FREE TRADE ZONES

Objective 7A.1 The objective is to create trade-related infrastructure to facilitate the import
and export of goods and services with freedom to carry out trade
transactions in free currency. The scheme envisages creation of world-class
infrastructure for warehousing of various products, state-of-the-art
equipment, transportation and handling facilities, commercial office-space,
water, power, communications and connectivity, with one-stop clearance of
import and export formality, to support the integrated Zones as
‘international trading hubs’. These Zones would be established in areas
proximate to seaports, airports or dry ports so as to offer easy access by rail
and road.

Status 7A.2 The Free Trade & Warehousing Zones (FTWZ) shall be a special category
of Special Economic Zones with a focus on trading and warehousing.

Establishmen 7A.3
t of Zone

(i) Proposals for setting up of FTWZs may be made by public

sector undertakings or public limited companies or by joint
ventures in technical collaboration with experienced
infrastructure developers. The proposals shall be considered by
the Board of Approval in the Department of Commerce. On
approval, the developer will be issued a letter of permission for
the development, operation and maintenance of such FTWZ.

(ii) Foreign Direct Investment would be permitted up to 100% in

the development and establishment of the zones and their
infrastructural facilities.

(iii) The proposal must entail a minimum outlay of Rs.100 crores

for the creation and development of the infrastructure facilities,
with a minimum built up area of five lakh sq.mts.
 (iv) The developer shall be permitted to import duty free such
building materials and equipment as may be required for the
development and infrastructure of the zone. Such equipment
and materials as are sourced from the DTA shall be considered
as physical exports for the DTA suppliers.

(v) Once it has developed the FTWZ, the developer shall also be
permitted to sale/lease/rent out warehouses/workshops/office-
space and other facilities in the FTWZ to traders/exporters.

Maintenance 7A.4 The developer shall itself or through suitable special purpose arrangements,
of Zone ensure a reliable mechanism for the proper maintenance of the common
facilities and security of the FTWZ.

Functioning 7A.5

(i) The scheme envisages duty free import of all goods (except
prohibited items, arms and ammunitions, hazardous wastes and
SCOMET items) for ware housing. As far as bond towards
customs duty on import is concerned, the units would be
subject to similar provisions as are applicable to units in SEZs.

(ii) Such goods shall be permitted to be re-sold/re-invoiced or re-

exported. Re-export shall be permitted without any restrictions.
However export of SCOMET items shall not be permitted
except with the permission of Inter-Ministerial Committee.

(iii) These goods shall also be permitted to be sold in the DTA on

payment of customs duties as applicable on the date of such
sale. Payment of duty will become due only when goods are
sold/delivered to DTA and no interest will be charged as in the
case of bonded warehouses.
 (iv) Packing or re-packing without processing, and labeling as per
customer or marketing requirements could be undertaken
within the FTWZ.

(v) The maximum period that goods shall be permitted to be

warehoused within the FTWZ will be two years, after which
they shall necessarily have to be re-exported or sold in the
DTA. On expiry of the two year period, customs duties as
applicable would automatically become due unless the goods
are re-exported within such grace period, not exceeding three
months, as may be permitted.

Entitlement 7A.6
of units

(i) Income Tax exemption as per 80 IA of the Income Tax Act.

(ii) Exemption from Service Tax.

(iii) Free foreign exchange currency transactions would be

permitted.

(iv) Other benefits mutatis mutandi as applicable to units in SEZs.

NFE criteria 7A.7 Units in FTWZs shall be net foreign exchange earners. Net foreign
exchange earning shall be calculated cumulatively for every block of five
years from the commencement of warehousing and/or trading operations as
per formula. applicable for SEZ units.
 EXPORT ORIENTED UNITS (EOUs), ELECTRONICS HARDWARE

TECHNOLOGY PARKS (EHTPs), SOFTWARE TECHNOLOGY

PARKS

(STPs) AND BIO-TECHNOLOGY PARKS (BTPs).

6.1 Units undertaking to export their entire production of goods and services
Eligibili (except permissible sales in DTA), may be set up under the Export Oriented
ty Unit (EOU) Scheme, Electronics Hardware Technology Park (EHTP)
Scheme, Software Technology Park (STP) Scheme or Bio-Technology Park
(BTP) Scheme for manufacture of goods, including repair, re-making,
reconditioning, reengineering and rendering of services. Trading units are not
covered under these schemes.

6.2 (a) An EOU / EHTP / STP / BTP unit may export all kinds of goods and
Export services except items that are prohibited in ITC (HS). Export of Special
and Chemicals, Organisms, Materials, Equipment and Technologies (SCOMET)
Import shall be subject to fulfillment of the conditions indicated in ITC(HS).
of
Goods

Procurement and supply of export promotion material like brochure /

literature, pamphlets, hoardings, catalogues, posters etc. upto a maximum
value limit of 1.5 % of FOB value of previous years exports shall also be
allowed.
(b) An EOU / EHTP / STP / BTP unit may import and/ or procure, from DTA
or bonded warehouses in DTA / international exhibition held in India, without
payment of duty, all types of goods, including capital goods, required for its
activities, provided they are not prohibited items of import in the ITC (HS).
Any permission required for import under any other law shall be applicable.
Units shall also be permitted to import goods including capital goods
required for approved activity, free of cost or on loan / lease from clients.
Import of capital goods will be on a self certification basis. Goods imported
by a unit shall be with actual user condition and shall be utilized for export
production.

(c) State Trading regime shall not apply to EOU

manufacturing units. However, in respect of Chrome Ore / Chrome

concentrate, State Trading Regime as stipulated in export policy of these
items, will be applicable to EOUs.
 (d) EOU / EHTP / STP / BTP units may import / procure from DTA, without
payment of duty, certain specified goods for creating a central facility.
Software EOU/ DTA units may use such facility for export of software.
(e) An EOU engaged in agriculture, animal husbandry, aquaculture,
floriculture, horticulture, pisciculture, viticulture, poultry or sericulture may
be permitted to remove specified goods in connection with its activities for
use outside bonded area.
(f) Gems and jewellery EOUs may source gold / silver/ platinum through
nominated agencies on loan / outright purchase basis. Units obtaining gold/
silver/ platinum from nominated agencies, either on loan basis or outright
purchase basis shall export gold/ silver / platinum within 90 days from date
of release.
(g) EOU / EHTP / STP / BTP units, other than service units, may export to
Russian Federation in Indian Rupees against repayment of State Credit /
Escrow Rupee Account of buyer subject to RBI clearance, if any.
(h) Procurement and export of spares / components, upto 5 % of FOB value
of exports, may be allowed to same consignee / buyer of the export article,
subject to the condition that it shall not count for NFE and direct tax benefits.
(i) BoA may allow, on a case to case basis, requests of EOU / EHTP / STP /
BTP units in sectors other than Gems & Jewellery, for consolidation of goods
related to manufactured articles and export thereof along with manufactured
article. Such goods may be allowed to be imported / procured from DTA by
EOU without payment of duty, to the extent of 5% FOB value of such
manufactured articles exported by the unit in preceding financial year. Details
of
procured / imported goods and articles manufactured by the EOU will be
listed separately in the export documents. In such cases, value of procured /
imported goods will not be taken into account for calculation of NFE, DTA
sale entitlement & profits accruing out of such procured / imported goods
will not be eligible for income tax benefits. Such procured/ imported goods
shall not be allowed to be sold in DTA. BoA may also specify any other
conditions.

