1

CHAPTER 1

INTRODUCTION

Finance and credit are available to help not only export production but also to sell tooverseas customers on credit. There are different schemes like pre shipment or packingcredit, post shipment credit and/or finance for deferred payment exports. The PSCFCScheme makes available post shipment credit in foreign currency.

Credit and finance is the life blood of business whether domestic or international.More so in case of export transactions on account of the emergence and prevalence ofingenious non price competitive techniques encountered by exporters in various countriesto enlarge their share of world markets. The selling techniques are no longer confined tomere quality, price or delivery schedules of the products but extended to payment termsoffered by exporters. Liberal payment terms generally score over the competitors of sameor similar products, not only of capital equipment but also of consumer goods.

These terms, however, depend on the availability of finance to exporters in relationto its quantum, cost and the period not only at post shipment stage but also at pre shipmentstage. After all, production and manufacturing for substantial supplies for exports taketime in case finance is not available to exporters for production. They will not be in a positionto book large export orders.

Even merchant exporters require finance for obtaining products from their suppliers.But financing of exporters and their in turn offering of liberal payment terms to overseasbuyers in the credit extended for financing such deferred payment exports is known asMedium and Long Term Credit. Credit beyond six months, export of Indian machinery andmanufactured goods, Consultancy and Technological Services on deferred payment termsare instances where export credit insurance becomes necessary.

According to the Economic Survey 2010-1, export credit as a percentage of net bankingcredit has gradually fallen to 4.1% as on December 31, 2010, from 4.3% as on March 26,2010, 4.6% on March 27, 2009 and 5.5% as on March 28, 2008 .

However, export credit, in itself, has grown by 11.3% as on December 31, 2010 toRs.153,794 crore from Rs.138,143 crore as on March 26, 2010.

2

CHAPTER 2

BASIC CONCEPTS OF FOREIGN EXCHANGE

INTRODUCTION:

An Indian resident, who is dealing, day in and day out in various commodities and to buyand sell them, uses legal currency of India i.e., Indian Rupee. But to buy and sell commoditiesand services, if he has a currency, which is other than his country’s currency, what willhappen? Say for example, an Indian resident receives US Dollar 1,000 from his relative,for using in India, he cannot straightaway use the Dollar, but has to convert in Indian Rupeesand use it to buy commodities/services.

Hence can we define Foreign Exchange in the following manner?

1) The currencies of other countries in the form of Currency Notes, Travellers’Cheques, Drafts, ElectronicTransfers, etc.

2) The mechanism by which our legal tender is converted into another currencyand vice versa.

Development in International trade is a prerequisite for world economic development and stability. The term foreign exchange involves the conversion of foreign currency to Indian rupees through a negotiable instrument, Cable Mail transfer Letter of Credit e- transfer Banks dealing in foreign currency are called authorized dealers (AD) under India’s apex bank, Reserve Bank of India. When we import, we pay in foreign currency converted into Indian currency at the rate prevalent on the date of settlement. In the same way, when we export, we get Indian rupee through Bankers determined at the rate prevalent on the date of settlement. The foreign exchange rates between Indian rupee and currency of any other country are determined on day-to-day basis. Fluctuations in foreign exchange are taken care of at national level by ADs and RBI.

3

Why Conversion is necessary?

Conversion of currencies with each other has become a necessity. Because no country inthis Universe can claim that they manufacture all the goods and services that their peoplerequire to consume. Even the mighty USA is no exception. They import Coffee fromBrazil, India, etc. for their consumption. Similarly India imports Capital goods, Technology,etc. from Western Countries.

All are aware that there is no Universal Currency through which such settlements acrossthe national barriers and borders could be made and settlements take place in the sellers’/buyers’/any mutually accepted currency. Hence the invention of conversion mechanism.

Why Exchange Control?

India is having the following Inflows and Outflows:

INFLOWS OUTFLOWS

1) Inward Remittances Outward Remittances

2) Remittances to Payments relating toall bank accounts imports

3) Foreign Aids/Loans Export related /Borrowings by payments likeCorporates, etc. commission, legal

fees, etc.

4) Export Receivables Tour/Travel relatedexpenses

5) Tourists’ income Loan repayments / servicing of loans

Normally in India, there is a shortfall of inflows than outflows. Our import paymentsare very crucial for the country’s economy and equally important are our payments towardsrepayment of loans and its servicing. When demand outplays supply, it is only prudent thatwe manage our foreign exchange reserves judiciously.

Hence Reserve Bank of India, under the provisions of Foreign Exchange RegulationAct 1973, controls the inflow and outflow of foreign exchange. Through the ExchangeControl Manual (1993 Edition) and subsequent AD (MA) Circulars, it enforces the propermanagement of country’s foreign exchange.

4

TRADE CONTROL:

It is equally important for any country to effectively monitor the movement of goods. Whilethe movement of foreign exchange is being controlled through Exchange Control Manualand subsequent AD (MA) circulars, goods movement in and out of the country is beingmonitored under the provisions of Foreign Trade (Development and Regulations) Act, 1992.The controlling authority in this case is Director General of Foreign Trade, New Delhi, andtheir various offices in other places headed by Joint Director of Foreign Trade. D.G.F.T.and J.D.F.T. are guided by the FT POLICY (02-07), which is being provided by the Ministryof Commerce, Government of India. Customs are the authorities who are ensuring themovement of goods according to the above-said provisions, besides collection of revenuesby way of duty on goods imported or exported.

HOW THE FOREIGN EXCHANGE IS HANDLED?

Reserve Bank of India under the provisions of FEMA, has delegated the authority ofhandling Foreign Exchange to State Bank of India (and its subsidiaries), Public SectorBanks, Private Sector Banks and Foreign Banks. They have delegated the authority ofhandling Foreign Exchange and they are explained through various Chapters of ExchangeControl Manual, a book released by RBI, the latest one being 1993 edition. Under ECM,designated Authorised Dealers (of Foreign Exchange) will be dealing in various ForeignExchange transactions, to comply with all terms and conditions. Again Banks that are

authorised to handle Foreign Exchange, designate certain branches to handle the Foreign

Exchange transactions, depending the necessity and potentiality of branch’s location and

they are called Authorised dealing branches.

Besides the above, RBI also authorises reputed Hotels and other private establishments

to handle Foreign Exchange in a limited way (say they can issue / encash Foreign Currency

Travellers’ Cheques / Foreign Currency Notes) to cater to the foreign tourists’ requirements.

