CHAPTER 4

EXPORT ON DEFERRED PAYMENT TERMS AND PROJECT EXPORTS AND

VENTURES ABROAD:

4,0 Planned

economic

thirty

years,

with

infrastructure,
technology,
position

development stretching over

period

of

special emphasis on the development

of

basic

and heavy industries

has brought India to a stage,

to

developing
promoting

share

her

countries

technical

and

industrial

where she is in a

know-how

in the third world.

a new world,

JOINT

with

With

other
view

to

India is prepared to share even its

scarce resources, of course, in a selective manner.

Indian entrepreneurs, who have developed a wide technological
and

organisational

base,

are

anxious

to

look,

beyond

frontiers, to share their knowledge, experience and resources

with

other

undertake

countries.
full

abroad- from
including

They have acquired a

responsibility

for

setting

capability
up

to

projects

the stage of conception to their commissioningconceptual

studies,

techno-economic

feasibilities and detailed project

reports,

market surveys,

marine surveys, development of master plans,

project

export of services,

selection,

selection
including

of

site selection,

contractors,

planning

such as

and

project
cost

engineering and computer services,

and

materials- including

construction,
management

supervision
of

maintenance, etc.

the

project specifications,

project

monitoring

control

services

system,

procurement of employment

inspection,
and

services-

plan

start

specialised

transportation,
up,

overall

devices

in

;161 s

Projects export,thus,

provides a very vital

co operation between different countries.

increased,
for

in

recent years,

infrastrutural

link of economic

Its importance has

to meet the increasing demands

development

in

the

oil

exporting

countries.

Indian entrepreneurs and undertakings have already

ventured,

in a big way,

on

turn-key

power

basis.

plants,

in the area of project construction

These projects include setting

telephone

systems,

treatment plants, housing-colonies,

railway

lines,

industrial

up

of

water

establishments

like sugar, cement and textile plants, etc.

Joint venture is a form of association,
and

industrial

more

collaboration,

countries,

'share

including

commercial

in which parties from two

responsibilities in

the

matter

or
of

operation of a company for providing risk capital , good will ,

know-how and management,

in an agreed manner.

The sustained

progress in the field of industry, science and technology has

led

to

India attaining capabilities,

industrial

activity.

This,

in

in a large sphere

turn,

has

establishment of Indian joint ventures abroad,

resulted
in a

of
in

variety

of industries such as metallurgy, engineering, transport and

communications, chemicals, drugs and pharmaceuticals, textile
mills,

construction

of

hotels etc..

ventures based on Indian technology,

India's financial
or

are

in

More than

350

joint

and in many cases, with

participation, have since been established,

the process of being set up,

in as many

as

36

:1 6 2
countries,
up

in

A majority of these joint ventures have been

the

third

established

world* countries^

some

have

set

even

in industrialised countries like the

been

UK,

USA.,

West Germany, the Netherlands, Austria, etc.

Thus,

the

Indian

Joint ventures abroad

have

successfully

transferred technology and know-how to the local people.

The

Engineering

national
the

Export Promotion Council has

strategy for achieving the ambitious targets

export

of

engineering goods from the

Rs.870 crores in 1984-85

major

suggested

level

which

designing,

may

contracts

include-supply

total

account

for

of

commissioning

turn-key

services
and

such

as

supervision,

consultancy services and construction

Such exports,

India's

about

to Rs 1862 crores in 1989-90 ). The

erection,

engineering contracts,

(-from

of

plank of this strategy will be the export of

projects,

which constituted 12 percent

exports of engineering goods

about 38 percent.

in

1950s,

This share will have

in
now

to

be

increased further to 50 percent, by the turn of the decade.

4.1 PROJECT EXPORTS CATESORISEDs

When

goods

and

services are

made

available

to

overseas

buyers, on terms of credit, which exceed the period laid down

by

the Reserve Bank of India,

proceeds

(i.e.

