Category Archives: Buyers Credit

Buyers Credit on Import of Non Capital Goods

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

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 2014

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. RBI Master Circular on External Commercial Borrowing (ECB) and Trade Credit: Dated: 01-07-2014
  2. Definition of Consumable in Foreign Trade Policy
  3. FTP Chapter 2: General Provisions Regarding Imports and Exports

Credit Rating and Buyers Credit

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

What is Credit Rating ?

A credit rating represents the rating agency’s opinion on the likelihood of a rated debt obligation being repaid in full and on time. Usually alphanumeric symbols are used to convey a credit rating. Credit rating can be Internal Rating (Banks rate customers internally) or External Rating by external agencies like CRISIL, ICRA and others.

Relevance of Credit Rating in case of Buyers Credit Funding Bank

Buyers Credit Funding Banks ask for Internal and / or External Credit rating  in the Letter of Undertaking format (LOU).  Purpose for the same are

  1. As per country regulations in which Indian bank branches operating, they have agreed and informed regulator that they would funds only those transaction which are above an X rating. Recently came accross a transaction where LOU was issued by local branch but overseas bank branch refused funding of the transaction post checking the rating of the client in LOU. Thus importer will now also have to keep this criteria in mind. For academic perspective, credit rating should not matter to buyers credit funding bank till the time they are receiving LOU from Indian bank as per their format. Reason being, buyers credit are funded on bank lines (taking risk on banks) and not on customer lines.
  2.  Second purpose of taking rating details in LOU is to help classify the portfolio. In the region in which these branches are operating, there are regulatory compliances which these branches have to follow, based on which their loan policy and trade policy is formulated.
  3. Rating are also required to determine provisioning on buyers credit transaction as per Basel II / Basel III norms.

Relevance of Credit Rating in case of Importers Bank & Importer 

From buyers credit perspective, some  importers bank provide preferential pricing to importer for LOU charges based on their rating

For Example: Bank of Baroda (BOB)Letter of Comfort Charges for availing Buyer’s Credit, varies based on rating. Please refer below chart:

2.4 (d) Letter of Comfort issued for availing Buyer’s Credit
Rating Upto One year
Raw Material &Capital Goods
Above One Year
( Capital Goods)
AAA 1.00 p.a 1.50 p.a
AA 1.00 p.a 1.50 p.a
A 1.50 p.a 2.00 p.a
BBB 2.25 p.a 2.50 p.a
Below BBB & Unrated 2.50 p.a 3.00 p.a

* Source: www.bankofbaroda.com

Relevance of Operating Cycle in Buyers Credit Transaction

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

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 Circular External Commercial Borrowing and Trade Credit

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).

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

It has also been decided that for availment of trade credit, the period of trade credit should be linked to the operating cycle and trade transaction.

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

Difference Between Sec 195 and Sec 194LC

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

Difference between sec 195 and sec 194lc

In earlier article 5% WHT as per Sec 194LC not applicable to Buyers Credit we had discussed on Sec 194LC. This article gives difference Between Sec 195 & Sec 194LC

 

Particular Sec 195 Sec 194LC
From Since Inception of Act July 2012
Upto - June 2015
Applicable on Any payment business Money borrowed under Loan Agreement; or By way of Issue of Long term Infrastructure bonds
Rate of TDS with availability of PAN Card As DTAA agreement. Incase of non DTAA 20%. Further details refer this link 5% and 3% Education Cess there on ( 2% Surcharge wherever applicable)
Who is responsible for tax deduction Resident or Non resident An Indian Company
Applicable If income is chargeable to tax in India in the hands of recipient If Interest is paid at approved rate

Revised Guidelines for Merchanting / Intermediary Trade

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

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 a tradeto be classified as merchanting trade following conditionsshould 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 Circular on  Import of Goods and Services: Dated: 01-07-2014
  4. Report of the Technical Committee on Services / Facilities to Exporters: Refer Chapter 4:  Dated: 29-04-2013
  5. Old Article: Suppliers’ Credit or Buyers’ Credit is not available for Merchanting Trade

Permitted Methods of Import Payment

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

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

Since Foreign Trade Policy allows imports in INR (Indian Rupees) also, what are the regulations related to buyer’s credit in respect of an import invoice which is in INR ?

Above question is more of an academic question as INR denominated import transaction are very limited but it will help in throwing light on concept of permitted methods of import payment.

Background

RBI Circular on Import of Goods and Services talks about permitted methods of payment of import, which is further defined in Notification No.FEMA14/2000-RB dated 3rd May 2000. They are:

Group Permitted methods
(i) All countries other than those listed under (ii) below (a) Payment in rupees to the account of a resident of any country in this Group
(b) Payment in any permitted currency*
(ii) Member countries in the Asian Clearing Union (expect Nepal) (a) Payment for all eligible current transactions by debit to the ACU (Asian Clearing Union) dollar account in India of a bank of the participating country in which is resident or by credit to the ACU dollar account of the authorised dealer maintained with the correspondent bank in the other participating country.
(b) Payment in any permitted currency in other cases

* The expression ‘permitted currency’ is used in the Manual to indicate a foreign currency which is freely convertible i.e. a currency which is permitted by the rules and regulations of the country concerned to be converted into major reserve currencies like U.S. Dollar, Pound Sterling and for which a fairly active market exists for dealings against the major currencies.

Answer to Question

RBI has allowed making import payment in INR but Buyers Credit as a concept is to raise funds from overseas market in the currency of payment resulting in interest arbitrage and hence cost saving.

Example

  • Transaction Value of $ 100000: Approx 10% (including overseas bank interest cost, lou charges, forward booking and arrangement fee)
  • Transaction Value of INR 6200000 (Approx INR equivalent) : INR Cash Credit Interest: Approx 13.50%
  • Resulting cost saving of 3.5% (approx)

If the import is in INR, funding arranged in INR will be at same cost and thus no cost saving. One more question which arise is, whether buyers credit in cross currency  is allowed for such transaction. According to me it is a gray area.

Reference

  1. Notification No.FEMA14/2000-RB dated 3rd May 2000
  2. Exchange Control Manual: Permitted Currencies and Method of payment
  3. Buyers Credit Cost Calculation Sheet

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

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

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. RBI Master Circular on External Commercial Borrowing (ECB) and Trade CreditDated: 01-07-2014
  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

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

MachineThe 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 Circulars: “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

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

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

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

tax

Related Article: Country-wise Double Taxation Summary Chart

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

Buyers Credit for Co Operative Bank Customers

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

Co Operative BankImporters banking with Co operative Bank’s both AD Category and Non AD Category, face issues with arranging buyers credit because

  • In case of AD Category Co operative Bank: Limited Lines in International Market or No Lines
  • Non AD Category Co operative Bank: They cannot deal directly in Import or Export transaction but have to route the transaction through tie up bank.

This article is to address the above queries:

Most of Co Operative Banks have banking arrangement with Nationalized and Private Sector Banks through whom they handle Export Import Transactions for their customers. Importer customer of these banks can also avail benefit of buyers credit. Before entering into any transactions importer will have to check below important points:

1. Limits of Co Operative Bank

It is an internal matter between Co Operative Bank and Nationalized Bank / Private Bank on where they have limits and what process they follow. But just for understanding, Co operative bank places FD with various bank on regular basis. Whenever there is a requirement, they can be marked lien and limits can used for buyers credit, LC Issuance, Bank Guarantee etc.

