These entities have masked cheaper foreign currency loans – known as ‘external commercial borrowings’ (ECB) in regulatory parlance – as ‘advances’ received from overseas buyers. In some cases the money received has been shown as ‘trade credits’ from suppliers abroad.
The Enforcement Directorate (ED) is learnt to have pulled up at least three companies recently, asking them to explain why the inflows claimed as advances were returned in about a year.
The agency’s suspicions were triggered on two counts: first, the funds were directly remitted by offshore offices of leading foreign banks having a strong presence in India, raising the obvious question as to why high-street banks, acting on their own and not on behalf of any overseas buyers, would make advance payments against future exports to steel traders and other entities in Kolkata and Delhi; second, the money was remitted back to the overseas banks within a year or 18 months on the grounds that the export order was cancelled for reasons like quality issues and inability to stick to the delivery timeline.
The strange nature of the transactions, between odd parties and the subsequent outflow after a while, backs the allegation that funds came in as short-term inexpensive dollar or yen bridge loans that would have been disallowed under the ECB norms, persons familiar with the development told ET.
“There has been an increased scrutiny by enforcement authorities on export transactions. It is therefore critical to ensure that foreign exchange inflows are not restructured in a manner that alters the true nature of the transaction. In case the ultimate objective is to avail financing the same would need to be necessarily compliant with the ECB regulations,” said Moin Ladha, partner at the law firm Khaitan & Co.
Among other conditions, the minimum average maturity period for ECBs is three to five years, have end-use requirements, entails compliance rules like monthly reporting on fund utilisation and taking loan registration number upfront. ECBs under the automatic route are possible only when the business is eligible for 100% foreign direct investment (FDI).
“Manufacturing companies have some leeway in terms of shorter maturity periods. But, in no way a trader or a services firm can take one-year ECB. Also, such bridge loans can come handy to acquire a local business as domestic banks rarely participate in acquisition financing,” said a banker. Indeed, most of these short-maturity, unauthorised ECBs were used for financing acquisition of shares.
The overarching intention of operators playing around with the Foreign Exchange Management Act (FEMA) is to show a capital account transaction (like ECB) as current account deals (like advance for exports and trade finance) which, thanks to lesser compliance needs, tend to stay below the regulatory radar.
Trade credit, the other tool used by some to hide ECBs, involves a foreign seller of machinery or capital goods letting a buyer in India pay over three years.
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