Mechanism for recovering payments from offending foreign importers
Since 1991, the opening of Indian markets during liberalization, privatization and globalization in India has resulted in a boost in international/foreign trade. However, as they say, every coin has a reverse. With increasing globalization and international trade, the risk of non-payment/non-fulfilment of exports to foreign importers has increased accordingly.
If analyzed through the lens of the Foreign Exchange Management Act 1999 (‘FEMA‘), the obligation to guarantee payment for their respective exports rests primarily with the exporter. The law requires exporters to remain cautious, as even simple inaction on the part of the exporter towards making export payments beyond the specified period is considered a violation under FEMA. Therefore, mitigating export payment risk has become a challenge for exporters.
On that note, first of allthis article focuses on the obligations of exporters in the event of non-fulfilment of export payments by offending foreign importers, and the legal and other remedies available to exporters when export transactions are not guaranteed in any way. Secondly, Since non-realization/repatriation of export proceeds is considered an offense, the options provided by FEMA laws in this regard.
Obligation of exporters:
Exporter obligations arise from the Foreign Exchange Management (Export of Goods and Services) Regulations 2015 (‘FEMA Regulations‘) and the main instructions on the export of goods and services (‘Export Executive management‘) issued thereunder.
According to FEMA Regulation 9, the exporter is required to realize the export value within the stipulated time period, i.e. nine months from the date of export, or fifteen months in the case where the goods are exported to a warehouse established outside India. Otherwise, exporters are deemed to be in violation of FEMA laws. The law expects exporters to take all reasonable steps to effect payment to foreign importers in a timely manner.
Legal remedies in the event of non-realization of export earnings:
A. Civil Remedies-
Any non-payment for goods supplied by the exporter to an overseas importer is an offense under Section 55 of the Sales of Goods Act 1930 and such exporters are entitled to civil remedies available under Indian laws. Exporters may bring an action for recovery by bringing a pecuniary action in the competent civil court under the provisions of the Code of Civil Procedure 1908 (‘CPC‘). Commencement of civil proceedings against an importer/foreign entity in the territory of India in accordance with Indian laws is permitted under the CPC unless it is a “Foreign State” for which a special prior authorization must be obtained by the central government in accordance with article 86. of the CPC.
B. Recourse through an Alternative Dispute Resolution Mechanism –
The alternative dispute resolution mechanism includes arbitration (domestic and international commercial arbitration), mediation and/or conciliation, through which the parties can settle their disputes, including disputes related to foreign trade. However, the requirement such as an existing arbitration agreement between the parties pursuant to section 7 of the Arbitration and Conciliation Act 1996 (“Arbitration Law‘), a written invitation to conciliation in accordance with Article 62 of the said law, etc. must be completed for the same. Before initiating any civil proceedings under the aforementioned point, it should be ascertained whether the agreement concluded between the parties, if any, or the respective purchase orders in place for the realization of the commercial transactions indicate or contain the provision of an alternative dispute resolution mechanism. If yes, then the parties should proceed in accordance with the same.
C. Appeal through the General Directorate of Foreign Trade-
Failure to pay or realize the export proceeds within the specified time period i.e. nine months or as the case may be under FEMA regulations and Foreign Trade Policy 2015- 2020 is also considered a trade dispute. The Directorate General for Foreign Trade (‘DGFT‘) set up a complaints portal, namely quality control and trade disputes (‘QCTD‘) for the benefit of Indian and foreign exporters and importers. Under this portal, Indian exporters can register compliance online on the DGFT website. Such a complaint request made by an Indian complainant is then forwarded to the respective Indian overseas mission in the concerned country for action.
However, there is not much clarity as to the exact remedies the Indian exporter could expect through this portal, as it is silent on the procedural aspect. However, an assumption could be made under a parallel scenario. Where, on the same portal, if a foreign importer lodges a complaint against Indian exporters under the provisions of the Foreign Trade (Development and Regulation) Act 1992 (‘FTDR Law‘), the DGFT investigates these complaints and, if found satisfactory, sanctions such as suspension or cancellation of the Import and Export Code (IEC) under Article 9 of the FTDR Act can be imposed. Accordingly, a similar action could be taken by the trade regulator of the foreign country concerned once such complaint is forwarded by the Indian mission abroad to the regulator of the foreign country concerned.
D. Remedy by taking action against offending foreign importers in the foreign country concerned –
Exporters also have the option of taking action against offending foreign importers in the country of the importer in accordance with their laws. The exporter may engage a lawyer in the foreign country concerned and bring a civil action for the recovery of money or an application for insolvency or any other action against this foreign importer, according to the advice of the foreign lawyer.
Options under FEMA law regarding ticketing for non-repatriation:
Generally, if exporters fail to fulfill their obligations, they are deemed to be in breach. While the above are the remedies for the subsequent recovery/repatriation of export proceeds, FEMA laws also allow exporters to explore some additional options:
A. Representation before the Authorized Retail Bank and/or the RBI-
Pursuant to Master Export Instructions as well as FEMA regulations, defaulting exporters may make representations to the Authorized Dealer Bank (‘Bank‘) describing the reasonable measures taken by them for the realization of the export payment. Pursuant to par. C.20 of the Export Master Directions, the Bank, after having analyzed whether the exporter has not made the payment for reasons beyond his control, may take a decision to extend the period for making the export until six months and no longer.
Exporters seeking certain specific remedies/instructions beyond the scope of the Bank, may make representation to the regional office of the RBI. After analysis of this representation, certain directives may be issued by the RBI as it deems appropriate for the purpose of securing payment.
Pursuant to par. C.23 of the Export Master Directions, exporters have the option of canceling unrealized export invoices themselves. They can also ask the Bank to cancel this invoice if the exporter wishes to cancel above the threshold of 5% of the total export earnings made during the calendar year preceding the year in which the cancellation is done. . The Bank, in such cases, may authorize amortization up to a threshold of 10% of the same value.
For exporters who have failed to take reasonable steps for realization, and who have furthermore failed to seek instructions from the RBI for an extension/delisting, or if the RBI has refused to give such instructions, there are sufficient grounds for the relevant authority to initiate a violation proceeding under FEMA. Pursuant to FEMA Section 13, a penalty of up to three times the amount involved in such violation may be imposed. It can also be considered a continuing violation if the exporter has not taken any action even after the expiry of the stipulated time period.
The exporter may, therefore, consider moving to aggravate the violation, in accordance with the procedures referred to in the Master Direction – Compounding of Contraventions under FEMA, 1999, as soon as possible in order to lessen the effect of the continuing violation. .
Nowadays, there are some ways in which exporters can secure their export payments, such as the use of a letter of credit, documentary drafts, etc. However, the most effective of these is the export credit guarantee. A range of export credit guarantees are provided by the Export Credit Guarantee Corporation of India Limited in the form of insurance covers to Indian exporters against the risk of non-fulfilment of export payments. In conclusion, one can keep in mind that the loss of export payments is not an individual loss but the nation’s loss of foreign currency, which affects India’s balance of payments. So, in all these ways, exporters can strive to secure their export payments.