2. Process Flow for Buyers Credit through Co operative Banks

For Below discussion: Co Operative Bank: XYZ Co Operative Bank, Private Bank: HDFC Bank, Customer: ABC Ltd

A. Documents Routed Through HDFC Bank

  • Overseas Supplier will submit document to his bank.
  • Suppliers Bank will send documents to HDFC Bank with forwarding letter : ABC Ltd A/c XYZ Co Operative Bank.
  • HDFC Bank will Lodge the Bill post receipt and will intimate XYZ Co Operative Bank of the same.
  • ABC Ltd will approach Buyers Credit Consultant for arranging quote.
  • ABC Ltd to submit documents in the format provided by HDFC Bank to XYZ Co operative Bank. Documents will include ECB Form, A1 Form, A2 Form, other documents of the bank along with offer letter and lou format provided.
  • XYZ Co Operative will have to counter sign all the documents of ABC Ltd. Make a forwarding letter giving details of reference number and authorising HDFC Bank to debit the charges and lien their existing fixed deposit. Post which they will forward the documents to HDFC Bank.
  • HDFC Bank based on the given documents and authorization, will block the limit of XYZ Co operative Bank and send lou swift to overseas bank from where Buyers Credit is arranged.
  • Overseas Bank will Fund the amount to nostro account of HDFC Bank on the value date.
  • HDFC Bank will debit their nostro and pay to supplier. HDFC Bank will provide payment advice and original documents to XYZ Co Operative Bank of the same.
  • XYZ Co Operative Bank handovers import documents to ABC Ltd.

B. Incase of Direct Documents received by ABC Ltd from Supplier

  • Overseas Supplier sends documents directly to ABC Ltd
  • Once the shipment reaches, release the goods by filling Bill of Entry for Home Consumption.
  • ABC Ltd arranges quote though Buyers Credit Consultant.
  • ABC Ltd to submit copy of import documents along with Bill of Entry Copy, Others documents in format provided by HDFC Bank ECB form, A1 form, A2 form along with offer letter and lou format.
  • Rest of the process remains same as above.

Costing

  • Bill Lodgment Charges of HDFC Bank
  • Swift Charges
  • LOU Issuing Charges of HDFC Bank (as this will be against 100% + FD margin, costing will be lower than limits customer.)
  • LOU Issuing Charges of XYZ Co Operative Bank

* Plus Service Tax at applicable rate

Reference

Period of Buyers Credit Linked to Operating Cycle

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

In 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, 2o13 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

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

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 currencies has 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

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


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

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

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

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

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

Transfer of Limits from One Bank to Another : Buyers Credit Rollover Process

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

transfer

Buyers Credit is arranged against Letter of Undertaking  (LOU) / Letter of Comfort (LOC) issued by Importer’s Bank. During this period if importer decides to shift his limits from X bank to Y bank, few complications arise.  For a Raw material transaction, importer may decide not to rollover the transaction to avoid complications; but for Capital goods  Importer has lesser options. If the buyers credit does not get rolled over, the same would get converted into term loan which would cost the importer higher rate of interest. This article provides details on process to be followed and what documents are needed for smooth transition. For understanding let assume,

  • X Bank: Existing Bank of Importer
  • Y Bank: New Bank of Importer where limits are shifted
  • A Bank: Existing Overseas Bank from where buyers credit is arranged
  • B Bank: New Overseas Bank from where the rollover buyers credit will be arranged.

Process

  1. Importer arranges for NOC from X Bank in favour of Y  Bank to arrange buyers credit.
  2. Importer arranges quote from overseas bank (other than existing overseas bank).
  3. Y Bank issues lou to B Bank against the existing import transaction
  4. B Bank transfer funds to the Nostro Account of Y Bank
  5. Y Bank transfer funds  to the Nostro Account of X Bank
  6. X Bank transfer funds to the Nostro Account of A Bank, thus completing the whole transaction.

Documents to be submitted by Importer to Y Bank

  1. ECB Form for Extension
  2. Photocopy of the Import document and Bill of Entry
  3. Fresh Offer Letter, LOU Format & Swift Address
  4. NOC from X Bank

Note

In the above example it is assumed that buyers credit rollover is taken from bank other than existing buyers credit providing overseas bank to avoid complications. From Importers perspective its an ideal position. Reason: Incase of rollover from the same bank there is no transfer of funds but only extension of tenure. As buyers credit is taken against LOU issued by X Bank whereas because of takeover rollover LOU needs to be sent by Y bank, there is issue of knocking of transaction at A Bank level.  Also issue will arise on how existing liability of X bank against A bank to be removed. 

Buyers Credit on Import of Precious and Semi Precious Stone

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

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

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

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 Burma were 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 origin are 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

Email: sanjaymandavia@gmail.com, Mobile: +919825560186

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. RBI Master Circular on External Commercial Borrowing (ECB) and Trade Credit: Dated: 01-07-2014

How to Calculate Total Cost of Buyers Credit

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

calculate-costReaders have come back asking for calculator to arrive at total cost on buyers credit transaction. To help readers, a link to excel sheet with buyers credit cost calculation is given below.

Buyers Credit Calculation excel sheet tries to incorporate all possible costs applicable on buyers credit transaction. Details have to be filled in yellow field. Some of these details will need to be filled by user as per importers bank actual cost and details like current LIBOR, forward premium, current currency conversion rates etc. Links are also provided in the sheet for getting latest rates. Given sheet is in unlocked form to allow users to make changes or do various permutation combination as per users need.

Excel Sheet Link: Buyers Credit Calculation

Bank Finance for Purchase of Gold

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

The earlier article on Buyers Credit on Gold Import, specified rules and process under which buyers credit can be taken against gold import. RBI has recently come out with a circular which resulted in changes in financing of gold; which in turn would also affect buyers credit on gold import. This article gives extract of the circular and its impact on various stake holders:

Extract of RBI Circular Dated 19/11/2012: Bank Finance for Purchase of Gold

In terms of extant guidelines issued vide circular DBOD.No.Leg.BC.74/C.124(P)-78 dated June 1, 1978, no advances should be granted by banks against gold bullion to dealers/traders in gold if, in their assessment, such advances are likely to be utilised for purposes of financing gold purchase at auctions and/or speculative holding of stocks and bullion. In this context, the significant rise in imports of gold in recent years is a cause for concern as direct bank financing for purchase of gold in any form viz., bullion/primary gold/jewellery/gold coin etc. could lead to fuelling of demand for gold. Accordingly, it is advised that no advances should be granted by banks for purchase of gold in any form, including primary gold, gold bullion, gold jewellery, gold coins, units of gold Exchange Traded Funds (ETF) and units of gold Mutual Funds. However, banks can provide finance for genuine working capital requirements of jewellers. The scheme of Gold (Metal) Loan detailed vide our circular DBOD.No.IBS.BC/1519/23.67.001/1998-99 dated December 31, 1998, as amended from time to time, will continue to be in force.

Impact of the above circular on various Stake Holders and Buyers Credit product:

  1. Importers:
    1. Getting fund based and non fund based limit will become extremely difficulty irrespective it is 100% backed by Cash Collateral for bullion traders in gold (Fixed Deposits etc). Thus buyers credit on import of gold reduce drastically.
    2. Importers who were trying to use Bullion Import for arbitrage will move to other precious metals (Diamonds, Diamonds Jewellery etc). As this circular specifically talks about finance on Gold Bullion only.
  2. Bankers: For many small private sector banks, bullion funding is a big source of business. Banks will not be able to grant advances against gold bullion to dealers/traders in gold if, in the banks assessment is that such advances are likely to be utilised for purposes of financing gold purchase at auctions and/or speculative holding of stocks and bullion.
  3. Trade Credit: Buyers Credit / Suppliers Credit on Bullion Import would come to a halt, which was high volume game for many Indian banks overseas branches.
  4. RBI: Purpose of above circular is to stop speculation and reduce import of such products. But this circular will have a limiting effect as it covers only Gold, allowing  importers to move to other products for speculation.

Reference

RBI Circular : Bank Finance on Gold Purchase

Buyers Credit with 6 Month Libor Reset

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

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

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

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 Circular on  Import of Goods and Services: Dated: 01-07-2013
  6. RBI Master Circular on External Commercial Borrowing (ECB) and Trade CreditDated: 01-07-2013

Impact of Libor Review on Trade Finance in India

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

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

Pushing the reset button on LIBOR – Speech by Martin Wheatley

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

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

Mr. Martin Wheatley – Managing Director, FSA, and CEO Designate, FCA – gave a speech at the Wheatley Review of LIBOR. It contain details on various issues in relation to LIBOR and his final recommendation of rectifying the same. It is worth reading, thus sharing with you complete speech below.

