Category Archives: Suppliers Credit

RBI Stops Buyers Credit Transactions (LOU & LOC)

Latest RBI Circular : RBI stops Buyers Credit. As is circular copy given below. Please refer bold section. 

  • Short Term Debit – Trade Related Credit Outstanding as on Sept 2017 was $91.063 billion (Refer Page 14).  This includes both LC and Buyers Credit transaction. Was not able to find bifurcated amount. But one can be sure it would be substantial amount which above  decision going to impact.
  • The instrument is blamed taking the focus away from the system failure in PNB
  • PNB fraud case both LOU and LC transactions were involved. Action has been taken against LOU transaction but no changes has been made to LC transactions.
  • Importers are going to get effected severely because of this move, as this will dry up liquidity
  • Non Performing Assets (NPA) of banks will go up in coming quarters as this move leave importers short of liquidity.
  • Pure Speculation: RBI has come out with this move after 1 month of PNB Fraud case. During this period, it seems RBI has found other lapse which are yet to come to public domain. Can be related to PNB or other bank.

What Importer can do on immediate basis ?

Raw Material Import

  1. Take Adhoc limit from banks for immediate outstanding payments
  2. Incase of outstanding transactions (DA/DP/LC/ Usance LC), ask supplier for extension of credit period.
  3. Move existing non fund based limits from BC to LC usance limits.
  4. For future transactions ask suppliers to accept  Usance LC which can be discounted at Libor rates.
  5. Increase fund base limit by moving some portion of non fund limit to fund base limit

Capital Goods Import

  1. Take External Commercials Borrowing (ECB) against existing buyers credit. (Infrastructure Companies – Bridge Finance before availing ECB)
  2. For new import of capital goods ask suppliers for  usance LC for 3 years and get it discounted. For suppliers it will be sight payment.
  3. For new import use ECA (Export Credit Agency) finance (will add an article shortly on this)
  4. Convert into term loan

Circular

Attention of Authorised Dealer Category – I (AD Category – I) banks is invited to paragraph 2 of A.P. (DIR Series) Circular No. 24 dated November 1, 2004 and paragraph No. 5.5 of Master Direction No.5 dated January 1, 2016 on ‘External Commercial Borrowings, Trade Credit, Borrowing and Lending in Foreign Currency by Authorised Dealers and Persons other than Authorised Dealers’ (Master Direction), as amended from time to time, on the issuance of LoUs/ LoCs/ guarantees for Trade Credits for imports into India under delegated powers of AD banks.

2. On a review of the extant guidelines, it has been decided to discontinue the practice of issuance of LoUs/ LoCs for Trade Credits for imports into India by AD Category –I banks with immediate effect. Letters of Credit and Bank Guarantees for Trade Credits for imports into India may continue to be issued 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.

3. AD Category-I banks may bring the contents of this circular to the notice of their constituents and customers.

4. The aforesaid Master Direction No. 5 dated January 01, 2016 will be updated to reflect the changes. The changes will be applicable from the date of issuance of this circular.

5. The directions contained in this circular have been issued under sections 10(4) and 11(1) of the Foreign Exchange Management Act, 1999 (42 of 1999) and are without prejudice to permissions/ approvals, if any, required under any other law.

Reference

  1. Discontinuance of Letters of Undertaking (LoUs) and Letters of Comfort (LoCs) for Trade Credits
  2. Implication on Buyers Credit because of PNB Fraud
  3. RBI 2016 Circular : Frauds Related to Trade Finance Transactions – Misuse of SWIFT
  4. Buyers Credit Secondary Market
  5. Bank Audit – Buyers Credit and Nostro Account
  6. India’s External debt as at End-September 2017
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Suppliers Credit Process Flow

  1. Importer enter into contract with supplier for import.
  2. With transaction details importer approaches arranger to get suppliers credit for the transaction
  3. Arranger get an indicative pricing from overseas bank, which importer confirms.
  4. Importer approach his bank and get LC issued, restricted to overseas bank counters with other required clauses
  5. Overseas Bank confirms the LC and advise LC to Supplier’s Bank. Suppliers Bank provides the copy of the LC to Supplier.
  6. Supplier ships the goods and submits documents at his bank counter.
  7. Supplier’s Bank sends the documents to Overseas Bank.
  8. Overseas Bank post checking documents for discrepancies (As per UCP 600) sends the document to importer’s bank for acceptance:
    • If documents are as per order, the same is discounted and transferred to supplier’s bank.
    • Incase of discrepant documents, documents are sent on acceptance basis. On receipt of Importer bank acceptance, the same is discounted and transferred to supplier’s bank.
  9. Supplier receives the payment for the LC. Depending on who is bearing the interest cost:
    • If importer is bearing interest cost, supplier receives full payment.
    • If Suppliers is bearing interest cost, supplier will receive LC amount – Interest.
  10. Importer’s Bank receives the documents. Importer’s bank and Importer accept documents. Importer’s Bank provides acceptance to Overseas Bank, guaranteeing payment on due date.
  11. On maturity, Importer makes the payment to his bank and Importer’s bank makes payment to Supplier’s Credit Bank

Interest Payment to Mauritius: 7.5% Withholding Tax

In earlier article “WHT (Withholding Tax) on Interest on Buyers Credit” we had discussed that if buyers credit is arranged from Mauritius based bank / branches, there was no withholding tax on interest payment as per Double Taxation Avoidance Agreements (DTAA).

India-Mauritius Tax Treaty was amended on 10 May 2016 and got effective from 01 April 2017. In this article, only amendment related to Interest Payment  (Article 11) is covered.

The Protocol provides for a shifting of taxing rights to India on interest income earned by Mauritius-resident banks from debt-claims and loans made as from 1 April 2017. Currently, such interest income is exempted from tax in India. However, the withholding tax is limited to 7.5% of such interest income.

In addition, interest income of Mauritius-resident banks on debt claims or loans existing as at 31 March 2017 shall remain tax exempt in India, irrespective of the maturity date of such instruments.

In simple terms

  1. All buyers credit funded post 31 March 2017, 7.5% WHT will be applicable if funds are arranged from Mauritian Resident Bank.
  2. Provision is for Resident Bank. Thus, Indian Bank branches in Mauritius shall not be covered.

Which Banks will be Impacted

  1. All Mauritius based bank.
  2. Indian Bank Subsidiary
  • SBI (Mauritius) Ltd: 7.5% WHT applicable
  • BOB Mauritius (Branch): Not Applicable
  • Afraisia Bank: 7.5% WHT applicable
  • State Bank of Mauritius Ltd : 7.5% WHT applicable
  • HSBC Bank(Mauritius) Limited: 7.5% WHT applicable
  • The Hongkong and Shanghai Banking Corporation Limited:  ??? (need to check)
  • Standard Chartered Bank (Mauritius) Ltd : 7.5% WHT Applicable.

Importers

Henceforth if Buyers Credit is arranged from Mauritius based Bank, Importers will have to deduct Withholding Tax (WHT) as per above provision.

Reference:

  1. India – Mauritius DDTA and Amendments.
  2. Updates on India’s Tax Treaties With Mauritius and Its Impact on the India-Singapore Tax Treaty
  3. India-Mauritius Tax Treaty: An end and a New Beginning
  4. Protocol to the India-Mauritius Double Tax Treaty

Buyers Credit & Suppliers Credit in Rupee (INR)

RupeeDollarRBI issued a circular on 10 Sep 2015, revising the policy on Trade Credit (Buyers Credit & Suppliers Credit). Summary of the same is given below:

As per revised guidelines, RBI has allowed resident importer to raise trade credit in Rupees (INR) within below framework after entering into a loan agreement with the overseas lender:

  1. Trade credit can be raised for import of all items (except gold) permissible under the extant Foreign Trade Policy.
  2. Trade credit period for import of non-capital goods can be upto one year from the date of shipment or upto the operating cycle whichever is lower
  3. Trade credit period for import of capital goods can be upto five years from the date of shipment
  4. No roll-over / extension can be permitted by bank beyond the permissible period
  5. Banks can permit trade credit upto USD 20 million equivalent per import transaction
  6. Banks are permitted to give guarantee, Letter of Undertaking or Letter of Comfort in respect of trade credit for a maximum period of three years from the date of shipment
  7. The all-in-cost of such Rupee (INR) denominated trade credit should be commensurate with prevailing market conditions
  8. All other guidelines for trade credit will be applicable for such Rupee (INR) denominated trade credits

Overseas lenders of Rupee (INR) denominated trade credits will be eligible to hedge their exposure in Rupees through permitted derivative products in the on-shore market with a bank in India. 

Modes Operandi for Importer, Importers Bank  and Indian Bank Overseas Branches (Probable)

  1. Importer imports goods in USD / EUR / Or any other freely convertible foreign currency
  2. Importer will ask Importers Bank to book conversion rate for making payment on due date of bill and provide equivalent INR details for arranging buyers credit quote.
  3. Importers arranges quote through buyers credit consultant in INR
  4. Indian Bank sends lou in INR to Indian Bank Overseas Branch
  5. Indian Bank Overseas Bank transfers INR to Importers Bank
  6. Importers Banks receives INR, converts the same in USD / Eur and makes payment to Supplier.
  7. On due date importer pay Principal + Interest in INR to Importers Banks
  8. Importers Bank makes payment in INR to Indian Bank Overseas Branch.

**As Indian Bank overseas bank borrows in USD / EUR in international market and if they lend in INR, they will have to do hedging.

Benefits to Importer

  1. As funding will be in INR, no hedging requirement.
  2. Margin requirement will be reduced / stabilize. Every time because of dollar movement, Importer had to bring in extra margin. If trade credit lending is in INR, once margin is given to bank, it will remain fixed. Thus importer will be able to better plan his fund requirement.
  3. Nullify expected interest hike by Federal Service System (FED) of USA, as lending will be in INR. Libor rates have already gone up by 20 basis points (bps) in last 6 months and are still expected to go up if FED increased rate of interest.

Few Question ???

  1. In current process of Trade Credit, there was no requirement of loan agreement, but above policy has used wording of Loan Agreement. Whether Letter of Undertaking (LOU / LOC) will be considered as loan agreement or not is a question which will get raised.  Clarification from RBI would be required on same.
  2. How many banks would be interested in taking up Trade Credit in INR ?
  3. What will be the lending rates in case of INR based funding ?

Reference

Form 15CA & Form 15CB applicable on All Payment

ConfusionPost below article CBDT has revised rules for form 15CA and Form 15CB effective from April 01, 2016. Refer article: Form 15CA and Form 15CB not Required for Import Payments

In revised notification issued by CDBT on 16th December 2015, effective 01’st April 2016, import payment has been made part of exempted list. Hence forth Form 15CA and Form 15CB will not required for the same during import transactions.

Addition to exempted List

Purpose Code Nature of Payment
S0101 Advance Payment against Imports
S0102 Payment towards Imports – Settlement of Invoice
S0103 Imports by Diplomatic Missions
S0104 Intermediary Trade
S0190 Imports below  5,00,000 ­(For use by ECD offices)

Old Article

In earlier article “Revised Form (15CA, 15CB) and Rules for Payment to Non Resident“, we had discussed that Form 15CA and Form 15CB is applicable only on those payment which were chargeable to tax.

In Finance Bill 2015,  a new sub-section 6 has been added to Section 195

In section 195 of the Income-tax Act, for sub-section (6), the following sub-section shall be substituted with effect from the 1st day of June, 2015, namely:— “(6) The person responsible for paying to a non-resident, (not being a company), or to a foreign company, any sum, whether or not chargeable under the provisions of this Act, shall furnish the information relating to payment of such sum, in such form and manner, as may be prescribed.”.
* Details in relation to above Form is provided in rule 37BB and Form Nos. 15CA & 15CB
After section 271H of the Income-tax Act, the following section shall be inserted with effect from the 1st day of June, 2015, namely:— “271-I. If a person, who is required to furnish information under sub-section (6) of section 195, fails to furnish such information, or furnishes inaccurate information, the Assessing Officer may direct that such person shall pay, by way of penalty, a sum of one lakh rupees.”.
Which means from June 1, 2015 on all payments made to non resident or foreign company Form 15CA and Form 15CB is applicable; except for payments under specified list (given below).
From Buyers Credit respective, as per our interpretation, Form 15CA and Form 15CB will still not be applicable to payments made to Indian Bank Overseas Branches as parent of the same is resident and above clarification hold true only for non-resident, (not being a company), or to a foreign company. Further details on the same can be found in article ” Form 15CA & Form 15CB not Applicable on Interest Payment to Indian Bank Overseas Branches
Specified List
Sl.No. Purpose code as per RBI Nature of payment
(1) (2) (3)
1 S0001 Indian investment abroad -in equity capital (shares)
2 S0002 Indian investment abroad -in debt securities
3 S0003 Indian investment abroad -in branches and wholly owned subsidiaries
4 S0004 Indian investment abroad -in subsidiaries and associates
5 S0005 Indian investment abroad -in real estate
6 S0011 Loans extended to Non-Residents
7 S0202 Payment- for operating expenses of Indian shipping companies operating abroad.
8 S0208 Operating expenses of Indian Airlines companies operating abroad
9 S0212 Booking of passages abroad -Airlines companies
10 S0301 Remittance towards business travel.
11 S0302 Travel under basic travel quota (BTQ)
12 S0303 Travel for pilgrimage
13 S0304 Travel for medical treatment
14 S0305 Travel for education (including fees, hostel expenses etc.)
15 S0401 Postal services
16 S0501 Construction of projects abroad by Indian companies including import of goods at project site
17 S0602 Freight insurance – relating to import and export of goods
18 S1011 Payments for maintenance of offices abroad
19 S1201 Maintenance of Indian embassies abroad
20 S1 202 Remittances by foreign embassies in India
21 S1301 Remittance by non-residents towards family maintenance and-savings
22 S1302 Remittance towards personal gifts and donations
23 S1303 Remittance towards donations to religious and charitable institutions abroad
24 S1304 Remittance towards grants and donations to other Governments and charitable institutions established by the Governments
25 S1305 Contributions or donations by the Government to international institutions
26 S1306 Remittance towards payment or refund of taxes.
27 S1501 Refunds or rebates or reduction in invoice value on account of exports
28 S1503 Payments by residents for international bidding

Reference

Buyers Credit on Import of Non Capital Goods

The trigger for this topic is a question that a reader asked:

We have a processing facility of granite. Can we use buyers credit for consumables (our banker refusing for consumables). As per them only raw material is allowed for buyer credit

To answer the above question one needs to understand both RBI Policy and Foreign Trade Policy.

As per RBI Master Circular: External Commercial Borrowing and Trade Credit 2015

AD banks are permitted to approve trade credits for imports into India up to USD 20 million per import transaction for imports permissible under the current Foreign Trade Policy of the DGFT with a maturity period up to one year (from the date of shipment).

AD banks are permitted to issue Letters of Credit/guarantees/Letter of Undertaking (LoU) /Letter of Comfort (LoC) in favour of overseas supplier, bank and financial institution, up to USD 20 million per transaction for a period up to one year for import of all non-capital goods permissible under Foreign Trade Policy (except gold, palladium, platinum, Rodium, silver etc.)

As its is clear from the above extract that RBI has allowed buyers credit on import of all non-capital goods permissible under Foreign Trade Policy upto 1 year. Non Capital goods are like Raw Material, Consumables, Accessories, Spares, Components, Parts etc.

Foreign Trade Policy (FTP)

Above circular also states ” imports permissible under the current Foreign Trade Policy of the DGFT”. Refer below extracts from FTP:

Chapter 2 of FTP

2.1 Exports and Imports shall be free, except where regulated by FTP or any other law in force. The item wise export and import policy shall be, as specified in ITC (HS) notified by DGFT, as amended from time to time

2.16 Capital goods, raw materials, intermediates, components, consumables, spares, parts, accessories, instruments and other goods, which are importable without any restriction, may be imported by any person.

Definition: “Consumables” means any item, which participates in or is required for a manufacturing process, but does not necessarily form part of end-product. Items, which are substantially or totally consumed during a manufacturing process, will be deemed to be consumables.

It is clear from above extracts that Consumables are permissible for import as per FTP.

Conclusion

RBI has classified imports into Capital goods and Non Capital goods for Trade Credit perspective. Buyers Credit can be taken against import of Consumable as it falls under Non Capital goods import and import of same is allowed as per FTP. This conclusion also stands true for all non capital goods import.

Reference

  1. Master Direction – External Commercial Borrowings, Trade Credit, Borrowing and Lending in Foreign Currency by Authorised Dealers and Persons other than Authorised Dealers: Dated: 19-09-2016
  2. Definition of Consumable in Foreign Trade Policy
  3. FTP Chapter 2: General Provisions Regarding Imports and Exports

Relevance of Operating Cycle in Buyers Credit Transaction

Incase of raw material imports, RBI had delegated approving powers to Authorised Dealers (Banks) for Trade Credit (Buyers Credit / Suppliers Credit) for a tenure upto 1 year from the date of shipment. Bank’s based on internal policies decided customerwise tenure. Because of variation in policies between banks,  few importers used buyers credit for arbitrage.

RBI Master Direction – External Commercial Borrowing and Trade Credit

On 11th July 2013, RBI revised the policy by linking Trade Credit to Operating Cycle.

Maturity prescriptions for trade credit on the non-capital goods, the maturity period is up to one year from the date of shipment or the operating cycle whichever is less.

Operating CycleWhat is Operating Cycle ?

In simple terms operating cycle is period for which funds are blocked in business. Every business transaction passes through a Operating Cycle– from initial cash – to Credit Purchase of raw material – to Manufacturing Process – to Credit Sales to Customer – to Realisation of Book Debts – to payment to creditors- and again in Cash

Business owner fill this gap by using their own funds and banks funds by way of Fund Based and Non Fund based limits.

How to Calculate Operating Cycle (Net Operating Cycle)

Net Operating Cycle = Days Stock Held (1) + Days Sales Outstanding (2) – Days Payable Outstanding (3)

(1)  Days Stock Held = (Average Stock * 365) / Cost of Goods Sold

      A. Average Stock =  (Opening Stock + Closing Stock) / 2

     B. Cost of Goods Sold = Opening Stock + Purchases – Closing Stock

(2) Days Sales Outstanding = (Debtors * 365) / Sales

(3) Days Payables Outstanding = (Creditors * 365) / Cost of Goods Sold

How will Bank Implement

At the time of sanctioning of fresh limits or renewal of existing limits, banks will have to define Operating Cycle of every importer and based on sanction tenure, importer will be able to take buyers credit.

Impact of the Policy

  1. Buyers Credit beyond Operating Cycle has stopped.
  2. Rollover of Buyers Credit beyond Operating Cycle has stopped. This is having negative impact of genuine imports whose operating cycle has gone up because of economic downturn.
  3. Few importers who were using Buyers Credit for Arbitrage has stopped.

Reference

Revised Guidelines for Merchanting / Intermediary Trade

Further to article published below, RBI received suggestion from merchanting traders and trade bodies, based on which guidelines on merchanting trade transactions have been further reviewed on 28th March 2014 and with effect from 17th January 2014. Summary of the changes are given below.

