FEMA Regulations relating to

EXPORTS, IMPORTS AND

GUARANTEES

S.Durairajan, M.Sc., CAIIB, MBA, Ph.D

Professor of International Finance

DGM, RBI (Retd.), Chennai22 December 2014@ICAI_SIRC

I. Export of Goods & Services

•RBI has notified FEMA (Export of

Goods and Services) Regulations, 2000

(the ‘Export Regulations’) vide

Notification No. FEMA 23/2000-RBNotification No. FEMA 23/2000-RB

dated May 3, 2000

•Has to comply with Trade Policy

(Foreign Trade Policy 2009-14)

•DGFT role

Declaration

• EDF/SDF

• Exemption for certain categories

• Waiver from declaration – AD’s

powerspowers

• ACU mechanism for ACU countries

• Third party payments for export /

import transactions

Invoicing & Realising Exp proceeds

•Invoicing: in freely convertible currency

or in Indian Rupees but

•Realisation:in freely convertible currency

•However, export proceeds against•However, export proceeds against

specific exports may also be realised in

Rupees provided it is through a freely

convertible Vostro account of a non-

resident bank

Realisation and Repatriation of proceeds

• Exporter to realise within a stipulated

period of 9 months (for all exporters

including SEZ, EOUs, STP, EHTP & Status

holders)from the date of export:holders)from the date of export:

• Within 15 months from the DoS in r/o

Goods exported to a warehouse

established outside India ( As soon as it

is realised).

Setting up of Offices Abroad and Acquisition of

Immovable Property for Overseas Offices

• (i) initial expenses: up to 15% of the average sales/income

p.a. or turnover during the last two financial years or up to

25% of the NW, whichever is higher.

• (ii) Recurring expenses: up to 10% , may be sent for the

purpose of normal business operations of the office (trading /purpose of normal business operations of the office (trading /

non-trading) / branch or representative office outside India s/t

conditions:

• a. The overseas branch/office has been set up or

representative is posted for conducting normal business

activities of Indian entity;

• b. The overseas branch/office/representative shall not enter

into any contract or agreement in contravention of the Act,

Rules or Regulations made there under;

Offices Abroad

• It should not create any financial liabilities, contingent or

otherwise, for the HO in India and also not invest surplus funds

abroad without prior approval of the Reserve Bank. Any funds

rendered surplus should be repatriated to India.

• (iii) The details of bank accounts opened in the overseas country

should be promptly reported to the AD Bank.should be promptly reported to the AD Bank.

• (iv) Such approved remittances can also be for acquisition of

immovable property outside India for its business and for

residential purpose of its staff.

• (v) The overseas office / branch of software exporter

company/firm may repatriate to India 100 per cent of the

contract value of each ‘off-site’ contract.

• (vi) In case of ‘on site’ contracts, they should repatriate the profits

of ‘on site’ contracts after the completion.

Advance Payments against Exports • the shipment of goods is made within one year

from the date of receipt of advance payment;

• The RoI, if any, payable on the advance is not

more than LIBOR + 100 bps;

• the documents are routed through the AD bank• the documents are routed through the AD bank

through whom the advance is received.

• no remittance towards refund of unutilized

portion of advance payment or towards payment

of interest, shall be made after the expiry of one

year, without the prior approval of the RBI.

Long term export advance• Exporters having a min.of 3 yrs’ satisfactory track record can receive

long term export advance (up to 10 years max.) to be utilized for

execution of long term supply contracts for export s/t conditions :

• (i) Firm irrevocable supply orders and contracts should be in place -

@ prevailing international pricing .

• (ii) Company should have capacity, systems and processes - that the • (ii) Company should have capacity, systems and processes - that the

orders over the said tenure can actually be executed.

• (iii) only to those entities, who have not come under the adverse

notice of ED or have not been caution listed.

• (iv) The RoI payable, should not exceed LlBOR plus 200 basis points.

• (v) The documents should be routed through one AD bank only. AD

should ensure compliance with AML / KYC guidelines .

• vi) Cannot be used to liquidate Rupee loans classified as NPA.

Export advance

• BG/SBLC for Export Performance – 2yrs at a

time and rolled over for another 2 yrs – not

more than the value of adv.on reducing

balance basis. No discounting of this L/C by balance basis. No discounting of this L/C by

branch of Indian bank aborad.

