2020 (9) TMI 1031 - HC - FEMA

Extension of the usance period of the Letter of Credit Facility sanctioned to the writ petitioners from 180 days to 270 days - distinction between the usance period of a Letter of Credit and the period of a Trade Credit - HELD THAT - The argument that the 2018 Regulations brought about a change in policy regarding the usance period for credit does not hold water, since the said Regulations and the Master Direction on External Commercial Borrowings and Trade Credits dated July 1, 2015, updated up to October 6, 2015, relate to loans extended by overseas banks. The germane consideration in the present case is, rather, the Master Direction Import of Goods and Services dated January 1, 2016 (updated lastly on April 1, 2019). Trade Credit Policy Revised Framework formulated by the RBI on March 13, 2019 does not alter the position as far as the usance period available to the petitioners was concerned. As correctly argued by the respondents, a Court order cannot impose its own view to substitute the terms of the original contract between the parties and the petitioners cannot insist upon the discretion of the bank to extend the usance period of credit to be exercised in the petitioners favour as a matter of right. as correctly argued by the respondents, a Court order cannot impose its own view to substitute the terms of the original contract between the parties and the petitioners cannot insist upon the discretion of the bank to extend the usance period of credit to be exercised in the petitioners favour as a matter of right. The petitioners shall repay the loan amount pertaining to the credit facilities obtained from the State Bank of India (represented by the respondents) in respect of the loan-in-question within 30 days from date along with interest at the rate of 6 percent per annum from the date of expiry of the credit period of 180 days post-shipment till repayment. Failure to repay the said cumulative amount (principal with interest) within 30 days from date would entail imposition of interest at the rate of 18 percent per annum which the petitioners shall pay.

Issues Involved:
1. Entitlement to extension of the usance period of the Letter of Credit Facility from 180 days to 270 days.
2. Distinction between the usance period of a Letter of Credit and the period of Trade Credit.
3. Applicability of RBI's Trade Credit Policy and related regulations.

Issue-wise Detailed Analysis:

1. Entitlement to Extension of the Usance Period:
The primary issue in the writ petition was whether the petitioners were entitled to an extension of the usance period of the Letter of Credit (L/C) Facility from 180 days to 270 days. The petitioners argued that the State Bank of India had accepted the operating cycle of their company to range from 225 to 270 days and, therefore, was bound to provide a usance period of 270 days for the L/C. They cited the "Trade Credit Policy – Revised Framework" by the Reserve Bank of India (RBI) dated March 13, 2019, which they claimed superseded earlier guidelines.

The petitioners relied on various regulations and clauses, including Regulation 2(xvii) of the Foreign Exchange Management (Borrowing and Lending) Regulations, 2018, and Regulation 4(B)(ii), to support their claim that the usance period should align with the operating cycle of the company. They argued that the bank's decision to reduce the usance period to 180 days was arbitrary and caused them financial difficulties.

In contrast, the respondent-bank argued that the usance period was a contractual term agreed upon by both parties, as specified in the Sanction Letters dated March 15, 2018, and January 22, 2019. The bank maintained that the maximum usance period for the L/C was 180 days, and this term could not be altered by a court order. The bank also highlighted that the discretion to extend the usance period lay with the lender-bank and was not a matter of right for the petitioners.

2. Distinction between Usance Period of L/C and Trade Credit:
The petitioners sought to equate the usance period of an L/C with the period of Trade Credit. They argued that the usance period of Trade Credit Facilities sanctioned to them was fixed in line with the extant norms of the bank based on the operating cycle of the company. However, the respondent-bank contended that "Trade Credit Period" and "usance period" were distinct concepts and could not be equated.

The court observed that the petitioners created unnecessary confusion by mixing up "Trade Credit," which refers to overseas loans, with the usance period governing credit facilities provided by Indian banks. The court clarified that Trade Credit, as defined in Regulation 2(xvii) of the 2018 Regulations, pertains to credits extended by overseas suppliers, banks, or financial institutions for imports into India. In contrast, the usance period of L/C facilities is governed by the loan agreement between the bank and the petitioners, as specified in the Sanction Letters.

3. Applicability of RBI's Trade Credit Policy and Related Regulations:
The petitioners argued that the Trade Credit Policy – Revised Framework of the RBI dated March 13, 2019, based on the Foreign Exchange Management (Borrowing and Lending) Regulations, 2018, should apply to their case. They claimed that this policy superseded earlier guidelines and allowed for a longer usance period.

However, the court noted that the Trade Credit Policy and related regulations pertain to foreign exchange management and credits extended by overseas entities. Since both the petitioners and the respondent-bank were situated in India, the concept of Trade Credit, as used by the petitioners, was not relevant. The court emphasized that the applicable guidelines were those related to the usance period of credit facilities provided by Indian banks, as specified in the Master Direction – Import of Goods and Services dated January 1, 2016 (updated April 1, 2019).

The court concluded that the usance period of the credit facilities available to the petitioners was governed by the terms of the contract between the parties, as borne out by the Sanction Letters. The RBI instructions dated May 21, 2018, and August 27, 2018, which reiterated the 180-day usance period, were binding on the respondent-bank.

Conclusion:
The court dismissed the writ petition, holding that the petitioners were not entitled to an extension of the usance period of the L/C Facility from 180 days to 270 days. The court emphasized that the discretion to extend the usance period lay with the lender-bank and could not be claimed as a matter of right by the petitioners. The petitioners were directed to repay the loan amount within 30 days, failing which higher interest rates would apply.

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