6.3 Second hand capital goods, without any age limit, may also be imported duty
Second free.
Hand
Capital
Goods

6.4 a) An EOU / EHTP / STP / BTP unit may, on the basis of a firm contract
Leasing between parties, source capital goods from a domestic / foreign leasing
of company without payment of customs / excise duty. In such a case, EOU /
Capital EHTP / STP / BTP unit and domestic / foreign leasing company shall jointly
Goods file documents to enable import / procurement of capital goods without
payment of duty.
 b) An EOU / EHTP / BTP / STP unit may sell capital goods and lease back
the same from a Non Banking Financial Company (NBFC), subject to the
following conditions:
i) The unit should obtain permission from the jurisdictional Deputy /
Assistant Commissioner of Customs or Central Excise, for entering into
transaction of ‘Sale and Lease Back of Assets’, and submit full details of the
goods to be sold and leased back and the details of NBFC;
ii) The goods sold and leased back shall not be removed from the unit’s
premises;
iii) The unit should be NFE positive at the time when it enters into sale and
lease back transaction with NBFC;
iv) A joint undertaking by the unit and NBFC should be given to pay duty on
goods in case of violation or contravention of any provision of the
notification under which these goods were
imported or procured, read with Customs Act, 1962 or Central Excise Act,
1944 , and that the lien on the goods shall remain with the Customs/ Central
Excise Department, which will have first charge over the said goods for
recovery of sum due from the unit to Government under provision of Section
142(b) of the Customs Act, 1962 read with the Customs (Attachment of
Property of Defaulters for Recovery of Govt. Dues) Rules, 1995 .

6.5 EOU / EHTP / STP / BTP unit shall be a positive net foreign exchange earner
Net except for sector specific provision of Appendix 14-I-C of HBP v1 , where a
Foreign higher value addition shall be required. NFE earnings shall be calculated
Exchan cumulatively in blocks of five years, starting from commencement of
ge production. Whenever a unit is unable to export due to prohibition /
Earning restriction imposed on export of any product mentioned in LoP, the five year
s block period for calculation of NFE earnings may be suitably extended by
BoA. BoA may also consider extension of block period by another one year,
for calculation of NFE, on case to case basis, for those units which complete
5 years block period in between 30.09. 2008 and 30.09.2009, keeping in view
the decline in exports in that particular unit, due to economic slow down
only.
6.6 (a) On approval, a Letter of Permission (LoP) / Letter of Intent (LoI) shall be
Letter issued by DC / designated officer to EOU / EHTP / STP / BTP unit. LoP / LoI
of shall have an initial validity of 3 years, by which time unit should have
Permis commenced production. Its validity may be extended further up to 3 years by
sion / competent authority. However, proposals for extension beyond six years shall
Letter be considered in exceptional circumstances, on a case-to-case basis by BoA.
of Once unit commences production, LoP/ LoI issued shall be valid for a period
Intent of 5 years for its activities. This period may be extended further by DC for a
and period of 5 years at a time.
Legal
Undert
aking;I
nvestm
ent
Criteria

(b) LoP / LoI issued to EOU / EHTP / STP / BTP units by concerned
authority, subject to compliance of provision in para 6. 2 above, would be
construed as an Authorization for all purposes.
(c) Unit shall execute an LUT with DC concerned. Failure to ensure positive
NFE or to abide by any of the terms and conditions of LoP / LoI / IL / LUT
shall render the unit liable to penal action under provisions of the FT (D&R)
Act and Rules and Orders made there under, without prejudice to action
under any other law / rules and cancellation or revocation of LoP / LoI / IL.
(d) Only projects having a minimum investment of Rs. 1 Crore in plant &
machinery shall be considered for establishment as EOUs. However, this
shall not apply to existing units and units in EHTP / STP / BTP, Handicrafts /
Agriculture / Floriculture / Aquaculture/ Animal Husbandry / Information
Technology, Services, Brass Hardware and Handmade jewellery sectors. BoA
may also allow establishment of EOUs with a lower investment criteria.

6.7 (a) Applications for setting up of units under EOU scheme, other than
Applica proposals for setting up of units in services sector (except R&D, software and
tion & IT enabled services, or any other service activity as may be delegated by
Approv BoA), shall be approved or rejected by the Units Approval Committee within
als 15 days as per criteria indicated in HBP v1 .

(b) In other cases, approval may be granted by BoA set up for this purpose as
indicated in HBP v 1 .
(c) Proposals for setting up EOU requiring industrial license may be granted
approval by DC after clearance of proposal by BoA and DIPP within 45 days.
(d) Applications for conversion into an EOU / EHTP/ STP / BTP unit from
existing DTA units, having an investment of Rs. 50 crores and above in plant
and machinery or exporting Rs. 50 crores and above annually, shall be placed
before BoA for a decision.

6.8 Entire production of EOU / EHTP / STP / BTP units shall be exported subject
DTA to following:
Sale of
Finishe
d
Product
s/
Rejects
/ Waste
/Scrap/
Remna
nts and
byprod
ucts

(a) Units, other than gems and jewellery units, may sell

goods upto 50% of FOB value of exports, subject to fulfilment of positive

NFE, on payment of concessional duties. Within entitlement of DTA sale,
unit may sell in DTA, its products similar to goods which are exported or
expected to be exported from units. However, units which are manufacturing
and exporting more than one product can sell any of these products into DTA,
upto 90% of FOB value of export of the specific products, subject to the
condition that total DTA sale does not exceed the overall entitlement of 50%
of FOB value of exports for the unit, as stipulated above. No DTA sale at
concessional duty shall be permissible in respect of motor cars, alcoholic
liquors, books, tea (except instant tea), pepper & pepper products, marble and
such other items as may be notified from time to time. Such DTA sale shall
also not be permissible to units engaged in activities of packaging / labeling /
segregation / refrigeration/ compacting / micronisation / pulverization /
granulation / conversion of monohydrate form of chemical to anhydrous form
or vice-versa. Sales made to a unit in SEZ shall also be taken into account for
purpose of arriving at FOB value of export by EOU provided payment for
such sales are made from Foreign Exchange Account of SEZ unit. Sale to
DTA would also be subject to mandatory requirement of registration of
pharmaceutical products (including bulk drugs). An amount equal to Anti
Dumping duty under section 9A of the Customs Tariff Act, 97 leviable at the
time of import, shall be payable on the goods used for the purpose of
manufacture or processing of the goods cleared into DTA from the unit.