• Advance Payment received for more than one

year s/t certain conditions – Bonafides,

KYC/AML, not more than LIBOR +100 bps, no

refund > 10%., no refund without RBI approval

Trade Fairs Exhibitions abroad

• EDF/SDF to be approved by ADs, certain conditions to be complied with –export for display, can sell abroad, can sell at discount and also could gift upto $5000 per exporter

• B/E for re-import within one month of import• B/E for re-import within one month of import

• Repatriation of sale proceeds, report to AD

• EDF/SDF approval for Export of Goods for re-imports

• re-import after repairs / maintenance / testing / calibration

• Certificate of destruction during testing in lieu of B/E

Part Drawing/Undrawn balances

• due to differences in weight, quality, etc., to

be ascertained after arrival and inspection,

weighment or analysis.

• maximum of 10 % of the full export value. • maximum of 10 % of the full export value.

• Undertake on EDF that he would realise

within the prescribed period of realisation

• AD to ensure that atleast 90% or drawn

amount is realised and one year has lapsed

Consignment exports

• AD instructs correspondent bank to deliver

shipping docs against Trust Receipt/undertaking

that sale proceeds would be paid within the

period for realisationperiod for realisation

• Consignee to Render account sales; Deductions

should be supported by bills/receipts in original

• In case the goods are exported on consignment

basis, freight and marine insurance must be

arranged in India.

Opening / Hiring of Ware houses

abroad

• AD permits on application for one year, renewable s/t conditions

• Applicant’s export outstanding does not exceed 5 per cent of exports made during the previous financial year. financial year.

• Applicant has a minimum export turnover of USD 100,000/- during the last financial year.

• All transactions should be routed through the designated branch of the AD Banks and realisedwithin the prescribed period.

Direct despatch by Exporter• AD despatches to overseas

brs/correspondent

• Occasionally to agents/consignees

provided there is ILC, or full advanceprovided there is ILC, or full advance

payment and ag’ment contains a clause

• Based on standing and track record of

exporter and Bank is satisfied that

arrangements have been made for

realisation. SHE/SEZ can directly despatch

s/to conditions.

Direct despatch by Exporter

• The duplicate copy of the EDF/SDF form is

submitted to the AD banks for monitoring

purposes, by the exporters within 21 days

from the date of shipment of export from the date of shipment of export

• The export proceeds are repatriated through

the AD banks named in the EDF/SDF Form.

Direct despatch by exporter• AD may regularize cases of dispatch of shipping documents by

the exporter direct to the consignee or his agent resident in the

country of the final destination of goods, up to USD 1 mio, per

export shipment, subject to the following conditions:

• The export proceeds have been realised in full.

• The exporter is a regular customer of AD bank for a period of at • The exporter is a regular customer of AD bank for a period of at

least six months.

• The exporter’s account with the AD bank is fully compliant with

the Reserve Bank’s extant KYC / AML guidelines.

• The AD bank is satisfied about the bona-fides of the transaction.

• In case of doubt, the AD bank may consider filing Suspicious

Transaction Report (STR) with FIU_IND (Financial Intelligence

Unit in India).

Counter-Trade Arrangement • = adjustment of value of goods imported into India against value of goods exported

from India, voluntarily entered into with overseas supplier

• through an Escrow Account opened in India in US Dollar will be considered by RBI

• All imports and exports under the arrangement should be at international prices in

conformity with the Foreign Trade Policy and Foreign Exchange Management Act,

1999 and the Rules and Regulations made there under.

• No interest will be payable on balances standing to the credit of the Escrow• No interest will be payable on balances standing to the credit of the Escrow

Account but the funds temporarily rendered surplus may be held in a short-term

deposit up to a total period of 3 m (in a block of 12 months) and the banks may pay

interest at the applicable rate.

• No fund based/or non-fund based facilities would be permitted against the

balances in the Escrow Account.

• Application for permission for opening an Escrow Account may be made by the

overseas exporter / organisation through his / their AD bank to the Regional Office ,

Reserve Bank.

• For Romania: Indian exporter should utilize the funds for import of goods from

Romania into India within six months from the date of credit to Escrow Accounts.

1.Invoicing of Software Exports –

SOFTEX FORMS

2. Short/Shut-out Shipments

3. Project Exports and Service Exports

RBI approval cases

• Export of Goods on Lease, Hire, etc.