LIBOR as a benchmark is also used for various Trade Credit products like Buyers Credit, Suppliers Credit, Foreign LC discounting etc. In a separate article will also analyze below recommendation’s implication on the same.

Quote

Good morning and thank you all for coming today.

Firstly I want to thank the Financial Secretary for his introduction.  I also want to thank the Lord Mayor for allowing us to host this morning’s event here in the heart of the City of London, a place built on a strong foundation of confidence and trust.

Confidence and trust are critical to financial markets.  Whether it is something common-place like opening bank accounts or something as previously obscure as the London Interbank Offered Rate, or LIBOR.  We need finance to work well – for consumers from all walks of life.

The reason we are here, however, is that we have been misled.   The system is broken and needs a complete overhaul.  The disturbing events we have uncovered in the manipulation of LIBOR have severely damaged our confidence and our trust – it has torn the very fabric that our financial system is built on.

Today we press the reset button; we need to:

  • get back to what this reference rate is supposed to do;
  • restore integrity to a globally important benchmark; and
  • make sure we get to a position where individuals act with integrity.

This is not a London issue.  This is a global issue and is why I have been working in partnership with my counterparts in the US, Japan, Switzerland, the EU and elsewhere.

For my part, when the Chancellor of the Exchequer asked me to carry out this review on behalf of the UK government; I was clear about the absolute importance, scale and challenge of this task.   The shocking behaviour exposed by the FSA and others demonstrated that an independent review of LIBOR was needed.

We have carried out that work, with a thorough and considered look at what went wrong and what should be done to put things right.

But pressing reset is not as simple as pushing a button. Today I am publishing a 10-point plan for extensive and lasting reform of a broken system to restore the trust that has been lost.  LIBOR needs to get back to doing what it is supposed to do, rather than what unscrupulous traders and individuals in banks wanted it to do.

First and foremost, I have concluded that LIBOR can be fixed through a comprehensive and far-reaching programme of reform.  Although the current system is broken, it is not beyond repair, and it is up to us – regulators and market participants – to work together towards a lasting and sustainable solution.

LIBOR is used in a vast number of financial transactions; with a value of at least $300 trillion.  The deep entrenchment of LIBOR as a reference rate in financial markets, and the subsequent effect on those markets in the event of a disruption to the rate, mean that any case for replacement entirely would have to prove that LIBOR is:

  • beyond repair;
  • that a better alternative existed at this moment in time;
  • and critically, that an immediate and smooth transition to that alternative could be made.

I have concluded that none of these conditions have been met and that instead there is a clear case for comprehensively reforming LIBOR, rather than replacing it.

Secondly, I have concluded that LIBOR submissions should be supported by relevant trade data and proper record keeping.

Some degree of judgement will have to be retained, because even in the more liquid markets there is not enough daily data available to have a system in place that is entirely based on market transactions, particularly in times of stress.

But we can’t allow the unfettered latitude that banks enjoyed previously. Much greater rigour and transparency must be introduced to the process of submission. Let me return to this point later.

And third, we must remember that LIBOR is a creation of the market, invented by the market for the market. It is clear that proper regulation and sanctions are needed and we stand ready to provide that, should the government agree. But banks and market participants must play their part too.

My recommendations combine both long-term and immediate changes, which I will explain in detail.

The three broad areas that these recommendations cover are:

  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.

Today we begin to put this right.  This responsibility will be taken forward by the new Financial Conduct Authority – which I will lead – and which will focus on making sure that financial services and markets function well, by promoting market integrity, consumer protection and effective competition.

Ensuring that the UK financial services sector conducts its business in line with the highest standards of integrity is vital work.

Consumers and market participants must be sure that the regulators stand ready to deal quickly and effectively with issues as they arise – our work on LIBOR over the last seven weeks is testament to this new approach.

There are three things I want to cover today:

  • why LIBOR is so important;
  • what went wrong; and
  • what is needed to restore confidence in LIBOR.

So, first, why is LIBOR so important?

Since the scandal came to light, we have all become aware of LIBOR, once an obscure benchmark, and its importance as an integral part of the modern financial system.

What struck me when the manipulation was made public was how much it angered people – they were rightly upset that something so important was so badly run, had such poor governance, and was manipulated without regard to the consequences.   It said something about the culture of financial services, but also led people to question what they can rely on.

As I have mentioned, LIBOR is used as a reference price for well over $300 trillion worth of loans and transactions around the world.  These range from interest rate swaps to direct lending and the pricing of mortgages to ordinary people, as well as commercial loans to businesses.

The Economist calls LIBOR the most important figure in finance, and they are not wrong. In simple terms – it represents the cost of borrowing to banks.  How much a bank has to pay to borrow money is a key determinant of the interest it will charge to lend money. It is therefore vital that people can trust it.    And that is why it is critical that it works well and my recommended reforms are deep, wide and effective to ensure that the trust and integrity of LIBOR is fully restored, and quickly.

So that’s why it matters – now what went wrong?

I would like to step back for a moment and briefly explain exactly what went wrong with LIBOR – I will then link each of my recommendations back to these failings.

There were fundamental flaws in the current system.  These were the deep failures in the way LIBOR submissions are made, how LIBOR was governed, and the way it was policed.

Submissions

The key flaw was the inability in the system to manage conflicts of interest.  The rate is meant to represent the true cost of borrowing to a bank.  Two problems occurred.   First, any complex bank has a myriad of different deals, particularly in the swaps market – which became more or less profitable depending on the rate of LIBOR.  Traders whose bonuses depended on these deals had an interest in pushing LIBOR up or down, depending on the deal.  They were allowed to do this freely with no oversight.

The second problem was that, at the height of the crisis in 2008, nobody knew which banks were safe.  The price a bank had to pay to borrow from another bank was an indicator of what banks thought of each other.  Nobody wanted to be at the top of that list so, again, there was an incentive to lie and put in a lower figure.  This was made more complex by the fact that at the time, banks effectively stopped lending to each other.  So there were very few actual trades to inform the decision.

Banks were further encouraged to make it look like their borrowing costs were lower than they actually were because the transparency in the system contained a fatal flaw: banks’ individual submissions were published immediately. This gave an instant indication of their creditworthiness.

What’s more – and worse – is that we are not talking about a few rogue individuals here, but a systemic problem. In the case of Barclays, for example, there was a web of traders that worked together to try and manipulate LIBOR to benefit one another.

To sum up, the system had in-built conflicts of interest from the start – banks could submit what they wanted – and with traders’ bonuses dependent on the LIBOR rate, and no bank wanting to be seen as vulnerable in such a transparent system, too many people had a vested interest in gaming the system.

Lack of oversight

The second fundamental flaw was a lack of oversight.

As we all know the British Bankers’ Association is currently responsible for the day-to-day running of LIBOR.  Oversight of LIBOR is the responsibility of a committee set up by the BBA with two subcommittees looking at unresolved problems and disciplinary procedures respectively.   The only problem is that these committees hardly ever met.

This is symptomatic of a careless approach that did not place enough emphasis on the importance of LIBOR from both a governance and regulatory perspective – essentially, people had an overt level of trust in a system that did not have the right level of checks and balances in place.

And the contributing banks themselves?  What did they do?  One bank we know of made no effort at all to aid credible submissions and has now paid the price.   Other banks will follow.

Organisations and individuals were basically left unchecked and were free to act without scrutiny, leading to abuse of the system – they essentially exploited the lack of checks and balances.  This is not good enough – just because the system provided that opportunity, society does not expect institutions with proud histories and millions of customers around the world to take advantage of it.

It is clear to me that, while the system lacked the right level of oversight, contributing banks also need to stand up and take responsibility for the quality of the submissions they make to the LIBOR process.

Lack of external accountability

Let me turn to the final flaw in the current system – the lack of external accountability.

Under the current regulatory and legal framework, the FSA does not regulate the process of making or compiling Libor submissions. While the FSA is currently taking regulatory action in relation to attempted manipulation of LIBOR, this is on the basis of the connection between LIBOR submitting and other regulated activities.

Further, because of this, individual employees of banks involved in the process do not have to be approved by the FSA.  This restricts the regulator’s ability to take disciplinary action against individuals.

