A government clamp-down on gold imports is causing serious concerns for India’s jewellery industry. Shannon Manders speaks to Deep Roy, senior associate at Economic Law Practice in Mumbai about how the situation will pan out.
GTR: The government has taken steps to ease gold demand in India; what has been the impact on trade and trade finance?
Roy: There has been much revision of regulations with regards to the import of gold. These changes were primarily made in order to address the country’s trade deficit.
In the past, a lot of gold was brought into India and payment was made in foreign exchange, but there was not an adequate amount of gold exports taking place. Therefore, there was a substantial amount of foreign exchange outflow but hardly any foreign exchange inflow.
The revised regulation incorporates what’s called the ‘80/20 mechanism’, which includes a mandate that ensures that for every import that takes place, 20% of that has to be re-exported. There is a lack of clarity with regards to the details around those regulations because the customs authorities in India and the director general of foreign trade are supposed to provide detailed operational rules and such rules are not yet in place.
This is affecting the gold market in India and therefore people are looking at other options.
Previously there were large players in the Indian market who provided various financing facilities which were linked to gold hedging facilities. So, for example, a certain bank used to provide trade financing options to gold jewellers in India which was linked to a derivative facility outside of the country. They used to have facilities where a gold jeweller could book a price at some point in time, and based on that price they could import gold into India. Present stipulations by the RBI clearly mention that any sale to a domestic jeweller by a nominated bank or agency which has imported gold will be on outright purchase basis and no credit would be allowed.
In effect, these changes to regulations and the lack of clarity has severely affected the gold market and financing facilities being provided to the jewellery industry in India.
GTR: How is the new Companies Act of 2013 affecting companies doing business in India?
Roy: In 2013 the government revamped the Companies Act, 1956. However, as of September 12, 2013, only 98 sections out of act had been notified. Several questions have been raised as there are portions of the old act and portions of the new act which are applicable.
As far as financing structures are concerned, one of the questions of concern is whether Indian companies can give guarantees, loans or securities for or on behalf of another group company if these companies have common directors.
Where certain sections of the new act have been notified, for financing transactions, certain additional resolutions and certificates are being advised to be obtained from borrowers and obligors.
The new act is definitely a positive step towards the development of commerce, however, until it is implemented in full force, it actually raises a lot more questions than providing answers. It will also be important to analyse the relevant company rules that are yet to be published by the Indian government.
GTR: What trends are you seeing with regards to trade finance facilities in India? What are Indian companies seeking, and how are their needs being met?
Roy: Indian companies are looking at various structures in order to tie in long-term supplies and in the process procuring upfront advances on the back of such commitments. These arrangements are with offshore entities, which are usually not agents in terms of legal concerns, but rather independent contractors acting as traders, who will then sell off the respective products into the market. Considering that these long-term commitments are for a sizeable total, the consideration that forms part of the advance payment are sizeable too. Accordingly, there are separate financing arrangements being structured at the offshore and onshore levels.
A lot of the companies in India are in the situation where they are quite highly-leveraged and as such their assets and accounts are under stress. As a result of this, one of the main facets of financing transactions, including trade transactions, are structures where they are able to get relief with regard to their existing financings. Not only is the aim to procure financing for their immediate trade requirements, but also to somehow have those structures dovetail into their current repayment arrangements so that they’re able to repay existing lenders as well.
Indian companies have come to terms with the fact that rupee loans and financing structures in the country are far more expensive that what is available outside India. As such, there has been an increasing interest to explore means of procuring funds from outside India. Obviously there are upfront restrictions in terms of the regulatory guidelines issued by the Reserve Bank of India with regards to external commercial borrowing and the utilisation of such funds. There have been efforts made by the Indian government to attract foreign funds, for example. Qualified financial institutions in addition to foreign institutional investors have been allowed to invest in Indian companies, and several concessions have been provided in the external commercial borrowing guidelines for infrastructure sector companies. There has been an increasing interest amongst our clients to seek avenues (including tax-efficient structures) to procure foreign funds.
With regards to trade finance facilities, there has been a growing trend of approaching the regulators for approvals and clarifications. Regulators are definitely more accessible and interested in providing solutions in the interest of commerce.
GTR: Do Indian FIs have appetite for trade finance transactions, and what are their growth prospects?
Roy: The appetite that is being seen in India for trade finance is quite impressive. Though most of the banks in India provide trade finance facilities, not every bank is providing advanced and complex structures.
The Indian trade finance market is relatively simple compared to the complex structures that are prevalent in certain Southeast Asian countries.
Banks like ICICI and Axis are setting up branches in China specifically to deal with trade finance activities. It just shows that there is a lot being done with China, and that Indian banks find it enough to justify all the rigmarole of setting up a branch in a foreign jurisdiction to push through such trade finance activity. Both the country itself and individual corporate groups are progressing well.
Indian promoter entities are looking at expansi
on and growth of their business, and it’s a given that with this global growth, there will be trade requirements which have to be met. When you talk to these companies as clients and understand their expansion plans it is clear that Indian companies have a positive approach towards growth.