• Export on Elongated Credit Terms

• AD approval:

Export of goods by Special Economic Zones

(SEZs)

II. Imports of goods & services

Imports – General provisions

• Import, regulated by FTP, DGFT, GOI, RBI.

• ADs need not obtain any document, including

Form A-1, except a simple letter from the

applicant containing the basic information, asapplicant containing the basic information, as

long as the exchange being purchased is for a

current account transaction (not in Sch I & II)

when the amount does not exceed USD 5,000

and the payment is made by a cheque drawn on

the applicant's bank or by a Demand Draft.

Form A-1 for import remittances

• Applications by persons, firms and companies for

making payments, exceeding USD 5000 or its

equivalent, towards imports into India must be

made in Form A-1.

• ADs may freely open L/Cs and allow remittances• ADs may freely open L/Cs and allow remittances

for import. (Except for goods in negative list)-

• ‘For Exchange Control purposes’ copy of the

Licence should be called for & after effecting

remittances banks may preserve the copies of

utilised licences till they are verified by the

internal auditors or inspectors.

Obligations of purchaser of FX• In terms of Section 10(6) of the FEMA, 1999 the person

acquiring foreign exchange is permitted to use it either for the

purpose mentioned in the declaration made by him to AD or to

use it for any other permissible purpose.

• (ii) Where foreign exchange acquired has been utilised for import

of goods into India, AD should ensure that the importer furnishesof goods into India, AD should ensure that the importer furnishes

evidence viz., Exchange Control Copy of the Bill of Entry, Postal

Appraisal Form or Customs Assessment Certificate, etc., and

satisfy himself that goods have been imported.

• (iii) In addition to the permitted methods of payment for imports

laid down in Notification No.FEMA14/2000-RB dated 3rd May

2000, payment for import can also be made by way of credit to

non-resident Rupee account of the overseas exporter maintained

with a bank in India.

Time Limit for Settlement of Imports

• Remittances against imports should be completed

within six months from the date of shipment, except

where amounts are withheld towards guarantee of

performance, etc.

• (ii) AD banks may permit settlement of import dues• (ii) AD banks may permit settlement of import dues

delayed due to disputes, financial difficulties, etc.

Interest in respect of delayed payments, usance bills or

overdue interest for a period of less than three years

from the date of shipment.

• Time Limit for Deferred Payment Arrangements – Trade

Credit guidelines – under ECB

• No Time Limit for Import of Books.

Import of Foreign Exchange into India• Any amount of foreign exchange can be brought into India,

s/t declaring it in the CDF to the Custom Authorities at the

Airport. No CDF if the amount TC/Cy <= $10000, and/or the

aggregate value of foreign currency notes (cash portion)

alone brought in by such person at any one time does not

exceed USD 5,000 .

• Import of Indian Currency and Currency Notes

• Any person resident in India who had gone out of India on a

temporary visit, may bring into India at the time of his

return from any place outside India, Indian currency notes

up to an amount Rs.10,000/- per person.

• (ii) A person may bring into India from Nepal or Bhutan,

currency notes of denominations of less than Rs.100 only.

Third Party Payment for Import

Transactions• AD banks are allowed to make payments to a third party for import

of goods, s/t conditions:

• a. Firm irrevocable purchase order / tripartite agreement should be

in place. However this requirement may not be insisted upon in case

where documentary evidence for circumstances leading to third

party payments / name of the third party being mentioned in the

irrevocable order / invoice has been produced.irrevocable order / invoice has been produced.

• b. AD bank should be satisfied with the bonafides of the

transactions and should consider the Financial Action Task Force

(FATF) statement before handling the transactions;

• c. The Invoice & B/E should contain a narration that the related

payment has to be made to the (named) third party;

• d. Importer should comply with the extant instructions relating to

imports including those on advance payment being made for import

of goods.

Advance Remittance• (i) AD may allow advance remittance for import of goods

without any ceiling s/t conditions:

• (a) If the amount of advance remittance exceeds USD 200,000

or its equivalent, an unconditional, ISBLC or a guarantee from

an international bank of repute situated outside India or a

guarantee of an AD bank India, if such a guarantee is issued

against the counter-guarantee of an international bank ofagainst the counter-guarantee of an international bank of

repute situated outside India, is obtained.