(b) For services, including software units, sale in DTA in any mode,
including on line data communication, shall also be permissible up to 50% of
FOB value of exports and /or 50% of foreign exchange earned, where
payment of such services is received in foreign exchange.
(c) Gems and jewellery units may sell upto 10% of FOB value of exports of
the preceding year in DTA, subject to fulfillment of positive NFE. In respect
of sale of plain jewellery, recipient shall pay concessional rate of duty as
applicable to sale from nominated
agencies. In respect of studded jewellery, duty shall be payable as applicable.
(d) Unless specifically prohibited in LoP, rejects within an overall limit of
50% may be sold in DTA on payment of duties as applicable to sale under
sub-para 6. (a) on prior intimation to Customs authorities. Such sales shall be
counted against DTA sale entitlement. Sale of rejects upto 5% of FOB value
of exports shall not be subject to achievement of NFE.

(e) Scrap / waste / remnants arising out of production process or in

connection therewith may be sold in DTA, as per SION notified under Duty
Exemption Scheme, on payment of concessional duties as applicable, within
overall ceiling of 0% of FOB value of exports. Such sales of scrap / waste /
remnants shall not be subject to achievement of positive NFE. In respect of
items not covered by norms, DC may fix ad-hoc norms for a period of six
months and within this period, norms should be fixed by Norms Committee.
Ad-hoc norms will continue till such time norms are fixed by Norms
Committee. Sale of waste / scrap / remnants by units not entitled to DTA sale,
or sales beyond DTA sale entitlement, shall be on payment of full duties.
Scrap / waste / remnants may also be exported.
(f) There shall be no duties / taxes on scrap / waste / remnants, in case same
are destroyed with permission of Customs authorities.
(g) By-products included in LoP may also be sold in DTA subject to
achievement of positive NFE, on payment of applicable duties, within the
overall entitlement of sub-para 6.8 (a). Sale of by-products by units not
entitled to DTA sales, or beyond entitlements of subpara 6.8(a), shall also be
permissible on payment of full duties.
(h) EOU / EHTP / STP / BTP units may sell finished products, except pepper
and pepper products and marble, which are freely importable under FTP in
DTA, under intimation to DC, against payment of full duties, provided they
have achieved positive NFE. An amount equal to Anti Dumping duty under
section 9A of the Customs Tariff Act, 1975 leviable at the time of import,
shall be payable on the goods used for the purpose of manufacture or
processing of the goods cleared into DTA from the unit.
(i) In case of units manufacturing electronics hardware and software, NFE
and DTA sale entitlement shall be reckoned separately for hardware and
software.
(j) In case of DTA sale of goods manufactured by EOU/ EHTP / STP / BTP,
where basic duty and CVD is nil, such goods may be considered as non-
excisable for payment of duty.
(k) In case of new EOUs, advance DTA sale will be allowed not exceeding
50% of its estimated exports for first year, except pharmaceutical units where
this will be based on its estimated exports for first two years.
(l) Units in Textile and Granite sectors shall have an option to sell goods into
DTA in terms of sub- paras 6. (a), (d), (e), (g) and (k) above, on payment of
an amount equal to aggregate of duties of excise leviable under section 3 of
the Central Excise Act, 1944 or under any other law for the time being in
force, on like goods produced or manufactured in India other than in an EOU,
subject to the condition that they have not used duty paid imported inputs in
excess of 3% of the FOB value of exports of the preceding year and they
have achieved positive NFE. Once this option is exercised, the unit will not
 be allowed to import any duty free inputs for any purpose.

6.9 Following supplies effected from EOU / EHTP / STP/ BTP units to DTA will
Other be counted for fulfillment of positive NFE:
Supplie
s in
DTA

(a) Supplies effected in DTA to holders of Advance Authorisation / Advance

Authorisation for annual requirement / DFIA under duty exemption /
remission scheme / EPCG scheme. However, printing sector EOUs (or any
other sector that may be notified in HBP v 1), can not supply goods, where
basic customs duty and CVD is nil or exempted otherwise, to holders of
Advance Authorisation / Advance Authorization
for annual requirement.
(b) Supplies effected in DTA against foreign exchange remittance received
from overseas.
(c) Supplies to other EOU / EHTP / STP / BTP / SEZ units, provided that
such goods are permissible for procurement in terms of para 6.2 of FTP.
(d) Supplies made to bonded warehouses set up under FTP and / or under
section 6 of Customs Act and free trade and warehousing zones, where
payment is received in foreign exchange.
(e) Supplies of goods and services to such organizations which are entitled
for duty free import of such items in terms of general exemption notification
issued by MoF, as may be provided in HBP v 1.
(f) Supplies of Information Technology Agreement (ITA -1) items and
notified zero duty telecom / electronics items.
(g) Supplies of items like tags, labels, printed bags, stickers, belts, buttons or
hangers to DTA unit for export.
(h) Supply of LPG produced in an EOU refinery to Public Sector domestic
oil companies for being supplied to household domestic consumers at
subsidized prices under the Public Distribution System (PDS) Kerosene and
Domestic LPG Subsidy Scheme, 2002 , as notified by the Ministry of
Petroleum and Natural Gas vide notification No. E-20029/18/2001-PP dated
28.01 2003 (hereinafter referred to as PDS Scheme) subject to the following
conditions:-
(a) Only supply of such quantity of LPG would be eligible for which
Ministry of Petroleum and Natural Gas declines permission for export and
requires the LPG to be cleared in DTA; and
(b) The Ministry of Finance by a notification has permitted duty free imports
of LPG for supply under the aforesaid PDS Scheme.

6.10 An EOU / EHTP / STP / BTP unit may export goods manufactured / software
Export developed by it through another exporter or any other EOU / EHTP / STP /
throug SEZ unit subject to conditions mentioned in para 6. of HBP v1 .
h
others

6.11 (a) Supplies from DTA to EOU / EHTP / STP / BTP units will be regarded as
Entitle “deemed exports” and DTA supplier shall be eligible for relevant entitlements
ment under chapter 8 of FTP, besides discharge of export obligation, if any, on the
for supplier. Notwithstanding the above, EOU / EHTP / STP / BTP units shall, on
supplie production of a suitable disclaimer from DTA supplier, be eligible for
s from obtaining entitlements specified in chapter 8 of FTP. For claiming deemed
the export duty drawback, they shall get brand rates fixed by DC wherever All
DTA Industry Rates of Drawback are not available.

(b) Suppliers of precious and semi-precious stones, synthetic stones and

processed pearls from DTA to EOU shall be eligible for grant of
Replenishment Authorisations at rates and for items mentioned in HBP v 1.
(c) In addition, EOU / EHTP / STP / BTP units shall be entitled to following:-
(i) Reimbursement of Central Sales Tax (CST) on goods manufactured in
India.
Simple interest @ 6% per annum will be payable on delay in refund of CST,
if the case is not settled within 0 days of receipt of complete application (as
in paragraph 9. 10.1 of HBP v1 ).
(ii) Exemption from payment of Central Excise Duty on goods procured from
DTA on goods manufactured in India.
(iii) Reimbursement of duty paid on fuel procured from domestic oil
companies / Depots of domestic oil Public Sector Undertakings as per
drawback rate notified by DGFT from time to time. Reimbursement of
additional duty of excise levied on fuel under the Finance Acts
would also be admissible.
(iv) CENVAT Credit on service tax paid.