In hindsight, it now appears untenable for such an important process to be unregulated.

So this is the final lesson. There is a clear lack of external accountability to safeguard that the incentives of those involved in this process are aligned with the wider interests of market participants, benchmark users and the public.  Added to this, there is a lack of a comprehensive sanctions regime to ensure that those who manipulated the rate are brought to book.

Overall then, the evidence we have seen in relation to this manipulation paints a clear and damning picture about the prevalence of the wrong incentives, and the sorts of behaviour that has allowed.

Whilst conduct in the banking industry at large is rightly a separate and ongoing debate, which is being taken forward by Andrew Tyrie’s committee on banking standards, my mandate is clear. Reform is needed to prevent the possibility of this gross misconduct from reoccurring – both in how LIBOR is constructed, and how it is overseen and enforced.

My team and I have addressed each of these failings in the recommendations that I will set out for you now.

The Wheatley Review recommendations

Consultation

Following the launch of my Discussion Paper on 10 August, we have met with a large number of stakeholders, and considered the many written responses that we received.

I would like to offer my thanks to all those involved for their timely and thought-provoking engagement with the Review.

Having considered all the issues and evidence in detail, let me turn to the steps that should be taken to ensure that LIBOR becomes a relevant, valued and trusted benchmark.

The report sets out a comprehensive 10-point-plan to fix LIBOR.  This is through reforms to put a stop to what is a broken system built on flawed incentives, incompetence and the pursuit of narrow interests that are to the detriment of markets, investors and ordinary people.

Regulation of LIBOR

The first step for credibly reforming LIBOR is to ensure that there is a clear, consistent and effective regulatory regime that underpins all activity.

This would allow the FSA to take action against those who break the rules, and provide confidence that misconduct will not be left unseen or unpunished.

In the light of recent evidence, it is clear that better and stronger regulatory tools are needed to crack down on such unacceptable behaviour.

I am recommending three specific regulatory changes to achieve these goals:

  • first, submission and administration of LIBOR should become regulated by the FSA;
  • second, the key individuals in these processes should be FSA approved persons; and,
  • finally, the government should amend the Financial  Services and Markets Act to allow the FSA to prosecute manipulation or attempted manipulation of LIBOR.

Bringing the submission and administration of LIBOR under the FSA’s regulatory umbrella will enhance the FSA’s ability to:

  • put in place rules that set out requirements on firms to ensure the integrity of the submission process;
  • allow the FSA to supervise the conduct of firms and individuals involved in the process; and
  • critically, the FSA will be able to take regulatory action against firms and approved persons in relation to misconduct, including public censure and financial penalties.

Many of the problems we have seen are down to the behaviour of individuals.  These powers will allow the FSA to approve key individuals for these roles, ensuring that they are fit and proper to perform the job, something which is clearly lacking in the present system.

As part of this process, my final recommendation is to amend the Financial Services and Markets Act to include, as an offence, the making of a false or misleading statement in order to manipulate LIBOR.  This would enable the FSA to use criminal powers for the worst cases of attempted manipulation.

These powers to take action against wrongdoers will be in addition to the powers under the new European market abuse regime.  The European Commission has acted quickly to amend this new regime so that it will apply to manipulation of benchmarks.

The UK government should continue to assist in finalising the new Market Abuse Regulation, which will apply across Europe, and bring another level of protection against manipulation.

Institutional reform

But statutory regulation – while vitally important in providing assurance and confidence in the process – is not a panacea.

Whilst the changes to the regulatory regime I have outlined will provide a sizeable and robust foundation for reform, it is equally important that the governance and oversight of LIBOR is overhauled.

To achieve this I recommend that:

The British Bankers’ Association clearly failed to properly oversee the LIBOR-setting process and should take no further role in the administration and governance of LIBOR.  Responsibility should be transferred to a new administrator.  We are today starting an open tender process to invite organisations to take over the running of LIBOR.  I am confident that there are a number who are willing to take it on and meet my expectations regarding the new institutional model of governance and oversight, which I have set out in detail in my report.

The process of transition to a new body is crucial; and it must be open, transparent and efficient, to ensure fairness and minimum disruption and volatility in markets. We must also ensure that the process delivers on restoring trust in the running of LIBOR.

As I have recommended in my report, there should be a tender process to be run by an independent committee convened by the regulatory authorities.

I am very pleased to be able to announce that Baroness Hogg, chairman of the Financial Reporting Council, has agreed in principle to chair this panel once it is established. Sarah brings an unparalleled depth and breadth of experience in corporate governance, regulation, public policy and financial services to this crucial task, and I can’t think of anyone better placed to lead it. I am delighted she has agreed to take this on.

The new administrator should fulfil specific obligations such as surveillance and scrutiny of submissions as part of its governance and oversight of the rate.

Broadly, I expect that new institutions should demonstrate much greater independence, with a clear distance between institutions and submitting banks. A specific oversight process also needs to be set up at administration, governance and bank levels. There must also be transparent systems, processes and structures, with clear accountabilities at every level.

It is essential that the conduct of the new administrator should be rigorous and transparent, in order that they cleanse the brand of LIBOR, and generate trust in the process moving forward.

The rules for governing LIBOR

Earlier I outlined the need to retain some level of judgement. But judgement needs to be explicitly and transparently linked to trade data wherever possible.

A number of my recommendations are therefore intended to establish strict and detailed processes for verifying submissions against hard data.

I expect that the first priority of the new administrator should be to introduce a code of conduct for submitters. This code of conduct should introduce specific guidelines prescribing that submissions be corroborated by trade data.

Submitting firms will be subject to new tough systems and controls that will be put in place. Transactions will need to be recorded and there needs to be a requirement for regular external audit of submitting firms.

The market also needs to know whether a submission has been made based on transactions or not.

Only with such rules and guidance can we ensure that the process has the much needed integrity.

Once the regulatory regime which I have described is up and running, this code of conduct should become industry-led and regulator-approved guidance.

Until this tender process has concluded, submitting banks should move to compliance with the submission guidelines presented in this report.

Immediate improvements to LIBOR

The recommendations that I have set out so far, are designed to generate extensive and lasting reform.

But a comprehensive approach to reforming LIBOR inevitably requires changes to be made immediately.   LIBOR as a reference rate continues to function as we speak. So what changes should be made now, to strengthen the rate as quickly as possible?

My report sets out a number of recommendations for immediate changes to the way in which LIBOR is derived, designed to establish a link between transactions and submissions, something advocated by many stakeholders as a way of enhancing credibility.

We examined the volume of transactions underpinning each LIBOR benchmark and the variance across different maturities and currencies.   Some of these contained very few trades and some LIBOR benchmarks are used for very few transactions.

I therefore recommend that the BBA, and in due course the new administrator, should remove those currencies and tenors from LIBOR, which lack a sufficient amount of trade data to corroborate submissions – we aim to phase out these rates over the next 12 months or sooner, where possible.

In particular, Australian, Canadian and New Zealand dollars, as well as Swedish krona and Danish krone, will be phased out. We also aim to reduce the maturities published by removing some of the intermediate tenors, such as four, five, seven, eight, ten and eleven months. This emphasis on the liquid segments of the market will further strengthen the link between submissions and observable transactions.   This will reduce the current number of LIBOR reference rates down from 150 to a number where we are confident there is a real market to underpin the rates.

As I explained, the publication of individual submissions by banks – a measure that was originally intended to enhance transparency – has paradoxically facilitated manipulation.  These details will remain available to the oversight committee, administrator, and the FSA for the purpose of oversight and scrutiny. I appreciate that this may be seen as a slight reduction in immediate transparency, but to rectify this, we have recommended the regular publication of a statistical bulletin, including trading volumes and values for the inter-bank funding market.

I am recommending that publication of individual submission is delayed by at least three months on a rolling basis, with the information remaining available to the oversight committee, the new rate administrator, and the FSA.

It is clear that there is a large gap between the number of banks which submit to the LIBOR process, and the number who use LIBOR as a reference rate, which has created a free rider problem. This is an issue which I consider should be quickly resolved.