  1. For atradeto be classified as merchanting trade followingconditionsshould be satisfied.
    1. Goods acquired should not enter the Domestic Tariff Area and
    2. The state of the goods should not undergo any transformation
  2. Goods involved in the merchanting trade transactions would be the ones that are permitted for exports / imports under the prevailing Foreign Trade Policy (FTP) of India, as on the date of shipment and all the rules, regulations and directions applicable to exports (except Export Declaration Form) and imports (except Bill of Entry), are complied with for the export leg and import leg respectively ;
  3. AD bank should be satisfied with the bonafides of the transactions. Further, KYC and AML guidelines should be observed by the AD bank while handling such transactions ;
  4. Both the legs of a merchanting trade transaction are routed through the same AD bank. 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 ;
  5. 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 ;
  6. The commencement of merchanting trade would be the 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 ;
  7. Short-term credit either by way of suppliers’ credit or buyers’ credit will be available for merchanting trade transactions, to the extent not backed by advance remittance for the export lag, including the discounting of export leg LC by an AD bank, as in the case of import transactions ;
  8. 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 ;
  9. Merchanting traders may be allowed to make advance payment 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 ;
  10. Letter of credit to the supplier is permitted against confirmed export order keeping in view the outlay and completion of the transaction within nine months ;
  11. 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 ;
  12. 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 in the format as annexed, within 15 days from the close of each half year, i.e. June and December ;
  13. The names of defaulting merchanting traders, where outstandings reach 5% of their annual export earnings, would be caution-listed.
  14. 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.
  15. It is clarified that the contents of this circular would come into effect in respect of merchanting trade transactions initiated after January 17, 2014.

 

As per RBI Circular Dated 17th January 2013

In earlier article “Suppliers’ Credit or Buyers’ Credit is not available for Merchanting Trade” we had discussed the guidelines for Merchanting Trade. RBI had set a committee under the Chairmanship of G Padmanabhan to examine the gaps / inadequacies / lacunae in the financial system / procedure. Based on the recommendations of the committee, RBI has revised the guidelines for Merchanting Trade and Intermediary Trade.

Take aways from revised guidelines

  1. Merchant tradeTrade Credit product like Buyers Credit, Suppliers Credit and LC discounting for export leg is now allowed.
  2. Overall tenure increased from 6 months to 9 months. Foreign exchange outlay from 3 months to 4 months
  3. Both Legs of the transaction to be routed through same AD bank.
  4. Commencement Date (whichever is first of the below) and Completion Date (whichever is last of the below) for calculating tenure of 9 months.
    1. Date of Shipment
    2. Export Leg Receipt
    3. Import Leg Payment
  5. One to One Matching of transaction to be done by bank and incase of default to be reported to RBI. Incase of repeated defaults (3 or more cases in a year), Bank should restrain trader from entering into any further transaction.
  6. The inward remittance from the overseas buyer should preferably be received first and the outward remittance to the overseas supplier will be made subsequently. Alternatively, an irrevocable Letter of Credit (LC) should be opened by the buyer in favour of the merchant. On the strength of such LC the merchant in turn may open a LC in favour of the overseas supplier. The terms of payment under both the LCs should be such that payment for import LC is required to be made after receipt of payment under export LC. The export LC should be issued in the name of original merchanting trader in India and import LC should be favouring the original supplier. In case export leg payment is received in advance, AD banks need not insist on opening of export LC.
  7. In case advance against the export leg is received by the merchanting trader, the advance payment may be held in a separate deposit / current account in foreign currency or Indian Rupees. The amount required for import leg should be earmarked till the payment of import and should not be made available to the merchanting trader for use, other than for import payment or short-term deployment of fund limited to the import payable, with the same AD for the intervening period.
  8. Advance for import leg should be paid against bank guarantee from an international bank of repute.
  9. Trade instrument like Back to Back LC and Transferable LC will be used more actively by Merchant Traders.

Gray Area / Open to Interpretation

  1. Transaction should result in reasonable profit.
  2. Defining words like Genuine Trader, Financial Intermediaries, Reasonable Profit & Original Suppliers.
  3. Capability of Merchanting Trader to perform the obligation under the order.

References

  1. RBI Circular: Merchanting Trade Transactions – Revised GuidelinesDated : 28-03-2014
  2. RBI Circular: Merchanting Trade Transactions: Dated : 17-01-2014
  3. RBI Master Direction –  Import of Goods and Services: Dated: 31-03-2016
  4. Master Direction – External Commercial Borrowings, Trade Credit, Borrowing and Lending in Foreign Currency by Authorised Dealers and Persons other than Authorised Dealers: Dated: 19-09-2016
  5. Report of the Technical Committee on Services / Facilities to Exporters: Refer Chapter 4:  Dated: 29-04-2013
  6. Old Article: Suppliers’ Credit or Buyers’ Credit is not available for Merchanting Trade
  7. RBI Circular : Merchanting Trade to Nepal and Bhutan: Dated: 30-042015

Buyers Credit Tenure Extended to 5 years for Import of Capital Goods

Trade Credit for Import into India

5 YearsIn earlier article “Trade Credit Extended Upto 5 Years for Infrastructure Firms” we had seen that RBI had allowed buyers credit to infrastructure firms till 5 years subject to conditions.

RBI has reviewed the policy as below

  • Tenure of Trade Credit (buyers credit / suppliers credit) for import of capital goods has been extended from 3 years to 5 years for companies in  all sectors.
  • Minimum tenure of buyers credit has been relaxed from 15 months to 6 Months. Which means trade credit can be taken and rollover in multiple of 6 months or more
  • But banks cannot issue Letter of Credit / Letter of Undertaking /Comfort beyond 3 years (from the date of shipment) 
  • Amended Trade Credit Policy will come to force with immediate effect
  • Policy cover both existing buyers credit as well as fresh buyers credit against capital goods. (As per RBI Master Circular : External Commercial Borrowing (ECB) and Trade Credit.

Observations

  1. Further clarity is required from RBI on “Banks cannot issue lou for period beyond 3 years“. As it seems that only large corporates will be able to take benefit of this extended tenure as overseas bank will not be keen on providing funds to SME without LOU / LOC issued by Indian Banks.
  2. Overseas Branches of Indian Bank and Foreign Banks will have to come out with a structure to take benefit of the extended tenure without LC /Letter of Undertaking / Letter of Comfort.

Reference

  1. RBI Circular :  Trade Credit for Import India: Dated: 24 September 2013
  2. Master Direction – External Commercial Borrowings, Trade Credit, Borrowing and Lending in Foreign Currency by Authorised Dealers and Persons other than Authorised Dealers: Dated: 19-09-2016
  3. Revised Guidelines: Trade Credit for Import into IndiaDated: 11-09-2012
  4. Buyers Credit Cost Calculation Sheet

Buyers Credit on Import of Second Hand Machinery

The trigger for this topic is a question that a reader asked:

Question : What are the RBI guidelines for availing Letter of credit facility and/or buyers credit facility for the import of second hand capital goods? Is it possible for a company to avail these facilities for second hand machinery?

RBI Master Direction: “Import of Goods and Services” & “External Commercial Borrowing and Trade Credit” are silent on the above subject.

Reference is found in Exchange Control Manual in relation to second hand machinery, extract of the same is given below:

In terms of Export-Import Policy presently in force, second hand capital goods are allowed to be imported freely subject to certain conditions. Such imports sometimes involve payment against delivery of second hand plant and machinery abroad on ‘as is where is basis’. In the absence of shipping documents, it will not be possible for authorised dealers to open letters of credit or make remittances against such imports. Applications for opening of Letters of Credit or for making remittances in regard to imports with such payment conditions should, therefore, be referred to Reserve Bank for prior approval with full details

Based on the understanding of above, buyers credit can be taken on the second hand goods without RBI Approval subject

  1. Machine delivery is not taken abroad on ‘as is where is basis’
  2. Import of the given category of second hand machinery is allowed in current Foreign Trade Policy.

Reference

Relationship Management Application (RMA) and Buyers Credit

Using Swift Codes Banks and Financial Institutions send and receive swift messages. But there must have been times where you might have come across your bankers coming back to you stating that they do not have swift key arrangement with buyers credit bank. Thus they will not be able to send Letter of Undertaking (LOU) / Letter of Comfort (LOC) authenticated swift message (MT799) to buyers credit bank. Below article gives a brief about why situation arise.

Relationship Management Application (RMA)

RMA  is a system, where a sender bank and receiver bank has to authorize each other to send swift messages and also what type of swift message they can send each other. Thus making the communication system more secure.

So, in cases where banks do not have an RMA with another bank, LOU issuing bank either has to set up an RMA with Buyers Credit Bank or has to route the swift message through a bank / branch with whom both banks have an RMA. Also note, there is an additional cost which correspondent bank will charges for Relaying or Forwarding the swift message. Normally this would cost between $50 – $100 and also result in consumption of additional time to complete transaction.

RMA Example

LOU Issuing Bank ———MT799 (LOU) ———Buyers Credit Bank

Non RMA Example

LOU Issuing Bank—–MT799 (LOU) —– XYZ Bank (Relay / Forward)——–Buyers Credit Bank

rma

RMA between institutions from Importers Perspective

  1. As a customer there is nothing much one can do than requesting his bank to get RMA setup with another bank where they do not have one.
  2. Bank would be interested in getting RMA done with another bank based on expected volume and other business which it can do.
  3. Both Banks should agree to get RMA done.
  4. Depending upon the backend process of both banks, it might take from one day to few weeks in getting the RMA setup between banks.

Revised Forms (15CA, 15CB) and Rules for payment to Non Resident

taxRefer Revised Article:

Form 15CA and Form 15CB not Required for Import Payments

Post below article CBDT has revised rules for form 15CA and Form 15CB. Please refer above article for further detail.

In earlier article about Withholding Tax (WHT), we have discussed about the process and applicability of Form 15CA and 15CB. On 5th August, 2013 CBDT revised the guidelines on Form 15CA and Form 15CB and further amended on 02nd September 2013. Below article gives a summary of changes made.

  • Revised Forms and Amendments shall come into force on the 1st October, 2013.
  • Applicable to : Any payment including any interest or salary or any other sum chargeable to tax, to non-resident, not being a company, or to a foreign company

Changes in New Form 15CA

Part A of Form 15 CA (Form 15CB not required)
Particulars Changes
Who Shall Fill It To be filled up if the remittance to non- resident or to a foreign company does not exceed Rs. 50000 per transaction and aggregate of such payments made during the financial year does not exceed Rs. 2,50,000
What information has to be filled 1. Particulars of Remitter, Remittee, Remittance made and TDS
2. Mandatory to furnish PAN of Remitter, if tax is deducted then TAN of the Remitter also needs to be provided
3. Form prescribes mandatory application of provisions of Section 206AA, if remittance is chargeable to tax and PAN of remittee is not available.
4. E-mail and Phone Number of remittee to be furnished, if available
Part B of Form 15 CA ***(Form 15CB required)
Who Shall Fill It To be filled up for remittances other those specified in Part A (If the Remittance is chargeable to tax and exceed Rs. 50000 per transaction and aggregate of such payments made during the financial year exceeds Rs. 2,50,000)
What information has to be filled 1. Forms prescribe mandatory application of provisions of Section 206AA, if PAN of remittee is not available;
2. Other Details
Secion A:
Details of Remitter, Remittee and Accountant to be specified in this section
Secion B:
Particulars of Remittance and TDS (as per certificate of accountant), namely:
a. Remittance details
b. Taxability under the Income Tax Act
c. Taxability under the relevant DTAA. Details of TRC (Tax Residency Certificate)
d. TDS details

*** Part B of Form 15CA is to be filled after obtaining either of the below

  • a certificate in form no. 15cb from an accountant (chartered accountant) or
  • a certificate from the Assessing Officer (AO) under Sec 197 or
  • an order from Assessing Officer under sub-sec (2) or sub-section (3) of sec 195

Changes in New Form 15CB(PDF) (Excel Format of  Revised Form 15CB)

Additional details to be provided in new Form 15CB are

  • Taxability under the Income-tax Act without considering the relief of the DTAA
  • If income is chargeable to tax in India and relief is claimed under the DTAA, whether TRC has been obtained from the recipient?
  • If remittance is on account of capital gains details of amount of short-term, long-term capital gains and the basis of arriving at the taxable income.

Revised Process for filing Form 15CA (atleast till the time NSDL site is update)

1. Login on the e-filing portal at the following link  – https://incometaxindiaefiling.gov.in/e-Filing/UserLogin/LoginHome.html

2.  Visit the link – e-file → Prepare and Submit Online Form(Other than ITR) → Select Form 15CA and Assessment year.

Form 15CA & Form 15CB not required for Import Payments

Few banks have started asking for Form 15CA and Form 15CB sighting RBI circular of 2007 “Remittances to non-residents – Deduction of tax at source

CBDT Circular clearly states ” Any person responsible for paying to a non-resident, not being a company, or to a foreign company, any interest or salary or any other sum chargeable to tax under the provision of the Act, shall furnish the following information” (in form 15CA and Form 15CB)

Payments made against Import Purchases constitutes Business Income of the Overseas Supplier and is taxable in India only if it is attributable to a Business connection/Permanent Establishment in India as per Section 9(1)(i) and respective Double Tax Avoidance Agreement. Thus, in absence of any income chargeable to tax in India there cannot be any application of Section 195 & form 15CA and Form 15CB is not applicable for remittances towards import payments.

Few banks are taking a declaration from Importers in their forwarding letter that given Import payment amount is non chargeable to tax in India and carrying out transaction without Form 15CA and Form 15CB.

Specified List :  

Explanation 2: For the removal of doubts, it is hereby clarified that for payments of the nature specified in column (3) of the specified list below, no information is required to be furnished under sub-rule (1).

Thus no form 15CA and Form 15CB in applicable for below cases.

Sl.No. Purpose code as per RBI Nature of payment
(1) (2) (3)
1 S0001 Indian investment abroad -in equity capital (shares)
2 S0002 Indian investment abroad -in debt securities
3 S0003 Indian investment abroad -in branches and wholly owned subsidiaries
4 S0004 Indian investment abroad -in subsidiaries and associates
5 S0005 Indian investment abroad -in real estate
6 S0011 Loans extended to Non-Residents
7 S0202 Payment- for operating expenses of Indian shipping companies operating abroad.
8 S0208 Operating expenses of Indian Airlines companies operating abroad
9 S0212 Booking of passages abroad -Airlines companies
10 S0301 Remittance towards business travel.
11 S0302 Travel under basic travel quota (BTQ)
12 S0303 Travel for pilgrimage
13 S0304 Travel for medical treatment
14 S0305 Travel for education (including fees, hostel expenses etc.)
15 S0401 Postal services
16 S0501 Construction of projects abroad by Indian companies including import of goods at project site
17 S0602 Freight insurance – relating to import and export of goods
18 S1011 Payments for maintenance of offices abroad
19 S1201 Maintenance of Indian embassies abroad
20 S1 202 Remittances by foreign embassies in India
21 S1301 Remittance by non-residents towards family maintenance and-savings
22 S1302 Remittance towards personal gifts and donations
23 S1303 Remittance towards donations to religious and charitable institutions abroad
24 S1304 Remittance towards grants and donations to other Governments and charitable institutions established by the Governments
25 S1305 Contributions or donations by the Government to international institutions
26 S1306 Remittance towards payment or refund of taxes.
27 S1501 Refunds or rebates or reduction in invoice value on account of exports
28 S1503 Payments by residents for international bidding

Reference

Period of Buyers Credit Linked to Operating Cycle

Operating CycleIn the circular issued on 11th July 2013, RBI has made following two changes in relation to Trade Credit transactions:

  1. Period of Trade Credit (Buyers Credit / Suppliers Credit) should be linked to the operating cycle and trade transaction. 
  2. All in cost ceiling of 6 Month L+ 350 bps will continue to be applicable till September 30, 2013 and is subject to review thereafter.

This circular has removed the ambiguity on tenure for which buyers credit (Trade Credit) can be availed. Earlier RBI circular was open ended stating tenure allowed for raw material import was upto 360 days and decision was left on the banks (AD) to decide on clientwise tenure based on their internal criteria.

Above changes in the circular will have impact on…

  • Buyers Credit rollover transaction will not be possible for tenure more than mentioned in sanction limits.
  • Those clients who were using buyers credit for arbitrage purpose earlier, this window has closed.

Reference

Change in LIBOR Tenures and Impact on Trade Finance

Libor changesLIBOR scandal was discussed in the earlier articles like Pushing the reset button on LIBOR – Speech by Martin Wheatley and Impact of Libor Review on Trade Finance in India .

Effective from 01 June 2013, two major change has been implemented.

  1. Henceforth LIBOR rates will be available for below tenures only:
    1. LIBOR – overnight
    2. LIBOR – 1 week
    3. LIBOR – 1 month
    4. LIBOR – 2 months
    5. LIBOR – 3 months
    6. LIBOR – 6 months
    7. LIBOR – 12 months
  2. Libor rates for the below currencieshas been discontinued.
    1. NZD (New Zealand Dollar)
    2. DKK (Danish Krone)
    3. SEK (Swedish Krona)
    4. AUD (Australian Dollar)
    5. CAD (Canadian Dollar)

3. Libor rates is now only available for below currencies

Impact on Buyers Credit & all Trade Finance Transactions

  1. If importer is looking for buyers credit for tenures for which Libor rates are not available, buyers credit providing banks has started using higher tenure LIBOR rates  & thus resulting in increase in cost for importers. For Example: If Importer is looking for buyers credit for tenure of say 120 days or 150 days. Earlier buyers credit was provided at 4 Month Libor or 5 Month Libor respectively. But since yesterday banks have started quoting for such transactions at 6 Months Libor only. Same way if importer is looking for  any tenure above 6 Months,  banks have started quoting rates at 12 Month Libor.
  2. Currencies for which Libor rates are not available, banks will have to start using alternate benchmark for providing trade finance. For example, as of now buyers credit would stop for these currencies transaction till the time banks find an alternate benchmark. As this currencies are used  limitedly by Indian importers it will limited impact.

Note: The above changes is yet not been made to Euribor. Thus will not impact EURO Transactions.

Reference Article

Swift Code & Messages Used in Buyers Credit Transaction

Latest Article:

What is SWIFT Code ?

SWIFT-Bank-Code

SWIFT code (also known as ISO 9362, SWIFT-BIC, BIC code, SWIFT ID or SWIFT code) is a standard format of Business Identifier Codes approved by the International Organization for Standardization (ISO). It is a unique identification code for both financial and non-financial institutions. These codes are used when transferring money between banks, particularly for international wire transfers, and also for the exchange of other messages between banks.

SWIFT (Society for Worldwide Interbank Financial Telecommunicationdoes not facilitate funds transfer; rather, it sends payment orders, which must be settled by correspondent accounts that the institutions have with each other. Each financial institution, to exchange banking transactions, must have a banking relationship by either being a bank or affiliating itself with one (or more) so as to enjoy those particular business features.

The SWIFT code is of 8 or 11 characters, made up of: 

For Example: HDFC IN BB AHM

  1. The first four characters represent the Bank code, for example HDFC (HDFC Bank)
  2. The next two characters represent the ISO Country code, for example IN (India)
  3. The next two characters are the Location code, for example BB (Mumbai)
  4. Optionally a three character branch code can be added at the end of the address.  For example HDFCINBBCCAHM might be the Ahmedabad branch. These codes are primarily used for internal routing purposes within the bank, as the branches themselves do not have direct connection. Usage is often more common in some countries. 