They are called Authorised Money Changers (AMC). They are classified as FULL-

FLEDGED / RESTRICTED MONEYCHANGERS.

TYPES OF FOREIGN EXCHANGE TRANSACTIONS:

Authorised Dealers can handle two types of transactions, viz. Purchase and Sale of Foreign

Exchange. When customers tender export bills denominated in Foreign Currency, ADs

shall purchase the Foreign Currency Bill. Likewise, when customers request for a

remittance in Foreign Currency towards payment of Import bills, then ADs have to sell

Foreign Currency to him. From this, we understand that both selling and purchasing

transactions are from the bank’s angle.

5

SETTLEMENT OF FOREIGN EXCHANGE TRANSACTIONS:

Settlements of Foreign Exchange Transactions are made through the following accounts:

-

1) NOSTRO Account: Our Account with you;

Ex: The account maintained by an Authorised Dealer with a foreign bank is called

“NOSTRO” Account or “Our Account with You”. When an instrument like a cheque or an

export bill is purchased the same is sent to the overseas bank (correspondent) for

realisation, the amount is collected and credited to Authorised Dealer’s account with

them.

Similarly, when a draft is issued on a banks foreign correspondent it will be paid at the

overseas centre by debiting the NOSTRO Account of the issuing bank.

2) VOSTRO Account: Your Account with us

Ex.: Foreign banks (Correspondents) also maintain accounts with any bank in India in

Indian Rupees for the purpose of settling their rupee transactions and these accounts

3) LORO Account: Their account with themEx.: Just like State bank Of India maintaining an account with foreign correspondent sayBTC, New York, Canara Bank may also maintain a Nostro Account with them. When SBIadvises BTC New York for transfer of funds to Canara Bank Account with them, CanaraBank Account is titled as Loro Account “i.e. their account with you”.

When our bank deals in an export credit bill on collection basis/on realisation of exportbills negotiated /purchased/discounted, the foreign currency funds is to be credited to ouraccount. For this purpose, we maintain Foreign Currency accounts with our variouscorrespondents abroad. The account is called NOSTRO account. Once the proceeds arecredited in our NOSTRO account, we receive the statement, based on which, the concernedbranch, who have handled the transaction, will be informed.

Likewise, when we would like to make remittances, on behalf of our customers towardsimport payments, miscellaneous remittances, etc., we give instructions to ourcorrespondents, to debit our NOSTRO account and effect payment.

Sometimes our correspondents maintain VOSTRO accounts (Rupee accounts of Non-resident banks) with our bank and payment or receipts are made through this account. Forexports, they will authorise us to debit their VOSTRO account and for imports, they will

6

give instructions to credit their account.

Likewise whenever the account of one bank in the books of the same correspondent,where we are maintaining our NOSTRO account, the other bank’s account with thecorrespondent is referred as LORO account. That is the account maintained by IndianBank with our correspondent Bankers Trust Co Newyork, will be referred as LORO accountof Indian Bank.

EXCHANGE RATES:

The rate, at which a currency is converted into another currency, is called the rate ofexchange. Such rates are arrived from the base rate, which is decided by market forcesand is quoted on a daily basis. Banks quote various rates for different types of operationslike Bill buying, Bill selling, TT (DD/MT/TT) buying , TT (DD/MT/TT) selling, etc. The ratesare arrived after loading suitable margins, as per F.E.D.A.I. (Foreign Exchange DealersAssociation of India) guidelines.

FOREIGN EXCHANGE MARKET:

Foreign Exchange Market is an Over the Counter Market. It means that there is no fixedmarket place. Market players are differently and distantly located. It has no borders andbarriers. All the transactions are put through over telecommunications followed up by writtenconfirmations. Hence there is the need of high level professionalism for the market players,which is in place.

Market Players are Authorised Dealers, Recognised Foreign Exchange brokers, Exporters,Importers, Reserve Bank of India. Sometimes market dealers include foreign banks abroad.

As such, Foreign Exchange Market is a three tier market viz.:

a) Merchant Market : Between Authorised Dealers and the public.

b) Inter Bank Market : Between Authorised Dealers in India including ReserveBank.

c) INTERNATIONAL MARKET : Comprising all Banks who deal in ForeignExchange at select international Foreign Exchange Centres like Singapore,Hong Kong, Tokyo, London, New York, etc. When an Authorised Dealer isunable to cover a deal in the local market, he will approach the other Bankersin the International Market for covering his deal.

Foreign Exchange is a scarce commodity, Hence, it is subject to control.

It commands a price due to the forces of supply and demand.

7

It has an active market (both domestic and international).

Authorised Dealers maintain stocks of Foreign Exchange abroad to meet contingenciesin the form of balances in Nostro Accounts with their Correspondent Banks.

F.E.D.A.I.

It is an association of all the AD banks in India to liaise with each other, with RBI and otheragencies. They prescribe the rules and charges for various foreign exchange transactions,with the concurrence of all the members.

8

CHAPTER 3

FOREIGN EXCHANGE RATES

INTRODUCTION

Every country has its own currency which is the legal tender within thatcountry. Nature has not bestowed every country with all the resources it would need.In that way, no country could have the comfort of being self-sufficient. Every countryneeds to import the resources / goods which are in short supply/not available withinthe country. At the same time the country may have some other resources/goodswhich are available in plenty within the country over and above the home requirement,which could be profitably exported. Hence, there arises the need for the movement ofgoods/resources/services from one country to another by way of export/import.

An exporter in India would like to be paid in Indian Rupees, whereas his counterpart - the importer - at the other end would prefer to pay for the imports in his homecurrency. Thus, it becomes necessary to convert one currency into another.

The rate at which such conversion is made is called exchange rate. In otherwords, exchange rate is the rate at which one currency can be converted into anothercurrency.

You may be aware, that till the early sixties, currencies of different countries wereon gold standard. i.e. a unit of a currency was valued in terms of certain amount of gold.The currency in circulation was kept at parity with gold or backed by gold reserves.When different currencies were on gold standard, the exchange rate could bedetermined with reference to the amount of gold each unit of the concerned currencycould fetch. Since gold is a scarce metal and the value of gold kept fluctuating dependingupon its demand and supply, the system of gold standard was abandoned. This gavebirth to IMF (International Monetary Fund) and World Bank at the Bretton WoodsConference. India was one of the founder members of the IMF and adopted the fixedexchange rate system.

As we were economically and politically linked with the United Kingdom,Reserve Bank kept Sterling Pounds as the intervention currency.