Not only would an increased number of submissions help inform the LIBOR rate, which is supposed to represent the market as a whole, it would also discourage manipulation.

Subsequently I am recommending that relevant banks who do not currently submit, should be encouraged to participate as widely as possible in the LIBOR compilation process, including, if necessary, through new powers of regulatory compulsion.  LIBOR requires collective responsibility if it is to work effectively.

Finally, 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 the other benchmark rates that are more appropriate?

Alternatives for LIBOR in the longer term

My report also considers the viability of alternatives to LIBOR in the longer term. Specifically, if there is a case for an environment where a variety of viable alternatives to LIBOR could exist simultaneously.

It also analyses the case for involvement of the authorities in any move towards either a replacement to LIBOR, or a plurality of alternatives. And finally, it sets out the most plausible candidate alternative benchmarks that were presented in my Discussion Paper, and examining each in more detail.

However, it is clear that there is widespread debate ongoing in the international community concerning the appropriate role of authorities around the globe in regard to a variety of benchmark rates. And several international organisations will be examining and recommending approaches to these issues.

I recommend in my report that international authorities should take forward a discussion of existing applications of interbank rates such as LIBOR, the merits of alternative reference rates for certain applications, and the role – if any – that the authorities should play in facilitating transition to these reference rates for future contracts.

In the first instance I believe that this discussion should be guided and coordinated by the Financial Stability Board (FSB), working in conjunction with International Organization of Securities Commissions (IOSCO), the European Commission and other interested international institutions such as the Bank of International Settlements.

Implications for other benchmarks

While today is about LIBOR, it is of course only one of a number of important benchmarks that are used in contracts around the world. And some commentators have already put the spotlight on other major international benchmarks, for example there has already been a substantial amount of work on Price Reporting Agencies in the oil market, led by IOSCO.

Further, there are a large number of other important benchmarks in other commodity markets – for example for the prices of agricultural products and precious metals – and in the equity, bond and money markets, which have not yet been reassessed, but which may need to be looked at given the current scrutiny of benchmarks.

Whilst other benchmarks vary greatly in design and application, I hope that those responsible for them will be able to draw some important lessons from my report on LIBOR, and that it will help stimulate wider debate on benchmarks.

In particular, I consider that it should be possible to develop a set of overarching principles that can be applied to all major benchmarks, to promote robustness and credibility across the markets.  In my report I have set out some basic features that, in my view, any major benchmark should have.

Many of these benchmarks are compiled in different parts of the world, and many are applied to contracts all over the world, so naturally I would expect that any such work is coordinated at the international level. My report outlines the various pieces of work that are already underway in different parts of the world.

As many of you will know, Gary Gensler, Chairman of the Commodity Futures Trading Commission, and I will co-chair an IOSCO task force.  We believe this task force will provide a useful vehicle to help advance this important work. Crucially, this IOSCO task force will be informed by the European Commission’s work on Regulation of Indices, as well as IOSCO’s Principles for Oil Price Reporting Agencies.

The European Commission has launched another important strand of work on the use and possible regulation of major benchmarks in Europe.

It is only through team work and collaboration that the various authorities and bodies will develop effective and lasting solutions to these issues.

I look forward to working with Chairman Gensler on this crucial aspect of international work; as well as with other international institutions such as the Financial Stability Board and key European institutions.

Domestically, my report also considers some examples of other important benchmarks that are UK-related and recommends that further work be taken forward by the UK authorities with respect to benchmarks that are compiled in the UK or relate to sterling products.

Concluding remarks

In closing, I would like to reflect on the range of issues covered today.

The evidence backs a strong case for reforming LIBOR.

Governance of LIBOR has completely failed resulting in the sort of shameful behaviour that we have seen.  This problem has been exacerbated by a lack of regulation and a comprehensive mechanism to punish those who manipulate the system.

That is why I am recommending that the FSA is given clear and extensive powers to ensure that regulation is able to cover the offences, and that there is enough clout to punish those who break the law.

But this regulatory foundation must serve as the last line of defence, behind an overhauled governance structure, with a new, independent body, backed by a clear code of conduct, with clear rules and procedures regarding submission.

These changes will ensure that the market can once again have confidence in LIBOR going forward, and that the public both in Britain and abroad, are reassured that this problem will not happen again.

There is still much work to be done on an international level in regard to the appropriate use of benchmarks in all markets, and the appropriate rules and regulations that should be applied. I encourage those bodies to consider and respond to this report.

Together, we need to get this right so that people and businesses can depend on a system that works, with good regulatory oversight, governance and reliable information.  I submit this review to the government for its consideration, and look forward to their response in due course.

Thank you.

Unquote

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 LIBORDated 28-09-2012

Certificate of Tax Residency under DDTA (Withholding Tax)

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

Note: As per Amendment to Finance Bill 2013, below requirement of prescribe format has been done away with.

Sec 90 of Income Tax Act 1961 has been amended by inserting Sec 90 (4). Details of the section has been given below. Sec 90 (4) have many implications, but this article is concentrating on its implication on Buyers Credit transaction.

Rule comes into force on 01-04-2013

From April 2013 onwards when buyers credit is taken from foreign bank, importer will also need to collect Certificate of Tax Residency in below specified format from these foreign banks to claim benefit of lesser Withholding Tax (WHT) rates under DDTA or else standard rate of 20% will be applicable.

Sec 90 of Income Tax Act 1961

In simple terms, Sec 90 is for claiming relief for Double Taxation under Double Taxation Avoidance Treaty (DDTA)

Sec 90 (2) 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 Sec 90 (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 they are more beneficial to that assessee.

Amendment : Sec 90 (4) of Income Tax Act 1961

S. 90 (4) of the Act, as inserted by the Finance Act 2012 w.e.f 1.4.2013 provides that an assessee, not being a resident, to whom an agreement referred to in sub-section (1) of s. 90 applies, shall not be entitled to claim any relief under a Double Taxation Avoidance Agreement unless a certificate, containing such particulars as may be prescribed, of his being a resident in any country outside India or specified territory outside India, as the case may be, is obtained by him from the Government of that country or specified territory. A similar provision has been inserted in sub-section (4) of s. 90A of the Act. Pursuant therto, the CBDT has issued Notification dated 17.09.2012 to insert Rule 21BA and Forms 10FA and 10FB specifying the manner in which the aforesaid Certificate of Tax Residency should be obtained.

Certificate of Tax Residency

Certificate of Tax Residency should contain below minimum details

  1. Name of the assessee;
  2. Status (individual, company, firm etc.) of the assessee;
  3. Nationality (in case of individual);
  4. Country or specified territory of incorporation or registration (in case of others);
  5. Assessee’s tax identification number in the country or specified territory of residence or in case no such number, then, a unique number on the basis of which the person is identified by the Government of the country or the specified territory;
  6. Residential status for the purposes of tax;
  7. Period for which the certificate is applicable; and
  8. Address of the applicant for the period for which the certificate is applicable;

Also, the certificate referred shall have to be duly verified by the Government of the country or the specified territory of which the assessee claims to be a resident for the purposes of tax.

Reference

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

Buyers Credit on Jewellery

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

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

Overdue Interest and Late Payment Charges on Buyers Credit

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

Overdue Interest is applicable for the period after due date on which payment of principal and interest is payable to the buyers credit bank. Some banks have been clearly stating these charges in their offer letter or in letter of undertaking format. Once the buyers credit get overdue, they have been raising demand for overdue interest / charges on lou issuing bank. While giving letter of undertaking (LOU), lou issuing bank gives unconditional undertaking than they would make the payment on due date, irrespective of importer’s ability to make the payment and incase of delay would pay over due charges. Thus are under obligation to make such payments.

Reasons for Delayed Payment

  • Error by Importer’s Bank: Importer’s bank made payment not as per the instruction provide mt799 to Buyers Credit bank. Thus, resulting into non receipt of funds. Recently an importer had to pay $900 to buyers credit bank because of this issue which resulted in 5 days delayed receipt of funds.
  • Non payment by Importer’s Bank on Due Date: This can be because of missing to pay on the due date, rollover taken from other bank for existing buyers credit but funds for the same has not been received and any other such reasons.
  • Delayed Payment by Importer: Delay in funding of account by importer for payment to be made on due date.