Where an 8-digit code is given, it may be assumed that it refers to the primary office.

Type of Swift Message

SWIFT messages are identified in a consistent manner. They all start with the literal “MT” which denotes Message Type. A 3-digit number then follows this. The first digit represents the Category. A category denotes messages grouped together because they all relate to particular financial instruments or services. The full list is as follows:

MT0nn System Messages
MT1nn Customer Payments
MT2nn Financial Institution Transfers
MT3nn FX, Money Market & Derivatives
MT4nn Collections and cash letters
MT5nn Securities Markets
MT6nn Precious Metals & Syndications
MT7nn Documentary Credits & Guarantees
MT8nn Travellers Cheques
MT9nn Cash Management & Customer Status

The last digit is the Type and denotes the individual message. There are several hundred message types across the categories in total.

A special subset of Messages is known as the Common Group because the last two digits represent the same message in each category. For example:

MTn99 Free format
MT299 Free format relating to transfers
MT599 Free format relating to securities
MT999 General free format

Types of Swift Message used in Buyers Credit.

  1. MT799 :  Authenticated Free Format Message type.  
    1. LOU Issuing Bank: For sending letter of undertaking / letter for comfort for availing buyers credit
    2. Buyers Credit Bank: For confirmation of funding along with repayment details
  2. MT202: Requests the movement of funds between financial institutions
    1. Buyers Credit Bank: At the time of payment of buyers credit to LOU issuing Bank
    2. LOU Bank: At the time of repayment of buyers credit of principal and interest
  3. MT999 : Unauthenticated Free Format Message. Cases where there is no direct swift key arrangement, banks use this free format for basic communication.

How to Search a Swift Code of a Bank

Using the below link, one can find swift code for a particular financial institution. Filling up details of two fields i.e. Institution Name and Country, will provide the desired Swift Code.

Swift Code Search

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Tax Residency Certificate Not Required in Prescribed Format

CertificateIn September 2012, CBDT had prescribe a format in which Tax Residence Certificate (TRC) was required from April 2013. In the Amendments to Finance Bill 2013, requirement of prescribed format has been done away with. Below article gives further details on the same.

Sub-section (4) of 90 and 90A provides that treaty benefit will not be available to any Non Resident unless he furnishes TRC from the Government of his country of residence containing such particulars as may be prescribed. The Finance Bill, 2013 had proposed to insert sub-section (5) in sections 90 and 90A to provide that TRC shall be a necessary but not a sufficient condition for claiming any relief under a DTAA.

The Finance Minister had subsequently clarified, by way of Press Release dated 1st March 2013, that the TRC issued by the Government of a foreign country would be accepted as evidence of tax residency and the tax authorities cannot go behind the TRC to question the residential status.

In order to incorporate the said clarification in the statute, sub-section (4) of sections 90 and 90A is proposed to be amended to substitute the words “a certificate containing such particulars as may be prescribed of his being a resident” with the words “a certificate of his being a resident”. Therefore, a certificate issued by the Government of a foreign country would constitute proof of tax residency, without any further conditions regarding furnishing of prescribed particulars therein.

Also, sub-section (5) of sections 90 and 90A which provided that TRC shall be a necessary but not a sufficient condition for claiming any relief under a DTAA is proposed to be substituted to provide that the assessee referred to under sub-section (4) of sections 90 and 90A shall also provide such other documents and information, as may be prescribed.

Reference

  1. Amendments to Finance Bill 2013
  2. Sec 90 of Income Tax Act 1961
  3. Sec 90 A of Income Tax Act 1961
  4. Sec 90 (4) of Income Tax Act 1961
  5. Finance Bill, 2012 – Direct Taxes
  6. CBDT Circular on “Certificate of Tax  : Dated 17-09-2012
  7. India Mauritius Double Taxation Avoidance Agreement (DTAA)
  8. Country-wise Double Taxation Summary Chart
  9. Countrywise DDTA Agreements Copy
  10. Ministry of Finance Notification on 194LC (5% WHT – Not Applicable to Buyers Credit)Dated: 21-09-2012

Surcharge and Education Cess on Withholding Tax

taxEarlier articles have discussed about applicability of Withholding Tax on Interest payment in case of Buyers Credit and Suppliers Credit. Readers have come back asking query whether Surcharge and Education Cess is applicable or not on withholding tax amount. Below article answers these queries.

Is Surcharge and Education Cess Applicable on WHT ?

Yes. The basic gross rate of withholding tax on a foreign currency loan, availed by an Indian holding company from non-residents is 20% which, with applicable surcharge and education cess.

Incase of DTAA limits Surcharge and Education Cess

Withholding Tax rates may be limited by application of a tax treaty. The surcharge and education cess will not apply where the withholding tax is limited by a tax treaty.

Incase where DTAA is Silent on Surcharge and Education Cess

Incase where double taxation avoidance agreement does not say anything about inclusion of surcharge and education cess for the purpose of deduction of tax at source, there is an apparent conflict between the Income-Tax Act and DTAA between the two sovereign countries.  Thus one needs to refer Sec 90(2) of Income-Tax Act

“Where the Central Government has entered into an agreement with the Government of any country outside India or specified territory outside India, as the case may be, under sub-section (1) for granting relief of tax, or as the case may be, avoidance of double taxation, then, in relation to the assessee to whom such agreement applies, the provisions of this Act shall apply to the extent that are more beneficial to that assessee.”

In view of the above, in respect of a taxpayer to whom the double taxation avoidance agreement applies, the provisions of the Indian Income-tax Act shall apply to the extent they are more beneficial to that taxpayer. In other words, if the provisions of DTAA are more beneficial to the taxpayer, then the provisions of DTAA would prevail over the Indian Income-tax Act. Incase where DTAA is silent about the surcharge and education cess for the purpose of deduction of tax at source,  taxpayer can take advantage of that provision in the DTAA for deduction of tax.

Reference

Buyers Credit on Import of Precious and Semi Precious Stone

semiprecious-stones1In earlier articles, we had seen that, banks are permitted by RBI to approve Suppliers’ and Buyers’ Credit (Trade Credit) including the usance period of Letters of Credit opened for  Import of gold in any form including jewelery made of gold/ precious metal and or studded with diamonds /semi precious /precious stone not exceeding 90 days from the date of shipment.

RBI has further clarified with circular dated 20-02-2013, that Suppliers’ and Buyers’ Credit (Trade Credit) including the usance period of Letters of Credit opened for import of even precious stones and semi-precious stones should not exceed 90 days from the date of shipment. The revised directions will come into force with immediate effect.

Reasons for the above step taken by RBI

  • Reduce Current Account Deficit.
  • Discouraging importers using the above products solely for arbitrage.

Reference

  1. RBI Circular: Import of Precious Stones and Semi Precious Stones – RBI Clarification: Dated: 20-02-2013
  2. RBI Circular : Fema 1999 – Import of Gold in any form including Jewellery – ClarificationDated: 24-09-2012
  3. RBI Master Circular on External Commercial Borrowing (ECB) and Trade Credit: Dated: 01-07-2014
  4. RBI Master Circular on  Import of Goods and Services: Dated: 01-07-2014
  5. RBI Circular for Buyers Credit and Suppliers related to of import of Rough, Cut and Polished diamondDated: 06-05-2011
  6. RBI Circular for Import of Platinum, Palladium, rhodium, and SilverDated: 28-01-2008

Myanmar Economic Sanctions – Background, Recent Relaxation & Trade Finance

Myanmar has been under various international economic sanction for more than a decade, which has crippled its international trade. Below article gives a background of economic sanctions on Myanmar, recent relaxations in these sanctions and what will be its likely impact on trade finance from Indian importers perspective.

Background on Myanmar Sanctions

Myanmar

Under Burmese Freedom and Democracy Act 2003 (BFDA) and Junta’s Anti-Democratic Efforts (JADE) Act 2008 and US Government placed Myanmar under economic sanctions which resulted into

  1. Restriction on Imports from Burma: With certain exceptions, goods of Burmese origin could not be imported into the United States.
  2. Blocking of Property: Blocking of all property and interests in property of the persons listed in Special Designated Nationals and Blocked Persons List (SDN List).
  3. New Investments: New Investments in Burma were prohibited by U.S. person.
  4. Exportation of Financial Services to Burma: With certain exceptions, the exportation or re-exportation of financial services to Burmawere prohibited. The term exportation or re-exportation of financial services to Burma would broadly mean (as defined in 31 C.F.R. § 537.305):
    1. Transfer of funds, directly or indirectly, from the United States or by a U.S. person, wherever located to Burma; or
    2. The provision, directly or indirectly, to persons in Burma of insurance services, investment or brokerage services (including but not limited to brokering or trading services regarding securities, debt, commodities, options or foreign exchange), banking services, money remittance services; loans, guarantees, letters of credit or other extensions of credit; or the service of selling or redeeming traveler’s cheques, money orders and stored value.

Along with US, other countries like European Union (EU), UK, Norway, Switzerland, Australia and Canada also imposed various sanctions on Burma.

From International Trade / Trade Finance perspective, 3rd condition and various other countries sanctions brought International Trade from Myanmar to a standstill. Reason: Currencies widely used in international trade among countries was now not available for Myanmar transactions.

Recent Relaxation in Myanmar Sanctions

United States (under General License) and other countries started the process of easing restrictions on imports of Burmese goods in response to the substantial and significant reforms that have taken place in that country over the past years. Some of these relaxations related to international trade are:

  1. Authorizing the Exportation or Re-exportation of Financial Services to Burma: On 11-07-2012, exportation or re-exportation of financial services to Burma, directly or indirectly,  from the United States or by a U.S. person,was authorized subject to below mentioned limitations:
    1. Exportation or Re-exportation of Financial Services to Burma as defined in 31 C.F.R. § 537.305 (as given in above paragraph).
    2. This general license does not authorize, in connection with the provision of security services, the exportation or re-exportation of financial services, directly or indirectly, to the Burmese Ministry of Defense, including the Office of Procurement; any state or non-state armed group; or any entity in which any of the foregoing own a 50 percent or greater interest.
    3. This general license does not authorize the exportation or re-exportation of financial services, directly or indirectly, to any person whose property and interests in property are blocked as per SND List.
  2. Importation of Products of Burma: On 16-11-2012, Import of goods of Burma originare authorized except
    1. For jadeite or rubies mined or extracted from Burma or article of jewelry containing jadeite or rubies mined or extracted from Burma.
    2. Import from block person or entity as per SDN list.

Note: Above relaxation are under General Licence. A general licence authorize a particular type of transaction for a class of person without the need to apply for a license. Further details are given in FAQ.

Impact of Relaxation on Bilateral Trade between India and Myanmar & Trade Finance

India bilateral trade with Myanmar in year 2010 – 11 was $1070.88 Million (Source: website of Indian Embassy in Myanmar).

India’s imports from Myanmar (US$ 876.13) are dominated by agricultural and forest based products. Myanmar is the second largest supplier of beans and pulses to India, accounting for one third of India’s total requirements of imported pulses. Myanmar contributes to nearly one fifth of India’s imports of timber.

India’s exports (US$ 194.75) to Myanmar , though small, are diverse, ranging from primary commodities to manufactured products. Primary and semi-finished steel along with steel bars and rods constitute over one third of India’s exports. In 2010-11, coupled with metals, this commodity accounted for more than 30% of India’s exports to Myanmar. Pharmaceuticals are the next most important item and accounted for 27% (nearly US$ 60 mn) of India’s exports to Myanmar in 2009-10.  The other products exported to Myanmar are Iron & Steel (US$ 43 mn), Electrical machinery, Mineral oil, Rubber and articles, Plastics etc. Export of chemicals, plant & machinery and consumer goods, though small, shows potential for growth.

From Exporters and Importers Perspective it further opens up the market and ease of using various trade finance products. For Example, Indian Importers Importing Wood log into India from Myanmar earlier were not able to take benefit of Trade Finance products like LC, Buyers Credit etc from their banks. With recent relaxation, importers will now be able to avail various benefit of trade finance products thus resulting in cost  saving.

Frequently Asked Questions (FAQ)

  1. What is OFAC ?  The Office of Foreign Assets Control administers and enforces economic sanctions programs primarily against countries and groups of individuals, such as terrorists and narcotics traffickers. The sanctions can be either comprehensive or selective, using the blocking of assets and trade restrictions to accomplish foreign policy and national security goals.
  2. What is a license? A license is an authorization from OFAC to engage in a transaction that otherwise would be prohibited. There are two types of licenses: general licenses and specific licenses. A general license authorizes a particular type of transaction for a class of persons without the need to apply for a license. A specific license is a written document issued by OFAC to a particular person or entity, authorizing a particular transaction in response to a written license application. Persons engaging in transactions pursuant to general or specific licenses must make sure that all conditions of the licenses are strictly observed. OFAC’s regulations may contain statements of OFAC’s specific licensing policy with respect to particular types of transactions.

  3. What is an SDN? As part of its enforcement efforts, OFAC publishes a list of individuals and companies owned or controlled by, or acting for or on behalf of, targeted countries. It also lists individuals, groups, and entities, such as terrorists and narcotics traffickers designated under programs that are not country-specific. Collectively, such individuals and companies are called “Specially Designated Nationals” or “SDNs.” Their assets are blocked and U.S. persons are generally prohibited from dealing with them

I will appreciate readers feedback on the content.

Reference

  1. US Department of The Treasury: Burma (Myanmar) Sanction.
  2. General License No. 16 : Authorizing the Exportation or Reexportation of Financial Services to Burma Dated: 11-07-2012
  3. General License No. 18: Authorizing the Importation of Products of Burma Dated: 16-11-2012
  4. Summary of Myanmar Sanction by EU, UK, Norway, Swiss, Australia, Canada, US OFAC Sanction and FATF Warning List
  5. Specially Designated National List
  6. FICCI: India-Myanmar Trade Relations
  7. Indian Embassy of Myanmar

Buyers Credit on High Sea Sales Transaction

What is High Sea Sales ?

High Sea Sale

High Sea Sales (HSS) is a sale carried out by the carrier document consignee to another buyer while the goods are yet on high seas or after their dispatch from the port/airport of origin and before their arrival at the port/ airport of destination.

As defined in Central Sales Tax Act 1956. Section 5 (2) 

A sale or purchase of goods shall be deemed to take place in the course of import of the goods into the territory of India only if the sale or purchase either occasions such import or is effected by a transfer of documents of title to the goods before the goods have crossed the customs frontiers of India.

As per above definition, for a transaction to be consider as high seas sale, it have to satisfy below three conditions,

  1. A sale or purchase shall be deemed to take place in the course of import of the goods into the territory of India only if :
    1. the sale or purchase either occasions such import, or
    2. it is effected by a transfer of documents of title to the goods before the goods have crossed the customs frontier of India.
  2. Section 2(4) of the Sales of Goods Act,1930 defines “document of title to goods,”

“document of title to goods” include a bill of lading, dock warrant, warehouse-keeper’s certificate , wharfinger’s  certificate, railway receipt, warrant or order for the delivery of goods and any other document used in the ordinary course of business as proof to the possession or control of goods, or purporting to authorise, either by endorsement or by delivery, the possessor of the document to transfer or receive goods thereby represented”;

The bill of lading is considered to be document of title to goods and the sale can be
made by endorsement delivery or by mere delivery of a blank bill of lading before the goods cross the customs frontier.  It may be noted that airway bill is not a document of title to goods. However, delivery order issued by banker is recognised as a negotiable document.

3.  Section 2(ab) of the Central Sales Tax Act, 1956 defines “Crossing the customs frontiers of India”. It is defined as under:

“Crossing the customs frontiers of India” means crossing the limits of the area of a customs station in which imported goods or export goods are ordinarily kept before clearance by custom authorities

Process flow of High Sea Sales Transaction

The following is the procedure that is followed in case of High Sea Sales:-

  1. High Sea Seller places order with supplier for import of goods.
  2. Supplier ships the goods to High Sea Seller and submits the documents to his bank counter. (Assumption in this case: Payment mode is Documents Against Payment)
  3. High Sea Seller sells the goods to High Sea Buyer while the goods are still on High Sea by entering into an agreement of sale to effect the sale on high sea of specific goods.
  4. Documents arrives at banks counter of High Sea Seller’s bank. High Sea Seller makes payment from his own funds or using buyers credit and gets documents released.
  5. The document of title i.e. Bill of Lading is endorsed by the High Sea Seller in favour of High Sea Buyer and provides him with local invoice (in INR) and other documents required to file Bill of Entry.
  6. High Sea Seller retains a copy of the endorsed Bill of Lading and hands over original Bill of Lading to High Sea Buyer under covering letter.
  7. High Sea Buyer shall file Bill of Entry and pay customs duty, clearing charges etc. and gets the goods released.
  8. High Sea Buyer hands over a Copy of Bill of Entry to High Sea Seller for further submission to his Bank.

Documents Provided By High Sea Seller to High Sea Buyer

  1. High Sea Sale Agreement
  2. Sale Invoice in INR
  3. Consignee Copy of B/L – Duly Endorsed in favour of Buyer
  4. Import Invoice, Packing List, Certificate of Origin & Insurance Certificate-Duly Endorsed in favour the High Sea Buyer

Conclusion

RBI Master Circular for External Commercial Borrowing and Trade Credit only talks about buyers credit can be taken against import and thus inference needs to be drawn based on  movement of documents and funds. Incase of High Sea Sale, import is done High Sea Seller and documents are routed to his bank by supplier. Final payment to supplier is also done by High Sea Seller. Thus  buyers credit can be arranged by High Sea Seller.

Reference

  1. Central Sales Tax Act 1956. Section 5 (2) and Section 2 (ab)
  2. Section 2(4) of the Sales of Goods Act, 1930
  3. Master Direction – External Commercial Borrowings, Trade Credit, Borrowing and Lending in Foreign Currency by Authorised Dealers and Persons other than Authorised Dealers: Dated: 19-09-2016

Withholding Tax (WHT) on Suppliers Credit Transactions

In earlier article we had discussed about WHT on Buyers credit. This article answers questions related to withholding tax on suppliers credit.

What is Suppliers Credit ?

Supplier’s Credit is a structure of financing import into India. In this structure, overseas suppliers or financial institutions outside India offer financing to importer on Libor linked rates against usance letter of credit (LC).

Is WHT applicable on Suppliers Credit Transactions ?

Yes it is applicable.