As our international trade in course of time got diversified and Sterling Pound wasbecoming volatile in the market, Rupee was delinked from Sterling Pound effectivefrom September 25,1975 and the Rupee was pegged to a basket of currencies. Thecomposition of the basket and the weight attached to each currency in the basket wasnot disclosed. The rates were fixed by Reserve Bank from time to time and the rate atwhich it would buy from and / or sell to Authorised Dealers Sterling Pound wereannounced periodically.

9

However, with effect from January 01, 1984, the interest rate which was built inthe exchange rate was de-linked from the exchange rate and the Sterling rate schedulewas abolished.

PRESENT SYSTEM

Later, during the period 1990-91 our country was hit by record low level offoreign exchange reserves, widening current account deficit coupled with impact ofthe invasion of Iraq on Kuwait resulting in the hike in oil price in the internationalmarket. As a consequence, our economy was hit hard by the rising import bill.

Even the Indians residing outside the country started withdrawing their deposits.The credit rating of our country took a beating in the international market.

To tide over the crisis Reserve Bank took an unconventional measure of sale of 20tons of gold with repurchase option to bolster up our reserves. Later 46.91 tonsof gold was pledged for getting a temporary line of credit from Bank of England andBank of Japan. A high level committee was formed to look into the exchange rateregime and the committee recommended among other things the introduction of dualexchange rate system. The system was introduced with effect from March 01, 1992 andwas known as Liberalised Exchange Rate Management System (LERMS).

The system provided for 40% of a foreign exchange transaction to be settled atofficial exchange rate and the balance 60 % at market rate, i.e., the rate as determinedby the market forces of demand and supply. As the reserves position improved asanticipated, with effect from 1st March 1993, the dual exchange rate system wasreplaced by the unified exchange rate system. The rate of exchange rate since thenis determined by market forces of demand and supply. In other words, the exchangerate is not administered but is market driven.

However, as the Reserve Bank carries the responsibility to manage the forexreserves and maintain the external value of Rupee , they have reserved the option tointervene in the market as and when they deem necessary.

EXCHANGE RATE QUOTES:

There are two standard ways in which exchange rates are quoted in differentcountries. They are the Direct quote and the Indirect quote. Under the direct quotesystem the exchange rate for a fixed unit of foreign currency is expressed in terms ofvariable units of domestic currency.

e.g. USD 1 = INR 45.00

10

Under the indirect quote system the exchange rate is quoted in terms of the numberof units of a foreign currency with reference to fixed / specific units of home currency. i.e.,the foreign currency is the variable.

e.g. INR 100 = USD 2.22

Both direct and indirect quotes represent the same value of the exchange rate.Till August 1993 we had the indirect system of exchange rates. With effect from 2ndAugust 1993 we switched over to the more convenient system of direct quotes. Allexchange rates are quoted per unit of foreign currency. There are certain currencies forwhich exchange rates are quoted per 100 units of foreign currency.

They are :

i. Euro & other European currenciesii. Japanese Yeniii. Indonesian Rupiahiv. Kenyan Schilling

TWO-WAY QUOTES

It is the practice in foreign exchange markets to always quote the rates both ways i.e.,one rate for selling and the other for buying. This ensures continuous availability of pricesfor both buyers and sellers.

PURCHASE AND SALE

A transaction is identified as purchase or sale with reference to the AuthorisedDealer who transacts the exchange. When the Authorised Dealer acquires foreignexchange by paying its equivalent in rupees the transaction is termed as a purchasetransaction. When the Authorised Dealer sells foreign exchange in exchange for rupeesthe transaction is termed as a sale. Ex.: purchase of an export bill denominated inforeign currency is a purchase transaction and remittance of foreign currency towardspayment of an import bill is a sale transaction. To understand it better, if the foreign currencyis converted into Rupees it is called Purchase or buying transaction and if the rupee isconverted into foreign currency it is called selling transaction.

RATES FOR VARIOUS TRANSACTIONS

Authorised dealers come across various types of customer transactions. Whenthe Authorised Dealer agrees to sell foreign exchange to a customer he should be ina position to buy from somebody or from the market and this is known as matchingpurchase transaction from another customer or from another Authorised Dealer inthe market. The market quotes to the Authorised Dealer the market selling rate, which

11

will be the basis for quoting selling rate to the customer. Similarly, when the Authorised

Dealer agrees to buy foreign exchange from a customer, the Authorised Dealer should

have a matching sale transaction with another customer or another Authorised Dealer in

the market, at the market buying rate which will be the basis for quoting buying rate to the

customer.

Further a sale transaction could be a clean remittance or a remittance towards

import bill. In the former case the work involved is just recovery of the rupee equivalent

and issue of DD/TT in foreign currency. In the latter transaction the work involved to the

Authorised Dealer are scrutiny of documents received, acknowledgment, presentation to

the drawee, safe custody of documents etc. The additional work involved in such a

transaction is compensated by selling the currency at a little costlier rate to the importer

customer.

Hence, there is a need to have two selling rates. They are TT selling rate and Bill

selling rate. Similarly, in the purchase transaction also, we have two buying rates viz.:

TT buying rate and Bill buying rate. Naturally the maxim is: “BUY LOW AND

SELL HIGH”.

Authorised Dealers arrive at the merchant rates as per Reserve Bank / FEDAI

guidelines. Market rates form the basis for quoting the merchant rates. Authorised

Dealers arrive at the base rates based on the on going market rate. After arriving at such

base rate Authorised Dealers marks it up to cover margin and profit by loading some

margin to the base rate. FEDAI has earlier laid down the minimum and maximum exchange

margin that are to be loaded for different types of transactions but now left to the

discretion to individual banks.

Bill Selling rate margin is loaded on TT selling rate. Authorised Dealers are also

required to ensure the maximum spread between the two TT rates shall be within the

range prescribed by FEDAI from time to time.

APPLICATION OF EXCHANGE RATES

1) Selling Rate Transactions

TT selling rate : Outward remittance in foreign currency ( TT, MT, DD ),

Cancellation of purchase ( Bill purchased returned unpaid / transferred to collection

account), Cancellation of forward purchase contract.

12

Bill selling rate : Transaction involving transfer of proceeds of import bills2) Buying Rate Transactions

TT Buying rate : Clean inward remittance for which cover has already beencredited to Authorised Dealers Nostro account. Conversion of proceeds of instruments/export bills sent for collection. Cancellation of TT/DD issued. Cancellation of forward salecontract.

