Long-term export advances: A boost for ‘Make in India’

In consonance with the Indian government’s campaign of “Make in India”, the regulators seem to be doing their bit to facilitate business and trade. Data from the Ministry of Commerce and Industry show that India received about ₹12.7 trillion (US$210 billion) by way of exports between April and November 2014.

To provide an impetus to exporters and to make cash flow available to them, the Reserve Bank of India (RBI) issued a circular on 21 May 2014 permitting authorized dealer banks to allow exporters to receive export advances for long-term export contracts up to a maximum term of 10 years subject to the satisfaction of certain conditions stipulated in the May circular. The long-term export advances are required to be adjusted through future exports.

Such long-term export advances are to be backed by export performance bank guarantees issued by authorized dealer banks in India on behalf of Indian exporters to back their obligations under the long-term export contracts. The May circular stipulates that export performance bank guarantees may be issued by authorized dealer banks only for a two-year term with the right to be rolled over every two years. Such export performance bank guarantees are unconditional and assignable bank guarantees. An export performance bank guarantee is assigned to the offshore lenders of the offshore beneficiary as the beneficiaries usually seek funding for long-term export advances.

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As per the May circular (read with the RBI’s Master Circular on Exports of Goods and Services, dated 1 July 2014) the end-use of such export advances should be for execution of long-term supply contracts for export of goods. Further, under the May circular, the export advances cannot be used to liquidate rupee loans which are classified as non-performing assets. Double financing for working capital for execution of export orders is also prohibited.

However, it is important to note that the RBI’s Master Circular – Guarantees and Co-acceptances, dated 1 July 2014, observed that exporters could not use export advances received on the back of guarantees extended by authorized dealer banks in India for repayment of loans obtained from Indian banks, except in cases where the necessary approvals have been obtained under the Foreign Exchange Management Act, 1999. The Master Circular – Guarantees and Co-acceptances also reiterated that such guarantees can only be used for the purpose of facilitating execution of export contracts by exporters.

In light of the above, considering the May circular allows for export advances backed by export performance bank guarantees and does not clearly restrict the end-use to repayment of rupee loans which have not been classified as non-performing assets, it is not totally clear whether long-term export advances backed by export performance bank guarantees can be used to liquidate standard rupee loans. It may be considered that the RBI has put a check in the form that authorized dealer banks will have to check and be satisfied with the company’s track record before providing the bank guarantee.

The May circular mandates that firm irrevocable supply orders and contracts should be in place between the overseas buyer and the Indian exporter. The pricing of the goods is required to be in consonance with prevailing international prices.

To be eligible to obtain long-term export advances, exporters must have a minimum of three years satisfactory track record and the necessary capacity, systems and processes in place to ensure that the export orders can be executed.

In this regard, the RBI issued a circular dated 9 February 2015 stipulating that authorized dealer banks should exercise proper due diligence and ensure that only bona fide export advances flow into India. The authorized dealer banks also have an obligation under the February circular to follow up with the Indian exporters for the purpose of ensuring that the goods are exported within the stipulated time period. If authorized dealer banks foresee that the export advances have been obtained for purposes other than bona fide purposes, the February circular enables them to report such cases to the Directorate of Enforcement for further investigation.

The May circular stipulates that the rate of interest payable in respect of such long-term export advances cannot exceed Libor plus 200 basis points.

The export performance bank guarantees are required to be on a reducing balance basis. Further, Indian banks are prohibited from discounting the export performance bank guarantees either by way of their overseas branches or through their subsidiaries in India.

It is clear from the above-mentioned circulars issued by the RBI that it would be possible for an Indian exporter with a good track record to procure funds and receive a much required cash injection. Indian banks would also issue non-fund-based guarantees and the cost of the export advances (excluding the cost of the export performance bank guarantee) would only be Libor plus 200 basis points. This would definitely facilitate and provide a much needed impetus for Indian exports.

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Babu Sivaprakasam is a partner, Deep Roy is an associate partner and Megha Agarwal is an associate at Economic Laws Practice. This article is intended for informational purposes and does not constitute a legal opinion or advice.