6.12 Other entitlements of EOU / EHTP / STP / BTP units are as under:
Other
Entitle
ments

(a) Exemption from Income Tax as per Section 10A and 10B of Income Tax
Act.
(b) Exemption from industrial licensing for manufacture of items reserved for
SSI sector.

(c) Export proceeds will be realized within 12 months.

(d) Units will be allowed to retain 100% of its export earning in the EEFC
account.
(e) Unit will not be required to furnish bank guarantee at the time of import
 or going for job work in DTA, where unit has
(i) a turnover of Rs. 5 crores or above;
(ii) unit is in existence for at least three years; and
(iii) The unit:

(a) has achieved positive NFE / export obligation wherever applicable;

(b) has not been issued a show cause notice or a confirmed demand, during
the preceding 3 years, on grounds other than procedural violations, under the
penal provision of the Customs Act, the Central Excise Act, the Foreign
Trade (Development & Regulation) Act, the Foreign Exchange Management
Act, the Finance Act, 1994 covering Service Tax or any allied Acts or the
rules made thereunder, on account of fraud / collusion / willful mis-statement
/ suppression of facts or contravention of any of the provisions thereof;
(f) 100% FDI investment permitted through automatic route similar to SEZ
units.
(g) Units shall pay duty on the goods produced or manufactured and cleared
into DTA on monthly basis in the manner prescribed in the Central Excise
Rules.

6.13 (a) Transfer of manufactured goods from one EOU / EHTP / STP / BTP unit
Inter to another EOU / EHTP / STP / BTP unit is allowed with prior intimation to
Unit concerned DC and Customs authorities, following procedure of in-bond
Transfe movement of goods. Transfer of manufactured goods shall also be allowed
r from EOU / EHTP / STP / BTP unit to a SEZ developer or unit following
procedure prescribed in SEZ Rules, 2006.
(b) Capital goods may be transferred or given on loan to other EOU / EHTP /
STP / BTP / SEZ units, with prior intimation to concerned DC and Customs
authorities.
(c) Goods supplied by one unit of EOU / EHTP / STP / BTP to another unit
shall be treated as imported goods for second unit for payment of duty, on
DTA sale by second unit.

6.14 (a) (i) EOU / EHTP / STP / BTP units, including gems and jewellery units,
Sub- may on the basis of annual permission from Customs authorities, subcontract
Contrac production processes to DTA through job work which may also involve
ting change of form or nature of goods, through job work by units in DTA.

(ii) These units may subcontract upto 50% of overall production of previous
year in value terms in DTA with permission of Customs authorities.
(b) (i) EOU may, with annual permission from Customs authorities,
undertake job work for export, on behalf of DTA exporter, provided that
goods are exported directly from EOU and export document shall jointly be
in name of DTA / EOU. For such exports, DTA units will
be entitled for refund of duty paid on inputs by way of brand rate of duty
drawback.
(ii) Duty free import of goods for execution of export order placed on EOU
 by foreign supplier on jobwork basis, would be allowed subject to condition
that no DTA clearance shall be allowed.
(iii) Subcontracting of both production and production processes may also be
undertaken without any limit through other EOU / EHTP / STP / BTP / SEZ
units, on the basis of records maintained in unit.
(iv) EOU / EHTP / STP / BTP units may subcontract part of production
process abroad and send intermediate products abroad as mentioned in LoP.
No permission would be required when goods are sought to be exported from
subcontractor premises abroad. When goods are sought to be brought back,
prior intimation to concerned DC and Customs authorities shall be given.
(c) Scrap / waste / remnants generated through job work may either be
cleared from job worker’s premises on payment of applicable duty on
transaction value or destroyed in presence of Customs / Central Excise
authorities or returned to unit. Destruction shall not apply to gold, silver,
platinum, diamond, precious and semi precious stones.
(d) Sub-contracting / exchange by gems and jewellery EOUs through other
EOUs or SEZ units or units in DTA, shall be as per procedure indicated in
HBPv1 .

6.15 (a) In case an EOU / EHTP / STP / BTP unit is unable to utilize goods and
Sale of services, imported or procured from DTA, it may be
Unutiliz
ed
Materia
l

(i) transferred to another EOU / EHTP / STP / BTP/ SEZ unit; or

(ii) disposed off in DTA with approval of Customs
authorities on payment of applicable duties and submission of import
authorization; or
(b) Capital goods and spares that have become obsolete / surplus, may either
be exported, transferred to another EOU / EHTP / STP / BTP / SEZ unit or
disposed off in DTA on payment of applicable duties. Benefit of depreciation,
as applicable, will be available in case of disposal in DTA only when the unit
has achieved positive NFE taking into consideration the depreciation
allowed. No duty shall be payable in case capital goods, raw material,
consumables, spares, goods manufactured, processed or packaged, and
scrap / waste / remnants / rejects are destroyed within unit after intimation to
Customs authorities or destroyed outside unit with permission of Customs
authorities. Destruction as stated above shall not apply to gold, silver,
platinum, diamond, precious and semi precious stones.
(c) In case of textile sector, disposal of left over material / fabrics upto 2% of
cif value or quantity of import, whichever is lower, on payment of duty on
transaction value, may be allowed, subject to certification of Central Excise /
Customs officers that these are leftover items.
(d) Disposal of used packing material will be allowed on payment of duty on
 transaction value.

6.16 EOU / EHTP / STP / BTP units may be set up with approval of BoA to carry
Recond out reconditioning, repair, remaking, testing, calibration, quality
itioning improvement, upgradation of technology and re-engineering activities for
/ Repair export in foreign currency. Provisions of paragraphs 6.8 , 6.9, 6.10, 6.13 ,
and Re- 6.14 of FTP and para 6.28 of HBP v1 shall not, however, apply to such
engine activities.
ering

6.17 (a) General provisions of FTP relating to export / import of replacement /

Replac repair of goods would also apply equally to EOU / EHTP / STP / BTP units.
ement / Cases not covered by these provisions shall be considered on
Repair
of
import
ed /
Indigen
ous
Goods

merits by DC.
(b) Goods sold in DTA and not accepted for any reasons, may be brought
back for repair / replacement, under intimation to concerned jurisdictional
Customs / Central Excise authorities.
(c) Goods or parts thereof, on being imported / indigenously procured and
found defective or otherwise unfit for use or which have been damaged or
become defective subsequently, may be returned and replacement obtained or
destroyed. In the event of replacement, goods may be brought back from
foreign suppliers or their authorized agents in India or indigenous suppliers.
The unit can take free of cost replacement (duty paid) from the authorized
agents in India of foreign suppliers, provided the defective part is re-exported
or destroyed. However, destruction shall not apply to precious and semi
precious stones and precious metals.

