Introduction

On 2 July 2024, the Reserve Bank of India (‘RBI’) released the draft Foreign Exchange Management (Export and Import of Goods and Services) Regulations 2024 (‘Draft Trade Regulations’) and the draft Direction on Export and Import of goods and services (‘Draft Trade Directions’) in an effort to streamline and simplify the regulations and guidelines governing import and export transactions. This step reinforced the RBI’s progressive initiatives in rationalising the Foreign Exchange Management Act, 1999 (‘FEMA’). The RBI in its Statement on Developmental and Regulatory Policies released in June 2024 also highlighted that the RBI intends to rationalise the trade regulations by granting greater operational flexibility to the Authorised Dealer Banks (‘AD Bank’). Once finalised, the Draft Trade Regulations will replace the existing Foreign Exchange Management (Export of Goods and Services) Regulations, 2015 (‘Export Regulations’), thereby bringing a fresh approach to managing India’s export activities. Further, the Draft Trade Directions are set to supersede the current Master Directions on Import of Goods and Services (‘MD-Import’) and the Master Directions on Export of Goods and Services (‘MD-Export’). As global trade continues to evolve, it is imperative that the regulations governing the same are also streamlined.

In this article, we delve into the recently proposed draft regulations and directions for import and export in an attempt to highlight the hits and misses. By examining the nuances of these changes, we aim to uncover their potential impacts on business operations and regulatory compliances for traders.

Reporting requirements for export of Goods and Services

Under the Draft Trade Regulations and the Draft Trade Directions, the Export Declaration Form (Form EDF) which is required to be filed in cases of exports taking place through customs manual port shall be required to be filed by all the exporters. The new Form EDF in the Draft Trade Regulations shall act as a master form which shall be used to report export of goods, services and software. Under the existing regulations, software exporters are required to file SOFTEX forms for reporting their software exports. Accordingly, the reporting requirement through Form SOFTEX is proposed to be dispensed. It is pertinent to note that upon the implementation of the Draft Trade Regulations and Draft Trade Directions, export of services from India will be required to be separately reported.

Flexibility in Payment Terms for Import and Export

In the proposed Draft Trade Directions, the RBI has removed the stringent 6 (six) months’ time limit, allowing the settlement period for import payments to be governed by the contractual terms between the Indian importer and the overseas supplier. This flexibility is a positive development, as it accommodates the varying needs of the parties. As mentioned in the Draft Trade Directions, extension beyond the agreed contractual time period may be permitted by the AD Banks only if there’s a delayed settlement of import payments or if the overseas supplier delays in fulfilling its obligations in cases of advance payment. As a contrast to the existing provisions, the time limit for exports made to a warehouse has been aligned with general export cases. Therefore, the consignment sales or warehouse transfer will be required to be closed within a period of 9 (nine) months only, rather than a 15 (fifteen) months period.

Advance Payment and Timelines: Autonomy to the Parties

The Export Regulations mandate the exporter to export the goods within a period of 1 (one) year from the date of receipt of advance payment towards such goods or 10 years in case of long term contracts on satisfying the conditions. However, Draft Trade Regulations provides more autonomy to the parties to decide the export and payment terms in terms of their trade contract. If the exporter fails to fully or partly make the shipment of goods within a year of receipt of advance payment for the said goods, the present Export Regulations prohibits refund of the unutilized portion of the advance payment (or towards payment of interest) without prior approval of the RBI. This stringent requirement is now proposed to be relaxed by allowing the exporters to seek an extension from the AD Bank. The AD Banks have been provided with ample amount of powers to prepare a draft policy for themselves and permit refund of such advance amount considering the bona fide of the transaction. If the said advance amount is not refunded or the period for completion of export obligation is not extended by the AD Bank, the advance so received shall be subjected to Regulations 3 of Foreign Exchange Management (Borrowing and Lending) Regulations, 2018.

Price adjustments and Discounts

Under the present MD-Export, the RBI has permitted the AD Banks to approve a reduction of export invoice up to a maximum limit of 25% of the invoice value. In the Draft Trade Directions, there are no such limitations and conditions, the AD Bank may permit reduction for the full export value of a transaction after being satisfied with the bona fides of such transaction. However, in cases where reductions or write-offs are sought for more than 25% of the export value, such cases shall be referred to the Board of the concerned AD Bank for post facto ratification. The provisions in relation to write-off (Para C.23 of the MD-Export) of export receivables with thresholds of 5% - self write off, 10% AD Bank write off has been proposed to be subsumed along with the reduction in invoice cases since the AD Bank shall be now empowered to reduce the entire realisable export value subject to the bona fide of transaction and its internal board policies.

Set-off of outstanding export receivables against outstanding import payables

The MD-Export provides stringent conditions to permit a set-off of export receivables against import payables which inter alia includes closing of both legs of the transaction in the same calendar year, existence of a legally enforceable agreement in case of settlement between associate or group companies, etc. The Draft Trade Regulations have liberalised the set-off process with respect to the timelines and permits set-off with the same overseas buyer/supplier. However, there’s no clarity whether set-off with associate or group companies would still require the existence of a valid agreement.

Project Export

All turnkey and civil construction contracts will be required to be approved by the AD Bank prior to their execution. The inter-project transfer of funds and machines for project exports has been omitted in the Draft Trade Directions. The detailed Project Export Manual is proposed to be replaced with simplified guidelines in line with Draft Trade Regulations and Draft Trade Directions.

Merchanting Trade Transaction (‘MTT’)

The Draft Trade Directions have also simplified the MTT by removing the requirement of completing the entire MTT within a period of 9 (nine) months starting from the first leg of a transaction. Further, the requirement of conducting a MTT as a profitable transaction has been omitted too.

Significance and Impact

The proposed regulations and directions from the RBI represent a significant step towards enhancing the ease of doing business.

By delegating most of the decision - making powers to the AD Banks, the RBI aims to empower these banks to provide quicker and efficient solutions to problems faced by the Indian traders. Though, the RBI intends to grant greater operational flexibility to the AD Banks for promoting ease of doing business, it is yet to be seen how the AD Banks shall exercise such powers and formulate their comprehensive policies for regulating import and export transactions. The detailed policies of the AD Banks will be released in the near future and are expected to ease the hurdles of traders. The opportunity to knock on the doors of the RBI for disapproved transactions by the AD Banks will be tested as well.

There is a possibility that one AD Bank might allow a particular trade while the other negates its possibility based on their internal policies creating chaos and confusion amongst the traders. These relaxations might also lead to wider interpretation and consequently more loopholes for offenses to slip through.

The RBI has invited public feedback on the Draft Trade Regulations and Draft Trade Directions via email by 1 September 2024. It is eminent that the industry participants and trade associations share relevant representations and seek clarification on pending trade issues.

[The authors are Partner, Principal Associate and Associate, respectively, in Corporate and M&A practice at Lakshmikumaran & Sridharan Attorneys]