3/6

months),

for the realisation of export

it

is

known

as

export

on

deferred payment terms". Such contracts normally provide for

* The First World of developed market economies, the Second

World of developed socialist economies, and the Third world
of developing countries.

s163:

payment
as

of a certain portion of the relative invoice

advance

or down payment,

instalments,
export

on

the balance being

spread over a period of time.

deferred

payment terms is

exporters

in

respect

including

capital and producer goods,

payable

in

The facility

of

available

of the export

of

value,

to

Indian

engineering

goods

consumer durables and

miscellaneous engineering goods.

For

the purpose of export assistance,

project

exports

are

categoriesed as unders
(i) TURN-KEY PROJECTS,
rendering
erection

i.e. those projects which involve the

of services like design,

and

commissioning

of

civil

plant

construct ion,

or

supervision

thereof, alongwith the supply of equipment.

(ii) CIVIL CONSTRUCTION CONTRACTS, i.e.which involve erection,
civil

works

and

commissioning,

apart from

supply

of

equipment.
(iii) SERVICE CONTRACTS:
(A) Engineering Service Contracts: Those involving supply
of services alone such as design, erection, commissioning
or supervision of erection and commissioning.
<B5 Consultancy Services Contracts:
include the preparation of

Those projects which

feasibility studies,

project

reports, preparation of designs and advice to the project

authority

on

specifications for

plant

and

equipment,

preparation of tender documents, evaluation of the tender

and purchase of plant and equipment.

s164 s
4.2 FINANCING OF PROJECT EXPORTSs
The

-financing o-f project exports is a crucial element due to

the

time

lag

between

the

actual

movement

o-f

goods

or

execution of a project and the receipt of funds. Revenues are

earned after a considerable gestation period.
(i)

Such

Credits

contracts may be concluded by

or

Buyer's credits.

In a

way

of

supplier"s

supplier's
credit,

the

exporter extends credit directly to the foreign buyer and has

to arrange for finance from a commercial bank/Exim Bank.

In

a Buyer's Credit, the Exim Bank extends credit to the foreign

buyer

<

banks),

either singly or in participation

with

commercial

and the exporter receives payment from the financial

institution, on a non-recourse basis, after fulfilment of the

commercial terms of the contract.
(ii) Commercial banks,
assist
the

project

Working

regarding

the

in participation with Exim Bank, also

exports by sponsoring their applications

Group,
terms

and
of

providing
playment,

necessary
exchange

to

counselling
fluctuation,

country risk,etc.
(iii)

In

projects

order to enable the contractors to

abroad,

commercial

banks/Exim Bank

undertake
provide

the
bid-

bonds/guarantees , performance guarantees and advance payment

guarantees, on behalf of their exporter-customers.
(iv)

Banks also establish letters of credit

for

import

of

raw materials/third country supplies.

(v)

Banks also provide packing credit, negotiate credit bills

against L/Cs,

extend term export/deferred credit facilities,

:165 s

finance
loans

against

incent ives/cash

subsidies,

taken/tobe taken by the buyers

guarantee

at the

instance

the
of

exporter, etc
(vi)

It will

exporters

to

banks/Exim
various

be in the long term interest of Indian

remain in constant touch with

Bank,

so

that

developments

international

they are kept

that

are

the

commercial

posted

taking

project

with

the

on

the

place

scene.

4.3 RATE OF INTEREST ON DEFERRED C R E D I T :

The rate of interest that can be charged by banks on deferred
credit
than

for a period beyond one year is still

that

on other export credit granted

shipment stage or post-shipment stage.

(which

is

whether

Such

at present B.65 percent p.a.)

more concessive
at

pre

concessive rate

is allowed only

post-shipment credit covering export of capital

and

on

producer

goods, on deferred payment terms.

