Raising Trade Credits for imports in India

Trade Credits (TC) denote the credits extended by the overseas supplier, bank, financial institution and other permitted recognised lenders for maturity, 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 TCs include suppliers’ credit and buyers’ credit from recognised lenders.

The framework for raising loans for imports through Trade Credits (TC) comprises two options viz. FCY denomination TC and Indian Rupee denomination TC.

Recognised Lenders:

Lenders for Suppliers’ credit: Supplier of goods located outside India.

Lenders for Buyers’ Credit: Banks, financial institutions, foreign equity holder(s) located outside India, and financial institutions in IFSCs located in India.

Note: Participation of Indian banks and non-banking financial companies (operating from IFSCs) as lenders will be subject to the prudential guidelines issued by the concerned regulatory departments of the Reserve Bank. Further, foreign branches/subsidiaries of Indian banks are permitted as recognised lenders only for FCY TC.

Period of TC:     The period of TC, reckoned from the date of shipment, shall be up to three years for the import of capital goods. For non-capital goods, this period shall be up to one year or the operating cycle whichever less is. For shipyards/shipbuilders, the period of TC for import of non-capital goods can be up to three years.

Exchange Rate: Change of currency of FCY TC into INR TC can be at the exchange rate prevailing on the date of the agreement between the parties concerned for such change or at an exchange rate, that is less than the rate prevailing on the date of agreement, if consented to by the TC lender.         For the conversion of FCY TC to Rupee TC, the exchange rate shall be the rate prevailing on the date of settlement.

Hedging provision: The entities raising Foreign Currency TC are required to follow the guidelines for hedging, if any, issued by the concerned sectoral or prudential regulator in respect of foreign currency exposure. Such entities shall have a board-approved risk management policy.

However, overseas investors are eligible to hedge their exposure in Rupee through permitted derivative products with AD Category I banks in India. The investors can also access the domestic market through branches/subsidiaries of Indian banks abroad or branches of foreign banks with Indian presence on a back-to-back basis.

Change of currency of borrowing: Change of currency of TC from one freely convertible foreign currency to any other freely convertible foreign currency as well as to INR is freely permitted.

However, a Change of currency from INR to any freely convertible foreign currency is NOT PERMITTED.

All-in Cost ceiling: Benchmark Rate plus 350 bps spread: For existing TCs linked to LIBOR whose benchmarks are changed to ARR.

Benchmark rate plus 300 bps spread: For new TCs.

For Indian Rupees TC: Benchmark rate plus 250 bps spread

Eligible borrowers:

Any Person resident in India acting as an importer can raise Trade Credits under an automatic route of Up to USD 150 million or equivalent per import including transactions for oil/gas refining & marketing, airline, and shipping companies. The limit for other importers is up to USD 50 million or equivalent per import transaction. TC can also be raised by a unit or a developer in an SEZ including FTWZ for the purchase of non-capital and capital goods within an SEZ including FTWZ or from a different SEZ including FTWZ subject to compliance with the parameters given above. Further, an entity in DTA is also allowed to raise TC for the purchase of capital / non-capital goods from a unit or a developer of an SEZ including FTWZ. TC transactions in respect of SEZs and DTAs as permitted above should also comply with applicable provisions of SEZ Act, 2005 as amended from time to time. For TC transactions related to SEZ, the date of transfer of ownership of goods will be treated as the TC date.

 As there will be no bill of entry for sale transactions within SEZ, the inter-unit receipt generated through NSDL can be treated as an import document.

Security for Trade Credit: The provisions regarding security for raising TC are as under:

• Bank guarantees may be given by the ADs, on behalf of the importer, in favour of an overseas lender of TC not exceeding the amount of TC. The period of such guarantee cannot be beyond the maximum permissible period for TC. TC may also be secured by the 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.
• To raise TC, 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. ADs may permit the creation of charge on the security offered/accept corporate or personal guarantee, duly ensuring that there exists a security clause in the loan agreement requiring the importer to create a charge, in favour of overseas lender/security trustee on immovable assets / movable assets / financial securities/issuance of corporate and/or personal guarantee;
• No objection certificate, wherever necessary, from the existing lenders in India has been obtained;
• such arrangement is co-terminus with underlying TC;
• In case of invocation, the total payments towards the guarantee should not exceed the dues towards trade credit; and
• 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.

Source: RBI website

Related Post: