Aditya Thomas & Jayati Bhatia

The very definition of “export” under the Foreign Exchange Management (Export of Goods & Services) Regulations 2015 (“Current Regulations”) has historically excluded services, limiting its scope to goods and software. This restrictive approach has led to conflicting interpretations, particularly when juxtaposed with the broader definition under the Foreign Exchange Management Act 1999 (“FEMA”), which includes services. Such inconsistencies reflect the complexity and rigidity of the existing export regulations, creating obstacles for seamless trade.

To address these challenges and streamline foreign trade, the Reserve Bank of India (RBI) has introduced the Foreign Exchange Management (Export and Import of Goods and Services) Regulations, 2024 (“Draft Regulations”) and Directions to Authorised Dealers on Export and Import of Goods and Services (“Draft Directions”). These aim to simplify the regulatory framework, consolidating provisions and explicitly including services alongside goods and software. By replacing the Current Regulations, the draft regulations signify a progressive step toward reducing bureaucratic hurdles and aligning export policies with India’s evolving trade landscape.

This article delves into these draft regulations, highlighting their features, implications, and potential to reshape India’s export governance, along with certain aspects that if refined, could make these regulations a robust framework to support India’s growing export sector.

Declaration of Exports

Under the current regulations, the reporting requirements for exports are only limited to export of goods and software through Form EDF and Form SOFTEX respectively. Export of services is not required to be reported through any specific form. The Draft Regulations consolidate the reporting requirement for all export categories through one common Master Form EDF. This may simplify the process and enhance the accuracy in keeping track of services exported out of India.

However, with no minimum threshold, all services, regardless of export value, must be reported within 21 days of invoicing, and in case of continuous invoices that are raised under the same transaction or agreement, the reporting obligations could become tedious and repetitive. A major drawback of the Draft Regulations is the omission of certain categories of exports such as samples, prototypes, gifts, defective goods, etc., that are exempted from declaration obligations under the Current Regulations. The mandatory declaration of such exports may only increase the burden of the exporters to meet the compliance requirements.

In an attempt to reduce administrative hurdles and unwarranted delays, Authorised Dealer (“AD”) banks have now been conferred with the power to accept the export documents, post the period of declaration after being satisfied with the genuineness of the cause of such delay shown by the exporter. To ensure prompt reporting, AD Banks are now mandated to make entries of exports and imports in the Export Data Processing and Monitoring System (“EDPMS”) and Import Data Processing and Monitoring System (“IDPMS”) on the same day of receipt of export documents.

Realisation of Exports

Under the Draft Regulations, the period for the realisation of export proceeds remains nine months from the date of shipment for goods and date of invoice for services. However, the specific provision allowing a fifteen-month realisation period for goods exported to overseas warehouses has been done away with, effectively mandating all exports to be realised within nine months.

The AD banks, in accordance with their internal policies, are now authorized to grant extensions for the realisation of the full export value beyond the nine months if the exporter is unable to recover the export proceeds due to circumstances beyond their control or in cases where an export advance has been received. A significant change brought about by the Draft Regulations is the removal of the maximum limit of 25% of the invoice value for reductions in the export value. AD banks are now allowed to permit a full reduction in the export value to accommodate genuine requests from exporters. However, the Board of the AD bank must ratify all requests for reductions of more than 25% of the value of exports subsequently. This change aims to streamline the export process by offering exporters greater leeway in addressing bonafide concerns while maintaining accountability through the AD bank’s board approval for significant reductions.

Advance Payment

The draft regulations introduce notable changes to the treatment of advance payments for exports and imports, aiming to streamline procedures while maintaining regulatory oversight. For exports, exporters may receive advance payments as per their export contracts, with any applicable interest capped by the all-in-cost ceiling of trade credit as outlined in the Foreign Exchange Management (Borrowing and Lending) Regulations, 2018. It also emphasizes that, in case the exporter fails to fulfill the export obligation within the contracted period, the advance must be refunded unless an extension is granted by the AD. For imports, the regulations mandate that importers repatriate unutilized advance payments and surrender them to the AD if the import does not materialize within the contracted period or the extended period granted by the AD. This dual approach introduces a broader accountability structure for both importers and exporters, while non-compliance is subject to the Borrowing and Lending Regulations.

Earlier regulations rigidly required advance payments to result in shipment within one year barring cases where the export agreement explicitly allowed shipments beyond this period. The earlier framework also capped interest at 100 basis points above LIBOR or other applicable benchmarks and required exporters to route shipment documents through the AD bank that received the advance payment. For exports, any failure to ship goods within the specified period required prior RBI approval for refunding unutilized advances or interest payments.

The draft regulations appear more flexible, offering exporters the ability to comply with extensions granted by AD banks rather than directly seeking RBI approval. Similarly, the introduction of repatriation obligations for importers ensures that funds are not misused in non-import scenarios.

However, this flexibility introduces potential operational risks, such as varied interpretations by AD banks and inconsistent compliance requirements. These changes reflect an intent to promote ease of doing business while maintaining safeguards, yet the practical implementation and regulatory oversight will be key to addressing these concerns effectively.

Project Exports

The draft regulations aim to simplify project exports by introducing a streamlined process for arrangements such as deferred payment terms, turnkey projects, and civil construction contracts. Under the new framework, exporters need to obtain prior approval from their Authorised Dealer (AD) bank before entering into these export arrangements. The AD bank will review proposals based on the rules and directions under FEMA, centralizing the approval process.