4.4 EXCHANGE CONTROL REGULATIONS:

Exports

of engineering goods on deferred payment

execution

of

turn-key /civil

require prior approval

terms

construction contracts

and

abroad

at two stages:

(a) at pre-bid stage, and

(b) when the proposal

Authorised

fructifies into a contract.

dealers are permitted to grant pre-bid

clearance

to submit tenders for supply of engineering goods on deferred

payment

terms and

execution of turn-key/civil

construction

.4

projects abroad,
does

not

provided the bid value, in any single case,

exceed

Rs.5

crores and

the

proposal

satisfied

certain stipulated requirements - Exim Bank is also authorised

to

grant

pre-bid

clearance for

engineering

goods

undertaking

execution

contracts
exceed

on

abroad,

Rs.20

in

deferred
of

All

for

export

payment

terms

or

turn-key/civil

cases

crores.

proposals

proposals where

the

exceeds Rs.20 crores will have to be submitted for

fructifies

submit

to

bankers,
DFX-3) ,

into

members

of

a contract,
the

Working

a common application,

does
bid

not
value

clearance

institutions.

When a proposal cleared by the Working Group,

stage,

for

construction

where the bid value

to the Working Group of financial

of

the

at the pre-bid

exporters

Group,

should

through

their

in the prescribed form (Form

giving full details of the contract for formal post

award

clearance.

award

clearance

The Exim Bank will grant a

for

the

contract,

on

package

behalf

post

of

the

institutional members of the Group, as well as the exporter's

bankers.
based

The

facilities,

facilities
member
where

approvals for various fund-based and

will

as

authorised

as requisite

therefore,

institutions
the

well

Exchange

be issued by

and the exporter's

non-fund

the

bankers.

Control

individual
In

pre-bid clearance has been granted either

dealer

or by the Exim Bank,under the

cases
by

an

scheme

of

delegation, the post-award clearance will be granted by them.

However,
conformity

the

actual

contract

should be signed

with the terms and conditions

granting the pre-bid package clearance.

in

stipulated,

strict
while

s167 s

4.5 SOME IMPORTANT

EXPORTS

(i)

An

PROVISIONS

illustrative

commercial

list

export

exporters

to

RELATING

TO

of goods

in respect

credit

may

prospective

be

DEFERRED

offered

buyers abroad

PAYMENT

of

which

by

is

Indian

given

in

Appendix V. This list is not exhaustive, and, is subject

to revision, from time to time.
Cii)

The

advance

documents

payment

and

payment

also known as "down

against

payment")

shipping
should

atleast

15 percent of the contract value and cover

foreign

exchange

by way of agency

commission,

be
the

import

replenishment and freight payable by the exporters, when

goods are shipped by foreign vessels.
(iii) Deferred

instalments should be received in half-yearly

instalments and no grace period should be allowed.

(iv)

The interest
reasonabie

on

deferred

credit

should be

at

rate and cover the prevailing cost of

a
post

shipment credit to exporter in India.

<v>

The

period

of credit that may be offered

for

capital

producer goods should be within the following limit:

Contract Val ue

Max.credit period including

grace period
Capital/
producer
goods

(a) Upto Rs.10 Lakhs

3
<b> Over Rs.10 lakhs, but
not exceeding Rs.50 lakhs 5
<c) Over Rs.50 lakhs ,but
not exceeding Rs.i crore
8
(d) Over R s .1 crore
11

Turn-key
projects

years

4 years

years

6 years

years
years

9 years
12 years

160 !

(vi) For consumer and other enginering goods,

value,
the

credit

irrespective of

terms should not exceed 12 months.

Where

value of any individual export order is Rs.10

lakhs

or more, credit may be extended upto two years.

(vii) If

payment

of commission is

involved,

it

should

not

exceed 5 percent of FOB value of the contract.

(viii) If

any

third country import is involved,

the

overseas

buyers should make cash payment or open letter of

to finance such imports?
arrange

to

credit

otherwise, the exporters should

obtain matching deferred payment terms

from

the supplier in the third country.

