" Foreign Trade Financing "

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"Foreign Trade Financing "

TRADE FINANCING IN INDIA

International trade is important for all countries as it increases the overall efficiencies of world production. The significance of international trade has resulted in the supporting activities assuming their own importance. The most important supporting activity is that of financing international trade. Financing of international trade takes two forms - financing imports and financing exports.

Important Financing

The major way in which imports are financed is through letters of credit. Though a letter of credit, per se, is not a financing instrument, it is an important document which facilitates financing.

Letters of Credit

A letter of credit is defined as "an arrangement by means of which a bank acting at the request of a customer, undertakes to pay to a third party a predetermined amount by a given date, according to agreed stipulations and against presentation of stipulated documents".

Parties to Letters of Credit

There are four parties to a letter of credit. These are

· Applicant (or opener): It is the importer who approaches the bank for opening a letter of credit.

· Issuing bank: It is the bank which opens the letter of credit.

· Beneficiary: It is the exporter in whose favor the letter of credit is opened.

· Advising bank: It is the bank which informs the exporter about the letter of credit being opened, at the behest of the issuing bank. It is generally based in the same place as the exporter.

Types of Letters of Credit

Letters of Credit are classified into various categories on the basis of their features. This classification, given below, is not mutually exclusive.

Revocable Letter of Credit: A revocable Letter of Credit is one which can be canceled or revoked by the issuing bank at the request of the applicant, without the consent of the beneficiary.

Irrevocable Letter of Credit: An irrevocable Letter of Credit is one which cannot be canceled by the issuing bank without the consent of the beneficiary.

Deferred Payment Letter of Credit: It is a Letter of Credit that allows the issuing bank to make the payment to the beneficiary in installments. The timing and the amounts of these installments are predetermined.

Confirmed Letter of Credit: A letter of credit that is confirmed or guaranteed by a bank in addition to the issuing bank, is referred to as a confirmed Letter of Credit.

Unconfirmed Letter of Credit: When a letter of credit is not confirmed by any bank other than the issuing bank, it is called an unconfirmed letter of credit.

Revolving Letter of Credit: A letter of credit whereby the credit available to the beneficiary gets reinstated after being utilized once, is referred to as a revolving credit. A revolving credit may be limited by the overall credit available, or the time period in which such credit may be utilized, or both.

Transferable Letter of Credit: A transferable letter of credit is one where the beneficiary can transfer his rights to a third party. The third party is usually the manufacturer of the goods utilizing the services of the beneficiary as a marketer or a middleman.

Back-to-Back Letter of Credit: A back-to-back credit or a countervailing credit is a letter of credit, which is opened with another letter of credit as the security. The letter of credit acting as the security is known as the overriding or principal credit. This letter of credit may be opened by a middleman in favor of the actual producer

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or supplier of goods, on the security of the letter of credit opened by the importer quoting him as the beneficiary. A back-to-back letter of credit may be opened by the beneficiary when he does not want to reveal the identity of the producer from the importer or when the importer does not want to open a transferable letter of credit.

Anticipatory Letter of Credit: It is a letter of credit under which payment is made to the beneficiary even at the pre-shipment stage. There are two kinds of anticipatory letters of credit. Under the red clause credit, advance is given for purchase of raw material, processing and/or packing of goods. Under the green clause credit, advance is also given for warehousing and insurance charges at port.

Export Financing

Exports are a subject of significance to every economy whether developing or developed because they represent the biggest source for earning foreign exchange. The need is all the more acute for a developing economy, which mostly experiences deficit on current account as well as capital account. Attempts to create capital account surplus are also desirable yet the funds that come in shall remain under the ownership of the non-residents. However, surplus on current account represents earnings by residents and thus the ownership rests with residents. While there are exceptions to what is stated above it is quite common for countries to take steps to encourage exports in the larger interest of the economy. It is no different in India. Government of India provides incentives either directly or indirectly to exporters for undertaking their normal business activities. Such incentives include the following:

· Cash incentives for certain exports

· Concessional interest rates on export credit

· Lower duties on imports which are required for exports

· Tax concessions

· Infrastructure facilities.

Commercial banks play a vital role in this process since they become channels in this process in one form or the other. As in the case of any business commercial banks are predominantly involved in extending working capital finance to the exporters. The export credit sanctioned is classified into two categories depending on the timing of the credit.

