Indian engineering firms say that the ongoing payment settlement imbroglio with Iran could cost them an estimated $2 billion worth of business opportunity, mainly in the hydrocarbon sector.
Industry sources said companies have, since April, been unable to execute orders of over Rs 300 crore in Iran. Of this, L&T alone is said to account for around Rs 100 crore.
The payments problem has arisen in the wake of an RBI circular in December 2010, requiring all trade and other current account transactions with Iran to be settled only in permitted currencies outside the Asian Clearing Union (ACU) mechanism.
With the ACU mechanism being stopped, all dollar payments to exporters were then temporarily routed through the US banks, with euro payments similarly being done through European banks.
However, since January, the US and European banks have blocked payments on Iran-related transactions to Indian exporters due to the global sanctions on Iran. With this, Indian banks like SBI are unable to accept Letters of Credit for such transactions.
Officials in L&T refused to confirm the exact quantum of projects stuck in Iran. They, however, told Business Line that the business opportunity lost is “quite substantial, around $2 billion”. Although the company has bagged orders worth several crores of rupees, “we are simply unable to execute them”, they said.
L&T and other affected firms have sought to raise the matter with the Commerce Ministry through the Engineering Export Promotion Council. The issue will figure during the Ministry's sectoral review of exports. Exporters of tea, tobacco and basmati rice have also been hurt by the payment problem.
The Federation of Indian Export Organisations (FIEO) had said that following the RBI circular, large sums of payments to exporters have been stopped by Indian banks even after being paid by their Iranian counterparts.
According to FIEO, an issue troubling Indian companies is bid bond and performance guarantee for taking part in bidding for supply to Iranian companies. Indian companies keen to supply to Iranian public sector firms have to deposit a certain percentage of bid amount to Iranian banks for participation in tenders. However, they are unable to do so since Indian banks are not accepting transactions with Iran. This has resulted in huge loss of business opportunities in Iran to Indian project exporters, FIEO said.
Meanwhile, sources said India and Iran are in the process of finalising a solution to the payment problem. India imports around $12 billion worth of goods from Iran, but exports only around $2 billion. The sources said a proposal is to choose a bank nominated together by Iran and India so that the payments regarding imports from Iran can be deposited in the bank in Indian rupees. This would in turn be used to finance Iran's imports from India. The payments to Indian exporters will also be settled from this account.
However, one of the issues involved in this is whether to extend this facility to offset investments from Iran and also for payments to traders in services. “The Government is considering a multi-pronged strategy. We are looking at many approaches and the final solution could be a combination of those,” an official said, adding that nothing has been concretised. Options of allowing payments in different currencies and cargo-by-cargo payment are also being considered.
In the absence of a solution, Indian exporters have been routing their products through third countries such as the UAE, while Iranian products such as bituminous substances and mineral waxes are being routed through subsidiary companies in Australia, sources said.