4.6 JOINT VENTURES ABROAD:
(1) Indian applicant desiring to set up a joint venture
abroad

has to submit the application,

form,

to

Section
Where

the Ministry of Commerce for

27 of Foreign Exchange

the

applicants

simultaneous
Affairs,
for

clearance

in the prescribed
approval,

Regulations

are

public

of

the

Act,

limited

under
1973.

companies,

Department

of

under Section 372(4) of the Companies

inter-corporate investments,

unit

Company
Act,1976

is also required to be

obtained.
(2) Indian

participation

export

of

required
each

indigenous

should normally be in the form

plant

and

for the joint ventures.

case,

participation

capitalisation

of

service

in

machinery/equipment,
However,

the

fees,

of

form

on merits of
of

royalties

know-how,
and

other

169

payments,

raising of foreign currency loans abroad,

grant

loans to the joint venture units may

of

considered

Normally,

cash

remittance

and

also

be

not

be

will

allowed for meeting equity contribution, but the hard and

deserving

cases

will

be considered on

merits

and

on

consideration of the fields of col 1aboration .

<3) Necessary powers have been delegated to the Reserve
to

Bank

consider requests for release of exchange for meeting

ore!iminary expenses in connection with setting up

venture

company,

personnel

visits

of technical

and

joint

managerial

, e t c ..

<4) The share certificate should be received by the exporters

within

three

remittance

months

and

from

produced

the date
to

the

of

shipment/ cash

Reserve

Bank

for

perusal . The exporters should also obtain the approval of

the

Reserve

Bank

to hold the

shares

of

the

foreign

company, under section 19 of the FERA, 1973.

Dividend on the shares, technical know how ,
fee,
due

royalty,

engineering

management fee and other lumpsum payments

to them should be repatriated to India promptly

and

regularly,
4-7 CONSTRUCTION CONTRACTSs
<1) Construction
erection,
supply

contracts

civil

of

implications

works

equipment,

undertaken
and
etc.,

abroad

commissioning,
and

have

involved
apart
variety

from
of

such as foreign exchange/credit facilities,

170;

issue

of

bid-bonds

guarantee,

and

etc.,ECSC

construction

perf ormance/advance

cover

and

payment

export/import

equipment/materials,

etc.

The

of

above-

mentioned

various aspects of the

overseas

construction

contracts

will require approval of several

institutions

in

India,

which

would be covered when the proposal

is

cleared by the Exim Bank, on behalf of the Working Group.

The clearance granted by the Exim Bank will be a
clearance

on

behalf

of

the RBI,

to

ensure

that

the

ECSC

package

and

the

Bank <s> .
(2) In

order

necessary
perform
will

contractors,

have

the

competence and capabilities to tender for

and

overseas construction jobs,

who

the

Working

consider proposals only from contractors,

on the Approved List of Ministry of Commerce,

of India.
should
the

Intending tenderers,

Group

who are
Government

who are not on the list,

first approach the Screening Committee set up

Ministry

of

Commerce,

for

getting

their

by

names

included in the Approved List.

(3) Reserve

Bank

of

India

and

grant

operate

permission,
foreign

on

application,

to

accounts,

the country in which the contract is being

in

open

will

executed or in any other foreign country,

of

convenience

advance/progress

for

the

payments,

purpose

currency

on the grounds
of

due under the

receiving
contract

meeting expenditure connected with the contract,

and

subject

S 171 3

to

submission

of quarter! y statements of

account.

The

balance in the overseas accounts, after completion of the

project, will have to be transferred to India.
(4) The

contractors

performance

should

normally

take

equipment

for

of construction contracts from India .Reserve

Bank will not ordinarily permit purchase of

indigenously

available

Reserve Bank

will

equipment by contractors abroad.

permit,

India,

on

on application,

condition

imported into India,

if let out/sold,

that

export of equipment

the equipment

will

from

be

re

on conclusion of the contract,

and

full hire charges/sale proceeds will be

promptly repatriated to India.