Overdue interest as mentioned in offer letter / lou of few banks, for example are: 

  1. Overdue interest 2.5% pa over and above applicable rate
  2. Interest for delayed period @US prime + 3% & Late payment fee of $100
  3. USD prime rate + 2% + $500 late payment charges + $100 swift charges per message
  4. 7.5% p.a. for overdue period plus any other charges
  5. Delay repayment attracts penal interest at bank’s prime rate + 2% in addition to penal charges of USD 200
  6. 3% over and above existing rate

Importer’s Prespective

Importer should make take utmost care that payment of buyers credit is made on due date to avoid any of these charges. If possible also get an MT202 copy shared with the buyers credit consultant to further share with Buyers Credit Bank. This would help in finding error if any at the earliest, to avoid such charges.

RBI Regulation

As with the case of prepayment, there is no specific mention of overdue charges incase of Trade Credit made in Master Circular of External Commercial Borrowing and Trade Credit. Thus, inference has to be derived  from other circulars

  • Master Circular on Import of Goods and Services. C.2. Interest on Import Bills. AD – Category – I bank may allow payment of interest on usance bills or overdue interest for a period of less than three years from the date of shipment at the rate prescribed for trade credit from time to time.

Reference

Prepayment of Buyers Credit

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

From Importer’s Prespective

There are various reasons because of which an importer would like to make a pre-payment of buyers credit. Such as:

  • USD-INR rate in favour of importer post buyers credit is taken.
  • Buyers credit is taken by way of keeping Fixed deposit as security and now importer wishes to free cash.
  • Importer wishes to free Non Funds based limits for other use.
  • Any other such reasons.

RBI Regulation

There is no specific mention of prepayment incase of Trade Credit made in Master Circular of External Commercial Borrowing and Trade Credit. Thus, inference has to be derived  from other circulars

  • Master Circular of External Commercial Borrowing and Trade Credit: Repayment of external commercial borrowing has been allowed by RBI for upto $400 Million without any approval.
  • Master Circular on Import of Goods and Services:
    1. Under general rules and regulation for import payment transaction, circular say “Where specific regulations do not exist, AD Category – I banks may be governed by normal trade practices”
    2. Under the same circular: C.2. Interest on Import Bills “(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.”

From Bank Prespective

Accept few banks, most of the bank  do not explicitly mention  in the offer letter / undertaking format whether repayment is allowed or not. As market practice, few banks have been allowing making pre payment subject to 

  • It is pre informed to them before making principal and interest payment.
  • No part repayment.
  • Principal plus Interest payment is made.
  • Interest for complete tenure is paid. Say, if buyers credit is taken for 180 days and prepyament is made on 90 day, still interest of the complete tenure is payable. But while doing this, care should be taken that it does not breach all-in-cost ceiling of 6 Month Libor + 350 bps as prescribe by RBI.

Reference

Trade Credit Extended Upto 5 Years for Infrastructure Firms

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

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

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

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

5% WHT as per Sec 194LC not applicable to Buyers Credit

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

Provisions of newly inserted Section 194 LC for Tax Deduction by Indian Specified Company on Interest paid to Non resident / Foreign Company is not applicable to Buyers Credit.

Summary of Provision

  • For money borrowed during: July 1, 2012 – June 30, 2015.
  • Withholding Tax (WHT) at 5% instead of 20% (plus applicable surcharge and education cess).
  • Under Loan Agreement; or By way of Issue of Long term Infrastructure bonds
  • Loan should be in  Foreign Currency (Definition as per FEMA Act 1999, Sec 2 (m) “foreign currency” means any currency other than Indian currency)
  • By Specified Company was defined in original Finance Bill 2012 as infrastructure firm but the same was amended to any Indian Company.
  • Interest Rate as per approved rate by Central Government (RBI Master Circular on External Commercial Borrowing and Trade Credit. AAR Ruling which states that RBI approval to be consider as Central Government approval)
  • Indian Company is responsible for Tax deduction

Ministry of Finance Notification (Dated: 21-09-2012)

Over and above the above details, Ministry of Finance notification also clarifies below point.

With a view to lower the compliance burden and reduce the time lag which would arise on account of case-by-case approval, the Central Government has decided to grant approval to all borrowings by way of loan agreement and long-term infrastructure bonds that satisfy certain conditions. No specific approval in such cases would be required. Broadly, borrowings under a loan agreement or by way of issue of long-term infrastructure bonds that comply with External Commercial Borrowings (ECB) regulations as administered by the Reserve Bank of India (RBI) would be eligible for availing of the benefit of this concessional tax regime. Further, in case of long-term infrastructure bonds the end use of the proceeds of such bond issue should be for the infrastructure sector as defined by RBI under its ECB regulations. The details of the conditions to be satisfied are elaborated in the circular on approval of loan agreements/ long-term infrastructure bonds under Section 194 LC of Income Tax Act, dated 21/09/12 issued by the Central Board of Direct Taxes (CBDT).

CBDT Circular (Clarification on Loan Agreement. Dated 21-09-2012)

  1. The borrowing of money should be under a loan agreement.
  2. The monies borrowed under the loan agreement by the Indian company should comply with clause (d) of sub section (3) of section 6 of the Foreign Exchange Management Act, 1999 read with Notification No. FEMA3/2000-RB viz. Foreign Exchange Management (Borrowing or Lending in Foreign exchange) Regulations 2000, dated May 3, 2000, as amended from time to time, (hereafter referred to as “ECB regulations”), either under the automatic route or under the approval route.
  3. The borrowing company should have obtained a Loan Registration Number (LRN) issued by the Reserve Bank of India (RBI) in respect of the Agreement.
  4. No part of the borrowing has taken place under the said agreement before 1st July, 2012.
  5. The agreement should not be restructuring of an existing agreement for borrowing in foreign currency solely for taking benefit of reduced withholding tax rates.
  6. The end use of the funds and other conditions as laid out by the RBI under ECB regulations should be followed during the entire term of the loan agreement under which the borrowing has been made.

Reasons why non applicability to Buyers Credit:

To avail benefit under above section, either there has to be loan agreement and neither satisfy conditions layed down in CBDT Circular. Thus, in case of buyers credit Sec 194LC is  not applicable.

Applicable Sections: 

References

Form 15CA & 15CB Not Applicable on Interest payment to Indian Bank Branches

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

As per Income Tax circular 04/2009 dated 29th June, 2009 (Circular Link provided below), Form 15CA and 15CB Certificate under Section 195 of Income Tax is required to be submitted in cases where payments are made to a non-resident.

Residential status of a Company as defined u/s 6 (3) of Income Tax Act:

An Indian Company is always resident in India. A foreign company is resident in India only if, during the previous year, the control and management of its affairs are situated wholly in India. However, a foreign company is treated as non resident if, during the previous year, the control and management of its affairs are either wholly or partly situated out of India. The term “control and management” refers to “head and brain” which directs the affairs of policy, finance, disposal of profit and vital things concerning the management of a company. Usually control and management of a company’s affairs is situated at the place where meetings of its board of directors are held.

Deduction of tax at source from interest other than interest on securities u/s 194A of Income Tax Act in made in cases where payments are made to a resident:

Any person who is responsible of paying to a resident any income by way of interest, other than interest on securities, is required to deduct income-tax thereon at the rates in force.

However provisions of this section is not applicable where interest is credited or paid to any banking company, co-operative society engaged in banking business, public financial institutions, or notified institutions.

Based on above definitions, Indian Bank overseas branches becomes a resident and hence, whenever buyer’s credit interest payment is made to Indian bank overseas branches no TDS needs to be deducted and hence, form 15 CA and 15 CB is not required to be submitted.

For further details you can refer below articles

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

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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

IMO Number and Its importance in case of Buyers Credit

MS Eleonora Maersk container ship (at Gdańsk D...

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What is IMO Number ?

