c9f0fexport-import documentation and risk management in export-import business

7/28/2019 c9f0fExport-Import Documentation and Risk Management in Export-Import Business

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Presen tat ion on Expo rt -Impo rt Documentat ion

and Risk Management in

Export -Import Bus iness


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Role of Export Documentation Export documentation plays a vital role in

international marketing as it facilitates the smoothflow of goods and payments thereof across nationalfrontiers.

Exporters are required to follow certain formalitiesand procedures, using a number of documents.

Each of these documents serves a specific purposeand hence carries its own significance.

A clear understanding of all documents and theirpurpose, how to prepare these, number of copiesrequired, when and where to file, is a must for allexport professionals.


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Export Documentation in India

Export Documentation in India has evolved a greatdeal of interest since 1990.

Efforts are on, at a faster footing to streamline andmodernize the system further.

Prior to 1990, documentation was manual and itlacked proper co-ordination.

The result was lot of delays and mistakes, renderingthe task very clumsy, tiresome, repetitive, and truly

frustrating. India adopted the ADS (Aligned Documentation

System) in 1991 which is the Internationallyaccepted documentation system


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Export documentation is complex in nature as the

number of documents to be filled-in is very large,so also is the number of the concerned authoritiesto whom the relevant documents to be submitted.It is, therefore, advisable to take the help ofshipping and forwarding agents who will obtain and

fill out the documents correctly as well as arrangefor transportation.

There are buyers and exporters, buying agents,RBI, authorized dealers (where the exporter has his

bank Account), buyers bank (foreign bank), DGFT,Customs and Port Authorities, VAT and ExciseAuthorities, EPCs, Insurance Companies,Inspection Agencies, Clearing and Forwarding

Agents, Shipping Companies/Airlines and Inland

Carriers etc


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Proper Documentation will ensure smooth sailingwith the requirements of the above agencies andthe resulting transaction will be a successful one.

Inaccurate or incomplete documentation will result

in serious financial and goodwill losses.

Such losses can be completely avoided byunderstanding clearly the documentation

requirements of all concerned parties and thenmeticulously planning to get the right documents inthe right numbers, at the right places and at theright time.


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Classification of Export Documents

Export Documents can be classified into followingfour categories:

(1) Commercial Documents

(2) Regulatory Documents

(3) Export Assistance Documents

(4) Documents Required by Importing Countries

(1) Commercial Documents: These documents areused by exporters/importers to discharge theirrespective legal and other incidental responsibilitiesunder sales contract.


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Commercial documents can be further sub-dividedinto:

(i) Principal Commercial Documents

(ii) Auxiliary Commercial Documents(i) Principal Commercial Documents: These

documents serves the following purposes:

(a) To effect physical transfer of goods and title ofthe goods from exporter to the buyer.

(b) To realize export sales proceeds.


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Principal Documents include:

Commercial Invoice (and the invoice prescribed bythe importer)

Packing list

Certificate of Inspection Certificate of Insurance/Insurance Policy

Bill of Lading/Airway bill/Combined TransportDocuments

Certificate of Origin

Bill of Exchange

Shipment Advice


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(ii) Auxiliary Commercial Documents: These

Documents are required to prepare /procure theprincipal commercial documents and include:

Proforma Invoice

Shipping Instructions

Insurance Declaration

Intimation for Inspection

Shipping Order

Mates Receipt

Application for Certificate of Origin

Letter to bank for negotiation /collection of

documents


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Classification of Export Documents(2) Regulatory Documents: These are prescribed

by various Government Departments/Bodies forcompliance of formalities under relevant lawsgoverning export transactions. These include:

(i) Exchange Control Declaration Form-GR Form

(ii) Freight Payment Certificate(iii) Insurance Premium Payment Certificate

(iv) ARE I/ARE II Forms

(v) Shipping Bill/Bill of Export

(vi) Port Trust Copy of Shipping Bill/ExportApplication/Dock Challan

(vii) Receipt of Payment of Port Charges

(viii) Vehicle Ticket.


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(3)Export Assistance Documents: These are thedocuments which are required for claimingassistance under the various export assistancemeasures as may be in operation from to time.

Currently, these refer to drawbacks of centralexcise and customs duties, packing credit facilitiesetc

(4) Documentation required by Importing

Countries: These are the documents which arerequired by the importer in order to satisfy therequirements of his Government. These includecertificates of origin, consular invoice, qualitycontrol certificate etc.


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Commercial Documents(1) Commercial Invoice:

It is the basic and most important document in anexport transaction and extreme care has to betaken by the exporter to prepare this document.