· Pre-shipment Credit

· Post-shipment Credit Pre-shipment Credit

The purpose of this credit is to provide the necessary funds to the exporter to procure raw material and meet the costs involved in manufacturing the goods. This credit may be initially extended without any security in which case it is known as extended packing credit. At this stage it remains a clean advance. The funds so lent are used to procure the raw material, which then is charged to the bank. Then the advance becomes a secured advance. The advance is given either in the form of a loan or in the form of an operating account. The advance so given has to be adjusted with the proceeds of the export. Hence it is necessary to ensure that the loan given for executing a particular export order is adjusted out of the sale proceeds of that export. However the banker is vested with the authority by RBI to waive this condition and to allow the advance to be adjusted from the proceeds of any export transaction.

Pre-shipment credit is extended for the period which matches with the operating cycle of the activity. However, the period of credit is normally restricted to a maximum of 180 days. It is envisaged that the export will be materialized within the due date and the loan will be adjusted from the export proceeds. However, the banks have the discretion to extend the period of credit up to 360 days under special circumstances. In order to ensure that export will materialize banks normally insist for a Letter of Credit opened in the name of the exporter or a confirmed order before releasing the pre-shipment credit.

Post-Shipment Credit

Once the goods are exported there will be a time lag between the time of export and the receipt of the payment from the importer. This time depends on the transit time and the credit period extended by the exporter if any. The banks extend finance during this period, which is known as Post-shipment finance. This is usually in the form of finance extended against documents (Bill Finance). The documents presented along with the bill should conform to the terms and conditions of the Letter of Credit, which normally accompanies an export transaction.

Advance Against Cash Incentives

In order to encourage exports the Government of India extends certain cash incentives to the exporters so that exporting becomes more competitive than selling in the domestic market. Once the export is complete the government releases the amount of cash incentive. In such instances the commercial banks extend credit to the

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exporter in anticipation of the receipt of cash incentive. The advance may be extended either at pre-shipment stage or at post-shipment stage.

Deferred Payment Exports

Generally, export proceeds are expected to be realized within a period of six months from the date of shipment. Where payment extends beyond this period, it is known as deferred payment contract. Payment will be made by the importer over a period in installments.

Deferred payment contracts are allowed with the prior approval of RBI.

Turnkey Projects

Turnkey projects are those requiring the rendering of services like civil construction, design, erection and commissioning of plants, supervision thereof and supply of equipment for the plant. Both deferred payment exports and turnkey projects require various guarantees. Commercial banks execute guarantees on bid bond, performance, and advance payment, retention of money after seeking approval of the EXIM BANK. For large contracts, EXIM bank may also participate with the bank in issuing guarantees.

Bank guarantee is an undertaking by the issuing bank to the importer or the importer's bank or the government of the importer's country that in the eventuality of the exporter not fulfilling the conditions of the contract, the bank would compensate them for the loss subject to the maximum amount specified in the guarantee.

Duty Drawback Credit Scheme, 1976

Under this scheme, exporters who were entitled to Duty drawback incentives under the EXIM Policy in force for exports effected by them could avail interest free advances from the Bank, provided they submitted Provisional Duty Drawback Entitlement Certificate issued by the Customs authorities. The RBI in turn refinanced the banks for extending small advances, free of interest. But, as all refinance facilities, excepting exports refinance, were withdrawn with effect from October 9, 1991, and as the Government abolished some of the export incentives, the facility of interest free advances to the exporters under the Duty Drawback Credit Scheme also stood withdrawn. Exporters however, continue to be eligible for advances from banks against duty drawback and other incentives receivable from the Government covered by ECGC guarantee.

The Role of Export – Import Bank of India

(Exim) in Trade Finance

The EXIM bank was set up to finance and promote foreign trade. EXIM bank extends finance to exporters of capital and manufactured goods, exporters of software and consultancy services and to overseas joint ventures and turnkey/construction projects abroad. Term loans are also extended to projects located in export zones.

EXIM bank financing can, if required, supplement working capital finance extended by commercial banks at pre-shipment stage. The functions of the EXIM bank are lending, guaranteeing, promotional services and advisory services.