• (b) In cases where the importer (other than a Public Sector

Company or a Department/Undertaking of the Government of

India/State Government/s) is unable to obtain bank guarantee

from overseas suppliers and the AD is satisfied about the track

record and bonafides of the importer, the requirement of the

bank guarantee / standby Letter of Credit may not be insisted

upon for advance remittances up to USD 5,000,000 .

Adv. Rem.• AD may frame their own internal guidelines to deal

with such cases as per a suitable policy framed by the

bank's Board of Directors.

• (c) A Public Sector Company or a department/Utg. of

the GOI / State Government/s which is not in a position

to obtain a guarantee from an international bank of to obtain a guarantee from an international bank of

repute against an advance payment, is required to

obtain a specific waiver for the bank guarantee from

the Ministry of Finance, GOI before making advance

remittance exceeding USD 100,000.

• (ii) All payments towards advance remittance for

imports shall be subject to the specified conditions.

AR for the Import of Services• AD bank may allow remittance for import of services without any

ceiling subject to the following conditions:

• (a) Where the advance is >USD 500,000 or its equivalent, a g’tee

from a bank of international repute situated outside India, or a

g’tee from an AD in India, if such a guarantee is issued against the

counter-guarantee of a bank of international repute procured bycounter-guarantee of a bank of international repute procured by

supplier.

• (b) Usual restriction for PSU, for AR > $100000 without BG. –

Ministry of Finance approval.

• (c) AD should also follow-up to ensure beneficiary of the advance

remittance fulfils his obligation under the agreement with the

remitter in India, failing which, the amount should be repatriated to

India.

Interest on Import Bills

• (i) AD bank may allow payment of interest on usance

bills or overdue interest for a period of less than three

years from the date of shipment at the rate prescribed

for trade credit from time to time.

• (ii) In case of pre-payment of usance import bills,

remittances may be made only after reducing theremittances may be made only after reducing the

proportionate interest for the unexpired portion of

usance at the rate at which interest has been claimed or

LIBOR, whichever is applicable.

• Where interest is not separately claimed or expressly

indicated, remittances may be allowed after deducting

the proportionate interest for the unexpired portion of

usance at the prevailing LIBOR of the currency.

Remittances/G’tees against

Replacement Imports• Where goods are short-supplied, damaged, short-landed or lost

in transit and the EC Copy of the import licence has already been

utilised to cover the opening of LC against the original goods

which have been lost, the original endorsement to the extent of

the value of the lost goods may be cancelled by AD and fresh

remittance for replacement allowed, provided, the insurance

claim relating to the lost goods has been settled in favour of theclaim relating to the lost goods has been settled in favour of the

importer. It may be ensured that the consignment being replaced

is shipped within the validity period of the license.

• In case replacement goods for defective import are being sent by

the overseas supplier before the defective goods imported

earlier are reshipped out of India, AD may issue G’tees for

dispatch/return of the defective goods, according to their

commercial judgment.

Receipt of Import Bills/Documents

• Import of Equipment by Business Process

Outsourcing (BPO) Companies for their

Overseas Sites – ICCs

• Receipt of Import Bills/Documents

• Import bills and documents should be• Import bills and documents should be

received from the banker of the supplier by

the banker of the importer in India. AD should

not, therefore, make remittances where

import bills have been received directly by the

importers, except in the following cases:

Receipt of import documents by the importer

directly from overseas suppliers

• (i) Where the value of import bill does not exceed USD

300,000.

• (ii) Import bills received by wholly-owned Indian

subsidiaries of foreign companies from their principals.

• (iii) Import bills received by SHE as defined in the FTP,

100% EOU/ Units in SEZ, PSUs/ and Limited Companies.100% EOU/ Units in SEZ, PSUs/ and Limited Companies.

• Sector specific measure: AD permitted to allow

remittance for imports up to USD 300,000 where the

importer of rough diamonds, rough precious and semi-

precious stones has received the import bills /

documents directly from the overseas supplier and the

d/e import is submitted by the importer at the time of

remittance. Subject to conditions:

Receipt of import documents by the

importer directly/by AD directly• (i) The import would be subject to the prevailing FTP.

• (ii) The transactions are based on their commercial judgment and they are

satisfied about the bonafides of the transactions.

• (iii) AD should do the KYC and due diligence exercise and should be fully satisfied

about the financial standing / status and track record of the importer customer.

Before extending the facility, they should also obtain a report on each individualBefore extending the facility, they should also obtain a report on each individual

overseas supplier from the overseas banker or reputed overseas credit rating

agency.

