Unit – 5. Facilities for Exporters and Importers

Exports

RBI and DGFT

 RBI controls Foreign Exchange and DGFT (Directorate General of Foreign Trade) controls Foreign Trade. Exim Policy as framed in accordance with FEMA is implemented by DGFT.

DGFT functions under direct control of Ministry of Commerce and Industry. It regulates Imports and Exports through EXIM Policy.

On the other hand, RBI keeps Forex Reserves, Finances Export trade and Regulates exchange control. Receipts and Payments of Forex are also handled by RBI.

IEC – Importer Exporter Code

One has to apply for IEC to become eligible for Imports and Exports. DGFT allots IEC to Exporters and Importers in accordance with RBI guidelines and FEMA regulations. EXIM Policy is also considered before allotting IEC.

Export Declaration Form

All exports (physically or otherwise) shall be declared in the following Form.

  • GR form--- meant for exports made otherwise than by post.
  • PP Form---meant for exports by post parcel.
  • Softex form---meant for export of software.
  • SDF (Statutory Declaration Form)----replaced GR form in order to submit declaration electronically.
  • SDF is submitted in duplicate with Custom Commissioned who puts its stamp and hands over the same to exporter marked “Exchange Control Copy” for submission thereof to AD.

Exceptions

  • Trade Samples, Personal effects and Central Govt. goods.Up to USD 25000 (value) – Goods or services as declared by exporter.22
  • Gift items having value up to Rs. 5.00 lac.
  • Goods with value not exceeding USD 1000 value to Mynmar.
  • Goods imported free of cost for re-export.
  • Goods sent for testing.

Prescribed Time limits

  • The time norms for export trade are as under:
  • Submission of documents with “Exchange Control Copy” to AD within 21 days from date of shipment.
  • Time period for realisation of Export proceeds is 12 M or 365 days from date of shipment.
  • No time limit for SEZ (Special economic zones) and SHE(Status Holder Exporters) and 100 EOUs.
  • After expiry of time limit, extension is sought by Exporter on ETX Form.
  • The AD can extend the period by 6M. However, reporting will be made to RBI on XOS Form on half yearly basis in respect of all overdue bills.

Direct Dispatch of Shipping Documents

AD banks may handle direct dispatch of shipping documents provided export proceeds are up to USD 1 Million and the exporter is regular customer of at least 6 months.

Prescribed Method of payment and Reduction in export proceeds

Exporter will receive payment though any of the following mode:

  • Bank Drafts, TC, Currency, FCNR/NRE deposits, International Credit Card. But the proceeds can be in Indian Rupees from Nepal.
  • Export proceeds from ACU countries (Bangladesh, Burma, Mynmar, Iran, Pak, Srilanka, Nepal and Maldivis can be settled in ACUEURO or USD. A separate Dollar/Euro account is maintained.

Exports may be allowed to reduce the export proceeds with the following:

  • Reduction in Invoice value on account of discount for pre-payment of Usance bills (maximum 25%)
  • Agency commission on exports.
  • Claims against exports.
  • Write off the unrecoverable export dues up to maximum limit of 10% of export value.

The proceeds of exports can be got deposited by exporter in any of the following account:

  • Overseas Foreign Currency account.
  • Diamond Dollar account.
  • EEFC (Exchange Earners Foreign Currency account)

DDA _ diamond Dollar accounts

Diamond Dollar account can be opened by traders dealing in Rough and Polished diamond or Diamond studded Jewellary with the following conditions:

  • With track record of 2 years.
  • Average Export turnover of 3 crore or above during preceding 3 licensing years.
  • DDA account can be opened by the exporter for transacting business in Foreign Exchange.
  • An exporter can have maximum 5 Diamond Dollar accounts.

EEFC Exchange Earners Foreign Currency accounts can be opened by exporters. 100% export proceeds can be credited in the account which do not earn interest but this amount is repatriable outside India for imports (Current Account transactions).