6.18 (a) With approval of DC, an EOU may opt out of scheme. Such exit shall be
Exit subject to payment of Excise and Customs duties and industrial policy in
from force.
EOU
Schem
e

(b) If unit has not achieved obligations, it shall also be liable to penalty at the
time of exit.
(c) In the event of a gems and jewellery unit ceasing its operation, gold and
 other precious metals, alloys, gems and other materials available for
manufacture of jewellery, shall be handed over to an agency nominated by
DoC, at price to be determined by that agency.
(d) An EOU / EHTP / STP / BTP unit may also be permitted by DC to exit
from the scheme at any time on payment of duty on capital goods under the
prevailing EPCG Scheme for DTA Units. This will be subject to fulfillment
of positive NFE criteria under EOU scheme, eligibility criteria under EPCG
scheme and standard conditions indicated in HBP v .
(e) Unit proposing to exit out of EOU scheme shall intimate DC and Customs
and Central Excise
authorities in writing. Unit shall assess duty liability arising out of debonding
and submit details of such assessment to Customs and Central Excise
authorities. Customs and Central Excise authorities shall confirm duty
liabilities on priority basis, subject to the condition that the unit has achieved
positive NFE, taking into consideration the depreciation allowed. After
payment of duty and clearance of all dues, unit shall obtain “No Dues
Certificate” from Customs and Central Excise authorities. On the basis of
“No Dues Certificate” so issued by the Customs and Central Excise
authorities, unit shall apply to DC for final debonding.
In case there is no proceeding pending under FT(D&R) Act, DC shall issue
final debonding order within a period of 7 working days. Between “No Dues
Certificate” issued by Customs and Central Excise authorities and final
debonding order by DC, unit shall not be entitled to claim any exemption for
procurement of capital goods or inputs. However, unit can claim Advance
Authorisation / DEPB / Duty Drawback. Since the duty calculations and dues
are disputed and take a long time, a BG / Bond / Installment processes
backed by BG shall be provided for expediting the exit process.
(f) In cases where a unit is initially established as DTA unit with machines
procured from abroad after payment of applicable import duty, or from
domestic market after payment of excise duty, and unit is subsequently
converted to EOU, in such cases removal of such capital goods to DTA after
debonding would be without payment of duty. Similarly, in cases where a
DTA unit imported capital goods under EPCG Scheme and after completely
fulfilling export obligation gets converted into EOU, unit would not be
charged customs duty on capital goods at the time of removal of such capital
goods in DTA when debonding.
(g) An EOU / EHTP / STP / BTP unit may also be permitted by DC to exit
under Advance Authorization as a one time option. This will be subject to
fulfillment of positive NFE criteria.

6.19 (a) Existing DTA units may also apply for conversion into an EOU / EHTP /
Conver STP / BTP unit, and Income Tax benefits under Section 10A and 10B will be
sion available for plant, machinery and equipment already installed.

(b) Existing EHTP / STP units may also apply for conversion / merger to
EOU and vice-versa. In such cases, units will remain in bond and avail
 exemptions in duties and taxes as applicable.

6.20
Monito Performance of EOU / EHTP / STP / BTP units shall be monitored by Units
ring of Approval Committee as per guidelines in HBP v1 .
NFE

6.21 EOU / EHTP / STP / BTP are permitted to:

Export
throug
h
Exhibiti
ons /
Export
Promot
ion
Tours /
showro
oms
abroad
/ Duty
Free
Shops

(i) Export goods for holding / participating in exhibitions abroad with

permission of DC.
(ii) Personal carriage of gold / silver / platinum jewellery, precious, semi-
precious stones, beads and articles.
(iii) Export goods for display / sale in permitted shops set up abroad.
(iv) Display / sell in permitted shops set up abroad, or in showrooms of their
distributors / agents.
(v) Set up showrooms / retail outlets at International Airports.

6.22 Import / export through personal carriage of gems and jewellery items may
Person be undertaken as per Customs procedure. However, export proceeds shall be
al realized through normal banking channel. Import / export through personal
Carriag carriage by units, other than gems and jewellery units, shall be allowed
e of provided goods are not in commercial quantity. An authorized person of
Import Gems & Jewellery EOU may also import gold in primary form, upto 10 Kgs
/ in a financial year through personal carriage, as per guidelines prescribed by
Export RBI and DoR.
Parcels
includi
ng
throug
h
Foreign
bound
Passen
gers

6.23 Goods including free samples, may be exported / imported by airfreight or

Export through foreign post office or through courier, as per Customs procedure.
/
Import
by Post
/
Courier

6.24
Admini Details of administration of EOUs and powers of DC are given in HBP v1 .
stratio
n of
EOUs/
Powers
of DC

6.25 Subject to a unit being declared sick by appropriate authority, proposals for
Revival revival of the unit or its take over may be considered by BoA .
of Sick
Units.

6.26 In case of units under EHTP / STP schemes, necessary approval / permission
Approv under relevant paragraphs of this Chapter shall be granted by officer
al of designated by Ministry of Communication and Information Technology,
EHTP / Department of Information Technology, instead of DC, and by Inter-
STP Ministerial Standing Committee (IMSC) instead of BoA.

6.27 Bio-Technology Parks (BTP) would be notified by DGFT on

Approv recommendations of Department of Biotechnology. In case of units in BTP,
al of necessary approval / permission under relevant provisions of this chapter will
BTP be granted by designated officer of Department of Biotechnology.
 Export Production Assistance and Export Marketing Assistance

To provide effective support to the exporters, particularly new and small exporters and effective
system consisting of several export promotion measures have been instituted.

Export Marketing

Although the intensity and coverage of these measures have undergone change with the
liberalization of policy, there does exist a number of schemes for export production as well as
marketing. The various export assistance or promotion measures are undertaken through a
number of organisations existing both at the Centre and State level.

Export assistance includes facilities for efficient export production and marketing.

1) Export Production Assistance:

Export production assistance is available right from the stage of acquiring land and building,
procuring plant machinery, equipments, components, spares, technical guidance/training, to
giving finance and credit in time at comparatively cheaper rate. Export production assistance
includes following facilities provided to enhance the assistance:

i) Infrastructural Facilities:
Besides providing land and building to exporting units, Special Economic Zones, Technology
Parks, Export Promotion Parks, Industrial Estates, etc., have been set-up in various parts of the
country.

There are 8 Special Economic Zones at Kandla (Gujarat), Santa Cruz (Maharashtra), Falta (West
Bengal), Noida (U.P.), Cochin (Kerala), Chennai (Tamil Nadu), Surat (Gujarat), and
Visakhapatnam (Andhra Pradesh) which arc functional at present (Sept ’03). Whereas all the
Zones, except Seepz, are multi-product Zones, the Seepz at Santa Cruz in Bombay is exclusively
for Electronics and Gem and Jewellery items. Private Bonded Warehouses for Exports are also
allowed to be set-up in DTA (Domestic Tariff Area) for procurement of goods from domestic
manufacturers without payment of duty. Such applies are considered as physical export, provided
payment for the same is made in foreign exchange.