How to Compute Withholding Tax (Example)

  • WHT Rate: Assume 10%
  • Transaction Amount: $100000
  • Quote :  Libor+ 100 bps +  WHT  (Libor : 1%, Margin: 1% (net of WHT) Tenure: 180 days
  • USD / INR:  65
  • Net Interest Amount  is $ 1000 {$1,00,000*2%*(180/360)}
  • Gross Interest Amount = $1111 = {$1000* (100/90)}
  • Withholding tax = $ 111 = Rs. 7215
  • Grossed up margin in % : 1.22% pa ($1111 / $100000 * 2)

Process flow of payment of Withholding Tax

  1. Check from tax residency certificate and Indian Pan Card from Overseas Bank or Suppliers depending who is funding transaction.
  2. Check if India has DTAA with Tax resident country.
  3. If answer question 2 is yes, check for TDS rates as per  Countrywise double taxation summary chart.
  4. Compute TDS amount.
  5. Deposit the tax through challan no. 281 (Nature of payment 195).
  6. Get Form 15CB issued from Chartered Accountant (CA) for the suppliers credit interest payment.
  7. Submit online Form 15CA based on details in form 15CB provided by CA.
  8. Along with Form A2 submit Form 15CA and Form 15CB to Authorised Dealer (AD Bank) on or before due date of making payment for suppliers credit interest.
  9. File Quarterly return of withholding tax through Form No. 27Q (Section Code: 195).
  10. AD Bank forwards a copy of document to Assessing Officer / Income Tax Department.

Note: 

  1. If DTAA & PAN of suppliers credit providing bank is available, then as per DTAA .
  2. If no DTAA or PAN, then @ 20% (see section 206 AA of Income Tax Act).
  3. As per DTAA, rate of TDS should not exceed tax rate given in DTAA. Which means, where rate as per DTAA is applicable, Surcharge and Education Cess shall not apply.

What points should Importer take care

Legal Answer on Why WHT is applicable on Suppliers Credit

Mumbai bench of the Income-tax Appellate Tribunal in the case of Uniflex Cables (Ltd) held that payment made to a foreign supplier towards finance charges for availing credit for purchase of raw material is in the nature of “Interest” under Section 2 (28A) of the Income Tax Act, 1961. Thus any payment made to overseas supplier or financial institution for such payment attracts WHT under Section 195.

Interest within the meaning of Sec.2(28A) of the Act. Sec.2(28A) of the Act was introduced by the Finance Act, 1976, w.e.f 1-4-1976 and it reads as under: “(28A) “Interest” means interest payable in any manner in respect of any moneys borrowed or debt incurred (including a deposit, claim or other similar right or obligation) and includes any service fee or other charge in respect of the moneys borrowed or debt incurred or in respect of any credit facility which has not been utilised ;”

  1. The Tribunal relied on the Gujarat High Court’s decision in the case of Vijay Ship Breaking Corporation where it was held that the non-resident is taxable under the Act in respect of usance interest and the same would be deemed to have accrued and arisen in India in view of the provisions of sec. 9(1)(v)(b) of the Act.
  2. Additionally, DTAA for the country in question needs to be referred. If the sum in question is treated as interest under the Act, whether the same is liable to tax in India in view of the DTAA between India and the countries of which the persons who supplied raw material to the assesse were tax residents. Reason The provisions of the Agreement will override the provisions of the Act.”  (Ref: Countrywise DDTA Agreements Copy)

Reference: 

  1. Uniflex Cables Ltd v. DCIT [I.T.A. No.7019/Mum/2006]
  2. CIT v. Vijay Ship Breaking Corpn [2003] 261 ITR 113 (Guj)
  3. Vijay Ship Breaking Corporation v. DCIT [2003] 86 ITD 497 (Rajkot)
  4. Transmission Corporation of A.P. Ltd v. CIT [1999] 239 ITR 587 (SC)
  5. CIT v. Visakhapatnam Port Trust [1983] 144 ITR 146 (AP)

CBDT Circular

  • Circular No 65 dated 02 September 1971
  • Circular No 647 dated 22 March 1992

Important Related Links

Buyers Credit with 6 Month Libor Reset

Note: Post this article there are changes in maturities for which libor is issued. This article might now be relevant for long tenure transactions (12 Months and Above). Refer link for more details on change in Libor: Change in LIBOR Tenures and Impact on Trade Finance

Banks and Importers consider various factors before going for Buyers Credit transaction for more than 6 months tenure. One such factor is buyers credit with 6 Month Libor Reset option.  The below article elaborates on these factors.

Libor is calculated for 7 different maturities and for 5 different currencies and with longest maturity rate of 12 Month. For simplicity of understanding the below article  considering USD Libor rates only.

For Buyers Credit transaction with tenure more than 6 months but less than 5 years banks use Libor rates with various maturities between 6 Month to 12 Month Libor.

For example: For a buyers credit transaction with maturity of 360 days, buyers credit providing banks can offers quotes at 6 Month Libor with Reset every six months or 12 Month Libor. From bank’s and importer’s point of view, which month Libor maturity is used is important to understand because of risk and cost factors. USD Libor as on October 19, 2012 are as follows:

  • 6 Month USD Libor : 0.55940
  • 9 Month USD Libor: 0.73250
  • 12 Month USD Libor: 0.89650

(For latest Libor rates with different maturities, please click here)

From Banks point of view

Asset Liability Management is the practice of managing risk that arise due to mismatches between the asset and liability (debt and assets) of the bank. Bank manages the risks of asset liability mismatch by matching the assets and liability according to the maturity pattern or the matching of the duration, by hedging and by securitization.

To explain in simple language, when a bank quotes for a buyers credit transaction of 12 Month tenure with 12 month Libor, it means bank had borrowed funds (or has funds for that tenure) from market at that tenure. This removes liquidity risk and interest rate risk.

Interest Rate Risk: Volatility of rate of interest in future

When a bank offers 12 month tenure transaction with 6  month Libor, it means banks had funds for 6 month tenure and the same it is using to fund for 12 month transaction. A situation may arise because of factor not in control of bank where 6 month funds are available in market  at a higher rate than committed rate to importer and extending such transaction further would result into financial loss for funding bank.

For Example.:  X bank funds a buyers credit transaction at 6 Month Libor + 150 bps (bps means Basis Points. A unit that is equal to 1/100th of 1%) with reset clause for a 360 days buyers credit transaction. Incase at the time of reset funds are available at a rate higher than L+150 bps, it would result into loss for funding bank.

This also explains the reason why higher rates are quoted for a transaction which is more than 6 Months. Banks add risk premium while funding the transaction at 6 months Libor reset.

Liquidity Risk: Availability of funds to meet the committed requirement:

During 2008 crisis and 2011 Greece crisis, short-term funds market had dried up.  This resulted in many buyers credit bank out of market for some period. Banks with commitment of long-term transaction (more than 6 months) and with 6 Month Libor reset, had to move back on the commitment.

Both above risk also opens the bank to Reputational Risk also.

From Importers point of view

Importer must consider all the below factors before choosing which options to go for:

  • Cost: Among the options provided by various bank, which one is cheaper. In most of the cases 6 Month libor quote would work out to be cheaper. Reason difference between 6 Month libor and 12 Month. As in our earlier example: As on October 19, 2012 difference between 6 Month USD Libor and 12 Month USD Libor is 0.3371 bps. Thus, 6 Month Libor + 150 (with reset) is cheaper by 0.3371 against 12 Month Libor + 150 bps.
  • Process: In case of 6 Month Libor reset quote, every 6 months importer will have to pay the interest amount on the due date before further tenure is extended by bank. Whereas in case of 12 Month Libor, interest is payable along with principal  at the end of the tenure or 12 month whichever is earlier.
  • As explained in case of Banks point of view, in future in case of crisis if banks are not able to meet its commitment, it would result into higher cost for importers. For example, during Greece crises in 2011, costing in market were as high as 6 Month Libor + 350 bps. In cases where banks moved back on commitment, funds had to be rearranged from other banks at a high cost. In addition there were also cases were importers even after being ready to pay such a higher pricing were not able to get funds. Resulting into using of Term Loan or Working Capital limits as the case may be.

Others

For tenure which are more than 1 year it mainly works to whether it is 6 Months Libor Reset or 12 Month Libor Reset. This is applicable for import of capital goods and infrastructure firms who are looking for arranging funds at one go for the complete tenure.

Review of Trade Credit All-In-Cost Ceiling

After the expiry of deadline of 30-09-2012, there was a prolonged uncertainty for last 9 days on what is the all in cost ceiling for Trade Credit  (Buyers Credit / Suppliers Credit). Reserve Bank of India (RBI) issued a clarification or revised circular today clarifying the same. Summary of the same is given below

  1. Maximum Interest cap for Upto 5 Years : 6 Month Libor + 350 bps. This rate has been referred in it circular 11-09-2012 (Link given below)
  2. Until further review, the rate remains same. Thus, this time there is no deadline set for the review of the above rate to avoid any slippage like above.

Reference

  1. RBI Latest Circular: Trade Credit for Imports into India – Review of all-in-cost ceiling: Dated 09-10-2012
  2. Trade Credit for Import Into India: Dated 11-09-2012
  3. RBI Circular : Trade Credit for Imports into India – Review of All-in-cost ceiling:Dated: 30-03-2012
  4. RBI Circular : Trade Credit for Imports into India – Review of All-in-cost ceiling:Dated 15-11-2011
  5. RBI Master Direction –  Import of Goods and Services: Dated: 31-03-2016
  6. Master Direction – External Commercial Borrowings, Trade Credit, Borrowing and Lending in Foreign Currency by Authorised Dealers and Persons other than Authorised Dealers: Dated: 19-09-2016

Impact of Libor Review on Trade Finance in India

Note: Since this article was written, below regulation has been implemented. Refer Article: Change in LIBOR Tenures and Impact on Trade Finance

Article “Pushing the reset button on Libor” covers broader issue in relation to Libor and its recommendations are classified in below categories,

  1. Regulation – Introducing a new regulatory structure for LIBOR, including criminal sanctions for those who attempt to manipulate it.
  2. Governance – Transferring the oversight and governance role from the British Bankers’ Association.
  3. The rate itself – A range of technical changes to make the system work better, including streamlining a lot of the currencies and maturities currently used.

From Trade Credit (Buyers Credit, Suppliers Credit etc.) perspective, recommendation under above point 3 is the most relevant. It is further classified as,

1. Review has recommended that the number of currencies and tenors for which LIBOR is published to be reduced. Specifically:

  • Publication of all LIBORs for Australian Dollars, Canadian Dollars, Danish Kroner, New Zealand Dollars and Swedish Kronor should be discontinued;
  • For remaining currencies, publication of LIBOR for 4 months, 5 months, 7 months, 8 months, 10 months and 11 months tenors should be discontinued;
  • Continued publication of overnight, 1 week, 2 weeks, 2 months and 9 months should also be re-considered.

Should this recommendation be implemented in full, the number of LIBOR benchmarks published daily could be reduced from 150 to 20. Thus, either taking buyers credit in the above currencies will cease to exist or buyers credit providing bank will have to find an alternate benchmark for lending against these currencies. For example,  instead of Swedish Krona Libor, buyers credit bank might start using the Stockholm Inter-bank Offer Rate (STIBOR).

Same way, in the absence of certain tenors, interpolation or extrapolation techniques could be used to create intermediate maturities between existing data points.            For example, if some is looking for buyers credit for tenure of 120 days and in future when 4 Month Libor is not available, buyers credit providing banks might either use 3 month Libor or 6 month Libor and adjust margin charged over Libor  accordingly. Or use an alternate benchmark which offer a reference rate for that tenure. But that is highly unlikely to happen as it would create difficulties to manage funds under different maturities and benchmark for buyers credit providing banks.

2. Review has recommended that market participants using LIBOR should be encouraged to consider and evaluate their use of LIBOR, including whether standard contracts contain adequate contingency provisions covering the event of LIBOR not being produced.       This might result in buyers credit providing bank making changes in the Letter of Undertaking (LOU) / Letter of Comfort (LOC) format to  introduce the above contingency provision. However it needs to be seen how would local bank react to these changes.

3. Review has recommended that market participants should be encouraged to consider and examine their present use of LIBOR as a reference rate. Is it the most appropriate reference rate for transactions that they undertake? Or are there other benchmark rates that are more appropriate? In future we might even see a complete new benchmark being used for Trade Credit transactions. Like it happened with Euro transaction. Most of the Euro transactions now day are happening in EURIBOR instead of Euro Libor.

The Review has recommended a 12-month transition period for the full implementation of these changes. However, some LIBORs may be able to be reduced in a shorter time period, perhaps within six months. This timeframe would give market participants time to adapt to alternative benchmarks. It would also give market participants the time to establish market-wide solutions, where appropriate.

To keep the transaction smooth, RBI, Industry Association, Industry and Banks will have to come together and work out a clear road map on future of Trade Credit and all other product which are linked to LIBOR .

Reference

  1. The Wheathley Review of Libor : Final Report : Dated 28-09-2012
  2. HM Treasury : The Wheatley Review
  3. Speech by Martin Wheatley – Managing Director, FSA, and CEO Designate, FCA at the Wheatley Review of LIBOR : Dated 28-09-2012

Buyers Credit on Jewellery

In earlier articles on Buyers Credit on Import of Gold and Import of Platinum, Palladium, Rhodium, Silver, as stated, Reserve Bank of India (RBI) had permitted banks to approve Suppliers and Buyers Credit (Trade Credit) including the usance period of Letters of Credit for import of rough, cut and polished diamonds, for a period not exceeding 90 days, from the date of shipment.

But there still remained an ambiguity on maximum tenure allowed on imported jewellery as circulars were silent on the same. Because of this ambiguity, few LOU Issuing banks were issuing lou / loc (Letter of Undertaking / Letter of Comfort)  for 360 days tenure and thus importers were enjoying buyers credit  upto 360 days tenure.

RBI issued a clarification circular on the above matter. RBI has clarified that Suppliers’ and Buyers’ credit (Trade Credit) including the usance period of Letters of Credit opened for import of gold in any form including jewellery made of gold/precious metals or/ and studded with diamonds/ semi precious / precious stones should not exceed 90 days, from the date of shipment.

Reference

  1. RBI Circular : Fema 1999 – Import of Gold in any form including Jewellery – Clarification: Dated: 24-09-2012
  2. RBI Master Circular on External Commercial Borrowing (ECB) and Trade Credit: Dated: 01-07-2014
  3. RBI Master Circular on  Import of Goods and Services: Dated: 01-07-2014
  4. RBI Circular for Buyers Credit and Suppliers related to of import of Rough, Cut and Polished diamondDated: 06-05-2011
  5. RBI Circular for Import of Platinum, Palladium, rhodium, and SilverDated: 28-01-2008

Trade Credit Extended Upto 5 Years for Infrastructure Firms

Reserve Bank of India (RBI) issued a fresh circular on September 11, 2012 in relation to Trade Credit for Import into India. Please find below summary of changes made into existing policy:

  1. Maximum tenure under Buyers Credit for import of capital goods has been extended from 3 years to 5 years for company classified as Infrastructure as defined in guidelines on External Commercial Borrowings (ECB). Infrastructure sectoris defined as under:
    1. Power
    2. Telecommunication
    3. Railways
    4. Roads including Bridges
    5. Sea Port and Airport
    6. Industrial Parks
    7. Urban Infrastructure (water supply, sanitation and sewage projects)
    8. Mining
    9. Exploration and Refining
    10. Cold storage or cold room facility, including for farm level pre-cooling, for preservation or storage of agricultural and allied produce, marine products and meat.
  2. Trade Credit must be availed for Minimum fifteen months at one go and should not be in the nature of short-term roll overs.
  3. For Existing Trade Credit transactions availed on or before 14th December 2012, abinitio (from beginning) buyers credit would be for min tenure of 6 months.
  4. Banks are not permitted to issue Letters of Credit/guarantees/Letter of Undertaking (LoU) /Letter of Comfort (LoC) in favour of overseas supplier, bank and financial institution for the extended period beyond three years.
  5. All-in-cost ceiling for upto 5 years is 6 Month Libor + 350 bps. The all-in-cost ceilings include arranger fee, upfront fee, management fee, handling/ processing charges, out of pocket and legal expenses, if any.
  6. All other policy of trade credit remains unchanged and needs to be complied with.
  7. Starts from : Immediately
  8. Ends on: Subject to review based on the experience gained in this regard by RBI
  9. RBI has allowed refinancing of such bridge finance (if in the nature of buyers’/suppliers’ credit) availed of, with an ECB under the automatic route subject to conditions.

Reference:

Difference Between EURIBOR & EUR Libor

EURO based buyers credit is currently funded by most of the banks using EURIBOR which is issued by European Banking Federation and ACI. A similar rate is issued by British Banking Association known as EUR Libor but is not often used by bankers for funding buyers credit transactions.

Reasons for specifying this are,

  • Both are different rates
  • Off late the spread between EURIBOR and EUR Libor has increased. For example, on 06 September 2012, 3 Month Eur Libor is 0.16643% whereas 3 Month Euribor is 0.269%.

Different Method used for Calculating EURIBOR & EURO LIBOR 

Unlike BBA (British Banking Association) Euro LIBOR, EURIBOR, the complementary fixing which has been established by the European Banking Federation and ACI to benchmark in-zone rates, applies a concept of country quota. Each in-country has at least one bank represented on the Panel and smaller countries will rotate membership of the Panel amongst their leading commercial banks every 6 months. EURIBOR has a panel of 49 Reference banks from in-zone countries as well as international banks. Bank of Tokyo-Mitsubishi, Chase, Citibank, JP Morgan Bank of America and UBS have been selected to represent international banks. The averaging method of BBA LIBOR (wherein the top and bottom quartiles are discarded and the middle 50% averaged to produce the LIBOR fixing) is similar to EURIBOR although only the top and bottom 15% are rejected in the FBE/ACI process. This differential topping and tailing will result in there being a greater ratio of smaller banks to larger banks in EURIBOR.

Spread Between Euribor and EUR Libor

The spread between the Euro Libor rate and that of Euribor was negligible between 2006 to mid-2009, as the attached chart shows. Since then, however, it has been rising, reaching a peak in early 2012.

In theory there should be no disparity, because the same rate is being calculated, just in different geographical locations.

One of the reasons of the spread is differing samples and questions. “In the case of [Euro] Libor, the submission is based on the bank’s own experience. In the Euribor situation, the question is directed to ask what the respondent thinks other banks are achieving.” The European approach, they say, carries the risk that respondents are projecting their own problems on to other institutions.

The Euribor sample includes responses from banks at the sharper end of the euro crisis, including German Landesbanks, the National Bank of Greece, Ireland’s AIB Group and a number of Spanish and Italian banks. The 15 banks that are surveyed for the Libor calculation, however, are some of the most secure lenders in the eurozone – which may also help explain why the Euribor measure is higher.

Reference

Basel III – Future Impact of Trade Finance

To Avail Buyer’s / Supplier’s Credit: E: sanjaymandavia@gmail.com, M: +919825560186

The Basel Committee on Banking Supervision (BCBS, or Basel Committee) is an institution created by the central bank Governors of 27 members from both developed and emerging economies. The most influential publications by the BCBS are Basel Accords. The key part of  Basel framework as commonly referred to, guides banking industry how to calculate risk-weighted assets (RWA) and capital requirements. The Basel Committee gave its  final text of Basel III on Dec 2010 of details of updated global regulatory standards on bank capital adequacy and liquidity, which was agreed by the Governors and Heads of Supervision, and endorsed by the G20 Leaders at their November 2010 Seoul summit.

Implementation in India From: January 012013. The Basel capital ratio will be fully implemented as on March 31, 2018

Impact on Buyers Credit

  • LOU costing will go up
  • LOU issuing bank would prefer their branches / subsidiaries for arranging funds because of the provisioning norms. Thus would reduce options to their customers.