Pre-shipment Finance or Packing Credit

  • Packing credit has the following features:
  • Calculation of FOB value of order/LC amount or Domestic cost of production (whichever is lower).
  • IEC allotted by DGFT.
  • Exporter should not be on the “Caution List” of RBI.
  • He should not be under “Specific Approval list” of ECGC.
  • There must be valid Export order or LC.
  • Account should be KYC compliance.
  • Liquidation of Pre-shipment credit
  • Out of proceeds of the bill.
  • Out of negotiation of export documents.
  • Out of balances held in EEFC account
  • Out of proceeds of Post Shipment credit.
  • Concessional rate of interest is allowed on Packing Credit up to 270 days. Previously, the period was 180 days. Running facility can also be allowed to good customers.

Post Shipment Finance

Post shipment finance is made available to exporters on the following conditions:

  • IEC accompanied by prescribed declaration on GR/PP/Softex/SDF form must be submitted.
  • Documents must be submitted by exporter within 21 days of shipment.
  • Payment must be made in approved manner within 6 months.
  • Normal Transit Period is 25 days.
  • The margin is NIL normally. But in any case, it should not exceed 10% if LC is there otherwise it can be up to 25%.

Types of Post Shipment Finance:

Export Bills Purchased for sights bills and Discounting for Usance bills.

Export bills negotiation.

Discrepancies of Documents

Late Shipment, LC expired, Late presentation of shipping documents, Bill of Lading not signed properly, Incomplete Bill of Lading, Clause Bill of Lading , Short Bill of Lading or Inadequate Insurance.24

Advance against Un-drawn Balance

Undrawn balance is the amount less received from Importers. Bank can finance up to 10% undrawn  amount.

Advance against Duty Drawback

Duty drawback is the support by Government by way of refund of Excise/Custom duty in case the domestic cost of the product is higher than the Price charged from the importer. This is done to boost exports despite international competition. Bank can make loan to exporter against Duty Drawback.

Crystallization of Overdue Bills

Consequent upon non-realization, Conversion of Foreign Exchange liability into Rupees is called crystallization. It is done on 30th day after notional due date at prevailing TT selling rate or Original Bill Buying Rate (Whichever is higher).

DA Bills

Notional due date is calculated in DA Bill by adding normal period of transit say 25 days in the Usance period. 30th day is taken from notional due date.

DP Bills

30th day after Normal Transit Period. If 30th day happens to be holiday or Saturday, liability will be crystallized on the following working day.

Policy has been liberalized and crystallization period will be decided.

Export of services

Credit can be provided to exporters of all 161 tradable services covered under GATS (General Agreement on Trade in services) where payment for such services is received in Forex. The provisions applicable to export of goods apply to export of services.

Gold Card Scheme

All exporters in Small and Medium Sector with good track record are eligible to avail Gold Card Scheme. The conditions are :

  • Account should be classified as Standard assets for the last 3 years.
  • Limit is sanctioned for 3 years and thereafter automatic renewal.
  • There is provision of 20% Standby limit.
  • Packing Credit is allowed in Foreign currency.
  • Concessional rate is allowed for 90 days initially which can be extended for 360 days.
  • Bank may waive collateral and provide exemption from ECGC Guarantee schemes.

Factoring and Forfaiting

Factoring is financing and collection of Export Receivables. The client sells Receivables at discount to Factor in order to raise finance for Working Capital. It may be with or without recourse. Factor finances about 80% and balance of 20% is paid after collection from the borrower. Bill should carry LR/RR. Maximum Debt period permitted is 150 days inclusive of grace period of 60 days. Debts are

assigned in favour of Factor. There are 2 factors in International Factoring. One is Export Factor and the other is Import Factor. Importer pays to Import factor who remits the same to Export Factor.

Forfaiting is Finance of Export Receivables to exporter by the Forfaitor. It is also called discounting of Trade Receivables such as drafts drawn under LC, B/E or PN. It is always No Recourse asis (i.e. without recourse to exporter). Forfaitor after sending documents to Exporters’ Bank , makes 100% payment to exporter after deducting applicable discount.