Government has also recently permitted development of Special Economic Zones by

Private/State or Joint Sector. Export Promotion Industrial Parks Scheme has been introduced
with a view to involving State Government in providing infrastructural facilities for export-
oriented production.

Technology Park for Electronic Hardware and Software development for export have also been
set-up, mostly on the lines of SEZs providing same facilities for production and export.

ii) Manufacture-in-Bond:

Manufacture-in-bond facility is available both in the excise as well as customer regulations.

Whereas rule 13 of the Central Excise Rules relates to Excise Regulations, Section 65 of the
Customs Act provides facilities of manufacture in bond.

iii) Machinery and Equipments:

Besides making available machinery and equipments on lease, there is a special facility to import
CG (Capital Goods) at 5% duty under EPCG, i.e., Export Promotion Capital Goods Scheme.

iv) Production Inputs:

Raw-materials, components, spares, consumables, etc., whether indigenous or imported, can be

obtained for export production under various schemes. Imported inputs for use in export products
are importable duty free under the Duty Exemption/Remission Scheme, popularly known as
Advance Licensing Scheme, Duty Free Replenishment Certificate (DFRC), and Duty
Entitlement Passbook (DEPB) Scheme, although there are several other schemes covered there
under. Still another scheme known as duty free import entitlement scheme has been introduced
for status holder exporters including service providers.

Goods (including CG) are also allowed to be imported without an import license or Customs
Clearance Permit (CCP) for jobbing, repairing, servicing, etc., against bond, surety/security.
Such goods are to be re-exported with specified minimum value addition. There are special for
export of gold/silver jewellery and articles as also for specified sectors like pharmaceuticals,
readymade garments other than leather garments, electronics/writing instruments, and
engineering goods.

v) Technology Upgradation:

Besides allowing duty free import of technical samples/prototypes and trade samples upto
specified value, simplified approval mechanism has been introduced for foreign technology
agreements. Foreign exchange is also released liberally for foreign visits and testing abroad of
indigenous raw materials. National Laboratories, National Test House, etc., provide technical
guidance for export production. The Pilot Test House offer special technical support facilities to
the industry. SISIs and Regional Testing Laboratories also provide technical support.

vi) Packing Credit:

It is also known as pre-shipment credit. It is available even if there is no export other in hand. It
consists of cash credits and overdraft facilities, and given at a concessional rate of interest.

Pre-shipment credit is also available in foreign currency under the PCFC Scheme. It is applicable
to both the domestic and imported inputs for export goods.

vii) Back-to-Back Letter of Credit (L/C)

An inland Back-to-Back Letter of Credit Scheme has been instituted which makes sub- suppliers
of raw-materials, samples, etc., to exporter, eligible for export packing credit on the basis of
export order or L/C in the name of the export order holder.
2) Export Marketing Assistance:

A number of steps have been taken to assist the exporters in their marketing effort. These include
conducting, sponsoring or otherwise assisting market surveys and research; collection, storage,
and dissemination of marketing information, organising and facilitating participation in
international trade fairs and exhibitions; credit and insurance facilities; release of foreign
exchange for export marketing activities; assistance in export procedures; quality control and
pre-shipment inspection; identifying markets and products with export potential; helping buyer-
seller interaction, etc.

Some of the schemes and facilities which assist export marketing are as follows:

i) Marketing Development Fund (MDF):

This came into being in 1963-64, the nomenclature was changed to Marketing Development
Assistance (MDA) in 1975. The fund is administered for providing grants/assistance to Export
Promotion Councils, other export bodies, also for special schemes approved for specific export
promotion efforts. The fund is on the decline, and sufficient amount had not been set apart in
recent years.

Assistance under the MDA is available for market and commodity researchers; trade delegations
and study teams; participation in trade fairs and exhibitions; establishment of offices and
branches in foreign countries; and grants-in-aid to EPCs and other approved organisations for
export promotion. Interest on Export Credit by commercial banks and approved cooperative
banks enjoy a subsidy of 1.5% out of MDA. Most of the MDA expenditure in the past was
absorbed by the CCS. The CCS helped the exporters to increase the price competitiveness of the
Indian products in foreign markets.

ii) Cash Compensatory Support:

Cash assistance for exports, which was later termed as Cash Compensatory Support (CCS.) was
introduced in 1966. The stated objectives were to enable exporters to meet competition in foreign
markets, to develop marketing competence and to neutralize disadvantages inherent in the
existing stage of development of the economy. The main basis for the CCS Scheme was to
provide compensation for unrebated indirect taxes (on both final and intermediate stages of
production) which enter into export production but are not refundable through Duty Drawback
System.

iii) Foreign Exchange:

It is released for undertaking approved market development activities such as participation in

trade fairs and exhibitions, foreign travel for export promotion, advertisement abroad, market
research, procurement of samples, and technical information from abroad.

iv) Trade Fairs and Exhibitions:

As trade fairs and exhibitions are effective media of promoting products, facilities are provided
for enabling and encouraging participating of Indian exporters/manufacturers in such events.
Foreign exchange is released for such purpose, the cost of participation is subsidized and the
ITPO plays an Important role in organising and facilities participation in trade fairs/exhibitions.
Besides the ITPO, some other promotional agencies also organise trade fairs. For example, the
MPEDA organises sea foods trade fair in India, in every 2nd year, which attracts a number of
foreign buyers and others connected with the sea foods industry.

v) Export Risk Insurance:

As international business in fraught with different types of risks, measures have been taken to
provide insurance covers against such risks. The Export Credit Guarantee Corporation (ECGC)
has policies covering different political and commercial risks associated with export marketing,
certain types of risks associated with overseas investments and risks arising-out of exchange rate
fluctuations. Further, ECGC extends the export credit risks cover the commercial banks. Marine
insurance is provided by the general Insurance Corporation and its subsidiaries.

vi) Finance:
The export-import bank and commercial banks and certain other financial institutions like
specified cooperative banks provide pre-shipment and post-shipment finance to exports. Some of
these institutions also provide suppliers’ credit including line of credit, to promote Indian
exports. Export credits generally carry concessional interest rates.

vii) Quality Control and Pre-Shipment inspection:

A number of steps have been taken by the Government to improve the quality of exports and to
ensure that only goods of appropriate quality are exported from the country. The Export (Quality
Control and Inspection) Act empowers the Government to make necessary regulations in this
respect.

viii) Institutional Assistance:

Export marketing is assisted in different ways by a number of organisations like the ITPO,
EPCS, Commodity Boards, Export Development Authorities like the MPEDA and APEDA, IIFT,
Indian Mission abroad, etc.

ix) Dollar Denominated Credit for Exporters:

There has been a persistent complaint, rightly so, from the exporters that the interest rates in
India are higher. This consequently is reflected in the cost of the products, which makes firms
non-competitive in quite a few products. Even though government agrees in principle, it is not
able to bring-down the interest rates in India, due to the fact that such a move would increase the
money supply, and result in inflation. Export Finance: Meaning and Export Credit in India
Meaning of Export Finance:

In order to be competitive in markets, exporters are often expected to offer attractive credit terms
to their overseas buyers. Extending such credits to foreign buyers put considerable strain on the
liquidity of the exporting firms. Therefore, it is extremely important to make adequate trade
finances available to the exporters from external sources at competitive terms during the post-
shipment stage.