Bill Buying rate : Purchase/discount of bills

Apart from the above rate structure Travellers cheques purchase and sale ratesand Currency purchase and sale rates are also quoted as per Reserve Bank / FEDAIguidelines.

13

CHAPTER 4

FORWARD RATES & CROSS RATES

FORWARD RATES

The spot exchange market has limitations when it comes to hedging futuretransactions. Although spot market allows cash flows in foreign currencies to be

converted into the required currencies , it cannot cope with cash flows that, although known,would not materialise till some future time. Specifically for this reason, the

forward exchange market developed and grew up.

Before we go into the working of the forward exchange market, it will be preferableto have a glance at the genesis and functioning of the euro currency market.

It is a money market in which currencies are traded outside the country of its

origin. For example, euro-dollar would be traded outside US markets, euro-sterlingoutside UK markets, and so on.

The euro-market is now a truly global market and the major players are sovereign

governments, central banks, commercial banks, investment banks, multinationalcorporations, etc.

In euro-markets funds are accepted and lent for periods ranging from 1 day to 1

year or above. A participant in the euro-market may be a market maker or marketuser. It is through the interaction of the foreign exchange market with this money

market (euro-market) the forward foreign exchange rates are possible.

Let us work out with an example.

Let us assume that the USD/DEM spot exchange rate quoted in the market is1.6700 (for easy understanding, ignore buying-selling or bid-offer form of exchange

rate).

Likewise, assume that in the euro-market the following rates are quoted:

3 Months euro-dollar 5% p.a. 3 Months euro-mark 3.50% p.a. (once again foreasy understanding, we have ignored the bid-offer form of money market quote).

Suppose a customer is interested in a three month forward USD/DEM rate. One

can have the following options:

14

i) Make a wild guess and estimate the very likely spot rate that would beruling 3 months later and quote

ii) Try to work out whether the quote available in the euro money market canbe utilised and worked out with the foreign exchange spot market quote obviously theoption under (i) would be very risky since no one can reasonably work out a rate thatwould be ruling 3 months later. He or she will then be exposed to exchange risk orcurrency risk. The option under (ii) will work out an alternate risk free rate for 3 monthsforward USD/DEM. The steps in such a work out would be

A. Sell spot USD and buy DEM at 1.6700

B. The bought DEM would be needed only after 3 months and hence can beplaced in deposits in euro money market at 3.5%.

C. For buying the DEM spot, we have to borrow USD for 3 months as we donot have the same right now. This can be accessed through euro moneymarket at 5%.

D. After 3 months get the dollar from the customer and give the mark to him.

E. In order not to make any profit or loss on the trade, the rate for 3 monthsforward could be worked out by dividing the DEM amount received byUSD amount paid.

The above transactions can be diagrammatically explained as follows:

Buy Spot DEM @ 1.6700 ——>Lend for 3 months @ 3.5% Receive DEM 1.6846125 after 3 months

To buy spot DEM @ 1.6700, we need to borrow 1 USD for three months at5.00%. Therefore, the borrowed USD would be repaid after 3 months with interest by

making a payment of USD 1.0125.

After 3 months, the cash flows would be:

Receive DEM 1.6846125Pay USD 1.0125

On a no profit no loss basis, these two amounts, that is USD 1.0125 and DEM1.6846125 should be equal.

From this 1 USD = DEM 1.6638

15

So, with the given market particulars, if the customer is quoting a forward rate of1.6638, it would be a risk free quote. Since both the currencies are fully hedged, therewill be no exchange or currency exposure !

This is the heart of the forward market. The real calculation will be morecomplicated as we have certain assumptions in the above calculation

i) There would be two way quote for the spot USD/DEM (buying- selling orbid-offer rate)

ii) Similarly in the euro market also there would be two way quote for 3months euro dollar and 3 months euro mark (bid-offer)

As a sequel, we will be getting two forward prices and these would be thebuying and selling prices or bid and offer prices of forward USD/DEM

Therefore, the forward price of a currency against another can be worked out withthe following factors:

i) Spot price of the currencies involved

ii) the interest rate differential for the currencies

iii) the term i.e. the future period for which the price is worked. Hence, theforward price is no indicator of the future trend of the currency. At thisstage, it would be ideal if we look at the equation from the base and offeredcurrency angle.

Suppose the price given is 1X = 2Ywhere X is the base currency and Y is the offered currency.

We can think of three possible scenarios in terms of interest rates for the currenciesX and Y for a given term They are

i) Interest rate for X > Interest rate for Yii) Interest rate for X < Interest rate for Yiii) Interest rate for X = Interest rate for Y

In the third possibility, naturally the forward rates would be equal to the spot ratessince the interest differential is zero. However, the forward rate will be different in the 1stpossibility than the forward rate in the second possibility.

This is because the direction of interest rate differential would be different. In thefirst possibility, if we are selling the currency X at spot against Y, then for the

16

period from spot date to the forward value date, the interest rate differential will be againstus. The forward rate will have to be such as to compensate us for this loss. Inthe second possibility, if we are selling the currency X spot, then for the period fromspot date to the forward value date, the interest rate differential will be in our favour.The forward rate will have to be such as to make us sacrifice for this gain. Thiscompensation and sacrifice for the interest rate differential being paid or received, iscalled the premium and discount in the foreign exchange parlance.

A currency having higher rate of interest is said to be at a discount in forwardrelative to the currency with a lower rate of interest and a currency having lower rate ofinterest is said to be at a premium in forward relative to the currency with a higher rateof interest.

Forward rates, can be represented in a mathematical form, in the following manner:

Forward Price = Spot Price +/- Forward Margin

In case, the base currency is at a premium, the forward margin would be addedto the spot price and in case the base currency is at a discount, then the forward marginwould be deducted from the spot price.

As a rule of thumb, to ascertain from the given forward margin, whether thebase currency is at a premium or discount, one can follow the following rule:

Base currency at a premium —> The forward margin would be in an ascendingorder, e.g., 80-85, 110-112, etc.

Base currency at a discount —> The forward margin would be in a descendingorder, e.g., 85-80, 112-110 etc.

Also the spread between the forward buying and selling rates would be morethan the spread between the spot buying and selling rates.

CROSS RATES

Suppose, we are dealing in a market, where rates for a particular currency pair isnot directly available, still, we may be able to arrive at the price for the said currencypair indirectly with the help of “cross rate” mechanism. This can be explained with thehelp of an example.