I . Lending to Indian Companies

Direct Assistance

Funds are provided on deferred payment terms to Indian exporters of plant, equipment and related services, which enables them to extend deferred credit to the overseas buyer. Credit is provided by EXIM bank in participation with commercial banks. Banks provide the credit and they can avail of refinance from the EXIM bank. The exporter is expected to obtain an advance and a down payment of at least 15 percent of the contract value.

Consultancy and Technology Services

Indian companies executing overseas contract involving consultancy and technology services, can avail of EXIM's financing program, to offer deferred payment terms to their clients. The credit may be extended to the Indian company either by EXIM bank in participation with commercial banks, or directly by commercial banks who could in turn seek refinances from EXIM bank. The Indian company in turn would offer deferred payment terms to their clients.

The credit normally given in Indian rupees is repayable in half-yearly installments over a period not exceeding five years. Guarantee of foreign Government or a guarantee/irrevocable LC of an acceptable bank would need

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to be obtained. The Indian company also has to obtain ECGC insurance cover and assign it in favor of the bank.

Overseas Investment Finance

The EXIM bank provides export credits to Indian promoters for their equity contribution to overseas joint ventures. The funds are in the form of long-term credit not exceeding ten years. EXIM bank's finance will be made available to Indian promoters by way of

i. Rupee term loans for financing equity contribution.

ii. Foreign currency loans/guarantees, where the equity contribution is allowed by the Government of India out of foreign currency loan to be raised by the Indian promoter.

Equity contribution by Indian promoters can be in various forms such as

a. Capitalization of proceeds of exports in the form of plant and machinery.

b. Technical know-how.

c. Capitalization of earnings such as royalty and management fees.

d. Cash remittances.

Where cash remittances are allowed, Indian promoters are granted approvals to remit foreign exchange from India or raise foreign currency loans for the purpose of equity contribution.

The quantum of finance will be determined with reference to the Indian promoter's share in the equity structure of overseas joint ventures, subject to a maximum of 80 percent of the Indian promoter's equity contribution. Commercial banks may also opt to take up risk participation in term loans and guarantees extended by EXIM bank.

Pre-Shipment Credit

If the requirement of pre-shipment credit by exporters is for periods in excess of 180 days, EXIM bank participates in the credit.

Financing Deemed Exports

Deemed exports occur in case of specified transactions within India, which result in foreign exchange earnings or savings as given below:

i. Supplies made in India to World Bank\ IDA-aided projects against international competitive bidding

ii. Supplies to free-trade zones/100 percent export oriented units

iii. Sales to foreign shipping companies and

iv. Supplies to ONGC and Oil India Ltd., for offshore and onshore drilling operations.

Deemed exports can avail of EXIM bank's deferred credit facility. EXIM bank may participate with commercial banks in extending rupee loans for bridging cash flow deficits of projects/supply contracts; EXIM bank also issues guarantees and provides bridge finance in foreign currency.

Capital and producer goods are eligible for medium-term credits. Long-term credits up to ten years are provided in exceptional cases. Credit is normally secured by a bank guarantee.

Assistance to Export – Oriented Units

Free-trade zones and export-oriented units are given finance for acquisition of land, building, plant and machinery, preliminary and pre-operative expenses and working capital (as margin money). EXIM bank's assistance will be in the form of direct assistance given as rupee term loans or deferred payment guarantees or indirect assistance as refinance to commercial banks. Direct assistance will be extended on its own or in participation with commercial banks/term lending institutions in respect of projects with cost above Rs.2 crore. Re-finance will be available for projects with cost up to Rs.2 crore.

Repayment period (not exceeding ten years) of the term loans will be determined on the basis of projected cash flow. Promoters' contribution will have to be a minimum of 20 percent of project cost. EXIM bank also requires a debt-equity ratio of 1.5:1, relaxable on merits. The export-oriented units seeking EXIM's finance will have to establish the technical, economic and financial feasibility of their projects.