This document requires the exporter to submitdetails such as his own details, Invoice number

with date, details of the consignee and buyer (if thebuyer is other than consignee), buyers ordernumber with date, country of origin of the goods,country of final destination, terms of payment anddelivery, pre-carriage details (Road/Rail),vessel/flight number, port of loading, port ofdischarge, final destination, container number,number and kind of packaging, detailed descriptionof goods, quantity, rate and total amount

chargeable etc


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Commercial Documents

Therefore, a Commercial Invoice contains thecomplete details of the export order.

Normally, the trade practice is to raise and senda Proforma Invoice to the buyer for his approval,

once the order has been finalized. On receipt of the approved Proforma Invoice,

the exporter can use it as a part of the exportcontract.

The Commercial Invoice then becomes easier toprepare on the basis of the approved ProformaInvoice.


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Commercial Documents(2) Packing List:

This document provides the details of number ofpackages; quantity packed in each of them; theweight and measurement of each of the packageand the net and gross weight of the total

consignment.

Net weight refers to the actual weight of the itemsand the gross weight means the weight of the items

plus the weight of the packing material. The packing list serves a useful purpose of the

exporter while dispatching the consignment as across check of goods sent.


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Commercial Documents For the port personnel, it comes handy while

planning the loading and offloading of cargo. It is also an essential document for the customs

authorities as they as they can carry out thephysical examination of the cargo and conduct

checks on the weight and measurements of thegoods smoothly against the declarations made bythe exporter in the packing list.

(3) Certificate of Inspection: This is the

Certificate issued by the Export Inspection Agencyafter it has conducted the pre-shipment inspectionof goods for export provided the goods fall underthe notified category of goods requiring compulsoryshipment of inspection.


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Commercial Documents(4) Certificate of Insurance/Insurance Policy:

Insurance is an important area in the exportbusiness as the stakes are usually very high.

Protection needs to be taken in the form ofinsurance cover for the duration of transit of goods

from the exporter to the importer.(5) Bill of Lading:

This is issued when the goods are shipped usingocean (marine) transport.

When the exporter finally hand over the goods tothe shipping company for loading on board the shipfor transport to their final destination, the shippingcompany issues a set of Bills of Lading to the

exporter.


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Commercial Documents(6) Airway Bill:

Airway Bill is a bill of lading when the goods areshipped using air transport.

It is also known as air consignment note or airway

bill of lading.(7) Combined Transport Document:

This is also known as Multi-modal Transport

Document. Ever since containers have become popular, the

concept of Combined Transport Document hasgained solid ground.


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Commercial Documents(8) Certificate Of Origin:

This document serves as a proof of the country oforigin of goods for the importer in his country. Imported countries usually require this to be

produced at the time customs clearance of importcargo.

It also plays an important part in computing theliability and the rate of import duty in the countryof import.

This certificate declares the details of goods to be

shipped and the country where these goods aregrown, manufactured or produced. Such goods needs to have substantial value

addition so as to become eligible to certification ofthis nature.


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Commercial Documents(9) Bill of Exchange:

Also known as Draft, this is an instruments forpayment realization.

It is a written unconditional order for payment froma drawer to a drawee, directing the drawee to paya specified amount of money in a given currency tothe drawer or a named payee at a fixed ordeterminable future date.

The exporter is the drawer and he draws (preparesand signs) this unconditional order in writing uponthe importer (drawee) asking him to pay a certainsum of money either to himself or his nominee

(endorsee).


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Commercial Documents

This order could be made for payment on demand,called a bill of exchange at sight or payment at afuture date, called a usance bill of exchange.

(10) Shipping Advice:

The exporter sends this document , called shippingadvice, to the buyer soon after the shipment ismade to provide him all the shipment details.

This serves as an advance intimation of theshipment and allows the importer to arrange fordelivery of the same.


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Risk Management in Export-importBusiness

Risk is a fact of business life, more so ofinternational business.

The Management of International business is themanagement of risk.

No manager can make a strategic business decisionor enter into important business transactionwithout a full evaluation of the risks involved.

Many of the best business plans have been ruinedby a miscalculation or a mistake, or an error injudgment that could have been avoided withproper planning.


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If the risk cannot be reduced through advanceplanning and careful execution, perhaps it canbe shifted to some other party to the

transaction. If the risk cannot be shifted to another party to

the transaction, it might be shifted to aninsurance company.

Many types of risks can be insured against,including the risk of damage to the goods atsea, the risk of loosing an investment in a

developing country and many others.