Suppose, we are looking in for DEM/INR quote. Let us assume, no one is preparedto quote DEM/INR in the market. Still, we can work out an effective DEM/INR quote through USD/DEM and USD/INR quotes.

17

USD/DEM would be available in the international markets and USD/INRwould be available in the domestic market.

By crossing out USD in both the quotes, we can arrive at an effective DEM/INRquote. This is the basis for working out cross rates.

Suppose both the quotes are direct rates as in the above case, e.g. USD/DEMand USD/INR, then cross division will result in the required rate. That is the Offerprice of USD/INR should be crossed with the bid price of USD/DEM and bid price ofUSD/INR should be crossed with the offer price of USD/INR.

Suppose one quote is in direct quote and the other indirect quote, like, forexample, STG/USD and USD/INR, then the offer price of STG/USD and the offerprice of USD/INR should be crossed and the bid price of STG/USD and the bid price ofUSD/INR should be crossed to work out an effective STG/INR rate.

Cross rate mechanism is a possible solution for calculation of rates for currencypairs which are not actively traded in the market.

Due to rising rupee, exporters can now hedge more against the foreign exchangerisk.

Hedging is the reduction or elimination of risk by taking corresponding opposite posi-tions. There are also various tools available for reducing the risk management task suchas holding accounts denominated in foreign currency, from where the receipts and pay-ments are made. This would reduce the exposure to the net amount.

Forward Cover

A forward cover is an agreement to exchange certain amount of two currencies at a prede-termined rate and time. Thus the fact that the exchange rate is already known to the enter-prise eliminates all the risk attached to it.

However, one of the severest limitations of forward cover is the fact that it is a bindingcontract. If, for example, an enterprise enters into a contract to convert a future receipt intoIndian Rupees on the anticipated date of receipt at a pre- determine rate, it would still haveto deliver the foreign currency to close the forward cover, whether the anticipated receiptcomes or not. For example, if the customer defaults in his payment, the enterprise wouldhave to buy the foreign currency spot to close the forward cover. This could result in agreater loss than the loss intended to be hedged.

18

CHAPTER 5

METHODS OF INTERNATIONAL PAYMENT SETTLEMENT

The objective of this chapter is to make the reader understand :

1. The meaning of terms of payment

2. The four methods of payment namely Advance Payments, Open AccountSystem, Consignment Sale and Bill for Collection.

3. The advantage of the different methods to the buyer and seller.

4. Different financial instruments used in settlement like Demand Draft, andSWIFT.

To be very clear as to how payments for goods are to be sent, it is necessary thatthe buyer and the seller incorporate the details in the contract of sale itself. Dependingupon the bargaining power of the buyer and seller, provisions of Exchange Contracts inthe countries concerned, the duration of trade relationship between the buyer and sellerand also the credit worthiness of the parties concerned, terms of payment are arrived at.It can also be said in general that terms of payment reflects the extent to which the sellerrequires a guarantee of payment before he loses control over the goods.

ADVANCE PAYMENT

When there is a sellers market for the goods, the Exporter can demand that the

Importer should make full advance payment before the goods are despatched. Even

though this method is the most desirable for the Exporter, the Importer has to rely on the

integrity of the Exporter and his capacity to execute the order in time. More than that,

the entire transaction is financed by the Importer in this method thereby making the

transaction more costly for him; besides exposing the Importer to credit risks. On account

of the above factors some countries have imposed Exchange Control restriction regarding

imports. For example in India advance payment is allowed only in respect of import of

books, periodicals, life saving payment apparatus, capital goods, machinery and a few

other items. Bankers may stipulate that the Importers produce documentary evidence

showing the supplier demanding the advance payment. Advance payment of USD 2500/

- or its equivalent can be made for commercial imports subject to the following conditions.

1. Production of documentary evidence showing the demand of the overseassupplier.

2. Remittance will be made direct to the overseas supplier.

3. Endorsement in the import licence if any.

19

4. Undertaking that the Importer will submit evidence of import in the Exchange

Control Copy of Bill of Entry/Postal wrapper within a period of 3 months

from the date of remittance.

5. Import is permitted either by a licence or under OGL. As regards

exports, depending on the nature of goods exported and the

competitiveness of the product, advance payment is insisted. For example

in the case of export of vegetables and fruits, it is customary to demand

100% advance payment.

6. Application in F.A.I. in duplicate.

Even though advance payment cannot be insisted upon on all trade transactions

it is quite common for a sale contract to require a partial payment in advance and the

balance payable after despatch of goods.

Open Account System

When an Exporter agrees to sell the commodity on open account system to the

Importer, he despatches the goods to the buyer directly followed by the transport

documents and an invoice requesting payment. You may observe that the Exporter loses

control over the goods completely and leaves everything on the integrity of the buyer. To

put it in other words, the effect of this system is just opposite to advance payment system.

While open account system is most advantageous to the Importer, the Exporter bears

the entire financial and commercial risks. This system is normally resorted to when the

goods command buyer’s market. The commercial risk is, to some extent minimised by

taking a policy of ECGC. To take care of the interest of the Indian Exporters, there are

Exchange Control restrictions imposed by RBI on open account export Sales.

Consignment Sale

While the ownership and possession passes to the buyer in the case of open

account system, the ownership remains with the seller in the case of consignment sale.

The consignee in this case will be selling agent of the Exporter. The goods are sold by

the consignee on behalf of the Exporter and as and when the proceeds are received,

they are remitted to the Exporter. The agent/consignee may deduct from the sale proceeds

of the goods, the expresses normally incurred such as warehousing & handling charges,

Jewellery, precious stones and engineering goods are normally sold by this method. In

the case of goods exported on consignment basis, freight and marine insurance must

be arranged in India. Engineering Export promotion council maintains a warehouse at

Rotterdam to assist the Exporters. The time limit for realisation of export proceeds is 15

months as against the usual 6 months.

20

Documentary collection

In the methods mentioned above, either the Exporter benefits or the Importerbenefits. Can there be a method where the Exporter does not lose control over the goods(title to goods) and the Importer is not required to make payment before the documentare received evidencing despatch of goods? Yes, it is called the documentary collection,using the services of the Bank. The Exporter prepares the proper financial and commercialdocument including the transport document and hands over to his Banker requesting inclear terms as to how the documents are to be delivered to the Importer at the otherend. The uniform rules for collection (International Chamber of Commerce, PublicationNo. 322) with effect from January 1979 form an internationally accepted code of practicecovering documentary collection. There are four main parties to a documentary collection.