Unless competitive trade finance is available to the exporters, they often resort to quote lower
prices to compensate their inability to offer competitive credit terms. As a part of export
promotion strategy, national governments around the world offer export credit, often at
concessional rates to facilitate exports.

Export Credit in India:

In India, export credit is available both in Indian rupees and foreign currency as discussed here.

Export credit in Indian rupees:

The Reserve Bank of India (RBI) prescribes a ceiling rate for the rupee export credit linked to
Benchmark Prime Lending Rates (BPLRs) of individual banks available to their domestic
borrowers. However, the banks have the freedom to decide the actual rates to be charged with
specified ceilings.

Generally, the interest rates do not exceed BPLR minus 2.5 percentage points per annum for the
specified categories of exports as under:

1. Pre-shipment credit (from the date of advance)

(a) Up to 180 days

(b) Against incentives receivable from the government covered by Export Credit and Guarantee
Corporation (ECGC) guarantee up to 90 days

2. Post-shipment credit (from the date of advance)

(a) On demand bills for transit period, as specified by FEDAI (Foreign Exchange Dealers
Association of India)

(b) Usance bills (for total period comprising usance period of export bills, transit period as
specified by FEDAI, and grace period, wherever applicable)

(i) Up to 90 days

(ii) Up to 365 days for exporters under the Gold Card Scheme

(c) Against incentives receivable from government (covered by ECGC Guarantee) up to 90 days

(d) Against undrawn balances (up to 90 days)

(e) Against retention money (for supplies portion only) payable within one year from the date of
shipment (up to 90 days)
Pre-shipment credit:

Pre-shipment credit means any loan or advance granted by a bank to an exporter for financing
the purchase, processing, manufacturing, or packing of goods prior to shipment. It is also known
as packing credit. As the ultimate payment is made by the importer, his/her creditworthiness is
important to the bank.

Banks often insist upon the L/C or a confirmed order before granting export credit. The banks
reduce the risk of non-payment by the importer by collateral or supporting guarantee.

Period of advance:

The period of packing credit given by the bank varies on a case to case basis, depending upon the
exporter’s requirement for procurement, processing, or manufacturing and shipping of goods.
Primarily, individual banks decide the period of packing credit for exports.

However, the RBI provides refinance to the banks only for a period not exceeding 180 days. If
pre-shipment advances are not adjusted by submission of export documents within a period of
360 days from the date of advance, the advance cease to qualify for concessive rate of interest ab
initio. Banks may release the packing credit in one lump sum or in stages, depending upon the
requirement of the export order or L/C.

Liquidation of packing credit:

The pre-shipment credit granted to an exporter is liquidated out of the proceeds of the bills drawn
for the exported commodities on its purchases, discount, etc., thereby converting pre-shipment
credit to post-shipment credit.
The packing credit may also be repaid or prepaid out of the balances in Exchange Earners’
Foreign Currency (EEFC) Account. Moreover, banks are free to decide the rate of interest from
the date of advance.

Running account facility:

Generally, pre-shipment credit is provided to exporters on lodgement of L/Cs or firm export

orders. It has also been observed that in some cases the availability of raw material is seasonal
whereas the time taken for manufacture and shipment of goods is more than the delivery
schedule as per the export contracts in others.

Besides, often the exporters have to procure raw material, manufacture the export products, and
keep the same ready for shipment, in anticipation of the receipt of firm export orders or IVCs
from overseas buyers. In view of these difficulties faced by the exporters in availing the pre-
shipment credit in such cases, banks are authorized to extend pre-shipment credit ‘running
account facility’.

Such running account facility is extended in respect of any commodity without insisting upon
prior lodgement of a firm export order or an IVC depending upon the bank’s judgment.

Post-shipment credit:

Post-shipment credit means any loan or advance granted or any other credit provided by a bank
to an exporter of goods from the date of extending credit after shipment of goods to the date of
realization of export proceeds. It includes any loan or advance granted to an exporter, in
consideration of any duty drawback allowed by the government from time to time.

Thus, the post-shipment advance can mainly take the form of:

i. Export bills purchased, discounted, or negotiated

ii. Advances against bills for collection

iii. Advances against duty drawback receivable from government

Post-shipment finance can be categorized as:

i. Advances against undrawn balances on export bills

ii. Advances against retention money

iii. Exports on consignment basis

iv. Exports of goods for exhibition and sale

v. Post-shipment credit on deferred payment terms

Post-shipment credit is to be liquidated by the proceeds of export bills received from abroad in
respect of goods exported.

Period of post-shipment credit:

In the case of demand bills, the period of advance is the normal transit period (NTP) as specified
by the FEDAI. Normal transit period means the average period normally involved from the date
of negotiation, purchase, or discount till the receipt of bill proceeds in the Nostro account of the
bank concerned, as prescribed by the FEDAI from time to time.

It is not to be confused with the time taken for the arrival of goods at overseas destination.

The demand bill is not paid before the expiry of the normal transit period whereas the usance bill
is paid after the due date and is also termed as an overdue bill. In case of usance bills, credit can
be granted for a maximum duration of 365 days from date of shipment inclusive of NTP and
grace period, if any.

However, banks closely monitor the need for extending post-shipment credit up to the
permissible period of 365 days and they also influence the exporters to realize the export
proceeds within a shorter period.

Export credit in foreign currency:

In order to make credit available to the exporters at internationally competitive rates, banks
(authorized dealers) also extend credit in foreign currency’ (Exhibit 15.3) at LIBOR (London
Interbank Offered Rates), EURO LIBOR (London Interbank Offered Rates dominated in Euro),
or EURIBOR (Euro Interbank Offered Rates).

LIBOR is a daily reference rate based on the interest rates at which banks offer to lend unsecured
funds to other banks in the London wholesale (or ‘interbank’) money market. The rate paid by
one bank to another for a deposit is known as London Interbank Bid Rate (LIBID).

Export credit in foreign currency

Pre-shipment credit in foreign currency:

To enable the exporters to have operational flexibility, banks extend pre-shipment credit in
foreign currency (PCFC) in any one of the convertible currencies, such as US dollars, pound
sterling, Japanese yen, euro, etc., in respect to an export order invoiced in another convertible
currency. For instance, an exporter can avail of PCFC in US dollars against an export order
invoiced in euro. However, the risk and cost of cross-currency transaction are that of the
exporter. Under this scheme, the exporters have the following options to avail export finance:

i. To avail of pre-shipment credit in rupees and then the post-shipment credit either in rupees or
discounting/re-discounting of export bills under Export Bills Abroad (EBR) scheme

ii. To avail of pre-shipment credit in foreign currency and discount/rediscounting of the export
bills in foreign currency under EBR scheme

iii. To avail of pre-shipment credit in rupees and then convert at the discretion of the bank

Banks are also permitted to extend PCFC for exports to Asian Currency Union (ACU) countries.
The applicable benefit to the exporters accrues only after the realization of the export bills or
when the resultant export bills are rediscounted on ‘without recourse’ basis. The lending rate to
the exporter should not exceed 1.0 percent over LIBOR, EURO LIBOR, or EURIBOR,
excluding withholding tax.