• Receipt of import documents by the AD directly from overseas suppliers

• (i) At the request of importer, provided the AD is fully satisfied about the financial

standing/status and track record of the importer customer.

• (ii) Before extending the facility, the AD should obtain a report on each individual

overseas supplier from the overseas banker/reputed overseas credit agency.

However, such credit report on the overseas supplier need not be obtained in

cases where the invoice value does not exceed USD 300,000 provided the AD is

satisfied about the bonafides of the transaction and track record of the importer.

Evidence of Import - Physical Imports• (i) If Rem. exceeds USD 100,000 or its equivalent, it is obligatory on

the part of the AD to ensure that the importer submits :-

• (a) EC copy of B/E for home consumption, or

• (b) EC copy B/E for warehousing, in case of 100% EOU/ or

• (c) Customs Assessment Certificate or Postal Appraisal Form, as

declared by the importer to the Customs Authorities, where import

has been made by post, as evidence that the goods for which thehas been made by post, as evidence that the goods for which the

payment was made have actually been imported into India.

• (ii) For imports on D/A basis, AD should insist on production of

evidence when effecting remittance. However, if importers fail to

produce documentary evidence due to genuine reasons such as

non- arrival of consignment, delay in delivery/ customs clearance of

consignment, etc., AD may, if satisfied, allow reasonable time, upto

3 months from the date of remittance, to the importer.

Evidence in Lieu of Bill of Entry

• (i) AD may accept, in lieu of EC copy B/E, a certificate from the

CEO or auditor of the company that the goods for which Rem.

was made, have actually been imported into India provided :-

• (a) The amount of foreign exchange remitted is less than USD

1,000,000 .

• (b) The importer is a company listed on a stock exchange in India• (b) The importer is a company listed on a stock exchange in India

and whose net worth is not less than Rs.100 crore as on the date

of its last audited balance sheet, or, the importer is a public sector

company or an undertaking of the Government of India or its

departments.

• (ii) The above facility may also be extended to autonomous

bodies, including scientific bodies/academic institutions, such as

IISc/IITs whose accounts are audited by CAG. AD to insist on a

declaration from the auditor/CEO to this effect.

Non-physical Imports, Issue of Ack. And

Verification and Preservation• (i) Software or data through internet / datacom channels and

drawings and designs through e-mail / fax, a certificate from a CA

that it has been received by the importer, may be obtained.

• (ii) AD should advise importers to keep Customs Authorities informed

of the imports made by them under this clause.

• Ii) AD should acknowledge receipt of evidence of import e.g. EC copy

B/E, Postal Appraisal Form or Customs Assessment Certificate, etc., B/E, Postal Appraisal Form or Customs Assessment Certificate, etc.,

from importers by issuing acknowledgement slips containing all

relevant particulars relating to the import transactions.

• iii) Internal inspectors or auditors (including external auditors

appointed by AD) should carry out verification of the documents

evidencing import.

• (ii) D/e for import should be preserved by AD for a period of one

year from the date of its verification. In respect of cases which are

under investigation , till it is complete.

Follow-up for Import Evidence• (i) Evidence of import for > $100000, within 3 m from date of

remittance, AD to rigorously follow-up for the next 3 months.

• (ii) AD should forward a statement on half-yearly basis as at the

end of June & December of every year, in form BEF furnishing

details of import transactions, to the Regional Office of Reserve

Bank under whose jurisdiction the AD is functioning, within 15

days from the close of the half-year to which the statementdays from the close of the half-year to which the statement

relates.

• (iii) AD need not follow up submission of evidence of import

involving amount of USD 100,000 or less provided they are

satisfied about the genuineness of the transaction and the

bonafides of the remitter. A suitable policy may be framed by

the bank's Board of Directors and AD may set their own internal

guidelines to deal with such cases.

Merchanting Trade• In Merchanting Trade following conditions should be satisfied:

• a. Goods acquired should not enter the Domestic Tariff Area and

• b. The goods should not undergo any transformation.

• AD may handle bonafide MT Transactions and ensure that:

• (a) All regulations and directions applicable to export (except

Export Declaration Form) and import (except Bill of Entry) are

complied with.complied with.

• (b) Both the legs of a Merchanting Trade Transaction are routed

through the same AD.

