Navigating Deferred Consideration under FEMA
India is becoming one of the world’s fastest-growing economies and foreign investment destinations, thanks to its population boom. In the country’s developing economy, both direct/capital and indirect/portfolio play a critical role. Likewise, the role of RBI is central in ensuring the enforcement of deferred payment/considerations which is often the cornerstone of international capital investment
A situation when the buyer of services/goods makes the payment for the goods/services he brought earlier. The payment made some time after the actual exchange takes place and not simultaneously with the actual exchange is defined as deferred payment. International capital investment and the exchange of goods and services rely upon deferred payments as one of the fundamental bases.
Thereby, for deferred payments to be successful, the concerned country’s government and financial agencies must have adequate and efficient enforcement capacities. In India, the Reserve Bank of India (RBI) is the country’s central bank as well as the chief financial enforcement agency having a significant role in dealing with foreign exchange as well as foreign investment in India.
The present article will seek to understand the RBI’s restrictions on deferred considerations or its restrictions on deferred payment.
The Master Circular for External Commercial Borrowings and Trade Credits contains procedural instructions for deferred payment agreements. Trade credits include both supplier’s and buyers’ credit and are defined as payments made after six months from the date of shipment for a period of fewer than three years. However, the most important policy document dealing with the issue is the FEMA Act, 1994 (Foreign Exchange Management Act).
This establishes the methods and guidelines, as well as the legal framework, for dealing with foreign exchange management by the country’s financial institutions. It’s also worth noting that the Act establishes methods and standards for delayed payments between residents and non-resident Indians.
It specifically mentions, that for the deferred payment to take place, the concerned companies should apply and get approval from the RBI before the actual implementation.
However, a key issue is that it is sometimes difficult for the affected parties to acquire clearance, mostly due to a lack of time, as obtaining clearance from the relevant authorities typically needs a set period of time, which further adds to the length of the process. Secondly, some amount of bureaucracy and red-tapism is associated with the procedures, and the possibility of undue interference from the concerned authorities is often pertinent.
As a consequence, prior to the Act’s revision in 2016, there was much less foreign investment in the nation. The change to the Act permits anyone involved in the transactions to make a delayed payment for 18 months or 25% of the total sum without needing clearance from the country’s top financial enforcement authority.
But if the amount is more or the time period exceeds 18 months then the concerned parties are required to apply and obtain approval from the RBI to proceed with the transaction.
The modification, however, restricted in scope, is a measure taken by both the government and the country’s central bank to attract more foreign investment and improve the country’s ranking in the Ease of Doing Business Index. The current modification seeks to add flexibility to the FEMA Act by filling up the gaps left by the previous version.
The aforementioned revision is an improvement, as it eliminates the requirement to seek RBI permission in some cases now that PE funds have more freedom. The RBI has made a step in the direction of buyer protection in cross-border transactions. Along with providing a systematic roadmap for the Indian Mergers and Acquisitions landscape as already in place with other investor states.
It has all happened with the introduction of flexibility in the deferred purchase consideration mechanism but earlier, the deferment of purchase consideration was not permitted under the automatic route for a maximum period of only 6 months.
Tags: international capital investment, capital international investors, international capital group, capital group international equity, flexible pathway