Trade Finance

Trade finance covers a spectrum of payment arrangements between importers and exporters. While a seller (the exporter) would like to ask the purchaser (the importer) to prepay for goods to be shipped, the purchaser (importer) may wish to reduce risk by requiring the seller to document the goods that have been shipped. Banks may assist by providing support in various forms. International Chamber of Commerce (ICC) banking commission believes that almost 90% of the world merchandise trade is supported by trade finance.

With trade finance, exporters and importers can achieve four broad functions, i.e., arrange for payment, raising fund, mitigating risks and costs, and access of credit information. Trade finance transactions can be structured in a number of ways. The structure used in a specific transaction reflects the relationship between participants, countries involved, and competition in the market.  So far, letter of credit (L/C) transactions are the norm in sales associated with emerging market countries. Collections, especially documentary collections are also important in bank trade finance.

Basel III:  Trade Finance Regulations’ Likely Impact on Banks

1. Basel III framework is biased against banks in emerging markets.

The minimum standards set for the IRB approach even at the foundational level are complex and beyond the reach of many banks. Emerging markets would face serious implementation challenges with their low technical skills, structural rigidities, less robust legal system, shortage of experienced talents, etc. The complexity and sophistication of the proposals makes its application in emerging markets highly unlikely, where the banks continue to be the major segment in financial intermediation and would be facing considerable challenges in adopting all the proposals.

Under Basel II, for banks with good quality assets, the risk weighted assets (RWA) under IRB approach will be significantly lower than under standardized approach, and that is what exactly the Basel Committee intends to encourage banks to migrate from standardized approach. It is felt that the proposals will disadvantage banks in emerging markets. Those banks play pivotal roles in extending trade finance to local traders, with those banks’ cutting finance support, the trade development for emerging market will be adversely impacted.

2. One year maturity floor  for trade finance

Basel III prescribes one-year maturity floor to the maturity of lending facilities despite of the fact that the maturity of trade finance products is usually shorter than 180 days. Since capital requirements (naturally) increase with maturity length, the capital costs of trade finance are artificially inflated as a result. Such measurement does not precisely reflect the short-term and low-risk nature of trade finance and expands the occupation of risk capital of banks, which is not conducive to the development of trade finance business.

Basel II paragraph 321 stipulates that the one-year floor does not apply to certain short-term exposures, as defined by each supervisor on a national basis. In other words, the Basel Committee permits that all national regulators have the discretion to waive this floor,  however many regulatory authorities are still reluctant to exercise this discretion, even after UK FSA waived the one-year maturity floor at the end of 2008.

3. Lack of Specific Data Puts Trade Finance in an Unfavorable Situation

Banks are allowed to use either the standardized approach or the IRB approach to measure RWA in terms of credit risk. The fundamental difference between IRB and standardized approach lies in that banks would adopt their own models to estimate parameters required for calculating RWA. The low-risk nature of trade-related Off-Balance Sheet items (OBS) should lead to low values when calculating risk parameters and demonstrate the advantage of saving risk capital compared with other lending facilities. Nevertheless, IRB requires that banks accumulate relevant historical data for at least 5 years when calculating probability of default (PD) and the calculation of loss given default (LGD) and exposure at default (EAD) be based on data even longer.

The majority of banks in the world do not have sufficient historical performance data for trade-related OBS items. The factors causing this are wide and varied, but particular problems include: (a) migration of facilities (i.e. when a trade loss results in an exposure on another facility, such as an overdraft); (b) customer-centric data collection practices; and (c) inherent biases in the data collected. Due to the common shortage of relevant record of historical performance data of trade-related OBS items, the low-risk nature is not given a full play from the values of risk components devised by Basel II. When calculating the occupation of risk capital, banks have to adopt 20% or 50% Credit Conversion Factor (CCF) made by the regulatory rules and it gives rise to the excessive occupation of risk capital as far as trade-related OBS items are concerned.

The ICC, with Asia Development Bank (ADB), decided to establish a pooled performance database for trade finance products, which is called Register on Trade & Finance (the Register). By September 2010, altogether nine banks provided portfolio-level data comprising 5,223,357 transactions worth of USD2.5 trillion, with a total throughput between 2005 and 2009. The initial finding is encouraging. Only 1,140 defaults have been reported within the full data set of 5,223,357 transactions. More important, reported default rates for off-balance sheet trade products are especially low. The Basel RWA methodology are more concerned with issues of counterparty instead of facility issues, therefore it is somewhat difficult to build that some type of facility is low in credit default. However, the ICC is determined to further their efforts to meet regulatory requirements for data collection, and the ICC will work to enhance and expand the data collected.

4. Basel III 100% CCF for Leverage Ratio Proposal Poses Threat to Trade Finance

Basel III capital standards paragraph 163 provides that the Basel Committee recognizes that OBS items are a source of potentially significant leverage; therefore banks should calculate the above OBS items for the purposes of the leverage ratio by applying a uniform 100% credit conversion factor (CCF). Increasing the CCF to 100% for trade-related contingencies for the purposes of calculating a leverage ratio could significantly disadvantage trade finance-focused banks.

When the leverage ratio becomes compulsory, a bank may choose to increase the cost of providing trade products or selectively offer these products to customers, which will undoubtedly impact the perspectives of trade finance. It is not appropriate to apply 100% CCF to trade-related OBS items such as L/Cs and L/Gs in calculation of leverage ratio under Basel III. This calculating method fails to differentiate trade finance products from other OBS fictitious financial instruments. Trade finance products are often of the short-term and self-liquidating nature and closely related to the activities of real economy with actual trade background of goods and services. In other words, this sort of transaction is based on the real-economy need of customers and totally satisfies the demand of customers for credit enhancing, settlement and financing in the trade of goods and services. Compared with OBS synthetic financial instruments, it cannot increase market risk. Consequently, it is not justified to treat trade-related OBS items as the significant source of excessive leverage and to adopt 100% CCF to restrain them.

If the risk difference of distinct OBS assets is ignored, it might encourage banks to retain high-risk and high-profit asset businesses like derivatives driven by the motive to gain more profits when stepping into the precautionary area of leverage ratio supervision, thus deviating from the original intention of leverage ratio supervision.

5. Asset Value Correlation Cover Trade Finance 

Under Basel II, there are separate Asset Value Correlations (AVC) for retail mortgage, credit cards and other retail exposures. The correlations for these products are different due to the fact that they have different tenors, behavioural and payment patterns, and influencing macroeconomic factors. For corporate banking, there is only one AVC for all corporate products, including trade finance. Trade finance exposures are diverse in nature, smaller in value, shorter in tenor, self-liquidating and exhibit different behaviour and payment patterns from other longer term corporate lending products. Defaults on trade finance obligations are generally minimal, even during stress situations. This is supported by industry data from the International Chamber of Commerce (ICC) – Asian Development Bank (ADB) Trade Finance Default Register study. The study, covering 5.2 million trade finance transactions over a period of 5 years, confirms that trade finance has historically had low default rates, even during the financial crisis. Additionally, in the rare occasions when trade loans default, loss recoveries are high. The AVC proposals recommended by the Basel Committee could increase the cost of providing credit for trade transactions and limit their availability, particularly in emerging markets that rely on sustained and affordable access to trade finance to support commercial activities.

6. Likely Implementation Issue under Basel Liquidity Standards

On top of the aforementioned capital standards in the new Basel III regime, there are new liquidity ratios that firms are forced to adhere to.  Both the short-term Liquidity Coverage Ratio and long-term Net Stable Funding Ratio allow national discretion on all other contingent funding liabilities such as trade finance and L/Cs when calculating the amount of liquid assets and stable funding required to match the potential liabilities. As with the one- year floor issue above, it is likely that some national supervisors will use this discretion to implement onerous liquidity requirements, which, when added on to other aspects of Basel III, will restrict the availability of trade credit even further.  These rules should be harmonized to avoid having irregular national rules for global business.

Basel III:  Trade Finance Regulations’ Likely Impact on Companies.

  1. Increase in cost of trade finance. According to few bankers, trade finance will becoming 15 to 37 percent more expensive.
  2. Reduced number of banks providing trade finance. Trade finance is low margin business.  As capital requirement going up, bank would prefer to increase their exposure on asset which with more earning.
  3. In order to avoid higher capital requirement, banks may start insisting customer to take funding from their overseas branches for products like buyers credit instead of other banks. Reason : Under letter of undertaking provisioning norm would be at 100% where as incase of letter of comfort it would be zero.

Related Articles

  1. Treatment of Trade Finance under Basel Capital Framework : October 2011
  2. RBI Circular: Implementation of Basel III Capital Regulations in India – Final Guidelines : May 2012
  3. Report on Findings of ICC-ADB Register on Trade & Finance : September 2010
  4. Basel III : A global regulatory framework for more resilient banks and banking system: Revised Version : July 2011
  5. Basel III: International Framework for liquidity risk measurement, standards and monitoring: December 2010

Note: Purpose of putting this article is to explain the importance of Basel III and impacts that Basel III will have on Trade finance product like Buyers Credit. This article is summary of various articles available on Basel III. Please refer to subject matter expert before using the article.

Suppliers’ Credit or Buyers’ Credit is not available for Merchanting Trade

Post below articles, guidelines have been revised. Please refer article “Revised Guidelines for Merchanting / Intermediary Trade

What is Merchanting Trade?

Merchant tradeThe supplier of goods will be resident in one foreign country. The buyer of goods will be resident in another foreign country. The merchant or the intermediary will be resident in India. He will book the order from the buyer, place the order with the supplier, supervise and coordinate the shipment of goods from the supplier’s country and deliver the same to buyer’s country. He will be receiving payment from the overseas buyer and making payment to the overseas supplier through an authorised dealer in foreign exchange in India. The difference between the inward remittance and the outward remittance will be the profit for the merchant. Some times goods may be imported by a buyer in India from a seller in one country and exported to a buyer in another country. Such imports are kept in bond and then exported. It is also possible that repacking may be done under customs supervision and then exported. This is basically to avoid the foreign buyer to know the source from where goods are being bought and supplied to them. Such transactions are known as Merchanting Trade as per the Indian Foreign Exchange Management Regulations.

RBI Regulations

RBI under Master Circular of Import of Goods and Services, has given norms to be followed in case of all Merchanting Transactions.  Extract of the relevant section is given below.

C.17. Merchanting Trade

AD Category – I bank may take necessary precautions in handling bonafides merchanting trade transactions or intermediary trade transactions to ensure that:

  1. Goods involved in the transactions are permitted to be imported into India and all the rules, regulations and directions applicable to export (except Export Declaration Form) and import (except Bill of Entry) are complied with for the export leg and import leg, respectively.
  2. The entire merchant trade transaction is completed within a period of 6 months.
  3. The transactions do not involve foreign exchange outlay for a period exceeding three months.
  4. Payment is received in time for the export leg.
  5. Where the payment for export leg of the transaction precedes the payment for import leg, AD Category – I banks should ensure that the terms of payment are such that the liability for the import leg of the transaction is extinguished by the payment received for the export leg of the transaction, without any delay. 

AD Category – I banks may note that short-term credit either by way of suppliers’ credit or buyers’ credit is not available for merchanting trade or intermediary trade transactions

Country-wise Double Taxation Summary Chart on Interest

Below Country-wise double taxation summary chart provides Tax rate and Article reference number applicable on interest payments to beneficiary outside India. Same will be useful at the time of filling up Form 15CA and Form 15CB

Notes:

  • To use DTAA rates, beneficiary should have an Indian PAN Card
  • As per DTAA, rate of TDS should not exceed tax rate given in DTAA; which means, where rate as per DTAA is applicable, Surcharge and Education Cess shall not apply.
SR. NO. COUNTRY OF RESIDENCE OF RECEIPIENT OF REMITTANCE ARTICLE REFERENCE APPLICABLE TDS RATES
1 Armenia Clause 2 of Article 11 10%
2 Australia Clause 2 of Article XI 15%
3 Austria Clause 2 of Article 11 10%
4 Bangladesh Clause 2 of Article XII 10%
5 Belarus Clause 2 of Article 11 10%
6 Belgium Clause 2 (a) of Article 11 15% (10% if any loan granted by bank)
7 Botswana Clause 2 of Article 11 10%
8 Brazil Clause 2 of Article 11 15%
9 Bulgaria Clause 2 of Article 12 15%
10 Canada Clause 2 of Article 11 15%
11 China Clause 2 of Article 11 10%
12 Czech Republic Clause 2 of Article 11 10%
13 Cyprus Clause 2 of Article 11 10%
14 Denmark Clause 2 (a) of Article 12 15% (10% if any loan granted by bank)
15 Finland Clause 2 of Article 11 10%
16 France / French Republic Clause 2 of Article 12 10%
17 Georgia Clause 2 of Article 11 10%
18 Germany Clause 2 of Article 11 10%
19 Greece Article IX 20%(plus surchage)
20 Hashemite Kingdom of Jordan Clause 2 of Article 11 10%
21 Hungary Clause 2 of Article 11 10%
22 Iceland Clause 2 of Article 11 10%
23 Indonesia Clause 2 of Article 11 10%
24 Ireland Clause 2 of Article 11 10%
25 Israel Clause 2 of Article 11 10%
26 Italy Clause 2 of Article 12 15%
27 Japan Clause 2 of Article 11 10%
28 Jordan Clause 2 of Article 11 10%
29 Kazakstan Clause 2 of Article 11 10%
30 Kenya Clause 2 of Article 12 15%
31 Korea (South) Clause 3 (a) of Article12 15% (10% if any loan granted by bank)
32 Kuwait Clause 2 of Article 11 10%
33 Kyrgyz Republic Clause 2 of Article 11 10%
34 Libyan Arab Jamahiriya Article 10 20%(plus surchage)
35 Luxembourg Clause 2 of Article 11 10%
36 Malaysia Clause 2 of Article 11 10%
37 Malta Clause 2 of Article 11 10%
38 Mauritius Clause 3 (c) of Article 11 20% (Nil in case of bank carrying on a bonafide banking business)
39 Mongolia Clause 2 of Article 11 15%
40 Montenegro Clause 2 of Article 11 10%
41 Morocco Clause 2 of Article 11 10%
42 Mozambique Clause 2 of Article 11 10%
43 Myanmar Clause 2 of Article 11 10%
44 Namibia Clause 2 of Article 11 10%
45 Nepal Clause 2 of Article 11 15%(10% if any loan granted by bank)
46 Netherlands Clause 2 of Article 11 10%
47 New Zealand Clause 2 of Article 11 10%
48 Norway Clause 2 of Article 12 15%
49 Oman Clause 2 of Article 12 10%
50 Philippines Clause 2 (a)of Article 12 15% (10% if interest is received by financial institution or insurance company)
51 Poland Clause 2 of Article 12 15%
52 Portugal / Portuguese Republic Clause 2 of Article 11 10%
53 Qatar Clause 2 of Article 11 10%
54 Romania Clause 2 of Article 12 15%
55 Russian Federation/ Russia Clause 2 of Article 11 10%
56 Saudi Arabia / Kingdom of Saudi Arabia Clause 2 of Article 11 10% (Income from debt-claims)
57 Serbia Clause 2 of Article 11 10%
58 Singapore Clause 2 (a) of Article 11 15%(10% if any loan granted by bank)
59 Slovenia Clause 2 of Article 11 10%
60 South Africa Clause 2 of Article 11 10%
61 Spain Clause 2 of Article 12 15%
62 Sri lanka Clause 2 of Article 11 10%
63 Sudan Clause 2 of Article 11 10%
64 Sweden Clause 2 of Article 11 10%
65 Switzerland / Swiss Confederation Clause 2 of Article 11 10%
66 Syria Clause 2 of Article 12 7.5%
67 Syrian Arab Republic Clause 2 of Article 11 10%
68 Tanzania Clause 2 of Article 12 12.50%
69 Tajikistan Clause 2 of Article 11 10%
70 Thailand Clause 2 (a) of Article 11 25% (10% if any loan granted by bank)
71 Trinidad and Tobago Clause 2 of Article 11 10%
72 Turkey Clause 2 (a) of Article 11 15% (10% if any loan granted by bank)
73 Turkmenistan Clause 2 of Article 11 10%
74 U.A.E Clause 2 (a) of Article 11 12.5% (5% if any loan granted by bank)
75 UAR (Egypt) Clause 1 of Article XII 20% (plus surchage)
76 United Kingdom Clause 3 (a) of Article12 15% (10% if any loan granted by bank)
77 United Mexican States (Mexico) Clause 2 of Article 11 10%
78 Uganda Clause 2 of Article 11 10%
79 Ukraine Clause 2 of Article 11 10%
80 USA Clause 2 (a) of Article 11 15% (10% if any loan granted by bank)
81 Uzbekistan Clause 2 of Article 11 15%
82 Vietnam Clause 2 of Article 11 10%
83 Zambia Clause 2 of Article 11 10%

Important Related Links

Form 15CA and 15CB under Section 195 of Income Tax

Refer Revised Article :  Form 15CA and Form 15CB not Required for Import Payments

Post below article CBDT has revised rules for form 15CA and Form 15CB effective from April 01, 2016. Please refer above article for further detail.

Finance Act, 2008 inserted a new sub section (6) to section 195 effective from April 1, 2008, which requires the person responsible for making payment to a non-resident to furnish information relating to such payments in forms to be prescribed. The Central Board of Direct Taxes (“CBDT”) has now, by notification No 30/2009 dated March 25, 2009, prescribed a new rule 37BB in the Income Tax Rules, 1962 (“the rules”) prescribing Form 15CA and Form 15CB to be filed in relation to remittances to non-residents under section 195(6) of the Income Tax Act, 1961 (“the Act”). This new rule is effective from July 1, 2009 and shall apply to all remittances being made after July 1, 2009. The process that  has to be followed, before any remittance can be made, is as under—

Step 1 : Obtain a certificate from a Chartered Accountant in Form No 15CB

Step 2: Electronically fill Form 15CA on NSDL site and submits it.

Step 3:Take Print out of Form 15CA with system generated acknowledgement number.  The same must be signed by person authorised to sign the return of income of the remitter or a person so authorised by him in writing

Step 4: Submit in duplicate Form 15CA and Form 15CB along with Form A2 to Remitting Bank (Authorised Dealer)

Step 5:  Bank makes the remittance

Step 6: Bank forwards a copy of undertaking (Form 15CA) and certificate of Accountant (Form 15CB) to Assessing Officer

CBDT Notification no. 30/2009 :-

In exercise of the powers conferred by section 295 read with sub-section (6) of section 195 of the Income-tax Act, 1961, the Central Board of Direct Taxes hereby makes the following rules further to amend the Income-tax Rules, 1962, namely:-

1.a These rules may be called the Income-tax (Seventh Amendment) Rules, 2009.

1.b They shall come into force with effect from 1st July, 2009.

2. In the Income-tax Rules, 1962, after rule 37BA, the following rule shall be inserted, namely:-  “Furnishing of information under sub-section (6) of section 195.

37BB. (1) The information under sub-section (6) of section 195 shall be furnished by the person responsible for making the payment to a non-resident, not being a company, or to a foreign company, after obtaining a certificate from an accountant as defined in the Explanation to section 288 of the Income-tax Act, 1961.

