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2025 (1) TMI 263 - HC - FEMAInterpretation of the RBI s Master Circular on Rupee/Foreign Currency Export Credit Customer Service to Exporters ( Master Circular ) - Banking Ombudsman dismissed the Petitioners grievance against the very same interpretation that had been taken by HDFC Bank Limited (Respondent No. 4, HDFC Bank ) - according to HDFC Bank, since the Subvention Scheme provides Government-sponsored discount only to export credit , the exporter would not be entitled to any benefit of the Subvention Scheme where the advance ceases to be export credit ab initio - exports actually having been effected within 450 days HELD THAT - In our opinion, the Master Circular and the Subvention Scheme, are both instruments of law that seek to implement the stated economic policy objectives. When such instruments fall for interpretation, they ought to be read purposively, contextually, and in a manner that has due regard to the text as well as context, without inflicting violence on the policy objective. Master Circular on Export Credit - The Master Circular is explicit in terms of its purpose and objective. The Master Circular seeks to make short-term working capital finance available to exporters at internationally comparable interest rates . The crux of the Master Circular is that export credit at competitive interest rates must be made available to exporters in the form of short-term working capital. The very same Master Circular requires banks to keep a close watch on the end-use of funds advanced and to ensure that the credit supplied at special rates under the Master Circular are genuinely used for the purposes of exports. Crux of the Master Circular is that the maximum period of the export credit would be 360 days (extended to 450 days); one of the multiple means of liquidating it may be used; and the exports so financed would need to be performed within 360 days (extended to 450 days). Within such period, if the exports financed have indeed materialised, banks may purchase the export bills or discount the export bills, and thereby adhere to the period, simply converting the pre-shipment credit into a post-shipment credit (which is also another form of export credit ). So also, if the exports did not materialise at all in 360 days, the credit extended to the exporter would have to be charged interest at the domestic lending rate and not at the special rate applicable to exports, for the entire period of the credit. First Lot - We hold that the advances that financed the exports forming part of the First Lot clearly constitute export credit and are fully eligible for the subvention under the Subvention Scheme. Any subsequent period of the credit before its redemption i.e. the period of delay in submission of the export documents after the expiry of the maximum period of export credit, would be the period for which the Borrower enjoyed subvention despite the expiry of the maximum permissible period under the Master Circular. The Subvention Scheme is very clear that the subvention would be available only until the date on which the export credit becomes overdue. Reversal of any subvention for such period of delay would be a natural requirement, and we hold that HDFC Bank s first reaction on October 4, 2021 i.e. of reversing the subvention only for such delayed period was the correct approach that would get support under the Master Circular. HDFC Bank must compute the precise period of delay under each of the underlying exports and charge and effect the reversal of the subvention only for such period of delay insofar as export credit that financed the First Lot is concerned. Second Lot - The application of the domestic lending rate along with penal interest can only come into effect, if exports do not materialise at all within 450 days. The special rate applicable to export credit, and the benefits flowing from the Subvention Scheme would not be available to the Borrower in relation to the Second Lot. In any case, HDFC Bank had cash collateral in the form of the fixed deposits for the entire amount, and on the instructions of the Borrower, the cash collateral was to be liquidated and the loan was to be closed out. Any effect of the subvention becoming inapplicable would indeed need to be charged to the Borrower. It was the subvention reversal on the First Lot that led to a mismatch of figures between the two parties. Consequently, we are of the opinion that just as the subvention ought to be made available to the Borrower in relation to the First Lot, HDFC Bank was justified in reversing the subvention amount applicable to the exports underlying the Second Lot. We are unable to agree with Mr. Sridharan, who moulded his argument to submit that as and when the export eventually took place, at least the subvention for the first 450 days ought to be available. Principle for Drawing a Line - The controversy is only about whether the export documents should be submitted within 450 days and whether the exports should materialize within 450 days. We have articulated above that in our view, considering the objective of the Master Circular, the core requirement is for exports to have materialised within 450 days and the export documents evidencing the same ought to be submitted. If the export documents, even if submitted later, demonstrate that the exports indeed took place within 450 days, the fact that they were filed a few days late would not be fatal. One would be compelled to hold that the First Lot reasonably falls on the right side of the line. However, where not only have the exports not taken place at all within 450 days, but also the exporter himself has foreclosed the export credit within the 450-day period stating that it is unlikely to be completed within the period, we have no hesitation in holding that Second Lot does not reasonably fall on the right side of the line. Conclusions and Directions - a) The Master Circular is required to be read purposively, and is to be implemented in letter and spirit, in a manner that does not undermine its very objective and reason for introduction. It must not be read in a narrow, technical and literal sense and that too with one of its many provisions being read in a manner that undermines its objective; b) The maximum tenure of pre-shipment credit under the Master Circular is 360 days (extended to 450 days during the Covid-19 pandemic) and exports have to materialise within such period; c) If exports materialise within such period and export documents demonstrate that the exports have materialised, the credit advanced to the exporter would indeed not be disqualified for being treated as export credit , merely on the ground that the export documents that prove the timely materialisation of exports were submitted late; d) The period of delay in submission of export documents would not be fatal to the treatment of the advances as export credit what is vital is that the export documents ought to prove that exports took place within the stipulated period; e) The credit enjoyed after the maximum permissible period of export credit i.e. during the period of the delay in submitting the export documents, would attract interest at the normal interest rate along with penal interest in terms of the bank s policy (published pursuant to the Master Circular); f) If exports did not materialise within the stipulated period (360 days, extended to 450 days), for purposes of the Master Circular, it would be treated as exports not materialising at all. In such event, the very purpose of providing short-term working capital to finance successful exports would be undermined if the credit extended were to be treated as export credit despite exports not having materialised. Therefore, the credit advanced ought not to be treated as export credit ; g) Consequently, subvention would be available to the Borrower in respect of the finance provided in relation to the First Lot; h) Subvention would not be available to the Borrower in respect of the finance provided in relation to the Second Lot; i) HDFC Bank shall rectify the reversal of the subvention pertaining to the First Lot within a period of four weeks from the date this judgement is uploaded on this Court s official website; j) Consequently, the RBI and the Ministry of Commerce and Industry shall reimburse HDFC Bank with the funds that correspond to the subvention reversal in relation to the First Lot having been corrected as above; k) HDFC Bank shall within a period of four weeks from today, provide to the Borrower, a detailed statement of account and the computation of the manner in which it has worked out the dues owed and owing between them, in accordance with the declaration of the law in this judgement; l) There shall be no change to the reversal of subvention in relation to the advances made in connection with the Second Lot. 1. ISSUES PRESENTED and CONSIDERED The core legal questions addressed in this judgment include:
2. ISSUE-WISE DETAILED ANALYSIS Issue 1: Interpretation of the Master Circular
Issue 2: Entitlement to Subvention Scheme Benefits
3. SIGNIFICANT HOLDINGS
The judgment emphasizes a purposive and contextually aware interpretation of regulatory instruments, ensuring that the objectives of providing competitive short-term working capital to exporters are not defeated by overly technical readings of individual provisions.
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