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Cabinet panel reviews import rules for automobiles

The Cabinet Committee on Economic Affairs on Tuesday reviewed the controversial memorandum of understanding signed between the Director General of Foreign Trade and the joint venture motor vehicle manufacturers for the grant of import licences for import of kits in the completely knocked-down and semi knocked-down forms.

The CCEA, in its meeting on the June 26, 1995, had approved the proposal made by the commerce ministry with the stipulation that while granting import licences for the completely knocked down (CKD) and semi knocked down (SKD) kits, the ministry of commerce shall separately enter into a MoU with the applicant specifying the five parameters:
(a) inward equity investment by the foreign joint venture partner;
(b) production planning;
(c) level of indigenisation;
(d) projected outflow of foreign exchange on account of imports; and,
(e) projected export earnings from the exports of intermediate and final products.

The approval of Cabinet Committee on Economic Affairs is required on various points. The first is that all joint venture car manufacturers shall enter into an MoU with the DGFT for imports of CKD/SKD kits or components. The MoU, in turn, shall be based on the following conditions:
--i. Establishment of actual production facilities for manufacture of cars and not for mere assembly of imported kits and components.

--ii. A minimum foreign equity of 50 million dollars to be brought in by the foreign partner within the first three years of start of operations, if the joint venture involves majority foreign equity ownership. However, this condition will apply to new joint venture companies only.

--iii. Indigenisation of components up to a minimum level of 50 per cent in the third year or earlier, from the date of clearance of the first import consignment of CKD/SKD kits and components and 70 per cent in the fifth year or earlier. Once the MoU signing firm has reached an indigenisation level of 70 per cent, there will be no need for further import licences from the DGFT. Consequently, as and when the firms achieve 70 per cent indigenisation, they would go outside the ambit of the MoU automatically.

--iv. Regarding export obligations, the MoU signing firm would achieve a broad neutralisation of foreign exchange over the entire period of the MoU in terms of balancing between the actual CIF value of imports of CKD and SKD kits and components and the FoB value of exports of cars and auto components over the said period.

In addition, the period of export obligation would commence from the third year of commencement of production. The date of commencement of production would be deemed to be the date of the first release of consignment from factory after payment of excise duty but there would be a moratorium of two years from this particular date of commencement of production during which the firm need not fulfill any export obligation.

However, from the third year onwards (effective from date of release of first consignment), the MoU signing firm would have an export obligation for the remainder of the MoU period till they complete the entire export obligation. From the fourth year onwards, the value of imports of CKD and SKD may be regulated with reference to the export obligation fulfilled in the previous year as per the MoU. The export commitment would be met by export of cars as well as auto components. This export obligation will be over and above the export obligation.

The cabinet's approval will also be required to ensure that the MoU scheme will be enforced through the import licensing mechanism and the MoU signing firms would be granted import licences by the DGFT based on the above parameters.

The CCEA will also monitor the progress in respect of the elements stipulated above all the joint ventures would submit annual reports to the DGFT on the parameters outlined above and a joint annual review of the progress made in respect of these parameters would be undertaken by the ministry of commerce and others.

The CCEA declared that the revised guidelines will apply to all existing and future entrants into this sector.

However, companies intending to set up manufacturing units under foreign collaboration for light or heavy commercial vehicles, tractors and earthmoving equipments will not be required to sign any MoU.

UNI