(5) Contractors may sometimes find it necessary to appoint an
overseas

agent,

securing

market information,

liaisoning
execution

against

with
of

Ordinarily,

foreign
the

also.

approval

apply

citing

the

and

to

secure

prompt

for

bid

and

smooth

payment

at the initial stage itself,

will

include the

For actual-remittance of

should

commission,

following up the

employer

contract

of

the agency arrangement will be considered by

the Working Group,

package

payment

to Reserve Bank,

and the

agency

arrangement

commission,

contractors

through

their

package approval obtained from

the

bankers,
Working

Group.
<&) Construction firms/companies needing foreign exchange for
undertaking visits to foreign countries,
negotiating

construction

for securing or

jobs will be granted

exchange

s172 s
facilities

liberally,

on the basis o-f the standing

past performance of the applicants.

New entrants to

field

in support of

may

be required to produce,

and
the
their

applications, a letterof recommendation from the Builders

Association

of

India/Overseas Construction

Council

of

India, Bombay.
<7)

Firms/Companies undertaking

should

construction

contracts

apply to Reserve Bank for permission,

office

is

required

country,for

to

be

opened

in

the

the purpose of co-ordinating or

execution of the contract,

if a

furnishing full

site

foreign

supervising
particulars.

Permission will be granted, in approved cases, subject to

the

condition

allowed
will

for

that

no remittance from

India

opening/maintaining of such

will

office,

be closed immediately after the completion

be

which
of

the

contract.
4.8 CONSULTANCY/TECHNICAL SERVICES:
Individuals/firms/companies

can

freely undertake

contracts

for rendering consultancy/technical services abroad,

obtaining
provided

prior
the

approval

full

repatriated to India,
cases

where

amount

from Reserve
of

fees

Bank/Working

and

guarantee

is

respect

treated

of

the project as a whole,

the

to

be

employer,

contract

on par with a turn-key/civi1 construction

are

However, in

required

furnished by the Indian contractor to the overseas

in

Group

remuneration

through banking channels.

performance

without

is

contract,

s173 s

which

needs pre-bid clearance from an authorised

the Working Group,

service

dealer

or

as the case may be. Sometimes, high value

contracts are undertaken by Indian

contractors,

in

the -field of erect ion/instal 1at ion of plant and machinery, as

well as civil construct ion. Such service contracts are almost
as

complex in character as contracts for turn-key and

construction

projects

and

also involve

heavy

civil

direct

and

indirect foreign exchange liabilities, by way of execution of

performance/advance

payment guarantees,

counter

guarantees

for 1oans/overdrafts from banks abroad, and even considerable

expenditure

in

foreign

exchange,

tools/equipment of third country

on

purchase

of

origin.

Thus, in addition to a variety of exchange control approvals,

such

service

contracts

also

need

the

usual

financial

facilities from Exim Bank/ECGC and the Indian banking system.

Accordingly,
fund-based

all

service contracts involving grant

of

and/or non-fund based facilities from the

any

Indian

banking system - including Exim Bank, would need clearance of

the Working Group, at the pre-bid stage.
Working

Group

may

also

permit,

on

selective

basis,

consultancy/technical services contracts, on deferred payment

basis, provided the proposals satisfy specified norms.
4.9 MERCHANTING TRADE:

(I)

Merchanting

trade involves purchase of goods

country for sale to another country.

from

one

To enable the merchants

to strike the deals quickly, authorised dealers are permitted

to

approve

merchanting trade

transactions,

without

prior

174

approval of Reserve Bank, provided -following terms/conditions

are satis-fied,

and subject to post-facto reports to

Reserve

Bank :
(a) The

goods

will

importing

be

al1owed to

country

and

be

payment

imported
therefor

into

the

wil 1

be

forthcoming -from buyer.

<b) Firm

contracts

o-f

purchase/sal e

with

the

overseas

sel1er/buyer have been concluded by the merchant.