• The bank should verify the documents like invoice, packing list,

transport documents and insurance documents (if originals are

not available, Non-negotiable copies duly authenticated by the

bank handling documents may be taken) and satisfy itself about

the genuineness of the trade.

Merchanting Trade ..2• (c) The entire Merchanting Trade Transactions should be

completed within an overall period of nine months and there

should not be any outlay of foreign exchange beyond four

months.

• (d) The commencement of Merchanting Trade would be the

date of shipment /export leg receipt or import leg payment,date of shipment /export leg receipt or import leg payment,

whichever is first. The completion date would be the date of

shipment / export leg receipt or import leg payment,

whichever is the last;

• (e) Short-term credit either by way of suppliers' credit or

buyers' credit will be available for MT transactions, to the

extent not backed by advance remittance for the export leg,

including the discounting of export leg LC by an AD bank, as in

the case of import transactions ;

Merchanting Trade ..3• (f) In case advance against the export leg is received by the

Merchanting Trader, AD bank should ensure that the same is

earmarked for making payment for the respective import leg.

However, AD bank may allow short-term deployment of such

funds for the intervening period in an interest bearing account;

• (g) Merchanting Traders may be allowed to make advance

payment for the import leg on demand made by the overseaspayment for the import leg on demand made by the overseas

seller. In case where inward remittance from the overseas buyer

is not received before the outward remittance to the overseas

supplier, AD bank may handle such transactions by providing

facility based on commercial judgement. It may, however, be

ensured that any such advance payment for the import leg

beyond USD 200,000/- per transaction, the same should be paid

against Bank Guarantee / LC from an international bank of

repute, except in cases and to the extent where payment for

export leg has been received in advance;

Merchanting Trade..4• (h) L/C to the supplier is permitted against confirmed export order keeping in

view the outlay and completion of the transaction within nine months;

• (i) Payment for import leg may also be allowed to be made out of the balances

in Exchange Earners Foreign Currency Account (EEFC) of the Merchant Trader.

• (j) AD bank should ensure one-to-one matching in case of each Merchanting

Trade transaction and report defaults in any leg by the traders to the

concerned Regional Office of RBI, on half yearly basis within 15 days from the

close of each half year, i.e. June and December.

• (k) The names of defaulting Merchanting Traders, where outstanding reaches

5% of their annual export earnings, would be Caution-listed.

• (l) The KYC and AML guidelines should be observed by the AD bank.

• The Merchanting Traders have to be genuine traders of goods and not mere

financial intermediaries. Confirmed orders have to be received by them from

the overseas buyers. AD banks should satisfy themselves about the

capabilities of the Merchanting Trader to perform the obligations under the

order. The overall Merchanting Trade should result in reasonable profits to the

Merchanting Trader.

III. Issue of Guarantees under FEMA

G’tees are governed by FEMA

(Guarantees) Regulations, 2000

• In terms of Regulation 4 of the Foreign

Exchange Management (Guarantees)

Regulations, 2000, notified vide

Notification No. FEMA 8/2000-RB datedNotification No. FEMA 8/2000-RB dated

May 3, 2000, AD Category – I banks have

been permitted to issue guarantees on

behalf of exporter clients on account of

exports out of India subject to specified

conditions.

1. Bid bonds and performance bonds or

guarantees for exports

• AD banks have the permission to

give performance bond or

guarantee in favour of overseas

buyers on account of bona fidebuyers on account of bona fide

exports from India.

• (RBI approval needed in the case

of caution-listed exporters)

Precautions • Before issuing any such guarantees, AD banks

should satisfy themselves with the bona fides of

the applicant and

• his capacity to perform the contract and also

that the value of the bid/ guarantee as athat the value of the bid/ guarantee as a

percentage of the value of the contract/ tender

is reasonable

• and according to the normal practice in

international trade, and

• the terms of the contract are in accordance

with FEMA Regulations.

2. Counter-guarantees & IATA

• 1. In cases where guarantees of only resident banks are

acceptable to overseas buyers (in accordance with local

laws/ regulations) AD banks, can also, issue counter-g’tees

in f/o of their branches/ correspondents abroad in cover of

guarantees required to be issued by them, on behalf ofguarantees required to be issued by them, on behalf of

Indian exporters,

• 2. AD banks in their ordinary course of business can issue

g’tees in f/o of the foreign airline companies/IATA on behalf

of Indian agents of foreign airline companies, who are

members of IATA, in connection with their ticketing

business.