They are :

1. The Principal i.e.. the Exporter or Drawer of bill of exchange

2. The Remitting Bank - The Exporter’s Bank who has been entrusted thejob of collection.

3. The Collecting Bank - The Bank in the Importer’s country who is normallya branch or correspondent of the remitting Bank.

4. The Importer, the consignee or the drawee of the Bill of Exchange.

When the Exporter wants the Bank to hand over the export documents to theImporter only against payment immediately, the Bill of Exchange is called a Sight Draft.In case the Exporter wishes to give some time (30 days, 60 days, 90 days etc.) to theImporter to arrange for the funds but at the same time would not like to part with thedocuments before payment of money, the appropriate bill of exchange is called a D/P(Document against Payment) - In some cases, depending upon the mutual confidencebetween the buyer and acceptance and await payment after an agreed time. Theappropriate Bill of Exchange in this case is called a “Usance Draft” or D/A (Documentagainst acceptance). Here the buyer/importer has the permission to take delivery of goodswithout payment, use the commodity in his trade or manufacturing process, sell the finalproduct and remit the contracted amount on or before the due date.

Different financial instruments used in settlement

Traveller’s Cheque

It is a convenient mode of carrying purchasing power. The currency and denominationcan be chosen depending on our destination and purpose. For example if an exporter isplanning for an export promotion trip to Germany, he can obtain travellers cheques in

21

Deutsche Marks. At the time of purchasing them from a Bank he has to apply in FormA2 and indicate the currency and denomination in the requisition slip. The Bank willhandover the travellers, cheques after ensuring that your specimen signature is put onthe face of the travellers, cheques. When the Exporter is in Germany he can use thesecheques for payment of his hotel bills or purchases or encash them freely at any Bank.At that time he has to put his signature and date in the presence of the concerned officialin the space provided on the face of the travellers’ cheques. In the case of loss of travellers’cheque, refund can be obtained through a Bank after submitting a report. There is noexpiry date for travellers cheques.

Swift

SWIFT is an acronym for Society for Worldwide Interbank FinancialTelecommunication system and it provides telecommunication services and moreimportantly uniform procedures that are understandable to the banking industry throughoutthe world by use of standard message formats. SWIFT is a co-operative body of financialinstitutions with headquarters at Belgium.

In the 1960’s and 1970’s banks across the globe used to sent their financialpayment advices, letters of credit and amendments etc., by the conventional mail or telex.This was found to be expensive as well time-taking. Also banks worldwide used differentterms and different instructions to convey the meaning. This resulted in ambiguity leadingto delay in execution of payment etc. A need was felt to have one common structuredlanguage for all banks so that delay in correspondence and payment of damages couldbe avoided and speedier transmission of data could be introduced.

As a result, SWIFT was introduced. Banks universally could understand thelanguage since it is commonly structured and conforms to ISO standards.

What to look for in SWIFT message :

Whether it an authenticated message or not.

All messages are not authenticated.

Message types 100, 200, 400, 500, 600, 700, 800 series are authenticated andmessage types 300 and 900 series are not authenticated. Authenticated messages areidentified by a caption ‘AUTH’ correct with “current key”. This is a valid message andcan be acted upon.

SWIFT operates in more than 75 countries and is available 24 hours a daythroughout the year. It is the most widely used financial network around the world byover 3000 financial institutions.

22

Last year only, banks in India joined SWIFT network and presently one designatedbranch in Bombay of each SWIFT member bank is linked to the network. Shortly someof the up-country branches dealing in foreign exchange will also be connected to thenetwork.

The main benefits of using the computer network provided by SWIFT are speed,reliability and security in transfer a part from lower costs compared to conventionalcommunication methods.

MAIN POINTS

1. Different terms of Payments:

Advance payment: When there is a seller’s market.

Full/or partial payments are advanced before the goods are despatched. Importerbears the entire commercial/financial risks till the goods are received by him as per termsof agreement

Open Account System: When there is buyer's market.

Goods are despatched to Importer directly followed by Invoice requesting payment& transport documents

Risks of Exporter

a) Exporter bears entire commercial & financial risks till payments are received.

b) Exporter loses control over goods till payments are received safely.

Consignment Sale

Owner ships remains with the exporter to the extent of sale of goods. Time to realizepayments is 15 months

Documentary Collections

Exporter does not lose control on title of goods and importer also does not makepayment before documents.

2 types of documentary collections

i) D/P sight (or) credit 30/60/90 days etc., D/P sight Backhands are does to importagainst his immediate payment D/P Credit: As Bk.’s hands are do again stipulated creditdays against payment remittance by importers Bank hands over documents to importerand awaits payments as per credit term of agreement.

ii) D/A usance or D/AExporter permits the delay of goods and documents immediately on acceptanceand awaits payment after an agreed time.

23

2. Different modes of Financial instruments

Telegraphic Transfer (or) TT

Instruction for remittance by cable through NOSTRO account to make paymentThis is usually for its overseas branch or correspondent.

Foreign demand draft

The DD is handed over to buyer & who in turn despatches to the beneficiaryIt is time consuming and involves a lot of formalities if the DD is lost in transit.

Traveller’s cheque, are sold by all Authorised dealers and authorised money changesIt is issued in many currencies and denominations and accepted by world over.

Specimen signatures have to be affixed one while getting and the other at the time of encashing it anywhere in the world. There is no expiry date for Travellers cheques.

3. SWIFT (Society for world wide Inter bank Telecommunication system)

It is used to send the financial payments advise / L/Cs and their amendment in onecommon language for clarit1y & simplicity speedier transmission. Authenticity of themessage to be verified.

24

CHAPTER 6

INTERNATIONAL COMMERCIAL TERMS (INCOTERMS)

What are Inco terms?

In the early 1400s international traders located in different countries devisedshort abbreviations for certain commonly used trading terms. However due to differencesin culture and practice these trading terms had different meanings for different globalparticipants, confusion and errors became a regular staple and a consistent risk ofinternational trading. Therefore in order to foster consistency and eliminate confusion theInternational Chamber of Commerce in 1436, developed one, standard and uniform set ofinco terms for global traders to adopt. Since then these inco terms have played a key rolein global commerce. Specifically inco terms address certain key responsibilities andobligations and establish or signify markers along the chain of the micro logisticcomponents.

