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    Project Exports - FEMA Regulations

    Introduction:

     

    Export of engineering goods on deferred payment terms and execution of turnkey projects and civil construction contracts abroad are collectively referred to as ‘Project Exports’.

     

    Project export contracts are generally of high value and exporters undertaking them are required to offer competitive credit terms to be able to secure orders from foreign buyers in the face of stiff international competition. Indian exporters offering deferred payment terms to overseas buyers in respect of export of goods and those who have been awarded turnkey, civil construction contracts by overseas parties have to secure prior approval at post award stage from Authorised Dealer (“AD”) / Exim Bank for credit terms to be offered, third country imports etc. Regulations relating to Project Exports and Service Exports are laid down in the Project Exports Manual (“PEM”) issued by RBI.

     

    RBI vide its A.P. (DIR Series) Circular No. 39, dated 14th January, 2016 has done away with the limits on the delegated powers of AD and has updated the PEM.

     

    Exporters who have secured orders for undertaking supply contracts on deferred payment terms, those who have secured turnkey/civil construction contracts abroad or for export of services in the area of management, technical consultancy, etc. where execution of the contracts involves grant of fund-based and/or non-fund-based facilities from the Indian banking system or where deferred payment terms are to be offered require approval from Authorised Dealer / Exim Bank.

     

    .Meaning of “Deferred Payment exports”

     

    Contracts for export of goods against payment to be received partly or fully beyond the period statutorily prescribed for realisation of export proceeds (at present 9 months) are treated as deferred payment exports. Ordinarily, contracts providing for deferred payment terms will be allowed only for export of engineering goods (capital goods and consumer durables).

     

    Meaning of “Turn Key Project”

     

    Projects involving rendering of services like designing, civil construction and erection and commissioning of plant / factory along with supply of machinery, equipment and materials

     

    Meaning of “Civil Construction Contracts”

     

    Execution of civil construction contracts abroad involving mainly erection and civil construction work and supply of construction materials and equipment going into the civil works. It may also include turnkey engineering contracts, process and engineering consultancy services and Project construction items (excluding steel & Cement) along with civil construction contracts

    Export of Services

     

    Contracts for export of consultancy, technical and other services by Indian companies/firms generally fall in the following categories:

     

    • Preparation of project/feasibility reports, drawings, designs, etc.
    • Supply of technical know-how/engineering services in different fields.

     

    • Operation, maintenance and supervision of manufacturing plants, buildings and structures, etc.

     

    • Management contracts for commercial concerns.

     

    Period of Deferred Credit

     

    The periods for which credit may be offered for export of goods, consumer durables, turnkey contracts and civil construction contracts will depend on merits of individual case and may be determined by the exporter and his banker in mutual consultation on the basis of commercial judgement.

     

    However, consumer durables and miscellaneous engineering goods listed in the PEM should ordinarily be exported on cash terms. Four major factors viz. anticipated life of the goods to be exported, extent of foreign competition, nature of the foreign market and the contract value constitute the criteria for determining the overall terms of credit.

     

    Approval from AD / EXIM Bank

     

    Each project export contract or Service Export Contract involving Deferred Payments need to be approved either by AD/ EXIM Bank in India. Such approval need to be obtained on post award stage but before actual execution of the project.

     

    After entering into Engineering or Civil contract, the exporter should submit to his AD bankers an application in form DPX-1 (in respect of turnkey and deferred payment supply contracts) or in form PEX-1 (in respect of civil construction contracts), as the case may be, in six copies along with six copies of the contract. Now ADs are permitted to approve the contract without any limit. However, in case the participation of EXIM Bank or ECGC is involved for credit facilities or insurance etc., then the AD need to furnish the details of contracts etc., to them accordingly

     

    In case of export of Service Contracts, requiring furnishing a performance guarantee to the overseas employer in respect of the project as a whole especially for contracts in the field of erection/installation of plant and machinery as well as services like electrical or air-conditioning installations associated with civil construction work. The details of contract need to be submitted to AD in Form TCS-1 in six copies along with six copies of contract for necessary post-award clearance

    Follow-up of Turnkey / Construction Contracts/ Service Contracts

     

    Exporters and all their Indian sub-contractors executing turnkey contracts or civil construction contracts or Service Contracts of specified nature, abroad should furnish progress reports in form DPX 2 on a half-yearly basis (June and December) to concerned approving authority. The final Report in Form DPX 2 should clearly indicate the fact of completion of the project and full compliance with the requirements relating to completed projects

     

    Foreign Currency Accounts/Site Offices Abroad/ Agency Commission/Financial Requirements

     

    Project/ Service exporters may avail of facilities such as opening of foreign currency accounts, temporary site offices, payment of agency commission and availing of temporary overseas borrowings subject to the conditions as may be stipulated Exim Bank/AD. The project exporters may also be permitted to open temporary liaison offices overseas in connection with the execution of the contract abroad by the authority approving the relative project export proposal subject to the conditions as may be specified by the said authority.

     

    Third Country Purchases

     

    While granting package approval for turnkey/civil construction contracts involving purchase of machinery/equipment/materials from third country sources, the AD or Exim Bank will indicate the extent upto which such purchases may be made.

     

    Ordinarily, the third country purchases should be paid for separately by the overseas project authority or by the Indian exporter out of advance/down payment received from the project authority. Where the payments for the contract are receivable on deferred payment basis, the exporter should, as far as possible, try to secure matching deferred payment terms in respect of third country purchases required for the project to avoid a net outlay of funds in foreign exchange.

     

    Export of Construction Equipment and other equipment from India

     

    Exporters executing turnkey/ construction/ service contracts abroad should normally take from India construction and other equipment required for performance of the contracts. AD may permit, on application, export of equipment from India on the condition that it will be re-imported into India on completion of the contract and if let out /sold, the full hire charges/sale proceeds will be promptly repatriated to India.

     

    Exporters will also be permitted to purchase construction etc. equipment abroad, where necessary.

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