Forfaiting

Forfaiting is a common form of financing export related receivables. It is similar to Bill Rediscounting Scheme. EXIM Bank has introduced this scheme for the Indian exporters. Under this scheme, the exporter after finalization of the sale (or contract) with a prospective buyer furnishes all the necessary details regarding the contract to the EXIM Bank through which a contract of forfaiting is finalized by the exporter with the overseas forfaiting agency. The exporters draw a series of bills of exchange on the overseas buyers' which will be sent along with the shipping documents to the buyer's bank for overseas buyer's acceptance. Overseas buyer's bankers will hand over to the exporter the documents against the acceptance of the buyer and signature of 'aval' or the guaranteeing bank. The exporter will submit to his bank to be forwarded to EXIM Bank, which passes the documents to the forfaiting agency. Proceeds of the bills are passed from the overseas forfaiting agency to the exporter through the EXIM Bank. From October 1997, the authorized dealers are allowed to undertake forfaiting of medium-term export receivables.

II. Lending to Foreign Governments and Foreign companies

Buyers' Credit

Credit is given to buyers abroad to enable them to import engineering goods from India on deferred payment terms. The loan facility is to be secured by a letter of credit or a bank guarantee.

Lines of Credit

EXIM bank also extends lines of credit to overseas governments or agencies nominated by them, to enable buyers in these countries to import capital/engineering goods from India on deferred payment terms. The exporters can obtain payment from EXIM bank against negotiation of shipping documents.

Relending

An overseas bank can enter into a credit line agreement with EXIM bank. The overseas bank would relend the funds to importers of capital goods, consumer durables and services from India. The borrowing bank may be a commercial bank, a central bank, an investment/ merchant bank with a good credit standing. The credit line limit for each bank would normally be $5 mn to $10 mn and may be raised to $15 mn, if justified. The loan amount would be up to 95 percent of contract value.

Loans will be denominated in U.S. dollars and repayment will also be in the same currency. Short-term loans extending from 180 days to one year are repayable by quarterly/half-yearly installments. Medium-term loans are also given.

The relending facility will operate as follows:

a. The borrowing bank, upon its approval of a sub-loan to an importer, opens irrevocable letters of credit in favor of the Indian exporter through EXIM bank or banks designated by the latter.

b. The Indian exporter ships goods and presents shipping documents to EXIM bank or banks designated by the latter.

c. EXIM bank pays to the Indian exporter the rupee equivalent.

d. EXIM bank or the negotiating bank in India forwards shipping documents to the borrowing bank, together with the advice of having made disbursement to the supplier.

III. Lending to Indian Banks

Rediscounting of Export Bills

Commercial banks that are authorized dealers can rediscount their short-term usance export bills with EXIM bank.

Refinance for Deferred Payment Exports

Deferred payment exports arise when export proceeds are to be received after six months from the date of shipment. EXIM bank offers hundred percent refinance facility to banks, which enables a bank to extend deferred credit to an Indian exporter against supplier's credit offered by the exporter to the overseas buyer. Capital goods, consumer durables and industrial manufactures can be considered for deferred credit.

Commercial banks can entertain deferred credit contracts valued up to Rs.2 crore and avail refinance from EXIM bank. Contracts above Rs.2 crore attract participation finance from EXIM bank. EXIM bank refinance is

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made available in Indian rupees. The exporter is expected to obtain advance/down payment of at least 10 percent of the contract value.

Guarantees

Overseas Construction Projects

Guarantees are issued by the EXIM bank on behalf of exports of turnkey projects and construction contracts. Such guarantees include:

i. Bid bond guarantee

ii. Advance payment guarantee

iii. Performance guarantee

iv. Retention money guarantee and

v. Guarantee for borrowing abroad.

Bid bond guarantee is issued for a maximum period of six months. For advance payment guarantee, exporters are expected to secure mobilization advance of 10-20 percent of contract value. Performance guarantee for 5 to 10 percent of contract is issued and is valid up to one year after completion of the contract. Guarantee for release of retention money enables the exporter to obtain the release of full payments.

Bridge finance may be needed at the earlier phases of the contract. Up to 10 percent of the contract value may be raised in foreign currency from a foreign bank against the EXIM bank's guarantee for borrowing abroad.

Syndication of Export Credit Risks

EXIM bank and other banks participating in the funding of a loan would syndicate the respective credit risks to other eligible commercial banks, which would assume part of the total risk. Proposals valued at more than Rs.1 crore, entailing deferred credit exports of engineering goods and services, are forwarded by the sponsoring bank for consideration by an inter-institutional working group which meets at Mumbai, with EXIM bank as the focal point. While clearing the proposal, the participation arrangement for the funding of export credit is also determined.