The IMO ship identification number is made of the three letters “IMO” followed by the seven-digit number assigned to all ships by IHS Fairplay when constructed. This is a unique seven digit number that is assigned to propelled, sea-going merchant ships of 100 gross tons and above. It serves the purpose of identifying ships. It is a Unique number which does not change, even if when the ship’s owner, country of registry or name changes.

What is the Use of IMO Number ?

Banks are using Lloyd’s Register for checking ship details using IMO Number. Details such as owners of the ship till date, current owners, which countries flag this ship had used and  is currently using etc.

Purpose of doing this is to comply with US government sanctions on various countries under OFAC and other laws. IMO check is done at the time of every transaction, to avoid any violation of these laws.

Many buyers credit funding are done through US-based bank branches (quoting specifically US, others might also be using it), they check for IMO number of the vessel before buyers credit funding.

Issues which can arise in case of Buyers Credit

  1. Bank may refuse to fund the buyers credit transaction in case there is no IMO number available of the shipping vessel.
  2. In case of MultiModal Bill of Lading (B/L), there are more than one ship used either on international water or incase of part on international water and part on exporter’s country. Banks calls for all vessel name and BL details used during the transport of the goods, which is then further checked with Lloyd’s Register. In most of the cases ship moving on inland water of the country do not have IMO number, but some registration number given by local body of that country. In such a given case, funding will not happen.
  • Example: In one of such cases, which I had come across, goods were shipped from China to India. Part of shipment from exporter’s place to port was handled by local transport ship which did not have IMO number. An Indian Bank’s overseas branch in U.S. had refused to fund such transaction.

Precautions

At the time of entering into a contract with exporters, it can be clearly specified that transport document should be either an Ocean B/L or incase of Multimodal B/L, goods to be shipped with an IMO number.

Reference:

IMO Search by Vessel Name

Country-wise Double Taxation Summary Chart on Interest

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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

Consequence of Non Deduction of Withholding Tax (WHT / TDS)

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

As with other TDS defaults the consequences for Non deduction of Withholding Tax (WHT) may be broadly classified as under:

  1. Disallowance of the amounts paid under Section 40 (a) (i). It should be noted that the scope of the section dealing with payments to non residents is wider than that of 40 (a) (ia) which deals with residents.
  2. Simple Interest at 12 % p.a.  u/s 201A (which is on a month to month basis after the Finance Act 2007). As per amendment w.e.f. July 1, 2010, the rate of Interest is 1 % per month or part thereof, from the date on which tax was deductible to the date on which tax is actually deducted. The rate of Interest is 1.5 % per month or part thereof, from the date on which tax was actually deducted to the date on which tax is actually paid.
  3. Penalties for non deduction (u/s 271C) (Minimum Penalty is the amount of tax which such person has failed to deduct or pay) and failure to pay the deducted tax to the government (u/s 221) (Minimum Penalty is any such amount as the Assessing Officer may impose and maximum Penalty is upto tax in arrears)
  4. Prosecution u/s 276B

Note:  Section 195 A provides for the grossing up of payments in case of Net 0f Tax Payments.

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

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

Note: Post below article, CBDT has made few changes in guidelines. Refer article: Revised Forms (15CA, 15CB) and Rules for payment to Non Resident

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

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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.

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 13582

EO 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

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

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

Buyers Credit for Imports Under Direct Documents

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

trade creditRBI Circular of External Commercial Borrowing and Trade Credit gives information about buyers credit. But with specific type of transaction, inference has to taken from other related circulars. For example, for Buyers Credit in case of import against direct documents received by importers, RBI Circular on Import of Goods and Services has to be referred along with Trade Credit Circular. RBI has put in various criteria under which such transactions are allowed.

Receipt of documents directly by importers are bifurcated into two parts:

A. Receipt of Import documents by the importer directly from Overseas Suppliers

Import bills and documents should be received from the banker of the supplier by the banker of the importer in India. AD Category – I bank should not, therefore, make remittances where import bills have been received directly by the importers from the overseas supplier, except in the following cases:

  1. Where the value of import bill does not exceed USD 300,000.
  2. Import bills received by wholly-owned Indian subsidiaries of foreign companies from their principals.
  3. Import bills 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.
  4. Import bills received by all limited companies viz. public limited, deemed public limited and private limited companies.

B. Receipt of import documents by the importer directly from overseas suppliers in case of specified sectors

Receipt of import documents by the importer directly from overseas suppliers in case of specified sectors. As a sector specific measure, banks are permitted to allow remittance for imports up to USD 300,000 where the importer of rough diamonds, rough precious and semi-precious stones have received the import bills / documents directly from the overseas supplier and the documentary evidence for import is submitted by the importer at the time of remittance. Banks may undertake such transactions subject to the following conditions:

  1. The import would be subject to the prevailing Foreign Trade Policy.
  2. The transactions are based on their commercial judgment and they are satisfied of the bonafides of the transactions.
  3. Banks should do the KYC and due diligence exercise and should be fully satisfied about the financial standing / status and track record of the importer customer.
  4. Before extending the facility, they should also obtain a report on each individual overseas supplier from the overseas banker or reputed overseas credit rating agency.

Based on the above information, check with your bank, under which criteria an import transaction is getting classified and whether given criteria are getting  fulfilled. Based on  this the amount permitted for buyers credit for import against direct documents can be derived.

Also, for cases falling under category B, please refer (ii) carefully. Even if all conditions are getting satisfied, banks should be satisfied about the bonafides of the transaction. Thus banks have discretion under that point. In such cases, it is advised to provide all information and documents related to transaction, to make the bank comfortable about the transaction.

Along with the above provision, provision of Evidence of Imports are also to be considered.

Evidence of Import Physical Imports

  1. Import on Documents AgainstPayment (DP): In case of all imports, where value of foreign exchange remitted/ paid for import into India exceeds USD 100,000 or its equivalent, it is obligatory on the part of the bank through whom the relative remittancewas made, toensure that the importer submits :-
    1. The Exchange Control copy of the Bill of Entry for home consumption, or
    2. The Exchange Control copy of the Bill of Entry for warehousing, in case of 100% Export Oriented Units, or
    3. Customs Assessment Certificate or Postal Appraisal Form, as declared by the importer to the Customs Authorities, where import has been made by post, as evidence that the goods for which the payment was made have actually been imported into India.
  2. In respect of imports on D/A basis,  Bank should insist on production of evidence of import at the time of effecting remittance of import bill. However, if importers fail to produce documentary evidence due to genuine reasons such as non-arrival of consignment, delay in delivery/ customs clearance of consignment, etc., bank may, if satisfied with the genuineness of request, allow reasonable time, not exceeding three months from the date of remittance, to the importer to submit the evidence of import.

Evidence of import in lieu of Bill of Entry

  1. Bank may accept, in lieu of Exchange Control copy of Bill of Entry for home consumption, a certificate from the Chief Executive Officer (CEO) or auditor of the company that the goods for which remittancewas made have actually been imported into India provided :-
    1. the amount of foreign exchange remitted is less than USD 1,000,000 or its equivalent,
    2. the importer is a company listed on a stock exchange in India and whose net worth is not less than Rs.100 crore as on the date of its last audited balance sheet, or, the importer is a public sector company or an undertaking of the Government of India or its departments.
  2. The above facility may also be extended to autonomous bodies, including scientific bodies/academic institutions, such as Indian Institute of Science / Indian Institute of Technology, etc. whose accounts are audited by the Comptroller and Auditor General of India (CAG). AD Category – I bank may insist on a declaration from the auditor/CEO of such institutions that their accounts are audited by CAG. 

Reference

Difference between Buyers Credit and Letter of Credit (LC)

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

1. LC is one of the payment mode used in the International Trade between importer and exporter to cover third-party credit risk. Meaning if the importer defaults, his bank will have to pay on his behalf. Whereas, Buyers credit is a funding mechanism used by importer to funds his transaction.

2. Parties involved during the transaction.

Under Letter of Credit (LC) : Importer, Importer’s Bank, Exporter, Exporters Bank

Under Buyers Credit: Importer, Importer’s Bank, Foreign Bank funding the transaction

3. Under LC, there is movement of goods between export and import, movement of documents and funds between importers bank and exporters bank. Where as in buyers credit there is only movement of money.