(2) The information to be furnished under sub-section (6) of section 195 shall be in Form No. 15CA and shall be verified in the manner indicated therein and the certificate from an accountant referred to in sub-rule (1) shall be obtained in Form No. 15CB.

(3) The information in Form No. 15CA shall be furnished electronically to the website designated by the Income-tax Department and thereafter signed printout of the said form shall be submitted prior to remitting the payment.

(4) The Director-General of Income-tax (Systems) shall specify the procedures, formats and standards for ensuring secure capture, transmission of data and shall also be responsible for the day-to-day administration in relation to furnishing the information in the manner specified.

Reference

  1. Revised Form 15CA Format
  2. Revised Form 15CB Format, (PDF), Excel Format of  Revised Form 15CB
  3. NOTIFICATION 67/2013 [SO 2659(E)] : Income-tax (Fourteenth Amendment) Rules, 2013 – Substitution of Rule 37BB and Form Nos. 15CA and 15CB Dated : 02-09-2013
  4. CBDT-Substitution of Rule 37BB and Form 15CA-15CB (Notification No 58/2013):Dated: 05-08-2013
  5. Form 15CA – Online
  6. Form 15CB
  7. Income Tax Circular : Remittances to non-residents
  8. Procedure for furnishing information in Form 15CA and Form 15CB
  9. Form A2

OFAC Countries & Implication on Buyers Credit

What is OFAC Sanctions ?

  • The Office of Foreign Assets Control (OFAC) is an office of the Treasury Department of United States of America (US).
  • OFAC administers and enforces economic and trade sanctions based on U.S. foreign policy and national security goals against targeted foreign countries, organizations, entities, and individuals.
  • Regulations issued under Trading With the Enemy Act (50 U.S.C. App.§§ 1-44) or by the US President under authority delegated under the International Emergency Economic Powers Act.
  • The OFAC sanctions programs are implemented through restrictions on imports and exports, prohibitions on financial transactions, freezing of assets, and other means.

Why Indian Banks restrict transaction from OFAC Sanction Countries ?

    1. Risk of getting fined by US Treasury and FED. Since 2010 Deutsche Bank, Barclays, RBS, BNP Paribas, CommerzBank, Credit Agricole etc have been fined for violating OFAC sanctions in range of USD $100 Million to USD 8.9 Billion.
    2. Global banking system and transactions involve Correspondent banks, which could be based out of US or associated with the U.S. banks.
    3. Cross-border payments could directly or indirectly involve U.S. banks, hence third countries companies or banks, often refuse to conduct transactions with companies / countries on the US sanctions list on account of settlement related issues.
    4. Sanctions from UN and European Union in line with OFAC Sanctions.

OFAC Sanction Program

The several OFAC sanctions programs can be grouped into two general categories:

Comprehensive programs: These programs target trade, investment, and commercial activities with certain geographic regions and governments.

In general, OFAC comprehensive sanction programs prohibit:

  • Exports from the United States (direct or indirect)
  • Imports into the United States (direct or indirect)
  • Other related transactions or dealings

The comprehensive sanctions programs apply to transactions involving most goods, technology and services. However, OFAC may authorize otherwise prohibited transactions, either by a general license contained within the regulations for a particular program, or by a specific license issued by OFAC.

Such programs currently apply to:

  • Cuba
  • Iran
  • Sudan
  • Burma (Myanmar)

Non-Comprehensive Programs:

  1. Limited country-specific programs;
  2. Programs targeting groups or individuals who have contributed to conflicts in or undermined democratic process in certain countries, and
  3. Programs targeting individuals or entities involved in or supporting terrorism, drug trafficking and other activities

Such programs currently apply to:

  • Western Balkans
  • Belarus
  • Cote d’Ivoire
  • Democratic Republic of the Congo
  • Iraq
  • Liberia (Former Regime of Charles Taylor)
  • Persons Undermining the Sovereignty of Lebanon
  • Libya
  • North Korea
  • Somalia
  • Syria
  • Zimbabwe
  • Counter-Terrorism Sanctions Program
  • Non-Proliferation Sanctions Program
  • Counter-Narcotics Trafficking Sanctions Program
  • Diamond Trading Sanctions Program

Implications of OFAC Regulations for Financial Institutions

Financial institutions must monitor all financial transactions performed by or through them to detect those that involve any entity or person subject to the OFAC laws and regulations.

For most situations, a financial institution should accept deposits and funds subject to OFAC regulations, but freeze the funds and accounts, so that absolutely no funds can be withdrawn (this is called “blocking”). However, there are a few situations that require the financial institution to reject the transaction or funds instead of accepting and blocking them. Exact regulations vary, in accordance with requirements imposed by the eight federal statutes and the specific sanctions. A detailed description of specific regulations for each program is available on the official OFAC web site: http://www.treas.gov/ofac.

In general, OFAC rules prohibit financial institutions from engaging in transactions with the governments of, or individuals or entities associated with, foreign countries against which federal law imposes economic sanctions. Federal law also imposes sanctions against certain countries associated with terrorists and narcotics traffickers and their front organizations. OFAC rules prohibit transactions with these entities as well. OFAC maintains a list of entities and individuals against whom these restrictions apply. You will need this list, known as the “SDN list” (Specially Designated Nationals) in order to comply.

Transactions Subject to OFAC Santions

Every type of financial transaction should be reviewed for OFAC compliance including, without limitation, the following:

  • Deposit accounts (checking, savings, etc.)
  • Loans
  • Lines of credit
  • Letters of credit
  • Safety deposit boxes
  • Wire transfers
  • ACH transfers
  • Currency exchanges
  • Depositing or cashing checks
  • Purchase of money orders or cashiers checks
  • Loan payments
  • Guarantors and collateral owners
  • Trust accounts
  • Credit Cards

Moreover, the names of all parties to a transaction should be checked against the list of names of individuals, entities, geographical locations or countries that have been identified by OFAC. This includes, but is not limited to the following (as applicable):

  • Beneficiaries
  • Collateral Owners
  • Guarantors / Cosigners
  • Receiving Parties
  • Sending Parties

Summary Chart Countrywise

These regulations are complex, and vary widely with respect to different countries. Below Chart provides a general guide, but note the references in the chart to guides published by OFAC that reflect that office’s official position. Also note that OFAC issued a Final Rule titled “Economic Sanctions Enforcement Guidelines” on 11/9/2009, effective immediately, that affects how OFAC sanctions are applied to financial institutions and other parties.

Sanctions Program Summary of Sanctions/Penalties Licenses, Special Notes Resource Links
Balkans – Blocking Property of Persons Who Threaten International Stabilization Efforts in the Western BalkansGet the details BLOCKING. All property and assets of designated persons are BLOCKED and may not be transferred, paid, exported, withdrawn, or otherwise dealt in.Prohibited activity. The making or receiving by a U.S. person of any contribution or provision of funds, goods, or services to or for the benefit of a designated person is prohibited. In addition, any transaction by a U.S. person that evades or avoids or has the purpose of or attempts to violate these prohibitions and any conspiracy to violate the prohibitions is prohibited.Penalties: Criminal fines for violating the Executive Order or regulations to be issued pursuant to the Executive Order may range up to the greater of $500,000 or twice the pecuniary gain per violation for an organization, or up to the greater of $250,000 or twice the pecuniary gain per violation for an individual. Individuals may also be imprisoned for up to 10 years for a criminal violation. Knowingly making false statements or falsifying or concealing material facts when dealing with OFAC in connection with matters under its jurisdiction is a criminal offense. In addition, civil penalties of up to $11,000 per violation may be imposed administratively. Executive Order (EO) 13219 (6/27/2001), modified by EO 13304 (5/29/2003).Licenses: Western Balkans General License (No. 1) – Legal Representation in Matters Pending before the International Criminal Tribunal for the former YugoslaviaLast program update: 5/30/2011
Belarus – Blocking Property of Certain Persons Undermining Democratic Processes or Institutions in BelarusGet the details Assets Blocked As of June 19, 2006, all property and interests in property of persons listed in the OFAC SDN lists with a [BELARUS] designation are blocked, “and may not be transferred, exported, withdrawn, or otherwise dealt in.Donations to or for the benefit of those same persons are prohibited. EO 13405 (6/19/2006)Licenses: All prior licenses have expired.Last program update: 2/10/2011
Burma (Myanmar)Get the details Prohibited Activity:  New investment in Burma by U.S. persons and U.S. persons’ facilitation of new investment in Burma by foreign persons.Prohibited: – With certain exceptions, the exportation or reexportation of financial services to Burma is prohibited. The term exportation or reexportation of financial services to Burma is defined broadly to mean: (i) the transfer of funds, directly or indirectly, from the United States or by a U.S. person, wherever located, to Burma; or (ii) the provision, directly or indirectly, to persons in Burma of insurance services, investment or brokerage services, banking services, money remittance services; loans, guarantees, letters of credit or other extensions of credit; or the service of selling or redeeming traveler’s checks, money orders and stored value. This defined term is unique to the Burma sanctions program. Although there are limited exceptions to the ban on the exportation of financial services, under no circumstances can payments be made from blocked accounts on the books of a U.S. bank. Blocked: All property and interests in property of the persons listed [in SDN lists citing the BURMA sanction program].Allowed: – U.S. financial institutions can operate accounts for an individual ordinarily resident in Burma, provided that the individual is not a blocked person and further provided that each transaction processed through the account is of a personal nature and not for use in supporting or operating a business, is not otherwise prohibited, and does not involve a transfer directly or indirectly to Burma or for the benefit of individuals ordinarily resident in Burma unless authorized pursuant to General License No. 15. Pursuant to General License No. 15, certain noncommercial, personal remittances to Burma are authorized. U.S. depository institutions, U.S. registered brokers or dealers in securities, and U.S. registered money transmitters are authorized to process transfers of funds to or from Burma or for or on behalf of an individual ordinarily resident in Burma in cases in which the transfer involves a noncommercial, personal remittance, provided that the transfer is not by, to, or through a person whose property and interests in property are blocked. Such transfers of funds are authorized even though they may involve transfers to or from an account of a financial institution whose property and interests in property are blocked, provided that the account is not on the books of a financial institution that is a U.S. person. Noncommercial, personal remittances do not include charitable donations to or for the benefit of any entity or funds transfers for use in supporting or operating a business. However, U.S. persons may make charitable donations to nongovernmental organizations in support of certain activities in Burma, provided that the donations are made pursuant to Amended General License No. 14-B.Prohibited: The importation into the United States of products of Burma and the exportation or reexportation to Burma of financial services from the United States or by U.S. persons, wherever located. The importation of jadeite and rubies mined or extracted from Burma (and of articles of jewelry containing such jadeite and rubies) is prohibited, and there are conditions for the importation of jadeite and rubies mined or extracted from a country other than Burma (and of articles of jewelry containing such jadeite and rubies).Penalties: Criminal conviction may result in a fine of not more than $1,000,000, or if a natural person, imprisonment for not more than 20 years, or both. A civil penalty of $250,000, or twice the amount of the transaction, whichever is greater, may be assessed for each violation. Imported articles in violation may be forfeited. Beginning May 6, 2008, largely in response to losses of life and property damage in the wake of Cyclone Nagris, OFAC has issued a series of Licenses (Nos. 14, 14-A and 14-B) authorizing certain financial transactions in support of humanitarian or religious activities in Burma. The latest of the series has no time limit.Also on May 9, 2008, OFAC issuedGeneral License No. 15, to allow U.S. financial institutions to process transfers of funds, unlimited in amount, for noncommercial, personal remittances to or from Burma, or for or on behalf of an individual ordinarily resident in Burma, subject to certain conditions. Prior to the issuance of this general license, noncommercial, personal remittances to Burma were permitted only insofar as total remittances did not exceed $300 per Burmese household in any consecutive three-month period. This new general license includes no such limitation.Guidance: Burmese Origin ImportsLast program update: 9/10/2010
Congo, Democratic Republic of the – Sanctions Against Persons Contributing to the Conflict in the Democratic Republic of the CongoGet the details Blocked. Any property of any [DRCONGO] SDN is blocked.Penalties: – Criminal fines for willful violations of the E.O. or the Regulations range, upon conviction, up to $1,000,000; individuals may also face imprisonment up to 20 years. In addition, civil penalties of up to the greater of $250,000 or twice the amount of the underlying transaction may be imposed administratively for violations of the E.O. or the Regulations. EO 13413 of 10/27/2006, effective 10/30/2006.Licenses: No general licenses have been issued.Last program update: 2/11/2011
Côte d’Ivoire(Ivory Coast)Get the details Blocked:  Transactions are prohibited with persons designated in OFAC’s list of SDNs and Blocked Persons with a descriptor of [COTED], and others. Includes money, checks, drafts, bank accounts, securities and other financial instruments, letters of credit, bills of sales, bills of lading and other evidences of title, wire transfers, merchandise and goods. Blockable property also includes any property in which there is any interest of a Côte d’Ivoire SDNs, including direct, indirect, future or contingent, and tangible or intangible interests.Penalties: Criminal fines up to the greater of $500,000 or twice the pecuniary gain per violation for an organization, or up to the greater of $250,000 or twice the pecuniary gain per violation for an individual. Individuals may also be imprisoned for up to 10 years. Knowingly making false statements or falsifying or concealing material facts when dealing with OFAC in connection with matters under its jurisdiction is a criminal offense. In addition, civil penalties of up to $11,000 per violation may be imposed administratively. EO 13396 – 2/7/2006No licenses.Last program update: 1/6/2011
Counter Narcotics TraffickingGet the detailsThis program includes persons designated under the 1999 Foreign Narcotics Kingpin Designation Act (“Kingpin Act”) as SDNTKs and those designated under EO 12978 (10/21/1995) as SDNTs. Blocking. Blocks all property subject to U.S. jurisdiction in which there is any interest of a person designated as an SDNT or SDNTK.Prohibition: U.S. persons are prohibited from engaging in any transaction or dealing in property or interests in property of [SDNTK]s and from engaging in any transaction that evades or avoids the prohibitions of the Kingpin Act. These prohibitions affect trade transactions as well as accounts, securities, and other assets.Penalties, Kingpin Act violations: Corporate criminal penalties for violations of the Foreign Narcotics Kingpin Designation Act range up to $10,000,000; individual penalties range up to $5,000,000 and 30 years in prison. Civil penalties of up to $1,075,000 may also be imposed administratively.Penalties, violation of EO 12978:  Corporate criminal penalties for violations of the International Emergency Economic Powers Act range up to $500,000; individual penalties range up to $250,000 and 20 years in jail. Civil penalties of up to $50,000 may also be imposed administratively. Kingpin Act EO 12978No licenses issued.Last program update: 7/25/2011
Counter TerrorismGet the detailsIncludes Specially Designated Global Terrorist [SDGT], Foreign Terrorist Organization [FTO] and Specially Designated Terrorist [SDT] designations. Blocked: All property and interests in property of the designated persons that are in the United States or that hereafter come within the United States, or that hereafter come within the possession or control of United States persons.Prohibited: To assist in, sponsor, or provide financial, material, or technological support for, or financial or other services to or in support of, acts of terrorism or those persons listed; and being otherwise associated with designated persons, including the making of donations to persons designated under the Order.Penalties: Corporate criminal penalties for violations range up to $500,000; individual penalties range up to $250,000 and/or 20 years in jail. Civil penalties of up to $50,000 may also be imposed administratively. EO 12947, 1/23/1995EO 13099, 8/21/1998EO 13224, 9/24/2001EO 13268, 7/2/2002EO 13372, 2/16/2005Guidelines on Transactions with the Palestinian AuthorityLicenses: Several licenses have been issued, relating to international organizations; certain transactions with the Palestinian Authority; in-kind donations of medicine, medical devices and services, etc. See the individual licenses listed on theSanctions Details page for further information and links.Last program update: 6/23/2011
CubaGet the details.NOTE: OFAC’s Program Summary is currently under revision to reflect the January 2011 policy changes. Blocking. Cuban assets, both government and private, are BLOCKED.Financial dealings with Cuba are BLOCKED.All property of Cuba, all Cuban nationals, and all Specially Designated Nationals (SDNs) of Cuba are BLOCKED.An estate account becomes BLOCKED whenever a Cuban national is an heir or is the deceased.Access to a safe deposit box is BLOCKED whenever a Cuban has an interest in the contents of the box.Life insurance proceeds are blocked if the deceased is a Cuban resident.Notes: On 9/4/2009, OFAC announced a final rule amending the Cuban Assets Control Regulations (CACR), relaxing rules on family visits, family remittances and telecommunications. On 1/28/2011, OFAC published another final rule further relaxing its regulations to continue efforts to reach out to the Cuban people in support of their desire to freely determine their country’s future. These amendments allow for greater licensing of travel to Cuba for educational, cultural, religious, and journalistic activities and expand licensing of remittances to Cuba. These amendments also modify regulations regarding authorization of transactions with Cuban national individuals who have taken up permanent residence outside of Cuba, as well as implement certain technical and conforming changes. Authorized Travel, Carrier, and Remittance Forwarding Service Providers (8/26/2011)Last program update: 8/26/2011; under revision by OFAC to reflect January 2011 policy changes.
IranGet the detailsIncludes SDN designations as IRAN, IRGC, IFSR, IRAN-HR and ISA. BLOCKED. Per an Executive OrderBlocking the Property and Interests in Property of the Government of Iran and Iranian Financial Institutions (2/5/2012), U.S. persons are required to block all property and interests in property of the Government of Iran (including the Central Bank of Iran), of all Iranian financial institutions, and of all persons determined by the Secretary of the Treasury to be owned by, controlled by, or acting for or on behalf of any of those parties, when that property comes within the United States or within the possession or control of U.S. persons. New General License A and General License B were issued under the E.O. of February 5, and modify the effect of certain pre-existing licenses.An FAQ has been published to provide details on how the 2/5/12 EO affects transactions involving Iranian banks and the Government of Iran.OFAC also added a question about the impact of the 2/5/12 EO to its general FAQ on sanctions programs. An excerpt:”As a result, transactions involving entities bearing the [IRAN] tag on OFAC’s List of Specially Designated Nationals and Blocked Persons (“SDN List”) will now need to be blocked unless exempt or authorized by OFAC. Going forward, the [IRAN] tag will connote that a person or entity meets the definition of the term “GOI” or “Iranian Financial Institution”. OFAC will continue to update the SDN List and may add, delete, or edit existing entries as appropriate. “The E.O. of Feb. 5 blocks the property and interests in property of any individual or entity that comes within its definition of the term “Government of Iran” regardless of whether it is listed on the SDN List, and similarly it blocks the property and interests in property of all Iranian financial institutions as defined in the order regardless of whether the Iranian financial institution is listed on the SDN List.”Transactions not previously authorized by OFAC that involve property or interests in property of the Government of Iran, including the Central Bank of Iran, or of Iranian financial institutions must be blocked.U.S. Affiliates. U.S. persons (including financial institutions) with foreign affiliates may not permit the affiliate to do anything with regard to Iran that the U.S. person is prevented from doing directly.Penalties: Criminal penalties for violations of the Iranian Transactions Regulations may result in a fine up to $1,000,000, and natural persons may be imprisoned for up to 20 years. Civil penalties, which are not to exceed the greater of $250,000 or an amount that is twice the amount of the transaction that is the basis of the violation with respect to which the penalty is imposed may also be imposed administratively. Effective 11/10/2008, U.S. depository institutions may NO LONGER handle “U-turn transactions” that cover payments involving Iran.Banks may handle non-commercial family remittances involving Iran and non-commercial remittances involving humanitarian relief, provided the transfers are routed to or from non-U.S., non-Iranian offshore banks.The institution must determine prior to processing any payment orders that they do not involve prohibited transactions.Donations of articles intended to relieve human suffering are permitted.A list of banks owned or controlled by the Government of Iran is provided.Iran Sanctions Act: Implementation of Certain Sanctions Imposed on Seven Persons (11/14/2011)Designated IRGC Affiliates and Iran-Linked Financial Institutions – Extracted from SDN list.Executive Order Blocking the Property and Interests in Property of the Government of Iran and Iranian Financial Institutions (2/5/2012)FAQ regarding the 2/5/2012 Executive Order