Post-shipment credit in foreign currency:

The exporters also have options to avail post-shipment export credit either in foreign currency or
domestic currency. However, the post-shipment credit has also to be in foreign currency if the
pre-shipment credit has already been availed in foreign currency so as to liquidate the pre-
shipment credit.

Normally, the scheme covers bills with usance period up to 180 days from the date of shipment.
However, RBI approval needs to be obtained for longer periods. Similar to the PCFC scheme,
post-shipment credit can also be obtained in any convertible currency. However, most Indian
banks provide credit in US dollars.

Under the rediscounting of Export Bills Abroad Scheme (EBR), banks are allowed to rediscount
export bills abroad at rates linked to international interest rates at post-shipment stage.

Banks may also arrange a Banker’s Acceptance Factor (BAF) for rediscounting the export bills
without any margin and duly covered by collateralized documents. Banks may also have their
own BAF limits fixed with an overseas bank, a rediscounting agency or factoring agency on
‘without recourse’ basis.

Exporters also have the option to arrange for themselves a line of credit on their own with an
overseas bank or any other agency, including a factoring agency for rediscounting their export
bills directly.

Export Finance to Overseas Importers:

Generally, commercial banks extend exports credit, often at concessional rates, to finance export
transactions to the exporters as a part of their export promotion measures. In addition, credit is
also available to overseas buyers so as to facilitate import of goods from India, mainly under two
forms:

Buyer’s credit:

It is a credit extended by a bank in exporter’s country to an overseas buyer, enabling the buyer to
pay for machinery and equipment that s/he may be importing for a specific project.

Line of credit:

It is a credit extended by a bank in exporting country (for example, India) to an overseas bank,
institution, or government for the purpose of facilitating the import of a variety of listed goods
from the exporting country (India) into the overseas country. A number of importers in the
foreign country may be importing the goods under one line of credit.

Commercial banks carry out the task of export financing under the guidelines of the central bank
(for example Reserve Bank of India). The export financing regulations are modified from time to
time. Most countries have an apex bank coordinating the country’s efforts of financing
international trade.

For instance, the Export-Import Bank of India is the principal financial institution coordinating
the working of institutions engaged in export import finance in India, whereas the US too has the
Export-Import Bank of the US for carrying out similar activities.
Credit Risk Insurance in Export Finance:

Easy and hassle-free access to export finance significantly enhances firms’ abilities to compete in
international markets. Prior to agreeing to finance a firm’s export transactions, banks need to be
assured of the ability of the borrowers to repay the loan. Generally, banks insist on pleading
adequate collateral before sanctioning export finance.

In an international transaction, as a firm has to deal with an overseas buyer operating in a

different legal and political environments, the risks increases manifolds on the smooth conduct of
the commercial transaction. The major commercial risks in international trade transactions are as
follows:

i. Non-payment by the importer at the end of the credit period or after some specified period after
the expiry of credit term

ii. Non-acceptance of goods by the importer despite of its compliance with the export contract

iii. Insolvency of the purchaser

It has been observed that commercial risks have resulted in more losses in international
transactions compared to political risks. Credit risk insurance provides protection to exporters
who sell their goods on credit terms. It covers both political and commercial risks. Credit
insurance also facilitates exporters in getting export finances from commercial banks.

The benefits provided by credit insurance to the exporters are:

i. Exporters can offer competitive payment terms to their buyers.

ii. It protects the exporters against the risk and financial costs of non-payment.

iii. Exporters also get covered against further losses from fluctuations in foreign exchange rates
after the non-payment.

iv. It provides exporters a freer access to working capital.

v. The insurance cover reduces exporters’ need for tangible security while negotiating credit with
their banks.
vi. Credit insurance provides exporters a second check on their buyers.

vii. Exporters get access to and benefit from the credit insurer’s knowledge of potential payment
risks in overseas markets and their commercial intelligence, including changes in their import
regulations.

Insurance policies and guarantees extended by export credit agencies such as ECGC can be used
as collateral for trade financing. Once the perceived risks of default are reduced, banks are often
willing to grant favorable terms of credit to the exporters. Thus, in addition to funding for
exports, export finances also limit the firm’s risk of international transactions. Most countries
have central-level export credit agencies (ECAs) to cover credit risks offering a number of
schemes to suit varied needs of the exporters for export credit and guarantee.

Examples include Export Credit and Guarantee Corporation (ECGC) in India, Export Credit
Guarantee Department (ECGD) in the UK, Export Risk Insurance Agency (ERIA) in
Switzerland, and Export Finance and Insurance Corporation (EFIC) in Australia.

Export Credit Guarantee Corporation:

Export Credit Guarantee Corporation (ECGC) of India, established in 1957 by the Government
of India is the principal organization for promoting exports by covering the risks of exporting on
credit. It functions under the administrative control of the Ministry of Commerce. ECGC is the
world’s fifth largest credit insurer in terms of coverage of national exports.

The ECGC mainly:

i. Provides a range of credit risk insurance covers to exporters against loss in export of goods and
services

ii. Offers guarantees to banks and financial institutions to enable exporters obtain better facilities
from them

iii. Provides overseas investment insurance to Indian companies investing in joint ventures
abroad in the form of equity or loan

WTO Compatibility of Trade Finance and Insurance Schemes:

The multilateral trade regime under the WTO sets the framework for the types of subsidies that
can be provided by a country for export promotion. The agreement on Subsidies and
Countervailing Measures (SCM) prohibits national governments from providing subsidies that
are contingent upon export performance or upon the use of domestic goods over the imported
ones. Among the prohibited subsidies in the first category are direct subsidies to a firm or
industry contingent on export performance, such as:

i. Currency retention schemes giving a bonus to the exporters

ii. Internal transport and freight charges on export shipments on more favorable terms than for
domestic shipment

iii. The provision of subsidized inputs for the production of goods for exports

iv. Remission or exemptions from direct taxes and charges for export products

The SCM agreement also constrains government intervention in the area of export financing and
insurance. In particular, it prohibits the provision of export credits at conditions more favorable
than those set in international capital markets and the extension of export credit insurance and
guarantee programmes at subsidized premium rates.

Evolution of international monetary systems, prevailing exchange rate arrangements, and

exchange rate quotations used in foreign exchange markets help international managers in
making foreign exchange decisions.

Alternative modes of payment used in international trade have been elucidated so as to make
readers appreciate, evaluate, and select the most suitable option, depending upon the speed,
security, cost, market competition, and risks associated. Access to adequate finance is crucial to
successful completion of an export transaction. Various instruments used for financing
international trade have also been examined.