SAMPLES OF Pre-shipment & Post-shipment Finance

  1. 1. Received order of USD 50000(CIF) to Australia on 1.1.2015 when USD/INR Bill Buying Rate is 43.50. How much preshipment finance will be released considering profit margin of 10% and Insurance and freight cost@ 12%.

Solution

FOB Value = CIF – Insurance and Freight – Profit (Calculation at Bill Buying Rate on 1.1.2015)

= 50000X43.5 = 2175000 – 216000(12%) – 191400(10% of 1914000) = 1722600

Pre-shipment Finance = FOB value -25%(Margin) = 1722600-430650=1291950.

  1. 2. What will be amount of Post-shipment Finance under Foreign Bill Purchased for USD 45000 when Bill Buying rate on 31.3.2015 (date of submission of Export documents) is 43.85

Solution

45000X43.85 = 1973250 Ans.

  1. 3. Period for which concessional Rate of Interest is charged on DP bills from date of purchase.

Ans - 25 days

  1. 4. If the above said bill remains overdue for 2 months, what will be date of crystallization?

Due Date of Bill will be 31.3.11 + 25 days = 25.4.2011

The bill will be crystallized on 24.5.2011 i.e. on 30th day from due date.

  1. 5. On 8th Sep, an exporter tenders a demand bill for USD 100000 drawn on New York. The USD/INR quote is as under:

 

Spot---------USD 1 =34.3000/3500

Spot Sep-------------------6000/7000

Spot Oct--------------------8000/9000

Spot Nov------------------10000/11000

Transit Period is 20 days and Exchange margin 0.15%

Calculate Rupee payable to the customer. Customer wants to retain 15% in Dollars

Solution

Since, the currency is at premium, the transit period will be rounded off to the lower month (i.e. NIL).

And the rate to the customer will be based on Spot Rate. If interest rate is 13%, how much interest will be recovered from the exporter.

Spot Buying rate = 34.3000

Less Exchange Margin = 0.0515

=34.2485 or 34.25 per dollar.

Amount in Indian Rupee = 85000(85% of 100000) x 34.25 = 2911250/-

Interest will be charged on 2911250/- @ 13% for 20 days = 20738/-.

  1. 6. On 26th Aug, an exporter tenders for purchase a bill payable 60 days from sight and drawn on New York for USD 25650. The dollar rupee rate is as under:

Spot----------------------1USD = 34.6525/6850

Spot Sep--------------------------------1500/1400

Spot Oct---------------------------------2800/2700

Spot Nov--------------------------------4200/4100

Spot Dec--------------------------------5600/5500

Exchange Margin is 0.15%, Transit Period is 20 days. Rate of Interest is 13%.

What will be the exchange rate payable to the customer and Rupee amount payable?

Solution

Notional due Date = 20+60 days from 26th Aug i.e. 14th Nov. Since, the currency is at discount, the period will be rounded off to the same month (higher of Oct or Nov). Obviously, the discount of Nov will be more and it will make the Buy Rate Lower.

Dollar/Rupee market spot Buying Rate = 34.6525

Less Discount for August to November = 0.4200 = 34.2325

Less Exchange Margin @.15% .0513 = 34.1812

Rupee Amount payable to exporter = 25650 X 34.18 = 876717.00

Less Interest for 80 days @ 13% = 24980.0027

Less out of pocket expenses = 500.00 = 851237.00

 Imports

Imports – Prerequisites

AD1 banks are to ensure that Imports are in accordance with:

  • Exim Policy
  • RBI Guidelines
  • FERA Rules
  • Goods are as per OGL (Open General list).
  • Importer is having IEC (Import Export Code) issued by DGFT.