Software Exports

The new policy of the government on computer software exports and development has rationalized the system of facilities and incentives for exports. Under the new policy, EXIM bank has been designated as an agency for facilitating speedy clearances and meeting foreign exchange requirements towards imports for computer software export where export obligation of 350 percent of foreign exchange used is undertaken. EXIM bank will undertake financial and technical analysis of Software export proposals and monitor the progress.

EXIM bank extends advisory services to exporters in several areas and undertakes promotional activities like techno-economic surveys collecting and disseminating market information.

EXIM bank offers an integrated package covering foreign currency and rupee term finance for acquisition of imported and indigenous computer/computer-based systems for export purposes. EXIM bank welcomes the association of commercial banks for providing working capital finance for software exports projects assisted by it. A rebate of 50 percent on customs duty payable on import of computer system is available to software exporters opting for 350 percent export obligation.

Export and import transactions are governed by the EXIM policy and the RBI exchange control regulations. While the EXIM policy regulates the movements of goods and services by prescribing the permissible exports and imports, the RBI regulations regulate the corresponding payments for these international transactions. While extending credit for any such trade, the banks need to make sure that the respective guidelines have been followed by the concerned parties. The RBI regulations are given below:

Trade Regulations Governing Imports / Exports

The exim policy announced by the Commerce Minister lays down various trade regulations governing exports and imports. These regulations have to be mandatorily complied with, by exporters, importers, authorized dealers and all other market players engaged in the business of exports/imports transactions. Hence, it is necessary for these players to familiarize themselves with the trade regulations. Moreover, they are also required to keep a constant watch on any modifications/amendments to trade regulations effected by the concerned authorities from time to time in order to ensure strict compliance.

Given this fact, we shall now discuss trade regulations governing both exports and imports in detail.

Imports and Exchange Regulations

FEMA defines ‘import’ as bringing into India, any goods or services. Imports to India can be classified into two categories:

a. Freely importable items or the open general license (OGL): The OGL includes those items which are freely importable and do not require import licenses.

For instance the following items does not require import license:

· Microfilm Camera

· Paraffin wax

· Video Echo Sounder

· Collator Machine

· Asbestos Fiber, etc.

b. The negative list: Import of those items, which are not regulated by the OGL fall under the negative list category. This category of items is broadly grouped under 3 heads: Prohibited, Restricted and Canalized.

i. Banned or prohibited items are not permitted to be imported at all. They include tallow fat, animal rennet and unprocessed ivory.

ii. Restricted items are generally those for which demand can be adequately satisfied, in normal circumstances, by local production in India. These are permitted to be imported only against a license, and include certain categories of consumer goods, precious stones, seeds, animals, insecticides, certain electronic items, drugs and chemicals.

iii. Canalized items are those items, which are importable only by government trading monopolies. They are mostly commodity imports and any import of these items must be channeled through these agencies. Some of the canalized items include petroleum products to be imported only by the Indian Oil Corporation, nitrogenous phosphatic, potassic and complex chemical fertilizers by the Minerals and Metals Trading Corporation and cereals by the Food Corporation of India.

Import trade control is exercised by the Director General of Foreign Trade functioning under the Ministry of Commerce. Some of the trade regulations governing imports are discussed below.

Import Licenses

Import license means a license granted specifically for import of goods, which are subject to import control. Items, which require a license, can be imported only by an actual user, unless the actual user condition is specifically dispensed with by the licensing authority.

The Export-Import Policy defines “Actual User” as an actual user who may be either industrial or non-industrial user. “Actual User (Industrial)” is defined as “a person who utilizes the imported goods for manufacturing in his own unit or manufacturing for his own use in another unit including a jobbing unit.” “Actual User (Non-Industrial)” is defined as “a person who utilizes the imported goods for his own use in (i) any commercial establishment carrying on any business, trade, or profession; or (ii) any laboratory, Scientific or Research and Development (R&D) institution, university of other educational institution or hospital; or (iii) any service industry.”