3. Issue of BG on behalf of Service Importers

• AD Category-I banks are now permitted to issue guarantee for

amount not exceeding USD 500,000 or its equivalent in favour of

a non-resident service provider, on behalf of a resident customer

who is a service importer, provided:

• (a) the AD is satisfied about the bonafides of the transaction;

• (b) the AD bank ensures submission of documentary evidence

for import of services in the normal course; andfor import of services in the normal course; and

• (c) the guarantee is to secure a direct contractual liability arising

out of a contract between a resident and a non-resident.

• (d) a Public Sector Company or a Department/ Undertaking of

the Government of India/ State Governments, approval from the

Ministry of Finance, Government of India for issue of guarantee

for an amount exceeding USD 100,000 would be required.

4. Issue of BG-commodity hedging

• An AD bank may give G’tee or SbyLC in

respect of an obligation incurred by a

person resident in India and owed to a

person resident outside India in

connection with payment of margin moneyconnection with payment of margin money

in respect of approved commodity hedging

transaction of such person residing in India

subject to terms and conditions as may be

stipulated by RBI.

Invocation of guarantee

• In case of invocation, give detailed• In case of invocation, give detailed

report to RBI CO. FED, EPD

5. Other stipulations

• ADs encouraged by Export

Performance G’tee of ECGC

• 90% ECGC cover, if No cash margins• 90% ECGC cover, if No cash margins

• Other cases, reasonable cash margins

• Separate limits for issue of BG for bid

bonds

6. Unconditional G’tees in f/o of O/s

Employers/Importers

• Banks entitled to make payment;

exporter to seek legal remedy in case

of disputes; Non-honouring of BGs isof disputes; Non-honouring of BGs is

not viewed favourably and puts

Indian banks in bad light –so suitable

clauses are added while agreeing

with exporters, to issue such G’tees.

7. Certain precautions in case of PEX

• Wkg Group – Regulatory-Post-bid package approval

• AD banks – Responsible - examine the project proposals

thoroughly with regard to the capacity of the

contractor/ sub-contractors, protective clauses in the

contracts, adequacy of security, credit ratings of the

overseas sub-contractors, if any, etc.overseas sub-contractors, if any, etc.

• the export projects should be given more attention, in

view of their high value and the possibilities of forex

losses in case of failure, apart from damage to the

image of Indian entrepreneurs.

• Bid bonds and PG should not be given as a matter of

routine but after careful assessment and subject to

post award monitoring and follow-up.

8. Guarantees for Export Advance

• Banks should, be careful while extending guarantees against

export advances-to ensure that no violation of FEMA regulations

takes place and banks are not exposed to various risks. It will be

important to carry out due diligence and verify the track record

of such exporters to assess their ability to execute export orders.

• ADs have been allowed to issue guarantees in respect of a debt,

obligation or other liability incurred by an exporter, on accountobligation or other liability incurred by an exporter, on account

of exports from India, intended to facilitate execution of export

contracts by the exporter and not for other purposes.

• It has, however, been found that some exporter borrowers are

using export advances, received on the strength of guarantees

issued by Indian banks, for repayment of loans availed of from

Indian banks. This is a clear violation of FEMA instructions.

• Banks should ensure -export advances received are in

compliance with the FEMA regulations/ directions.

9. Other Guarantees regulated by Foreign

Exchange Management Rules

• i. Minor Guarantees –

- in the ordinary course of business, in respect of missing or defective documents, authenticity of signatures and for similar other purposes.

• ii. Bank Guarantees - Import under Foreign Loans/Credits

•

iii. Guarantees for Non-Residents

9a.i. Trade Credits for imports into

India – Issue of Guarantees

• Applications for providing guarantees/

standby letters of credit or letters of

comfort by banks relating to ECB in the

case of SMEs and by textile companies forcase of SMEs and by textile companies for

modernization or expansion of the textile

units, will be considered by the Reserve

Bank on merit under the Approval Route,

subject to prudential norms.

9a.ii. G’tees for Trade credits

• Suppliers’ or Buyers’ credit for maturity of

less than three years is ‘trade credit’ for

imports.

• For more than 3 years maturity, covered by • For more than 3 years maturity, covered by

ECB guidelines

• AD can approve Trade credits upto USD 20

mio for maturity of upto 1 year for normal

imports and upto 3 years in r/o capital

goods imports; no rollover or extension.