Deciphering Inco terms:- The Economy and trade of the21st century truly consists of one global market while buyers and sellers very often findthemselves at different parts of the globe. They can rest assured that they have a uniformand standardised set of International, Commercial, Terms (Inco terms) to help themnavigate through inter national transactions and also describe both Buyer‘s and Seller‘sand role in the supply chain.

Incoterms are use to define the relationship between Buyer and Seller regarding :-

1) The mode of delivery2) Who has to arrange for customs clearance and licenses3) Passage of title (i.e; ownership of goods)4) Transfer of risk and insurance responsibilities (i.e. who has to obtain insurance of

the merchandise during transport.5) What the delivery terms are6) How transport costs will be allocated between the parties and7) When is a delivery completed.

Contract Vs incoterms:-

The incoterms do not constitute a contract between the buyer (importer) and the seller(exporter). It only describes part of the obligation and understandings of the two parties.In the event of a dispute between the parties the sale contract would take precedence.

25

Incoterms will not

1) define contractual rights

2) define liabilites and/or obligations between the parties

3) specify transport detail such as transfer and /or delivery of the merchandise

4) dictate how the title of the merchandise would pass (even though incoterms can dicatewhen they transfer)

5) dictate obligations with regards to the merchandise prior to and after delivery.

6) protect a party from risk of loss

Understanding Incoterms:-

Incoterms can be broadly classified into various groups depending on certain essentialcharacteristics.

Group 1) The “E” groupe is short for ex-works (name & location) the main characteristic ofthis group is that the seller and /or exporter represent to make the merchandise availableact his/her own premises to the buyer/importers. Once the buyer/importer picks up thegoods the obligations are fulfilled.

The Seller/exporters has very few obligations and an extremely low risk of loss. Title istransferred at the beginning. Buyer bears the risk of loss and has to insure or bear therisks of transport.

Group (2) The “F” group includes terms such as FAS (Free along side) FOB (Free onBoard) and FCA Free Carrier + Named location) the essential characteristic of this groupare that buyer and seller have agreed that the seller/exporter is responsible to deliver themerchandise to a carrier/location designated by the Buyer. Once seller/exporter has affecteddelivery to the specific carrier/location, then seller/exporters obligation ceases and thebuyers/importers begin.

Group 3) The “C” group includes seen as CIF (Cost Insurance and freight), CFR Cost andFreight. CPT ( Carriage Paid to) and CIP (Carriage and insurance paid to) The essentialcharacteristics of their grouping are that the seller/exporter is obligated for contractingand paying for the transportation of goods but has no obligation to bear additional costnor has to bear any risk of loss once the goods have been shipped.

26

Group (4)-The “D” group include terms such a DAF (delivered act frontier named location,DES (Delivered Ex ship) DEQ (Delivered Ex Quay) DDU Delivered duty unpaid, DDP(delivered duty paid).Thus grouping is the exact opposite of the “E” Group in other wordsthe seller/exporter has all the obligation of costs, risks (insurance) duties etc and must.Make the Merchandise available at the named place of destination (usually named by thebuyer)

As you can see the general theme in the grouping is that there exists a progression ofobligations risks, costs, liabilities and duties between Buyer and Seller. As the groupingsprogress buyers starts off with all risks and costs and title while seller has none. Towardsthe end of the groupings the seller has all risks and costs while buyer has none. Basicallythe incoterms designate and define which party has what obligations and when and wherethese obligations begin and end.

Dangers of Improper use of IncotermsIf used properly, incoterms can and clearly define who has what risks costs burdens andobligations and this will enable each party to know exactly what prices to accurately quoteand will therefore avoid hidden and unexpected costs. These hidden and unknown chargesare often the heart of many disputes therefore it is crucial that each party fully understandthe implications of the incoterms and what their respective roles and costs will be beforeagreeing to them. Improper use or lack of understanding of incoterms can lead toambiguities, disputes and significant financial losses. Misuse of incoterms may void certaininsurance policies.

Incoterms 2000 covers four areas of an international transaction including:• Division of costs between the buyer and seller as it relates to banking, packing

and transportation, forwarding fees, customs house broker’s fees, duties andancillary charges relevant to a particular transaction.

• Division of responsibility in selecting the carrier, forwarder and customs housebroker.

• Division of risk in the transportatin of the cargo from the seller’s facility to thenamed delivery point.

• Definition of who will provide the documentation needed for the internationaltransaction.

1. Ex-Works means that the seller’s responsibility is to make goods available to thebuyer at works or factor. The full cost and risk involved in bringing the goods, from thisplace to the desired destination will be borne by the buyer. This term thusrepresents the minimum obligation for the seller.

Seller’s Primary Obligationsa) Deliver the goods as per contract of sale at his (seller’s) premises.

27

b) Provide whatever packing necessary to enable the buyer to take deliveryof the goods.

c) Pay for checking operations such as quality checking measuring.

d) Assist the buyer at the buyer ’s expense to obtain export license orcertificate of origin for the purpose of origin for the purpose of exportation.

2. Free on Rail (F.O.R) & free on Truck (F.O.T)

These terms are used when the goods are to be carried by rail, but they arealso used for road transport. The seller’s obligations are fulfilled when the goods aredelivered to the carrier.

Seller’s Primary Obligations

a) Deliver the goods to the railway and procure and load the wagons

b) Deliver the goods to the freight forwarder where the transport of less thanfull loads is arranged

c) Pay for packing of goods as the case may be

d) Pay for checking operations

e) Finish appropriate documents of title of goods and invoice to the buyer

f) Assist the buyer at buyer’s expense to obtain any other documents

g) Give notice to the buyer, without the goods have been loaded / deliveredinto custody of the carrier.

3. Free alongside ship (F.A.S)

Once the goods have been place alongside the ship, the seller’s obligations are fulfilledand when the buyer is notified, the buyer has to enter into a contract with the carriageof the goods to the destination and pay the freight. Sea carrier the buyer has to bearall costs and risks of the loss or damage to the goods hereafter.

Seller’s Primary Obligations

a) Deliver the goods alongside the ship and advise the buyer and provide analongside receipt. This may be a dock or warehouse receipts or warrantand must be customary clean documents.

b) Provide packing of goods

c) Assist the buyer at buyer’s request, risk and expense, in obtaining anydocument for exportation.

d) Pay for checking operation if required.

28

4. F O B (Free on Board)

The seller’s responsibility ends the moment, the contracted goods are placedon board the ship free of coast of the buyer, at a post of shipment named in the salescontract. On board means that a receipt for shipment bill of lading is not sufficient.Such bill of lading if issued must be converted into, shipped on board B / L by usingthe stamp, “Shipped on Board” and must bear the signature of the carrier or hisauthorized representative together with date on which the goods were boarded.

