India BUM Bank makes available
supplier/buyer credits and also extends line of credit to foreign financial institutions to promote exports of capital
goods from India.
Export Credit Guarantee Corporation of India Ltd. (ECGC)
Export Credit Guarantee Corporation of India Ltd. (ECGC) is a Government of India Enterprise
which provides export credit insurance facilities to exporters and banks in India. It functions under
the administrative control of Ministry of Commerce & Industry, and is managed by a Board of
Directors comprising representatives of the Government, Reserve Bank of India, banking, insurance
and exporting community. Over the years, it has evolved various export credit risk insurance
products to suit the requirements of Indian exporters and commercial banks. ECGC is the seventh
largest credit insurer of the world in terms of coverage of national exports. Its present paid up
capital is Rs. 1200 Crores and the authorized capital is Rs. 5000 Crores.
ECGC is essentially an export promotion organization, seeking to improve the competitive
capacity of Indian exporters by giving them credit insurance covers comparable to those available
to their competitors from most other countries. It keeps it's premium rates at the lowest level
possible Provides a range of credit risk insurance covers to exporters against loss in export of goods
and services Offers export credit insurance cover to banks and financial institutions to enable
exporters to obtain better facilities from them Provides Overseas Investment Insurance to Indian
companies investing in joint ventures abroad in the form of equity or loan
How ECGC helps exporters
• Offers insurance protection to exporters against payment risks
• Provides guidance in export-related activities
• Makes available information on different countries with its own credit ratings
• Makes it easy to obtain export finance from banks/financial institutions
• Assists exporters in recovering bad debts
• Provides information on credit-worthiness of overseas buyers.
TAKE-OUT FINANCING
Take-out financing is a method of providing finance for longer duration projects (say of 15 years) by
banks by sanctioning medium term loans (say 5-7 years).
It is understanding that the loan will be taken out of books of the financing bank within pre-fixed period, by
another institution thus preventing any possible asset-liability mismatch. After taking out
the loans from the banks, the institution could off-load them to another bank or keep it.
Under this process, the institutions engaged in long term financing such as IDFC, agree to take out the loan
from books of the banks financing such projects after the fixed time period, say of 5 years, when the project
reaches certain previously defined milestones. On the basis of such understanding, the bank concerned
agrees to provide a medium term loan with phased redemption beginning after, say 5 years. At the end of
5 years, the bank could sell the loans to the institution and get it off its books.
Prudent guidelines on NPA are applicable. Benefits - This ensures that the project gets longterm
funding though various participants.
Process of Take Out Financing
The original lender participates in a long term project (say 15-20 years) by granting a medium term
loan (of say 5-7).
On completion of the pre-decided period, this loan is taken over by another institution subject to
fulfillment of the conditions stipulated in .the orignal arrangement
Original lender receives the payment from the 2" lender who has taken over the loan
FACTORING
The arrangement in which short term domestic receivables on sale of goods or services are sold to a
company (known as a FACTOR), is called, factoring which was introduced during 1991 on the Report of
Kalyanasundrama Committee. Funcions : The FACTOR performs the functions such as (1) purchase of
receivables, (2) maintaining the sales or receivables ledgers, (3) submitting sales account to the creditors,
(4) collection of debt on due dates, (5) after collection, to return the reserve money to seller and provide
consultancy services to customer. Advantages of factoring are:
a: Sales practically become cash sales
b: Money blocked with debtors becomes available for business.
c: The seller also gets rid of collection of the receivables
d: His working capital management becomes efficient which also reduce his cost and in turn improve
the possibility of better profits. Process of Factoring
1. Seller sells goods on short term credit basis.
2. Buyer accepts the bills raised by seller.
3. Seller discounts these receivables with a FACTOR by assigning the receivables.
4. FACTOR purchases the receivable on with or without recourse basis.
5. FACTOR recovers the amount from buyer on due date.
With or without recource : If non payment loss is borne by the factor it is called without recourse
factoring. If risk can be transferred back to seller, it is called with recourse factoring.
FORFAITING
Forfeiting represents the purchase of obligations, which fall due at some future date and arise from delivery of goods
(or services) in export transactions, without recourse to the previous holder of the obligation.
Under forfeiting, the forfeiter deducts interest in advance for the whole period of credit and disburses the net proceeds to
the exporter. The sole responsibilities of the exporter is to manufacture and deliver the goods to the importer, which
creates a valid payment obligation of the importer.
Forfeiting and Factoring : Factoring is suitable for financing smaller and short term receivables with credit period
between 90 to 180 days, whereas forfeiting is used to finance capital goods' exports with credit terms between a few
months to 10 years. Factoring covers the commercial risk, whereas forfeiting additionally covers the political and
transfer risk.
Process of forfeiting:
•The exporter approaches the forfaitor, willing to undertake forfeiting.
• The transaction covers the export, the price of which is receivable over a medium term and it is covered by a bank
guarantee or aval.
•The forfaitor stipulates an expiry date during which the exporter will make the shipment, prepare the documents and
present the documents.
•The exporter gets payment immediately on presentation of documents.
•The forfaitor recovers the interest for the money, the charges for political, commercial and country risk and other
incidental costs.
•The importer becomes liable for the cost of contract and receives the credit from forfaitor for a given no. of years, at a
given interest rate.
•The importer's obligation is guaranteed by a bank guarantee or aval (guarantor).
Security for forfaiting: The drafts (In the form of promissory notes or accepted bills of exchange) covering the
transaction, are guaranteed by a bank aval (co-acceptance of bills of exchange or of promissory notes by the bank) or a
bank guarantee (as a separate guarantee bond), promising to pay the amount on the given date, in the event of nonpayment
by the original debtor (i.e. importer). The guarantor is usually an internationally active bank,
resident in the importer's country which can ascertain the importer's creditworthiness first-hand. Repayments : The
repayments are by periodic instalments, usually on 6 months intervals. The total period may range up to 7-10 years.