Guidance on Iran Sanctions in National Defence Authorization Act for FY 2012 (2/14/2012)

EO 13590 – Iran Sanctions (11/21/2011)

EO 13574 – Implementation of certain sanctions in Iran Sanctions Act of 1996, as amended (eff. 5/23/2011)EO 13553 – Blocking property of certain persons with respect to human rights violations by the Government of Iran (Eff. 9/29/2010)EO 13059 – Prohibiting certain transactions with respect to Iran (8/20/1997)EO 12959 – Prohibiting certain transactions with respect to Iran (5/7/1995)EO 12957 – Prohibiting certain transactions with respect to the development of Iranian petroleum resources (3/16/1995)EO 12613 – Prohibiting imports from Iran (10/29/1987)Last program update: 2/14/12

IraqGet the details.Iraq Stabilization and Insurgency Sanctions Regulations (ISISR) – [IRAQ] designations All transactions previously prohibited are now authorized, with certain exceptions.Exceptions:All property and interests in property blocked as of May 23, 2003 are still blocked.The export or re-export from a third country to Iraq of goods or technology must be authorized by the Department of Commerce.Transactions dealing with Iraqi cultural property illegally removed since August 6, 1990 are not authorized.Financial transactions with Iraq are allowed, except for those involving individuals and entities on OFAC’s SDN list. The opening of correspondent accounts for Iraqi financial institutions is permitted.Penalties: Civil penalties of up to $250,000 or twice the amount of the underlying transaction may be imposed administratively against any person who violates, attempts to violate, conspires to violate, or causes a violation of the ISISR. Upon conviction, criminal penalties of up to $1,000,000, or imprisonment for up to 20 years, or both, may be imposed on any person who willfully attempts to commit, or willfully conspires to commit, or aids or abets in the commission of a violation of the ISISR. Absent an authorization from OFAC, any accounts, assets, investments, or any other property of any kind owned by, belonging to, or held by the Central Bank of Iraq or the Development Fund of Iraq, are immune from attachment, judgment, execution, or other judicial process in the United States. Iraqi petroleum and petroleum products and interests are immune from attachment, judgment, execution, or other judicial processes until title passes to the initial purchaser of those products.Latest program update: 5/25/2011
LebanonGet the details BLOCKED:The assets of “persons undermining the sovereignty of Lebanon or its democratic processes” are blocked. Donations to these persons are forbidden.Such assets may not be transferred, paid, exported, withdrawn or otherwise dealt in. Assets of individuals who are determined to be spouses or dependent children of such persons are also blocked.On 7/30/2010, OFAC issued regulations at 31 CFR Part 549 implementing an 8/1/2007 Executive Order.Section 549.505 of that regulation authorizes entries in blocked accounts for certain types of “normal service charges.”The block on assets bars the making of any contribution or provision of funds, goods, or service by, to, or for the benefit of any person whose property is blocked.Penalties: Criminal conviction can result in a fine of up to $1 million, and for natural persons imprisonment for up to 20 years. Civil penalties of up to the greater of $250,000 or an amount twice the amount of the transaction involved. EO 13441 Blocking Property Of Persons Undermining The Sovereignty Of Lebanon Or Its Democratic Processes And Institutions – August 1, 2007
LiberiaGet the detailsFormer Liberian Regime of Charles Taylor Sanctions Regulations [LIBERIA] BLOCKED:The assets of certain persons involved with the former Liberian regime headed by Charles Taylor are blocked. Donations to these persons are forbidden.The importation of any rough diamonds from Liberia, regardless of origin, is forbidden. This prohibition will be lifted if the Secretary of State posts a notice in theFederal Register that Liberia has become a Kimberley Process Certification Scheme participant.Penalties: Criminal fines for violating the Regulations range, upon conviction, up to $500,000 for an entity and $250,000 for an individual; individuals may also face imprisonment of up to 20 years. In addition, civil penalties of up to $50,000 per violation may be imposed administratively. On 5/23/2007, OFAC issuedregulations at 31 CFR Part 593 implementing the 7/22/2004 Executive Order targeting the regime of Charles Taylor.Section 593.510 of that regulation includes a general license for the importation of round log or timber products originating in Liberia, except in a transaction with any of the blocked parties related to the Taylor regime.EO 13348, Blocking Property of Certain Persons and Prohibiting the Importation of Certain Goods from Liberia (Effective Date – July 23, 2004)Latest program update: 12/14/2010
LibyaGet the details BLOCKED: Property and interests in property of [LIBYA] designated persons, generally senior officials of the Qadhafi Government of Libya; Colonel Muammar Qadhafi and members of his family and associates; persons who have materially assisted them.Prohibited: All transactions with [LIBYA]-designated persons, except for transactions for the conduct of the official business of the U.S. government.
  • EO 13566 – Blocking Property and Prohibiting Certain Transactions Related to Libya (Effective Date – February 25, 2011)
  • General License No. 4 with Respect to Investment Funds in Which There Is a Blocked Non-Controlling, Minority Interest of the Government of Libya
  • General License No. 5Authorizing Transactions Related to Certain Oil, Gas, or Petroleum Products Exported from Libya
  • General License No. 6 Guidance and General License with Respect to the Transitional National Council of Libya as the Legitimate Governing Authority for Libya
  • General License No. 7a with Respect to the Libyan National Oil Corporation and its Subsidiaries
  • General License No. 8a with Respect to the Government of Libya, its Agencies, Instrumentalities, and Controlled Entities, and the Central Bank of Libya
  • General License No. 9 with Respect to the General National Maritime Transport Company
  • General License No. 10, unblocking all property and interests in property of Arab Turkish Bank and North African International Bank.

Latest program updates: 12/1/2011

Nonproliferation (Weapons)Get the details[NPWMD] Prohibited activity. Any transaction by a U.S. person to finance or otherwise participate in the importation into the U.S. of goods, technology, or services produced or provided by foreign persons found by the Secretary of State to have engaged in activities related to the proliferation of nuclear, biological, or chemical weapons is prohibited.Except where otherwise provided by regulations, orders, directives, ruling or licenses, all property and interests in property in the U.S. of persons listed in the SDN lists with the identifier NPWMD are blocked, and may not be transferred, paid, exported or withdrawn. This prohibition extends to charitable contributions to the blocked person, and to any credit agreement with the blocked party, except those specifically licensed.The sanctions also affect any U.S. person financing or otherwise participating in the importation into the U.S. of goods, technology, or services produced or provided by foreign persons found by the Secretary of State to have engaged in activities related to the proliferation of nuclear, biological, or chemical weapons.Penalties: Criminal penalties for willful violations of E.O. 13382, or of any license, rule or regulation issued under it, range up to 20 years in prison, $500,000 in fines for a corporation and $250,000 for an individual. In addition, civil penalties of up to $50,000 per violation may be imposed administratively. EO 13382, Blocking Property of Weapons of Mass Destruction Proliferators and Their Supporters (6/28/2005)EO 13159, Blocking Property of the Government of the Russian Federation Relating to the Disposition of Highly Enriched Uranium Extracted From Nuclear Weapons (June 22, 2000)EO 13094, Proliferation of Weapons of Mass Destruction (July 29, 1998)EO 12938, Proliferation of Weapons of Mass Destruction (November 14, 1994)31 CFR Part 544 – Weapons of Mass Destruction Proliferation Sanctions31 CFR Part 540 – Highly Enriched Uranium Assets Control Regulations31 CFR Part 539 – Weapons of Mass Destruction Trade Control RegulationsNonproliferation and Weapons of Mass Destruction Advisory General License No. 2, authorizing certain transactions related to the arrest, detention, and judicial sale of MV Dandle and MV DecretiveGeneral License No. 4: Exportation or reexportation of agricultural commodities, medicine, or medical devices to Iran through any Iranian port operated by Tidewater Middle East Company is authorized in certain circumstances.General License No. 5 – authorizing certain transactions related to the arrest, detention, and judicial sale of the MV Dianthe (f.k.a. Horsham, f.k.a. Iran Bam, IMO No. 9323833).Latest program update: 11/3/2011
North KoreaGet the details[NORTH KOREA], [DPRK] Blocked.Property and interests in property of North Korea or a North Korean national that were blocked as of 6/16/2000, remain blocked.Property and interests of SDNs under the [NORTH KOREA] or [DPRK] programs are blocked. U.S. persons, with limited exceptions, are prohibited from transferring, paying, exporting, withdrawing, or otherwise dealing in the property and interests in property of an entity or individual named on such SDN lists, or of entities owned directly or indirectly 50 percent or more by a person on such lists.U.S. persons are prohibited from registering vessels in North Korea, obtaining authorization for a vessel to fly the North Korean flag, and owning, leasing, operating, or insuring any vessel flagged by North Korea.Goods, services, and technology from North Korea may not be imported into the United States, directly or indirectly, without a license from OFAC. This broad prohibition applies to goods, services, and technology from North Korea that are used as components of finished products of, or substantially transformed in, a third country.Treasury prohibitions on exporting goods to North Korea specifically relate to sales involving parties whose property and interests in property are blocked under E.O. 13551.PENALTIES: Criminal fines for violating the E.O.s range up to $1,000,000; individuals may also face imprisonment up to 20 years. In addition, civil penalties of up to the greater of $250,000 or twice the amount of the underlying transaction may be imposed administratively for each violation. EO 13570 Prohibiting Certain Transactions With Respect To North Korea (Effective date – April 18, 2011)EO 13551 Blocking Property of Certain Persons With Respect to North Korea (Effective date – August 30, 2010)EO 13466 Continuing Certain Restrictions With Respect to North Korea and North Korean Nationals (June 26, 2008)LATEST PROGRAM UPDATE: 6/20/2011
SomaliaGet the detailsSANCTIONS AGAINST PERSONS CONTRIBUTING TO THE CONFLICT IN SOMALIA[SOMALIA] BLOCKED: EO 13536 imposes targeted sanctions only; it does not impose any broad-based sanctions against the people or the country of Somalia. However, property and property interests of specific individuals and entities listed as SDNs with the [SOMALIA] designation are blocked. FAQ on Providing Humnaitarian Assistance in Somalia (8/4/2011)NEWEO 13536 – Blocking Property of Certain Persons Contributing to the Conflict in Somalia (Effective Date – April 13, 2010)Information on Persons Listed in the Annex to E.O. 13536 of April 12, 2010 (September 22, 2010)31 CFR Part 551 (Abbreviated Somalia Sanctions Regulations)LATEST PROGRAM UPDATE: 8/4/2011
SudanGet the details[SUDAN] [DARFUR] Blocked. All property and interests in property of the Government of Sudan that are in the United States, that come within the United States, or that are or come within the possession or control of U.S. persons, including their overseas branchesProhibited activity. No U.S. bank may finance or arrange offshore financing for, third-country trade transactions where Sudan is known to be the ultimate destination of, or the Government of Sudan is the purchaser of, the goods.Prohibited Activity. Prohibits U.S. persons from engaging in any transactions involving such property or interests in property. It also prohibits all transactions by U.S. persons relating to Sudan’s petroleum or petrochemical industries, including, but not limited to, oil field services and oil or gas pipelines.Note: In an Executive Order effective 4/27/06, President Bush directed that assets of certain persons named as threatening the peace process in Darfur, The Sudan, be blocked.All dealings in property in which an SDN has an interest must be authorized by OFAC unless they are exempt. Any bank subject to U.S. jurisdiction that receives instructions to make an unlicensed funds transfer involving a direct or indirect interest of the Government of Sudan (including any transfer routed through a Sudanese Government-controlled bank) is required to place such funds into a blocked interest-bearing account on its books and to notify OFAC. Such funds may only be unblocked after receipt of a specific authorization from OFAC. Setoffs against blocked accounts are prohibited.There are import and export restrictions affecting most of Sudan. Specified portions of Southern Kordofan/Nuba Mountains State, Blue Nile State, Abyei, Darfur and designated areas in and around Khartoum are exempted from those import and export restrictions. For details, contact OFAC.Restrictions on Financial transactions with Sudan are complex. Interested banks should consult the documents available on the OFAC web site for details, and contact OFAC with questions.PENALTIES: Criminal fines for violating the Regulations range, upon conviction, up to $1,000,000; individuals may also face imprisonment of up to 20 years. In addition, civil penalties of up to $250,000 or twice the amount of the underlying transaction may be imposed administratively for each violation. Guidance Regarding the Application of the Sudanese Sanctions Regulations to the New State to be Formed by the Secession of Southern SudanGuidance on the Donations of Food and Medicine to Iran and the Non-Specified Areas of SudanGeneral License Related to Personal Communication Services (March 2010)Amendment to Sudanese Sanctions Regulations (31 CFR 538.529) – General License for Publishing Activities (December 2004)Amendment to Sudanese Sanctions Regulations (31 CFR 538) – General License expanding the scope of an existing authorization of certain imports for diplomatic or official personnel (June 2009)Amendment to Sudanese Sanctions Regulations (31 CFR 538) – General License Authorizing Agricultural Commodities, Medicine and Medical Devices to the Specified Areas of Sudan (September 2009)EO 13412 Blocking Property and Prohibiting Transactions With the Government of Sudan (October 13, 2006)EO 13400 Blocking Property of Persons in Connection With the Conflict in Sudan’s Darfur Region (Effective Date – April 27, 2006)EO 13067 Blocking Sudanese Government Property and Prohibiting Transactions With Sudan (Effective Date – November 4, 1997)31 CFR Part 538 – Sudanese Sanctions Regulations31 CFR Part 546 – Darfur Sanctions RegulationsLATEST PROGRAM UPDATE: 6/20/2011
SyriaGet the details.[SYRIA] Exports to Syria are limited. With limited exceptions, BLOCK property and interests in property of persons designated by State and Treasury Departments as

  • contributing to Syria’s provision of safe haven to various terrorist organizations;
  • involved in Syria’s military presence in Lebanon;
  • involved in Syria’s pursuit of WMD;
  • involved in steps taken by Syria to undermine U.S. and international efforts toward stabilization and reconstruction of Iraq;
  • owned or controlled by or acting on behalf of any person whose property or interests in property are blocked by the order; or
  • involved in certain terrorist acts in Lebanon

The BLOCK order covers contributions on behalf of persons whose property is blocked.

As of 8/18/11, all property and property interests of the Government of Syria within the U.S. are BLOCKED, and new investment in Syria by U.S. persons is prohibited. Also prohibited is the importation of petroleum or petroleum products of Syrian origin. See Licenses at right.

PENALTIES: Criminal penalties for violating the sanctions range up to 10 years in prison, $500,000 in corporate fines and $250,000 in individual fines. In addition, civil penalties of up to $11,000 per violation may be imposed administratively.

Executive Order 13582 Blocking Property of the Government of Syria and Banning Import of Petroleum Producsts of Syrian Origin (8/18/11)FAQ with Regard to Syria Executive Order 13582EO 13573 Blocking Property Of Senior Officials Of The Government Of Syria (May 18, 2011)

EO 13572 Blocking Property of Certain Persons with Respect to Human Rights Abuses in Syria (April 29, 2011)

EO 13460 Blocking Property of Additional Persons in Connection With the National Emergency With Respect to Syria (February 15, 2008)

EO 13399 Blocking Property of Additional Persons in Connection With the National Emergency With Respect to Syria (Effective Date – April 26, 2006)

EO 13338 Blocking Property of Certain Persons and Prohibiting the Export of Certain Goods to Syria (Effective Date – May 12, 2004)31 CFR Part 542 – Syrian Sanctions RegulationsGeneral Licenses related to Syria. There are currently 14 General Licenses relating to the Syrian Sanctions program. See OFAC’sSyria Sanctions page for details.LATEST PROGRAM UPDATE: 10/4/11

Transnational Criminal OrganizationsGet the details[TCO] “All property and interests in property that are in the United States, that hereafter come within the United States, or that are or hereafter come within the possession or control of any United States person, including any overseas branch, of the … persons [designated as ‘TCO’ SDNs] are blocked and may not be transferred, paid, exported, withdrawn, or otherwise dealt in.” Donations to such persons are also prohibited.PENALTIES:  To be determined. EO – Blocking Property of Transnational Criminal OrganizationsLATEST PROGRAM UPDATE: 7/25/2011
Zimbabwe – Persons that undermine democratic process or institutions in ZimbabweGet the details[ZIMBABWE] BLOCKING. All property and assets of designated persons are BLOCKED and may not be transferred, paid, exported, withdrawn, or otherwise dealt in.Prohibited activity. The making or receiving by a U.S. person of any contribution or provision of funds, goods, or services to or for the benefit of a designated person is prohibited.All persons or entities that would be affected by this sanctions program would be listed on the SDN list.In addition, any transaction by a U.S. person that evades or avoids or has the purpose of or attempts to violate these prohibitions and any conspiracy to violate the prohibitions is prohibited.PENALTIES:  Criminal fines for violating the Executive Order or regulations to be issued pursuant to the Executive Order may range up to the greater of $500,000 or twice the pecuniary gain per violation for an organization, or up to the greater of $250,000 or twice the pecuniary gain per violation for an individual. Individuals may also be imprisoned for up to 10 years for a criminal violation. Knowingly making false statements or falsifying or concealing material facts when dealing with OFAC in connection with matters under its jurisdiction is a criminal offense. In addition, civil penalties of up to $11,000 per violation may be imposed administratively. EO 13469 Blocking Property of Additional Persons Undermining Democratic Processes or Institutions in Zimbabwe (July 25, 2008)EO 13391 Blocking Property of Additional Persons Undermining Democratic Processes or Institutions in Zimbabwe (Effective Date – November 23, 2005)EO 13288 Blocking Property of Persons Undermining Democratic Processes or Institutions in Zimbabwe (Effective Date – March 7, 2003)31 CFR Part 541 – Zimbabwe Sanctions RegulationsLAST PROGRAM UPDATE: 6/21/2011

Review of all-in-cost ceiling – Trade Credit

In its circular dated 30/03/2012, RBI has decided to continue with the enhanced all-in-cost ceiling for Trade Credit for further period of six months.

  1. Maximum Cap on Interest Rate for tenure Upto 3 years : 6 Month LIBOR + 350 bps
  2. Applicable Upto: 30/09/2012 (Subject to review there after) 

RBI Circular Copy

Buyers Credit All-In-Cost Ceiling may move back to L+200bps from 01/04/2012

To Avail Buyer’s / Supplier’s Credit: E: sanjaymandavia@gmail.com, M: +919825560186

In its Circular dated 15/11/2011, RBI had increased the all-in-cost ceiling for Buyers Credit  from 6 Month L+ 200 bps to 6 Month L + 350 bps subject to condition that is only upto 31/03/2012 and after subject to review there after.