Every license has a validity period, which is specified therein. For example, the validity of the Export Promotion Capital Goods license (EPCG) is 24 months. Only those items or category of items mentioned on the license can be imported under that license. A license is issued subject to the provisions of the policy applicable as on date of issue of the license. Every license bears the security seal of the office of issue as well as the signature of the issuing authority. As per the present rules import licenses issued under various provisions of the policy indicate the value in Indian rupees and in foreign currency at the exchange rate prevailing on the date of issue of the license.

Categories of License

There are different categories of licenses.

Regular License: These are licenses issued for the import of goods that fall under the normal import policy. These can be issued to any body entitled for issuance as per the policy provision.

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Advance License: Advance licenses are issued under the duty exemption scheme. Under advance licenses, duty free imports of inputs are permitted on fulfillment of value addition and export obligation within a certain time frame. Such licenses (other than those for deemed exports) are exempted from payment of basic customs duty, surcharge, additional customs duty, anti dumping duty and safeguard duty, if any.

Under a value based advance license, any of the inputs specified in the license may be imported within the total CIF value indicated for those inputs, except inputs specified as sensitive items. Under such a license, both the quantity and the FOB value of the exports to be achieved shall be specified. It shall be obligatory on the part of the license holder to achieve both the quantity and FOB value of the exports specified in the license.

In case of quantity based license, each item of inputs for import will be restricted in terms of quantity (or value where restrictions cannot be put in quantity terms).

Licenses with Export Obligations

Certain licenses are issued with a rider, like ‘export obligation’ which means importers of capital goods are required to export to a place outside India, a certain proportion of goods manufactured by the use of imported capital goods. In case of importers rendering services, export obligation means receiving payments in freely convertible foreign currency for services, rendered through the use of such capital goods. License where export obligation is imposed indicates value of export obligation both in free convertible currency and Indian Rupees equivalent thereof at the exchange rate prevailing on the date of issue of the license. It also indicates exchange rate used for arriving at the rupee value of license. Value indicated on import licenses is always for CIF (Cost, Insurance and Freight) value of goods authorized to be imported.

Special Import License

A Special Import License (SIL) may be used to import, among other items, certain consumer goods. The SIL is like an import permit and is traded in the market, at a premium on its value. It is issued to Indian exporters as an export incentive, and its value is tied to export earnings. SIL licenses are freely transferable and thus can be easily procured in the market by any prospective importer. The Special Import License shall be valid for import of items appearing in the ITC (HS) classification of Export and Import items. ITC (HS) refers to Indian Trade Classification (Harmonized System). The ITC (HS) classification of export and import items contains 99 chapters and each chapter covers information in five columns: the 8-digit code i.e. the exim code, the item descripttion, the applicable policy (prohibited, restricted, canalized or free); any conditions relating to the Export and Import Policy (these conditions appear either indicated with the particular item or in licensing notes at the end of the HS Chapter or section thereof); and an indication of whether the product can be imported under a Special Import License. The eight digit code can be interpreted as follows: The first two digits represent the chapter number, the next two digits the heading of goods in that chapter, and the last four digits refers to the sub heading.

Import licenses are issued in duplicate. One copy is marked for “Customs purposes” and has to be presented to the customs authorities at the time of clearance of goods. The other copy is marked for “Exchange control purposes” and has to be presented by the importer to the authorized dealer while opening a Letter of Credit (L/C) or making payment for import of goods.

Transferability of Licenses

After the fulfillment of export obligation and other conditions lay down, the holder of a transferable license may transfer it to a third party. However, a request for endorsement of transferability should be made to the licensing authority within 36 months of the date of issuance of license. When the import license is so endorsed, the license holder may transfer the license in full in case he has not made any imports or where imports have already been made, the license may be transferred in part excluding the value and quantity of imports already made or the materials or the balance already imported.

Duty Entitlement Pass Book Scheme (DEFB)

The objective of Duty Entitlement Passbook Scheme is to neutralize the incidence of Customs duty on the import content of the export product. The neutralization shall be provided by way of grant of duty credit against the export product.

Under the Duty Entitlement Passbook Scheme (DEPB), an exporter may apply for credit, as a specified percentage of FOB value of exports, made in freely convertible currency. DEPB credit is available on export of goods. However, only those goods specified in the list of goods notified by the Director General of Foreign Trade by way of a public notice issued in this behalf will be eligible for credit. It thus becomes clear that unless the item is specified in the list notified by the DGFT, no DEPB credit can be availed of. The exim policy 1997-02 had introduced a new duty entitlement pass book scheme in place of the old pass book scheme.

