To promote the growth of global trade with an emphasis on exports from India and to support the increasing interest of the global trading community in INR, it has been decided to put in place an additional arrangement for invoicing, payment, and settlement of exports/imports in INR. Before putting in place this mechanism, AD banks shall require prior approval from the Foreign Exchange Department of Reserve Bank of India, Central Office in Mumbai.
The broad framework for cross-border trade transactions in INR under Foreign Exchange Management Act, 1999 (FEMA) is delineated below.
Invoicing: All exports and imports under this arrangement may be denominated and invoiced in Rupee (INR).
Exchange Rate: Exchange rate between the currencies of the two trading partner countries may be market determined.
Settlement: The settlement of trade transactions under this arrangement shall take place in INR following the procedure laid down in Para 3 of the circular.
In terms of Regulation 7(1) of Foreign Exchange Management (Deposit) Regulations, 2016, AD banks in India have been permitted to open Rupee Vostro Accounts. Accordingly, for settlement of trade transactions with any country, AD bank in India may open Special Rupee Vostro Accounts of correspondent bank/s of the partner trading country. To allow settlement of international trade transactions through this arrangement, it has been decided that:
Indian importers undertaking imports through this mechanism shall make payments in INR, which shall be credited into the Special Vostro account of the correspondent bank of the partner country, against the invoices for the supply of goods or services from the overseas seller /supplier.
Indian exporters, undertaking exports of goods and services through this mechanism, shall be paid the export proceeds in INR from the balances in the designated Special Vostro account of the correspondent bank of the partner country.
Documentation: The export/import undertaken and settled in this manner shall be subject to the usual documentation and reporting requirements. Letter of Credit (LC) and other trade-related documentation may be decided mutually between banks of the partner trading countries under the overall framework of Uniform Customs and Practice for Documentary Credits (UCPDC) and incoterms. Exchange of messages in a safe, secure, and efficient way may be agreed upon mutually between the banks of partner countries.
Advance against exports: Indian exporters may receive advance payment against exports from overseas importers in Indian rupees through the above Rupee Payment Mechanism. Before allowing any such receipt of advance payment against exports, Indian Banks shall ensure that available funds in these accounts are first used towards payment obligations arising out of already executed export orders/export payments in the pipeline.
The said permission would be under the conditions mentioned in para-C.2 on Receipt of advance against exports under Master Direction on Export of Goods and Services 2016 (as amended from time to time). To ensure that the advance is released only as per the instructions of the overseas importer, the Indian bank maintaining the Special Vostro account of its correspondent bank shall, apart from usual due diligence measures, verify the claim of the exporter with the advice received from the correspondent bank before releasing the advance.
Setting-off of export receivables: ‘Set-off’ of export receivables against import payables concerning the same overseas buyer and supplier with the facility to make/receive payment of the balance of export receivables/import payables, if any, through the Rupee Payment Mechanism may be allowed, subject to the conditions mentioned in para C.26 on Set-off of export receivables against import payables under Master Direction on Export of Goods and Services 2016 (as amended from time to time).
Bank Guarantee: The issue of a bank guarantee for trade transactions undertaken through this arrangement is permitted subject to adherence to provisions of FEMA Notification No. 8, as amended from time to time and the provisions of Master Direction on Guarantees & Co-acceptances.
Use of Surplus Balance: The rupee surplus balance held may be used for permissible capital and current account transactions under mutual agreement. The balance in Special Vostro Accounts can be used for payments for projects and investments, export/import advance flow management, investments in government treasury bills, government securities, etc. in terms of extant guidelines and prescribed limits, subject to FEMA and similar statutory provisions.
Reporting Requirements: Reporting of cross-border transactions needs to be done in terms of the extant guidelines under FEMA 1999.
Approval Process: The bank of a partner country may approach an AD bank in India for opening a Special INR VOSTRO account. The AD bank will seek approval from the Reserve Bank on the details of the arrangement. AD bank maintaining the special Vostro Account shall ensure that the correspondent bank is not from a country or jurisdiction in the updated FATF Public Statement of High Risk & Non-Co-operative Jurisdictions on which FATF has called for countermeasures.
The directions contained in this circular have been issued under sections 10(4) and 11(1) of the Foreign Exchange Management Act (FEMA), 1999 (42 of 1999) and are without prejudice to permissions/approvals, if any, required under any other law.