(c) The

payment terms agreed to with either parties

do

not

involve -foreign exchange outgo -from India, except for the

normal

transit period (not exceeding one month,

in

any

case).
(d) If

a letter of credit is to be opened or the payment

overseas

supplier

is

to be made on B/P or

D/A

basis,

either an advance remittance for the full value has

received
credit

to

been

from overseas buyer or an irrevocable letter of

has

been opened for the full value

by

overseas

buyer, in favour of the merchant.

(e) The transaction should be completed,
period

(not exceeding six months,

within a reasonable
in

any

case),

from

opening of the letter of credit.

(f) The transaction, when completed , should leave reasonable
profit margin, to the merchant, in foreign exchange.
(g) The

goods will either be directly shipped to the country

of the buyer or only transhipped at an Indian port, under

Customs' supervision and will not be imported into India.
(h) If

the goods are rejected by the buyer,they will be

exported to the country of

the supplier,

at

re

his cost,

without any remittance from India, and the entire cost of

the goods paid to the suppliers will be recovered in full.

s175:
(i) Any

claims

settled

arising out of the

transaction

would

by getting inward remittance from the

be

country

o-f the sel 1e r .

(II) The

merchants

prescribed

will

form

have to make an

(Form IF),

application,

in triplicate,

in

the

together'

with

necessary supporting documents like sale contracts, etc, to

the

authorised

dealer for opening a letter of

granting approval
(Ill) Very

credit

or

in principle for remittances.

often the merchants will

be exposed to exchange-risks

on either side of the transactions, because of the time-lag

involved

in

completion

of the different

transaction.

Authorised

dealers are permitted

forward

cover

exchange risk

facilities

to

the

stages

of

to

merchants,

the

extend

to

cover

in the transactions.

4.10 WORKING GROUP MECHANISMS

A working group mechanism was created under the aegis of the
IBBI

in 1975,

with a view to clearing expeditiously,

under

one roof, export bids for capital

goods exports and turn-key

contracts

terms,

on

construction
ordinating
simplify

deferred
jobs.

agency.

Now
In

payment
the

as

also

Exim Bank acts

performing its role,it

matters for exporters,

as

overseas
the

co

attends
and

to

offer "single window" or package clearance to such bids,

on

itself,

to reduce delays,

to

behalf

of

the Reserve Bank of India,

the

Credit

and Guarantee Corporation and the Commercial

Export
Banks.

176:

The contractors and their bankers will be associated in

discussions of the Group.

the

In cases where the performance of

the contracts will be through associate/sub-contractors, the

latter

and

their

discussions.

bankers will also be associated

The E>:im Bank has been delegated with

by the Government,
and

for

credit

covered

by

powers,

five

years.

delegated powers,

and

Proposals

not

projects

for

all

consultancy and technology services regardless of value,

they

require

sector,

the

to clear the proposals upto Rs.20 crores

periods upto

the

in

any financial assistance from Indian

are placed,

by the Exim Bank,

before the

if

banking
Working

Group .

4.11 GOVERNMENT'S POLICYs

In the matter of fulfilling the ambitious target, Government
policy

is

Government
project

crucial

has

Broadly

speaking,

exhibited a very positive attitude

exporters.

contractors

variable.

to

With

view to

buy essential

machinery,

which

Government

has

are

helping

construction

not available in

followed a liberal

the

import

the

towards
project

equipment

and

country,

the

policy.

Indian

firms

are allowed to purchase construction equipments

third

countries

and

such

equipments are

the

allowed

from
to

be

reimported into India, under certain conditions.

Besides,
also

for

with

a view to encouraging projects

compensating

the extra risk

exports

undertaken

by

and
the

5 177

project exporters,
per

cent

earnings

as

the Sovernment provides an additional

cash assistance on the net

-foreign

-from technical and other sources.

inter-ministerial
Development

committee

Committee"

- has

known as
also

set

Ministry a-f Commerce, to promote project exports.

000

exchange

high-powered

"Overseas

been

10

up

Project
in

the