Under this scheme, the exporter is issued a passbook, which has validity for a period of 12 months from the date of its issue. The holder of DEPB shall have the option to pay additional custom duty, if any, in cash as well and the DEPB and/or the items imported against it are freely transferable.

Diamond, Gem and Jewelry Export Promotion Scheme

To give a boost to exports of diamond, gem and jewelry for which India enjoys a special advantage of skilled labor, exporters under these sectors have been offered two special schemes viz:

· Replenishment (REP) licenses and

· Diamond Imprest Licenses.

For importing their inputs like raw/cut and polished diamonds, gold, etc. A brief summary of the provisions under these schemes is discussed hereunder.

i. Replenishment License:

Eligibility: The exporter of gem and jewelry products listed in Appendix-26 of the handbook (Vol. I) shall be eligible to import and replenish their input.

Procedure for obtaining REP Licenses:

· The Gem REP licenses are available as per the scale given in Appendix-26A.

· An application for the Gem REP license may be given to the license authority in Appendix 25 in the form given in Appendix-13A along with the documents prescribed therein.

· In case EP copy of the shipping bill and custom attested invoice is submitted to the nominated agencies, the exporter shall furnish a self certified photocopy of the same along with a certificate from the nominated agency certifying the carat/value of studdings in case of studded jewelry and excess the value addition achieved in the case of plain jewelry and articles.

· Such applications are to be made within 6 months following the month/quarter in which export proceeds were realized.

· A consolidated application is to be made for all the exports realized in a month/quarter.

· To claim REP licenses against third party exports, the EP copy of the shipping bill must show the names of both i.e. the name of the manufacturer and the 3rd party through whom it was exported. Secondly, a disclaimer should be furnished from the third party.

ii. Diamond Imprest License:

Under this scheme, diamond exporters can obtain Diamond Imp rest License in advance, for import of rough diamonds from any source. Such licenses, however, carry an export obligation, which the licensee has to fulfill.

Eligibility: An exporter of cut and polished diamonds who is status holder may be issued a license for import of cut and polished diamonds up to 5% of the export performance of the preceding year of cut and polished diamonds.

Procedure for obtaining a Diamond Imprest License:

Application has to be made in the prescribed format to the Regional licensing authority along with name and address of his banker and bankers certificate to the effect that there are no overdue export bills beyond a period of six months.

The export obligation against each consignment shall be fulfilled within a period of five months from the date of clearance of such consignment through customs.

Diamond Dollar Account

Diamond exporters enjoy several benefits including the right to open diamond dollar accounts which was introduced in the Exim policy 1997-2002. Diamond dollar accounts allow exporters to retain their proceeds in dollars. However, opening of this account is optional, and diamond exporters can continue to use their rupee accounts if required.

The criteria specified by RBI for operating diamond dollar accounts include:

· Firms/companies should be dealing in the purchase/sale of rough or cut and polished diamonds.

· A track record of at least 3 years in import or export of diamonds.

· An average annual turnover of Rs.5 crore or above during the preceding three licensing years.

Firms and companies maintaining foreign currency accounts, excluding export earners’ foreign currency (EEFC) accounts, with banks in India or abroad, are not eligible to maintain Diamond Dollar Accounts. Eligible firms or companies may be allowed to open not more than 5 Diamond Dollar accounts with their banks.

Export Finance and Exchange Regulations

FEMA defines ‘export’ as the taking or sending out of goods by land, sea or air, on consignment or by way of sale, lease, hire purchase, or under any other arrangement by whatever name called, and in the case of software, also includes transmission through any electronic media.

Exports may be of different types. They could be

Cash Exports

Cash Exports are those exports where the proceeds are realized within 6 months from the date of shipment or the due date for payment whichever is earlier. As per FEDAI rules, the normal transit period and the notional due date of the bill will be taken into consideration to determine the due date of payment.

Project Exports

Export of engineering goods on deferred payment terms and execution of turnkey projects and civil construction contracts abroad are collectively referred to as ‘Project Exports’. These contracts are usually of very high value.