Imports Formalities & Time limit for import payment

The following are essential elements of Imports:

  • An importer before remitting proceeds exceeding USD 500 must submit application on Form A-1 tothe Authorized Dealer.
  • AD banks can issue LC on the basis of License and Exchange Control Copy.
  • Remittance against exports should be completed within 6 months from date of shipment.
  • Any delay beyond 6 months will be treated as Deferred Payment arrangement and the same will be treated as Trade Credit up to the period less than 3 years.

Advance Remittances

  • AD Banks may remit advance payment of Imports subject to following conditions:
  • Up to USD 2,00,000 or equivalent after satisfying about nature of transaction, trade and standing of Supplier.
  • In excess of 2,00,000 USD, an irrevocable Standby LC or Guarantee from a bank of international repute or a guarantee from bank in India, if such guarantee is issued against Counter guarantee of International bank outside India.
  • The requirement of guarantee may not be insisted upon in case of remittances above USD200000 up to USD 50,00,000 (5 million) subject to suitable policy framed by BOD of bank.
  • The AD should be satisfied with track record of the exporter.
  • Approval of RBI is required only if Advance remittance exceeds USD 50,00,000 or equivalent.
  • Advance remittance will be made direct to Overseas supplier or his bank.
  • Physical imports must be made within 6 months from date of Remittance. For Capital goods, the period is 3 years.

Evidence of Imports

Importer must submit Evidence of Imports i.e. Exchange control copy of “Bill Of Entry”.

The AD will ensure receipt of Bill Of Entry in all cases where Value of Forex exceeds USD 100000, within 3 months from date of remittance. Otherwise, one months’ notice will be served.

If there is still default of 21 days after serving notice, Ad will forward Statement to RBI on Half yearly basis on BEF

Import Finance Importer can avail finance from banks/FIs in the shape of :

  • Letter of Credit
  • Import Loans against Pledge/Hypothecation of stocks.
  • Trade Credit – Supplier Credit or Buyer Credit

Trade Credit If the Import proceeds are not remitted, within 6 months, it is treated as Trade Credit up to the period less than 3 years. For period 3 years and above, the credit is called ECB (External Commercial Borrowings).

Suppliers’ Credit

  • It is credit extended by Overseas suppliers to Importer normally beyond 6 months up to period of 3 years.
  • Up to 1 year for Current Account Transactions
  • Up to 3 years for Capital Account Transactions
  • Monetary Limit is USD 20 million per transaction.

Buyers’ Credit

It is credit arranged by Importer from Banks/Fis outside countries. Banks can approve proposals of Buyers’ Credit with period of Maturity:

  • Up to 1 year for Current Account Transactions
  • Up to 3 years for Capital Account Transactions
  • Monetary Limit is USD 20 million per transaction.

Crystallization of Foreign Currency Liability into INR

In case the importer fails to make payment, crystallization of Foreign Exchange liability into Indian Rupees is done on 10th day at TT selling Rate.

In case of Retirement of Import Bill

The crystallization is done at current Bill Selling Rate or Contracted Bill Selling Rate (Whichever is higher).

  • DP Bill: On 10th Day from date of receipt of Import Bill.
  • DA Bill: On Actual Due Date.

All-in Cost Ceiling

The present Ceilings for all-in-cost, including interest for buyers’/suppliers’ credit, as fixed by RBI is as under:

  • Up to 365 days –--------------------- LIBOR + 350 bps
  • Above 1 year up to 3 years --------LIBOR + 350 bps

These ceilings include management fees, arrangement fees etc.

Example On 12th Feb, a customer has received an Import bill for USD 10000/-. He asks you to retire the bill to the debit of the account. Considering Exchange margin 0.15% for TT sales and 0.20% on Bill Selling Rate. What amount will be debited to the account.

Spot rate is 34.6500/34.7200

Spot march = 5000/4500

Rate applied will be Bill Selling Rate

Spot Rate = 34.7200

Add Margin for TT selling (0.15%) = 0.0520

TT selling Rate = 34.7720

Add margin for Bill selling@ 0.20% = 0.0695

Bill Selling Rate = 34.8415

Customers’ account will be debited with Rs. 348400/- (10000X 34.84)