Advantages of Forfaiting: 1.100 % risk cover as the forfaiter covers the (a) country risk (b) currency risk
(c) commercial risk (d) interest rate risk. 2. Instant Cash : The forfaitor generates instant cash for the
exporter that relieves his balance sheet and improves liquidity
TReDS - Receivable Finance System
RBI issued the guidelines on Dec 03, 2014, for setting up and operating the trade receivables system u/s 10(2) and Sec
18 of Payment & Settlement Systems Act, 2007.
Objective : To facilitate discounting of invoices and bills of exchange. TReDS can deal with (i) receivables factoring and
(ii) reverse factoring. The transactions will be "without recourse" to the sellers.
Participants: Sellers (MSMEs), corporate, other buyers, Government Departments, PSUs, financiers (banks and NBFC
factors). The TReDS provides a platform for uploading, accepting, discounting, trading and settlement of the invoices /
bills of sellers.
Generation of reports : In order to ensure a smooth process of payments, the TReDS would provide various types
of MIS report such as intimation of total receivables position, financed and unfinanced (to sellers); intimation of
outstanding position, financed and unfinanced with details of beneficiaries and beneficiary accounts to be credited (for
buyers); total' financed position for financiers; etc. The system will also generate due date reminders to relevant
parties, notifications to be issued to bankers when a factoring unit is financed, notifications to be issued to buyers once
a factoring unit related to their transaction is traded in the secondary segment, etc.
Access to TReDS : TReDS would put in place a standardized mechanism / process for on-boarding of buyers and
sellers on the TReDS. Access would be through IDs / Passwords for TReDS participants. Participation would be accepted
after submission of all KYC related documents to the TReDS, along with resolutions / documents.
Regulatory framework for TReDS
The TReDS, undertaking clearing and settlement activities, would be governed by RBI's regulatory framework under
Payment and Settlement Systems Act 2007 (PS5 Act) and function as an authorised payment system under the PSS Act
2007.
Eligibility criteria to set up/operate the TReDS There is a 3-dimension criteria as under:
(a) Financial Criteria
(i) Minimum paid up equity capital shall be Rs. 25 crore.
(ii) Entities, other than promoters, cannot have
shareholding In excess of 10% of the equity capital.
(b) Due diligence of promoters :RBI would assess the 'fit and proper' status on the basis of past record
of sound credentials and integrity; financial soundness and track record of at least 5 years in running their
businesses.
(c) Technological capability : The TReDS should have sound technological basis to support its
operations.
LEASING
A lease is a contract where the owner of the assets transfers the right to another person to use the assets
against, payment of fixed lease rentals. There are two parties in a lease contract i.e. lessor or the owner
and the lessee or user. The lesser remains owner and the leased property remains in the possession of
the lessee.
Leasing activity by banks : During March 1994, RBI permitted banks to undertake business of leasing
and hire-purchase but not beyond 10% of their total advances.
Period of lease: Lease is generally of fixed period. After expiry of the period, the lessee may purchase
the leased assets as per agreement. The lease contract is generally not cancelled.
Rental :The lease rentals are decided in advance for the entire lease period. The accelerated lease
rentals in leasing mean low in the beginning but gradually increase later on.
Lease and Hire-purchase : A lease (governed by Indian Contract Act 1872) is different from hirepurchase
which is a contract of owner-hirer and after the contract the ownership is passed to the hirer
on payment of the amount. The assets in hire-purchase appear in the balance sheet of the hirer and he
also claims depreciation. The instalment is partly treated as capital repayment and balance as interest
expenditure. Only the amount of interest is considered for tax benefits
Terms in leasing
Lessor A person who under an agreement, conveys to another person (the lessee) right to use, in return
for rent, an asset for an agreed period.
Lessee A person, who obtains from another person (the lessor) the right to use, in return for rent, an
asset for an agreed period of time.
Lease An agreement whereby the lessor conveys to the lessee, in return for rent, the right to use an
asset for an agreed period of time.
Finance lease A lease Is dassified as finance lease if it secures for the lessor, the recovery of his capital
outlay plus a return on the funds invested during the lease term. Such a lease is normally non-cancellable
and the present value of the minimum lease payments at the Inception of the lease exceeds or is equal to
substantially the whole of the fair value of the leased assets.
Operating lease A lease is classified as operating lease If It does not secure for the lessor the recovery of his
capital outlay plus a return on the funds invested during the lease term.
Sale and lease back A sale and lease back
transaction involves the sale of an asset by the vendor and the leasing of the same asset back to the
vendor. The rentals and sale price are usually Inter-dependent as they are negotiated as a package
and may not represent fair values.
VENTURE CAPITAL
Venture capital is a source of funds used to finance new proposals/ideas involving new technology or
products which are risky but with a potential of high returns. It is a capital committed in the form of
share-holding for the formation and setting up of a firm, specialising in new ideas or technologies. In
other words, it is a long term fund in equity or semi-equity form, to finance high-tech projects
involving high risks and yet having strong potential of high profitability.
In India, the venture capital has largely been sponsored by financial institutions.
Kinds of venture capital:
a Risk capital - representing financial investment in a highly risk proposition in the hope of earning
high rate of return
b Start-up capital, seed capital, initial capital
c Equity capital Advantages
• It makes contribution to technological innovations and promotion of entrepreneurship.
• It helps the industrialisation, technological development, generate employment and help develop
entrepreneurial skills.
• It benefits the investors when they are invited to invest only after organisation starts earning profit,
when risk is low and growth is healthy. Exit from project The investors can exit on success of the project,
by off loading their shareholding/ investment.
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