Deemed Exports

Goods under this kind of export do not leave the shore of the country. Any such supply to be eligible for labeling as deemed exports should comply with the following:

a. Supply of goods is to a project that is funded by multilateral/bilateral agencies like IBRD/ADB/OPEC, etc. and any other such projects notified by the Government of India from time to time.

b. Goods are supplied against an order received under international competitive bidding and to this effect the supplier of goods should submit a certificate from his buyer.

The central idea of this arrangement is that supply of goods has indeed facilitated inflow/retention of forex into/within the country.

The current trade policy allows for the free exportation of all goods, except to the extent such exports are regulated by the ITC (HS) classification of export and import items or any other provision of the policy or any other law for the time being in force. Exports from India are categorized into two (i.e. the Open General license and the negative list) on the same lines as imports. The negative list consists of those goods which are (a) permitted for export under license (restricted) or (b) canalized or (c) prohibited.

Some of the goods which are included under the restricted list are cattle, deoiled groundnut cakes containing more than 1% oil, fur of domestic animals excluding lamb fur skin, fodder including wheat and rice straw, etc. Canalized exports include export of petroleum products, mica waste, mineral ores, onions, etc. The prohibited list includes all forms of wild life, exotic birds, human skeletons, etc.

The Director General of Foreign Trade lays down conditions according to which certain items may be exported without licenses. Such terms and conditions generally include minimum export price, registration with specific authorities, quantitative ceilings and compliance with other laws. A person wishing to export an item on the negative list of exports must have a registration and membership certificate from the relevant export promotion council. He should also be in possession of a license issued by the licensing authority for the said purpose. An export license contains all the terms and conditions laid down by the licensing authority. Some of the details which are included in an export license are the quantity, descripttion and value of the goods, actual user condition, export obligation, value addition to be achieved by the exporter, and the minimum export price. It should be noted that an export license cannot be claimed as a right. The licensing authority has the power to refuse, grant or renew a license as per the provisions of the Act. All export contracts must be denominated in freely convertible currencies.

Guest

In addition to possessing an export license, exporters are also required to register themselves with any one of the export promotion councils (EPC) and obtain Registration and Membership Certificate (RCMC). Export promotion councils help in promoting and developing the exports of the country. Each council is responsible for promotion of a particular group of products, projects and services. EPCs are non-profit organizations registered under the Indian Companies Act or the Societies Registration Act as the case may be and are supported by financial assistance from the Government of India. An exporter who wishes to avail of the various exim benefits will have to mandatorily register with the export promotion council. The RCMC issued by the Export Promotion Council is valid for a period of 5 licensing years.

Prior to any export, an exporter is required to give a declaration that the full export value of the goods or if the value is not ascertainable at the time of export, the value which the exporter expects to receive from the export has been or will be paid within the stipulated time and in the prescribed manner.

Also, the export of goods to countries other than Nepal and Bhutan can be made only if a declaration in the prescribed form is furnished to the ‘prescribed authority.

However, declaration forms are not required in certain cases. Exports where declaration form is not required are

a. Trade samples supplied free of payment

b. Personal effects of travelers, whether accompanied or unaccompanied

c. Ships stores, transshipment cargo and goods shipped under the orders of the Central Government or of such officers as may be appointed by the Central Government in this behalf or of the military, naval or air force authorities in India for military, naval or air force requirements

d. Goods or software accompanied by a declaration by the exporter that they are not more than twenty five thousand rupees in value

e. By way of gift of goods accompanied by a declaration by the exporter that they are not more than one lakh rupees in value

f. Aircrafts or aircraft engines and spare parts for overhauling and/or repairs abroad subject to their re-import into India after overhauling/repairs within a period of six months from the date of their export

g. Goods imported free of cost on re-export basis

h. Goods not exceeding US$ 1000, or its equivalent in value per transaction exported to Myanmar under the Barter Trade Agreement between the Central Government and the Government of Myanmar

i. The following goods which are permitted by the Development Commissioner of the Export Processing Zones or Free Trade Zones to be re-exported namely:

(i) Imported goods found defective for the purpose of their replacement by the foreign suppliers/collaborators

(ii) Imported goods which were imported from foreign collaborator on loan basi

(iii) Surplus goods, which were earlier, imported from foreign suppliers or collaborators free of cost, after production operations.

j. Replacement goods exported free of charge in accordance with the provisions of the exim policy in force, for the time being.