4. Bank charges LC commission and usance charges (mainly with PSU). In case of buyers credit your bank charges letter of comfort / undertaking charges and foreign bank charges its interest cost.

5. LC is governed by UCP600 issued by International Chamber of Commerce (ICC). Every LC has a mention of the same. Incase of any dispute between importer’s bank and exporter’s bank, norms given in UCP600 needs to be referred. Normally Letter of comfort does not mention of any specific rules under ICC which also needs to be referred.

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

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

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) 

Buyers Credit Accounting Entries

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

Buyers Credit Essential Accounting Entries, Classification and Disclosures in Books of Accounts:

The following Journal Entries are to be passed in the books of Importer:

1. When raw material is purchased on credit

Purchases A/c Dr xxxxxx

To Party A/c Cr xxxxxx

2. When payment is made on our behalf to party

Party A/c Dr xxxxxx

To Bank A/c Cr xxxxxx

3. When Buyers Credit is availed against LC

Letter of Credit (name of bank) A/c Dr xxxxxx

To Buyers credit (name of bank) A/c Cr xxxxxx

4. When Buyers Credit is availed against Document at sight

Party A/c Dr xxxxxx

To Buyers credit (name of bank) A/c Cr xxxxxx

5. When Buyers Credit rollover

Buyers credit (name of bank) A/c Dr xxxxxx

To Buyers credit (name of bank) A/c Cr xxxxxx

6. When Buyers Credit is paid back

Buyers credit (name of bank) A/c Dr xxxxxx

Bank Interest A/c Dr xxxxxx

To Bank A/c Cr xxxxxx

7. When Withholding Tax is deducted and paid ( in cases where buyers credit is availed from Foreign Banks where WHT is applicable)

         Bank Interest A/c Dr xxxxxx

To TDS Payable A/c Cr xxxxxx

(when withholding tax payment accrues)

TDS Payable A/c Dr xxxxxx

To Bank A/c Cr xxxxxx

(when withholding tax is paid to the department through TDS challan)

8. When due to Foreign Currency Fluctuation income or loss is booked

when gain is booked

Party A/c Dr xxxxxx

To Gain due to Foreign Currency Fluctuation A/c Cr xxxxxx

when loss is booked

Loss due to Foreign Currency Fluctuation A/c Dr xxxxxx

To Party A/c Cr xxxxxx

9. When LC issuance charges taken by bank

LC issuance charges A/c Dr xxxxxx

To Bank account Cr xxxxxx

10. When LoU issuance charges taken by bank

LoU issuance charges A/c Dr xxxxxx

To Bank account Cr xxxxxx

11. When Buyers Credit Commission charges taken by bank

Bank Commission A/c Dr xxxxxx

To Bank account Cr xxxxxx

12. When Term Loan Interest is paid to bank

Bank (Term Loan) Interest A/c Dr xxxxxx

To Bank Account Cr xxxxxx

Disclosure in Balance Sheet as per Pre – revised Schedule VI  (which is applicable till 31st March, 2011)

Buyers Credit, Suppliers Credit and Unpaid LC shall be classified and disclosed  under the sub-head ‘Loans and advances from banks’  under the Head of Secured Loans under Sources of Funds in the balance sheet of the company as per the requirements of Schedule VI to the Companies Act, 1956.

Disclosure in Balance Sheet as per Revised Schedule VI

Buyers Credit, Suppliers Credit and Unpaid LC taken for more than 1 year shall be disclosed under the sub-head Long Term Borrowings under the Head of  Non Current Liabilities under Equity and Liabilities.

Whereas  Buyers Credit Suppliers Credit and Unpaid LC taken for less than 1 year shall be disclosed under the sub-head Short Term Borrowings under the Head of  Current Liabilities under Equity and Liabilities.

Disclosure in Profit and Loss Statement

LC issuance charges, LoU issuance charges, Bank Commission are considered as expenses as Bank Charges and Bank Interest is disclosed under the head of Finance Cost.

Gain due to Currency Fluctuation is considered as income as Exchange Gain and disclosed under the head of Other Income.

Infrastructure Companies – Bridge Finance before availing ECB

Cooling towers of the e.on power plant

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

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 on Capital Goods

To Avail Buyer’s Credit….. Email: sanjaymandavia@gmail.com, M: +919825560186

Buyers Credit can be used both for Raw Material and Capital Goods. Below article gives complete detailed information along with process and sample sanction letters.

Process Flow of Buyers Credit for Capital Goods

Term Loan Sanction –> LC Issuance for import of Machinery –> On the due date of payment of LC convert it to Buyers Credit and rollover it for 3 year –> At end of 3 year convert to term loan

Stage 1: Bank’s Term Loan Sanction:

  • Facility: Buyer’s Credit (capex) in lieu of Foreign L/C Capex (to be converted to Term loan after 3 years)
  • Purpose: Purchase of Machinery
  • Tenure : 36 months with rollover every 6 / 12 months till  Month / Year
  • Repayment: The buyers credit is under roll over every 6 / 12 months subject to availability of funds (to be converted to Term loan after 3 years)
  • % margin money
  • The buyers credit is proposed to be retired through term loan and the same will be repaid in say 24 equal monthly installments (example of 5 year term loan), starting from Month / Year. In-case buyers credit is not available for further rollover at any point of time, the buyer credit will be converted to term loan and the repayment will start immediately from the next month of conversion, repayable in monthly installments  (starting from the next month of conversion) equal divided into the balance tenor.
  • Pricing of the above term loan ; Base Rate + _____(margin)

Charges: Issuance of LOU / LOC Charges to overseas bank

Stage 2 : Based on the agreement with the supplier either a sight lc or usance lc get opened from bank. Based on this supplier will ship machinery.

Stage 3: 

  • The Indian customer will import the goods either under DC, Collections or open account
  • The Indian customer request the Buyer’s Credit Arranger before the due date of the bill to avail buyers credit financing
  • Arranger to request overseas bank branches to provide a buyers credit offer letter in the name of the importer. Best rate is quoted to importer
  • Overseas Bank to fund your existing bank nostro account for the required amount
  • Existing bank to make import bill payment by utilizing the amount credited (if the borrowing currency is different from the currency of Imports then a cross currency contract is utilized to effect the import payment)
  • On due date (6 / 12 Month) it will again get rollover (Principal + interest)  with the same foreign bank or another bank based on the pricing and availability on that day. This will keep on happening till 3 years

Stage 4: Based on the sanction convert the buyers credit to term loan at the end of 3rd year.

RBI Regulation:

A. Amount and Maturity

  • Maximum Amount Per transaction : $20 Million
  • Maximum Maturity in case of import of capital goods : upto 3 years from the date of shipment
  • Maximum Maturity in case of import of capital goods for companies classified as Infrastructure sector: Upto 5 years from the date of shipment. Subject to conditions are:
    1. Trade Credit must be abinitio (from beginning) for a period not less than 15 Months.
    2. For existing Trade Credit transactions availed on or before 14th December 2012, abinitio buyers credit would be for 6 months only
    3. For tenure above 3 years banks are not permitted to issue Letters of Credit / Guarantees / Letter of Undertaking / Letter of Comfort in favour of overseas supplier, bank and financial Institutions

B. All-in-cost Ceilings

Upto 5 years : 6 Month Libor + 350 bps

Costing

The cost involved in buyers credit is as follows: (Bold are the cost which will be part of Indian bank or through Indian Bank. And the margin requirements)

  • Interest cost: This is charged by overseas bank as a financing cost (LIBOR+Margin)
  • Letter of Comfort / Undertaking: Your existing bank would charge this cost for issuing letter of comfort / Undertaking. (In your case there are going to be multiple bank thus check their total cost)
  • Forward / Hedging Cost
  • Arrangement fee: Charged by person who is arranging buyer’s credit for you.
  • Other charges: A2 payment on maturity, For 15CA and 15CB on maturity, Intermediary bank charges.
  • WHT: The customer has to pay WHT on the interest amount remitted overseas to the Indian tax authorities.
Sample Sanction Letter from Bank

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