9a.iii. G’tees/LoU/LoC in f/o of o/s supplier• ADs can issue G’tees/LoU/LoC in f/o of overseas

supplier, bank and financial institution up to USD 20

million per import transaction;

• for a period up to 1 yr for import of all non-capital

goods permissible, under the Foreign Trade Policygoods permissible, under the Foreign Trade Policy

(except gold) and

• up to 3 years for import of capital goods, subject to

prudential norms issued by the RBI from time to

time. The period of such guarantees/LoUs/LoCs has

to be co-terminus with the period of credit,

reckoned from the date of shipment.

10. Loans abroad against securities in India

• In terms of Regulation 4(2) of Notification No.

FEMA.8/2000-RB dated May 3, 2000,

• an AD may give guarantee in respect of any

debt, obligations or other liability incurred by

a person resident outside India, among others,a person resident outside India, among others,

where such debt, obligation or liability is owed

to a person resident in India for a bona fide

trade transaction,

• provided that G’tee is covered by a counter

guarantee of a bank of international repute.

11 Guarantees for non-residents

• ADs may give on behalf of their overseas

branches/ correspondents or a bank of

international repute, guarantees/ performance

bonds in favour of residents of India in

connection with genuine transactions involvingconnection with genuine transactions involving

debt, liability or obligation of non-residents,

provided the bond/ guarantee is covered by a

counter-guarantee of the overseas Head Office/

branch/ correspondent or a bank of

international repute situated abroad.

Guarantees for non-residents (b)• ADs should ensure that counter-guarantees are properly

evaluated and their own guarantees against such

guarantees are not issued in a routine manner. Before

issuing a guarantee against the counter-guarantee from an

overseas Head Office/branch/ correspondent/ bank of

international repute, banks should satisfy themselves that

the obligations under the counter-guarantee, when invoked,the obligations under the counter-guarantee, when invoked,

would be honoured by the overseas bank promptly.

• If the AD desires to issue guarantee with the condition that

payment will be made, provided reimbursement has been

received from the overseas bank which had issued the

counter-guarantee, this fact should be clearly made known

to the beneficiary in the guarantee document itself.

Guarantees for non-residents (c)

• ADs to make rupee payments to the resident

beneficiaries immediately when the guarantee

is invoked and, simultaneously, arrange to

obtain the reimbursement from the overseas

bank concerned, which had issued thebank concerned, which had issued the

counter-guarantee.

• Cases where payments are not received by the

AD banks when the g’tees of overseas banks

are invoked, should be reported to RBI

indicating the steps being taken by the bank to

recover the amount due.

Guarantees for non-residents (d)• ADs may issue guarantees in favour of overseas

organisations issuing travellers cheques in respect of

blank travellers cheques stocked for sale by them or on

behalf of their constituents who are full-fledged money

changers holding valid licenses from Reserve Bank,

subject to suitable counter-guarantee being obtainedsubject to suitable counter-guarantee being obtained

from the latter.

• AD bank is permitted to issue bank guarantee, without

prior approval of the Reserve Bank, on behalf of a non-

resident acquiring shares or convertible debentures of

an Indian company through open offers / delisting / exit

offers, s/t certain conditions:

12. Guarantee on behalf of WOSs/JVs abroad

• (i) An Indian party may have financial commitment to its overseas

JV / WOS to the limit, as prescribed by the Reserve bank from time

to time, of the net worth of the Indian party as on the date of the

last audited balance sheet. The financial commitment may be in

the form of

• (a) capital contribution and loan to the JV / WOS;

• (b) corporate guarantee (only 50 percent value in case of• (b) corporate guarantee (only 50 percent value in case of

performance guarantee) and / or bank guarantee (which is backed

by a counter guarantee / collateral by the Indian party) on behalf

of the JV / WOS and

• (c) charge on immovable / movable property and other financial

assets of the Indian party (including group company) on behalf of

JV / WOS.

13. Non-resident Guarantee for Non-fund based

Facilities entered between Two Resident Entities

• Both for fund based and non-fund based

transactions between two Residents, on

the back of G’tee by a Non resident.

• On invocation, the NR would have to pay • On invocation, the NR would have to pay

– the Resident Principal Debtor is

permitted to remit the money to the NR

s/t certain conditions like maturity,

reporting to RBI etc.

Any Questions??

Thank you!

drrajanprof@gmail.com