The Punjab National Bank (PNB) grabbed headlines with a ₹13,000-crore loss on account of its high-profile client, Nirav Modi. Subsequently, lacunae were identified in the procedures of its foreign exchange transactions. An examination of the modus operandi revealed the ease with which a handful of employees could successfully subvert the internationally established SWIFT to the advantage of the jeweller. It would be well worth raising the question of whether this lackadaisical approach was an exception or whether bankers are easily influenced by the rich and powerful. Is our banking system jeopardising ‘Make in India’ because of its naïve understanding of cross-border financial transactions?
Exporters occupy pride of place as foreign exchange earners. It is well understood that an exporter is under an obligation to repatriate foreign exchange proceeds, against an order backed by a shipping bill as proof of shipment. Further, to make exports competitive, the government of India exempts the exporter from the burden of the Goods and Services Tax (GST). However, a closer scrutiny reveals anomalies that are weakening the domestic manufacturing sector.
An unequal playing field
At the epicentre are the banks misinterpreting the Foreign Exchange Management Act (FEMA) rules in favour of the buying houses, and thus creating an unequal playing field for the supporting manufacturer. The buying house does not have its own manufacturing unit and hence outsources execution of the export order to a supporting manufacturer. The manufacturer produces the goods, ships them to the destination outside India, and signs a declaration for repatriation of foreign exchange. The export documents are handed over to the buying house. Subsequently, the importer makes payment to the banker of the buying house.
However, the ground reality is that all documents, except the shipping bill, are transferred by the supporting manufacturer to the buying house. The buying house claims ‘exporter’ status, but without signing the repatriation declaration or possessing the shipping bill — the only proof of export. The banker of the buying house also accepts the payment of foreign exchange from the importer’s bank on the basis of a mere invoice, whereas rules do not allow it to even handle export documents without a shipping bill. Rule 11 of the Foreign Exchange Management (Export of Goods & Services) Regulations 2015 clearly specifies that all the export documents, including the shipping bill and repatriation declaration, must be transferred by the supporting manufacturer to the buying house. Obviously, banks are flouting a well-established rule. Further, such transactions can easily be used to launder money.
On the other hand, the supporting manufacturer is actually making a domestic sale to the buying house and thus must issue a GST-compliant invoice. The buying house, being an exporter, can then claim input credit from the government. Again, the reality is somewhat different. Since the supporting manufacturer is in possession of the shipping bill and signs the declaration of repatriation, he claims GST exemption based on his ‘exporter’ status.
The real ‘exporter’
At this stage, it is important to ask whether it is legally possible for two different entities to claim ‘exporter’ status for the same shipment. The supporting manufacturer is not the exporter since he does not have a contract with the importer. His banker cannot receive any payment in foreign exchange from the importer despite being in possession of the shipping bill and the repatriation declaration. The truth is that the buying house is transferring its liability and risk to the manufacturer, while continuing to enjoy the privilege of being an exporter.
The ramifications of this crisis of identity become clear when the overseas importer defaults on his payment. The supporting manufacturer, who has undertaken to bring in the foreign currency, actually has no legal right to enforce a claim against the importer. Business loss is inevitable for the manufacturer, with pending employee wages and bills, besides the added complication of the Reserve Bank of India (RBI) and the Enforcement Directorate chasing it. The government is easily misled and chases the domestic manufacturer, while the actual exporter, the nimble-footed buying house, makes a quick getaway.
While it may not be unusual for a buying house or a supporting manufacturer to break FEMA rules, what excuse do the banks have for favouring the buying house? Is the RBI being lax in the enforcement of rules? If ‘Make in India’ has to succeed, can the government afford to keep both exporters and supporting manufacturers outside the ‘One India, One Tax’ policy?
Meera Nangia teaches commerce at the University of Delhi. M.P. Singh and V.S. Chopra are ex-bankers