As of yesterday evening, there is no fresh circular from RBI on Trade Credit. If this situation remains, effective from 01/04/2012

  1. Maximum Cap will come down to 6 Month Libor + 200 bps
  2. Internationally price for < $100000 is already above 6 Month Libor + 200 bps. Thus, for SME it will get difficult to arrange funds.

RBI Circular on Trade Credit Dated 15/11/2012

Recent Changes to India’s Currency Forward Contract Norms for Hedging

RBI via circular dated 15/12/2011 made changes in Foreign Exchange Derivative Contacts with immediate effect until further review. Below is the extract of the same related to importers and exporters.

1). Under contracted exposures, forward contracts, involving the Rupee as one of the currencies, booked by residents to hedge current account transactions, regardless of the tenor, and to hedge capital account transactions, falling due within one year, were allowed to be cancelled and rebooked.

It has now been decided to withdraw the above facility. Forward contracts booked by residents irrespective of the type and tenor of the underlying exposure, once cancelled, cannot be rebooked.

2). Under probable exposures based on past performance residents were allowed to hedge currency risk on the basis of a declaration of an exposure and based on past performance up to the average of the previous three financial years’ (April to March) actual import/export turnover or the previous year’s actual import/export turnover, whichever is higher. Further, contracts booked in excess of 75 per cent of the eligible limit were to be on deliverable basis and could not be cancelled.

It has now been decided that

A. For importers availing of the above past performance facility, the facility stands reduced to 25 percent of the limit as computed above, i.e., 25 percent of the average of the previous three financial years’ (April to March) actual import/export turnover or the previous year’s actual import/export turnover, whichever is higher. In case of importers who have already utilised in excess of the revised / reduced limit, no further bookings may be allowed under this facility.

B. All forward contracts booked under this facility by both exporters and importers hence forth will be on fully deliverable basis. In case of cancellations, exchange gain, if any, should not be passed on to the customer.

3). All cash/tom/spot transactions by the Authorised Dealers on behalf of clients will be undertaken for actual remittances / delivery only and cannot be cancelled / cash settled.

RBI Circular

RBI Increase Buyers Credit All-in-Cost Ceiling

To Avail Buyer’s / Supplier’s Credit: E: sanjaymandavia@gmail.com, M: +919825560186

RBI reviewing the developments in global finance markets and the fact that domestic importers are experiencing difficulties in raising Trade Credit (Buyers Credit / Suppliers Credit) within the existing all-in-cost ceiling, RBI has made below changes in the existing policy.

  1. Revision in Interest Rate for tenure Upto 3 years : From 6 Month LIBOR + 200 bps to 6 Month LIBOR + 350 bps
  2. Effect From: Immediately
  3. Applicable Upto: 31/03/2012 (Subject to review there after) 

Infrastructure Companies – Bridge Finance before availing ECB

Considering the specific needs of the Infrastructure sector, RBI under its circular External Commercial Borrowing (ECB) – Bridge Finance for Infrastructure Dated 23-09-2011, reviewed the ECB policy. An amendment was made in this policy on 21-09-2012. Brief summary is given below:

Conditions in case of ECB under Approval Route

Allowed Indian companies which are in infrastructure sector to import capital goods by availing of short-term credit (including buyer’s credit and supplier’s credit) in the nature of “Bridge Finance” under the approval route,subject to following conditions

  • The bridge finance shall be replaced with a long-term ECB
  • The long-term ECB shall comply with all the extant ECB norms
  • Prior approval shall be sought from Reserve Bank for replacing the bridge finance with a long-term ECB

Conditions in case of ECB under Automatic Route

Allowed Indian companies which are in infrastructure sector to import capital goods by availing of short-term credit (including buyer’s credit and supplier’s credit) in the nature of “Bridge Finance” under the ECB automatic route, subject to following conditions

  • the buyers’/suppliers’ credit is refinanced through an ECB before the maximum permissible period of trade credit;
  • the AD evidences the import of capital goods by verifying the Bill of Entry;
  • the buyers’/suppliers’ credit availed of is compliant with the extant guidelines on trade credit and the goods imported conform to the DGFT policy on imports; and
  • the proposed ECB is compliant with all the other extant guidelines relating to availment of ECB.

2. The borrowers will, therefore, approach the Reserve Bank under the approval route only at the time of availing of bridge finance which will be examined subject to conditions

  • the bridge finance shall be replaced with a long term ECB;
  • the long term ECB shall comply with all the extant ECB norms;

Common Conditions in both the cases

The designated AD – Category I bank shall monitor the end-use of funds and banks in India will not be permitted to provide any form of guarantees. The designated AD – Category I bank shall evidence the import of capital goods by verifying the Bill of Entry. All other conditions of ECB, such as eligible borrower, recognized lender, all-in-cost, average maturity, prepayment, refinancing of existing ECB and reporting arrangements shall remain unchanged and should be complied with.

Note: As per RBI Circular on External Commercial Borrowing (ECB) and Trade Credit Dated 01-07-2011, Infrastructure sector is defined as

  1. Power
  2. Telecommunication
  3. Railways
  4. Roads including bridges
  5. Sea port and Airport
  6. Industrial parks
  7. Urban infrastructure (water supply, sanitation and sewage projects)
  8. Mining, exploration and refining
  9. Cold storage or cold room facility, including for farm level pre-cooling, for preservation or storage of agricultural and allied produce, marine products and meat

Reference

Buyers Credit Interest Rate (LIBOR + Margins)

Change in LIBOR Tenures and Impact on Trade Finance

Earlier articles on Buyer’s Credit have provided details on total cost involved like, Interest cost, libor, lou charges, forwarding booking cost, arrangement fee, and others.

This article provides details on how interest cost (margin) is arrived at by Indian Bank Overseas Branches or Foreign Bank.

LIBOR + Margin Rates

Factors which play important roles in Margin are

  1. Availability of Funds: Whether sufficient funds are available (will be able to borrow) for the required amount of transaction.
  2. Cost of Funds: The rate at which these banks gets to borrow funds from their local market (L + X).
  3. Tenure: Tenure for which these funds are borrowed.
  4. Banks Lines: For Example: When lines of a particular banks is running in scarcity, bank would ask for higher margin in comparison to other banks lines.
  5. Internal Minimum Margin: Over an above cost of funds (L+X) bank adds their margin. There is minimum cut off margin decided by bank treasury or committee below which they are not able to offer pricing.
  6. External Factors: Some recent examples are Market Volatility, US downgrade, Greece and Portugal debt crisis, etc.

Buyers Credit Calculation Sheet

Transaction where Buyer’s Credit is Restricted

Type of transaction where buyer’s credit cannot be done

  • Incase of local trade
  • Advance payment for Imports:  Buyers Credit for any amount paid as advance either part or full is not allowed as RBI Caster Circular on External Commercial Borrowing and Trade Credit. Inference has to drawn the above circular. Circular says maximum tenure allowed for buyers credit from the date of shipment is (shipped on board date) upto 360 days in case of raw material and upto 3 years in case capital goods. Any Advance Payment always done before shipment of goods. And thus not allowed.
  • Not allowed for import of services

Type of transaction where buyer’s credit can be done for limited amount

Case where import bill are directly received by importer from his overseas supplier, buyers credit amount is restricted upto $ 3,00,000.

Except for

  • Import bill received by wholly owned Indian subsidiary of foreign companies from their principal
  • Import bill received by Status Holder Exporters as defined in the Foreign Trade Policy, 100% Export Oriented Units, Units in Special Economic Zones, Public Sector Undertakings and Limited Companies
  • Import bills received by all limited companies viz. public limited companies, deemed public limited and private limited companies.

Type of transaction where buyer’s credit can be done for limited tenure

When below given goods / commodity are involved, buyer’s credit and suppliers credit cannot exceed 90 days from the date of shipment as per Reserve Bank of India (RBI) guidelines

  • Rough, Cut and Polishes Diamonds
  • Gold
  • Silver, Platinum, Palladium, Rodhium

Import of Platinum, Palladium, Rhodium, Silver

Reserve Bank of India (RBI) in its circular dated 28-08-2008 had revised guidelines for Import of Platinum, Palladium, Rhodium and Silver. Extracts of the circular are given below.

Suppliers’ and Buyers’ credit, including the usance period of Letters of Credit opened for import of Platinum, Palladium, Rhodium and Silver should not exceed 90 days from the date of shipment. The revised directions will come into force with immediate effect. 

Banks are being advised to ensure that due diligence is undertaken and Know-Your-Customer (KYC) norms and Anti-Money Laundering (AML) guidelines, issued by the Reserve Bank are adhered to while undertaking import of these metals. Further, any large or abnormal increase in the volume of business should be closely examined to ensure that the transactions are bonafide and are not intended for interest / currency arbitrage.  All other instructions relating to import of these metals shall continue.

Since the above circular, there is no change notification till date on the same.

RBI Circular

Buyer’s / Supplier’s Credit on Rough, Cut and Polished Diamonds

Reserve Bank of India (RBI) in its circular dated 06-05-2011 has revised guidelines for import of Rough, Cut and Polished Diamonds. Extracts are given below.

Supplier’s Credit and Buyer’s Credit (Trade Credit) including the usance period of Letter of Credit (LC) opened for import of rough, cut and polished diamonds has been restricted to 90 days from the date of shipment from immediate effect.

Banks have been also advised to ensure that due diligence is undertaken and Know-Your-Customer (KYC) norms and Anti-Money Laundering (AML) standards, issued by RBI are adhered to while undertaking the import transactions. Further, any large or abnormal increase in the volume of business should be closely examined to ensure that the transactions are bona fide and not intended for interest / currency arbitrage. All other instructions relating to import of rough, cut and polished diamonds shall continue.

The earlier instruction issued for import of gold, import of platinum / palladium / rhodium / silver and advance remittance for import of rough diamonds shall remain unchanged.

In a clarification circular issued by RBI, even on jewellery, tenure for buyers credit has been restricted to tenure of 90 days.

Reference

  1. RBI Circular : Fema 1999 – Import of Gold in any form including Jewellery – ClarificationDated: 24-09-2012
  2. RBI Master Circular on External Commercial Borrowing (ECB) and Trade CreditDated: 01-07-2013
  3. RBI Master Circular on  Import of Goods and Services: Dated: 01-07-2013
  4. RBI Circular for Buyers Credit and Suppliers related to of import of Rough, Cut and Polished diamondDated: 06-05-2011
  5. RBI Circular for Import of Platinum, Palladium, rhodium, and SilverDated: 28-01-2008

Buyer’s / Supplier’s Credit Consultants

Who is Buyer’s / Supplier’s Credit Consultant ?

Person / Firm who co ordinates with Indian Overseas Branches or Foreign Bank and arranges best possible quote for transactions. They do not directly represent any of these bank. They are also known as Buyers Credit Brokers & Buyers Credit Agents

Scope of Activity

  • Assisting you in technical aspect of transaction. (esp. RBI Provision)
  • Arranging quote for the transaction
  • Get funding done once Letter of Undertaking (LOU) is sent by Indian bank to Foreign bank.

Benefits of using Buyer’s Credit and Supplier’s Credit Consultants

  1. A decent consultant would have around 50+ banks from where he arranges buyer’s credit quote, thus helps getting best possible quote for the transaction.
  2. For an Importer doing this type of transaction for first time, consultant can help you with step by step process, thus your transaction goes smoothly.
  3. Each bank have their own criteria depending on amount, type of transaction, tenure, bank giving letter of comfort etc for doing the transaction. It would reduce trouble of finding right bank with right pricing for each type transaction.
    Different factor affecting transaction are:
  • Some bank would not funds <$50,000 transaction
  • Some would give differential pricing in case it is <50000 and / or  <$100000
  • Some would not fund less than 180 days transaction,
  • Some would not funds EURO/GBP/JPY transaction,
  • Some do not offer quote for capital goods
  • Say all factors falls under criteria but the bank do not have lines (limits) on your bank or lines have exhausted and thus not able to funds.
  • Reduce time in execution of transaction.
  • Handling local banks technical queries.
  • And many other such criteria.

Difference between Buyer’s Credit and Supplier’s Credit

Criteria Buyers Credit Suppliers Credit
Mode of Payment Can be used for payment mode like LC, LC usance, DA, DP, & Direct Doc Can be used only in case of LC transactions
LC Clauses No additional clauses or Amendment is required in LC At the time of opening LC or amending LC clauses given by Suppliers Credit bank needs to be changed. Like Negotiation Clause,  Confirmation Clause, Reimbursement Clause
Arrangement Can be arranged after documents have reached the bank or documents are received by importer directly Has to be arranged at the time of opening LC or before shipment of goods
Cost Interest Cost LC Advising Cost, LC Amendment Charges, Document Processing Charges, Courier Charges, Conformation Cost and Interest Cost

Supplier’s Credit – Meaning & Process

What is Supplier’s Credit ?

Supplier’s Credit is a structure of financing import into India. In this structure, overseas suppliers or financial institutions outside India provide financing to importer on Libor linked rates against usance letter of credit (LC).

Why Required ?

  • Suppliers would ask for sight payment where as importer want credit on the transaction.
  • Now with buyers credit structure not available, suppliers credit is one of  option for raising Libor linked finance for importer.

Benefits of Suppliers Credit 

For Importer

  • Availability of cheaper funds for import of raw materials and capital goods
  • Ease short-term fund pressure as able to get credit
  • Ability to negotiate better price with suppliers
  • Able to meet the Suppliers requirement of payment at sight

For Supplier

  • Realize at-sight payment
  • Avoid the risk of importer’s credit by making settlement with LC

Suppliers Credit Process Flow

  1. Importer enter into contract with supplier for import.
  2. With transaction details importer approaches arranger to get suppliers credit for the transaction
  3. Arranger get an indicative pricing from overseas bank, which importer confirms.
  4. Importer approach his bank and get LC issued, restricted to overseas bank counters with other required clauses
  5. Overseas Bank confirms the LC and advise LC to Supplier’s Bank. Suppliers Bank provides the copy of the LC to Supplier.
  6. Supplier ships the goods and submits documents at his bank counter.
  7. Supplier’s Bank sends the documents to Overseas Bank.
  8. Overseas Bank post checking documents for discrepancies (As per UCP 600) sends the document to importer’s bank for acceptance:
    • If documents are as per order, the same is discounted and transferred to supplier’s bank.
    • Incase of discrepant documents, documents are sent on acceptance basis. On receipt of Importer bank acceptance, the same is discounted and transferred to supplier’s bank.
  9. Supplier receives the payment for the LC. Depending on who is bearing the interest cost:
    • If importer is bearing interest cost, supplier receives full payment.
    • If Suppliers is bearing interest cost, supplier will receive LC amount – Interest.
  10. Importer’s Bank receives the documents. Importer’s bank and Importer accept documents. Importer’s Bank provides acceptance to Overaseas Bank, guaranteeing payment on due date.
  11. On maturity, Importer makes the payment to his bank and Importer’s bank makes payment to Supplier’s Credit Bank

Cost Involved

  • Foreign bank interest cost
  • Foreign Bank LC Confirmation Cost (Case to Case basis)
  • LC advising and or Amendment cost
  • Negotiation cost (normally in range of 0.10%)
  • Postage and Swift Charges
  • Reimbursement Charges
  • Cost for the usance (credit) tenure. (Indian Bank Cost)

Requirement 

  • Import transaction under LC
  • Incoterms : FOB/CIF/C&F
  • Arrangement has to be done before LC gets opened. Incase of LC already opened, relevant amendment has to done.
  • LC to be restricted to suppliers credit providing bank under 41D clause of LC
  • Under Payment Term: 90 days Usance payable at Sight (mention tenure according to tenure and offer received)

Prepayment of Suppliers Credit

Technically yes, prepayment can be made to Usance LC subject to below condition is satisfied. But as there will be loss of interest for  overseas banks it will not accept reduced payment. Even if they accept it will be with penal charges. Thus practically prepayment will not be possible.

Extract from RBI Master Directions on Import of Goods and Services
(ii) In case of pre-payment of usance import bills, remittances 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 of the currency in which the goods have been invoiced, 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 of invoice.

RBI Regulations

Over the years there has been many changes in norms. Summary of current rules are given below and for further details please refer articleRBI Trade Credit (Buyers Credit / Suppliers Credit) Circular Extract

Reference

Useful links in relation to Buyers Credit

1. ECB Form (Application Form for Buyers Credit /Supplier Credit)

2. Buyers Credit Cost Calculation Sheet

3. Current Exchange Rate

4. Future / Forward Rates of USD, EURO, GBP, JPY

Relevant RBI Circulars in Relation to Forward Contract

5. DTAA, Withholding Tax, Income Tax Notification in Relation to Form 15CA, Form 15CB, Challan 281, Form 27Q and Filling Links / Format

6. Relevant RBI Circulars in relation to Trade Credit

7. LIBOR Currencies

8. LIBOR Maturities (Below link gives USD Rate for different tenures. For other currencies, click on the above link)

9.    Country-wise Holiday List

RBI Trade Credit (Buyers/Suppliers Credit) Circular Extract

Updated on 19 October 2016

Trade Credits refer to the credits extended by the overseas supplier, bank and financial institution for maturity up to five years for imports into India. Depending on the source of finance, such trade credits include suppliers’ credit or buyers’ credit. Suppliers’ credit relates to the credit for imports into India extended by the overseas supplier, while buyers’ credit refers to loans for payment of imports into India arranged by the importer from overseas bank or financial institution. Imports should be as permissible under the extant Foreign Trade Policy of the Director General of Foreign Trade (DGFT).

A. Routes and Amount of Trade Credit

Automatic Route: ADs are permitted to approve trade credit for import of non- capital and capital goods up to USD 20 million or equivalent per import transaction.

Approval Route: The proposals involving trade credit for import of non-capital and capital goods beyond USD 20 million or equivalent per import transaction are considered by the RBI.

B. Maturity

  • Maximum Maturity in case of import of non capital goods (Raw Material, Consumables, Accessories, Spares, Components, Parts etc): upto 1 year from the date of shipment or operating Cycle whichever is less.
  • Maximum Maturity in case of import of capital goods : upto 5 years from the date of shipment (Beyond 3 years banks are not allowed to provide Letter of Undertaking / comfort)
  • Incase of Capital Goods, the ab-initio (from beginning) contract period should be 6 (six) months for all trade credits.
  • No Rollover / Extension will be permitted beyond permissible limits

C. All-in-cost Ceilings: 6 Month Libor (respective currency of credit) + 350 bps

D. Guarantee

  1. Up to USD 20 million per import transaction
  2. For a maximum period up to one year in case of import of non-capital goods (except gold, palladium, platinum, rhodium, silver, etc).
  3. For import of capital goods, the period of guarantee/ Letters of Credit/ Letters of Undertaking by AD can be for a maximum period up to three years.
  4. The period is reckoned from the date of shipment and the guarantee period should be co-terminus with the period of credit.
  5. Further, issuance of guarantees will be subject to prudential guidelines issued by the RBI from time to time.

Reference