In the earlier regulations, the process was more detailed. Exporters had to get prior approval from specific authorities, such as the Export-Import (EXIM) Bank of India or an AD bank, depending on the project. Additionally, the older framework allowed AD banks or Indian exporting companies to issue guarantees (e.g., for performance obligations or credit facilities) before or after receiving award approvals. These guarantees were explicitly recognized and supported project execution abroad.

However, the draft regulations do not address the issuance of guarantees, leaving uncertainty about how such obligations will be managed in future projects. Moreover, they omit provisions for inter-project fund transfers, which were allowed under the earlier framework. These omissions could create challenges for exporters managing multiple projects or fulfilling contract obligations.

While the draft regulations aim to simplify processes and reduce delays by consolidating approvals under AD banks, their success in handling complex project exports will depend on how these gaps such as the lack of clarity on guarantees and fund transfers are addressed in the final notification.

Caution Listing

Under the Current Regulations, exporters are caution listed by the RBI in accordance with the recommendations made by the AD banks as per its track record with the AD Banks and investigative agencies. However, Under the Draft Directions, this authority has now been transferred to AD Banks, which are required to add exporters to the caution list if the outstanding amount in the EDPMS remains unrealised for more than two years (including any granted extensions) from the due date of realisation. Such exporters may carry out export activities only against a full advance payment or irrevocable letter of credit. Furthermore, prior to being caution listed, the exporter must be informed and be given an opportunity of being heard. Upon realisation of all outstanding export proceeds, the AD Banks must remove the exporter from the caution list and update the same in the EDPMS.

Delegating caution-listing powers to AD banks improves accessibility, eliminating the need for exporters to approach the RBI for grievance redressal. However, in practicality, failure by the banking channels in promptly updating the EDPMS/IDMPS systems has resulted in undue hardships faced by the exporters despite submitting the relevant documents in a timely manner. The liability faced by the exporters must cease upon handing over the export documents to the AD banks. As the AD Banks are now empowered to caution list exporters, it would be of significant value if the exporters were provided with direct access to their records in the EDPMS system to effectively track the status of their transactions. The Draft Regulations do not provide for a mechanism to approach the RBI against the decisions of the AD Banks with respect to caution listing. It is crucial that such provision is included owing to the fact that AD Banks are now governed by their internal policies that can vary from bank to bank.

Internal Policy

As seen above, the RBI has delegated significant decision-making authority to AD banks, enabling them to manage export transactions more efficiently. This marks a departure from the Current Regulations, where the RBI exercised greater control and issued a comprehensive master direction for both exports and imports. Under the Draft Directions, the AD banks are empowered to oversee operational duties and resolve issues faced by exporters under their internal policies, which are guided by the broad framework provided by the RBI. By consolidating the regulatory framework into a single document and entrusting operational oversight to AD banks, the RBI seeks to reduce delays and bureaucratic hurdles, aligning the regulatory approach with the practical realities of trade.

However, this also brings in the responsibility on the AD banks who will now be tasked with formulating comprehensive, well-documented, and non-discriminatory internal policies approved by their Board of Directors, ensuring that transaction approval processes are transparent and structured. This includes dividing responsibilities clearly across various levels of authority within the bank for handling export transactions.

Further ambiguities that need clarification

Software

It is pertinent to note that the Draft Regulations have omitted the definition of ‘Software’. While the Current Regulations classify software as a distinct category of exports/imports, the Draft Regulations do not make any such distinctions. Although the Master Form EDF provides for software as a separate category, it is important to align the Regulations and the Form to prevent further confusion.

Third Party Payments

The Draft Directions make no reference to third party payments in comparison to the current Master Direction, which lays down a detailed procedure for third party payments. As the Master Form EDF provides for third party payments, it is essential that the RBI includes provisions relating to imports/exports financed by third parties.

Set-offs

The current Master Direction permitted the AD Banks to allow set-off of outstanding export receivables against outstanding import payables within overseas group or associate companies, enabling efficient management of cash flows and monetary transactions among transnational organizations. However, the Draft Directions permit set-off of transactions only with the same overseas buyer or supplier. This impermissibility of set-off within group companies may result in more rigidity, taking away from the main goal of promotion of ease of doing business.

Conclusion

The Draft Regulations and Draft Directions represent a significant step toward promoting ease of doing business, particularly for small-scale exporters and importers, by decentralizing decision-making and conferring wide-ranging powers upon Authorised Dealer (AD) Banks. By consolidating and simplifying the regulatory framework, these measures aim to streamline and rationalize India’s export and import policies, reduce bureaucratic hurdles, and align trade governance with practical market realities.

However, to fully achieve their intended purpose, the ambiguities and concerns highlighted above must be addressed. Issues such as the omission of certain export categories, inconsistencies regarding software and third-party payments, and the restrictions on set-offs within group companies could hinder the seamless execution of trade processes. Further, the wide discretion granted to AD Banks, while intended to increase efficiency, risks leading to varying interpretations and operational inconsistencies, as each bank tailors its board-approved policies to suit its customer base. This could create additional confusion and complications, particularly for exporters and importers navigating multiple banking channels.

To ensure the Draft Regulations become a robust and effective framework, these ambiguities must be clarified, and safeguards introduced to promote uniformity and transparency across all AD Banks. By addressing these concerns, the RBI can strike a balance between regulatory oversight and operational flexibility, creating a cohesive system that fosters growth and simplifies trade for all stakeholders.

Aditya Thomas and Jayati Bhatia are final-year B.B.A. LL.B. (Hons.) students at Symbiosis Law School, Pune.