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(1) Risk Assessment and the Firms ForeignMarket Entry Strategy:

When a firm is considering its entry or expansionin a foreign market, it must consider all optionsand decide on a course of action commensuratewith its objectives, capabilities and itswillingness to assume risk.

Selling to a customer in another country resultsin less risk to the firm than licensing trademarks,patents and copyrights there.

Ri k M t i E t i t


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(2) Managing Distance and Communications: The risks of doing business in a foreign country

are different from those encountered at home.

A firm doing business in a foreign country wouldencounter greater distances; problems incommunications; language and cultural barriers;differences in ethical, moral and religious codes;

exposure to strange foreign laws andgovernment regulations; and differentcurrencies.All these factors affect the risks ofdoing business abroad.

Ri k M t i E t i t


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(3) Managing Currency and Exchange RateRisks:

Currency risk is risk a firm is exposed to as a resultof buying, selling, or holding a foreign currency.Currency risk includes:

(i) Exchange Rate Risk

(ii) Currency Control Risk

(i) Exchange Rate Risk: Exchange rate risk resultsfrom the fluctuations in the relative values of theforeign currencies against each other when they arebought and sold on international financial markets.


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(ii) Currency Control Risk: Some countries, particularly developing countries

where access to ready foreign reserve is limited,put restrictions on currency transactions.

In order to preserve the little foreign exchangethat is available for international transactions, suchas importing merchandise, these countries restrictthe amount of foreign currency that they will sell to

private companies. This limitation can cause problems for a U.S or any

other country exporter waiting for payment from itsforeign customer who cannot obtain the dollarsneeded to pay for the goods.

Risk Management in Export import


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(4) Special Transactions Risks in Contracts forthe Sale of Goods:

Special risks are inherent in internationaltransactions for the purchase and sale of goods.

These transactions present special risks to both theparties because the process of shipping goods andreceiving payment between distant countries isriskier than within a country.Such risks are:

(i) Payment or Credit Risk(ii) Property or Marine Risk

(iii) Delivery Risk

(iv) Pilferage and Theft Risk

Ri k M t i E t i t


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(5) Managing Political Risk:

Political Risk is generally defined as the risk to afirms business interests arising form politicalinstability or political change in a country in whichthe firm is doing business.

Political Risk includes risk derived from potentiallyadverse actions of Governments of the foreigncountries in which one is doing business or whose

laws and regulations one is subject to. It also includes laws and Government

policies instituted by the firms homecountry which adversely affect the firmsthat do business in a foreign country.


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(6)Risks of Foreign Laws and Courts:

Many Acts that are perfectly legal in one countrycan be illegal in another.Indeed, most travelers to

a foreign country could conceivably break a host oflaws and not even be aware of it.

The same is true for the law of contracts,employment, competition, torts and other business

laws. It is virtually impossible to catalog all of the

differences between these laws from country tocountry


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Risk Management in Export-

import Business(7) Commercial Risks: The risks arising from

suitability of the product for the market or

otherwise change in supply and demandconditions and changes in price. Commercialrisks arise due to:

(i) Lack of Knowledge

(ii) Inability to adapt to the environment (iii) Different kinds of situations to be dealt with

(iv) Greater transit time involved

Risk Management in Export import


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(8) Cargo Risk: Transit disasters are an ever present hazard for

those engaged in Export-Import business.

Every shipment runs the risk of a long list of

hazards such as storm, collision, theft, leakage,explosion, spoilage etc.It is possible to transfer thefinancial losses resulting from perils of and in transitto professional risk bearers known as underwriters.

As most goods are transported by marine transport,every exporter should have an elementaryknowledge of marine insurance to get theprotection at the minimum cost.

S d R di


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Suggested Readings

(1) International Marketing Management-an Indian perspective

by R.L Varshney and B.Bhattacharya, Sixth Edition, 2006published by Sultan Chand and Sons, New Delhi.(2) International Business Law and its Environment by Richard

Schaffer, Beverley and Filiberto Augsti, Sixth Edition, 2005published by Thomson South-Western United States.

(3) Manual on Export Documentation published by CommercialLaw Publishers (India) Private Limited, NREW Delhi, 2006.(4) International Business Law, Text, Cases and Readings,

Fourth Edition, 2004. Published by Prentice Hall, U.S.A(5) International Marketing by Philips R.Cateora and John L.

Graham published by Tata McGraw Hill(6) International Business by Charles W.L Hill and Arun K.Jainpublished by Tata McGraw-Hill Publishing Company Limited,New Delhi.

(7) Export and import Management by Aseem Kumar

published by Excel Books 2007