Seller’s Primary Obligations

a) Provide packing of goods of sea / air worthy packing

b) Pay for checking operation, if required

c) Provide export license and pay export taxes and duties if required

d) Deliver the goods on board the named ship as per contract, notify the buyerand provide a clean on board receipt.

The following clauses do not convert a clean B / L

i) Clauses which do not expressly state that the goods or packing areunsatisfactory e.g., second hand cases, used drums etc.,

ii) Clauses, which emphasize the carrier non-availability for, risk arisingthrough the nature of the goods or the packing

iii) Clauses, which disclaim on the part of the carrier, knowledge ofcontents weight measurement quality or technical specifications ofthe goods.

e) Pay loading costs excluding the freight

f) Assist the buyer at buyer’s risk and cost to obtain documents like certificateof origin etc. to facilitate exportation.

5. F.O.A – F.O.B Airport

‘FOB Airport’ is on the same main principle as the ordinary FOB terms. The seller fulfillshis obligation by delivering the goods to their carrier at the airport of departure just todifferentiate ordinary FOB terms from FOB airport. It is to be noted that in the latter thepoint of delivery is not tied to the air carrier unlike the ship rail in the former.

The buyer usually arranges for carriage in case of see transport and in the case of FOBAirport the seller usually arranges for the carrier.

Seller’s Primary Obligationsa) Provide packing of goods and pay for checking operations

29

b) Notify the buyer if buyer wishes sells to contract for carriage

c) Contract for carriage

d) Deliver the goods to the air carrier at the airport of deposes and notify buyerwithout delay by Tele-communications channels at his own expenses

e) Assist the buyer at buyer’s risk of cost in obtaining any relevant documentto facilitate to buyers importation of goods

f) In case of loss or damages to the goods, seller renders the buyer at buyer’srequest, risk and expenses every assistance in bringing any claim againstthe air carrier or his agents

6. (C & F) Cost and Freight

The seller must on his won risk and not as an agent of the buyer contract for carriage ofthe goods to the port of destination named in the sale contract and pay the freight. Thisbeing a shipment do contract, the point of delivery is fixed to the ships rail, and the risksof loss or of damage to the goods is transferred from the seller to the buyer, at the verypoint. Through the seller bears the cost of carriage to the named destination the risk isalready transferred to the buyer at the port of shipment itself.

Seller’s Primary Obligation

a) Provide packing of goods

b) Pay for checking operations

c) Contract for the carriage to the named destination and pay the freight

d) Deliver the goods an board and notify the buyers

e) Pay the loading costs

f) Furnish tot he buyer the increase and clear on board B /L

g) Assist the buyer in obtaining any document to facilitate exportation/

importation in his country.

7. Cost Insurance and Freight (C.I.F)

The term is basically the same as C & F with the addition that the seller has to obtain

insurance at his cost against the risks of loss or damage to the goods during the carriage

30

Seller’s Primary Obligations

In addition to all points stated under C & F the seller has to change contract for the

insurance of goods during the carriage and pay the insurance premium.

He has also to furnish a cargo insurance policy or certificate as per contracts of sale the

buyer.

8. Freight or Carriage Paid ( F.C.P)

While C & F is used for goods which are to be carried by sea, the term, F.C.P is

issued for land transport only including national and international transport by road, rail

and inland waterways. The seller has to contract for the carriage of the goods to the

agreed destination named in the contract of the sale and pay freight. His obligation is

fulfilled when the goods are delivered to the first carrier and not beyond.

Seller’s Primary Obligations

a) Obtain export license and pay export taxes, fees of regd.

b) Provide packing of goods as the case may be and writing pays for checking

operations if regd.

c) Contract for carriage and pay the freight up to the named destination

d) Deliver the goods to the first carrier and notify the buyer expeditiously

e) Furnish to the buyer the increase and the usual transport documents if

customary

f) Assist the buyer at the buyer’s risk In obtaining any document for import

purpose.

9. Ex-Ship (EXS)

This is an arrival contract and means that the seller makes the goods available to the

buyer in the ship at the named port of destination as per sales contract. The seller has

to be bear the full cost and risk involved in bringing the goods there. The seller’s obligation

is fulfilled before the Customs border of the foreign country and it is for the buyer to obtain

necessary import license at his own risk and expense.

Seller’s Primary Obligations

a) Provide worthy packing of goods as the case may be and pay for checking

31

operations required

b) Deliver the goods in the ship as the named destination

c) Notify the buyer when goods are handed over to carrier expeditiously

d) Provide documents including B /L to enable buyer to take delivery fund

the port

10. Ex Quay (EXQ)

EX-QUAY means that the seller makes the goods available, to the buyer at a named quay.

As in the term Ex-Ship the points of division of costs and risks coincide, but they have

now been moved one-step further-from the ship to the quay or wharf i.e. after crossing

the Customs border at destination. Therefore in addition to arrange for carriage and

paying freight and insurance the seller has to bear the cost of unloading the goods from

the ship.

Thus an Ex-Quay sale is in a sense a sale in the market of the country of destination.

This important difference compared with the sale Ex-Ship is usually indicated by adding

the words duty-paid with in the parenthesis after the words Ex-Quay. If seller does not

want to assume this obligation he has to add the words ‘Duties on buyer’s account’. Duty

includes all tax’s fees and charges necessary for importation which means VAT levied

upon importation will have to be paid by seller. If the seller is a foreigner, this may well

be desirable for tax deduction purpose and the parties should in such cases consider

adding exclusive of VAT.

Seller’s Primary Obligation

In addition to those stated under Ex-Ship the seller will have to pay the cost of unloading

of goods.

11. Delivered at Frontier (D.A.F)

The term is primarily intended to be used when the goods are to be carried by rail orroad. The seller’s obligations are fulfilled when the goods have arrived at the frontier,before the Customs border of the country named in the sales contract.

Seller’s Primary Obligations

a) Provide worthy packing of goods & to pay for checking

b) Deliver the goods free for export at the frontier or named place as theyfrontier on the date on within the period stipulated in the contract of sale.

32

c) At the time of despatch of goods notify the buyer expeditiously to enablehim to take delivery of goods

d) Provide necessary documents like document of transport or warehousewarrant, etc.

e) Pay all charges taxes and fees up to the time when he puts the goods atthe disposal of the buyer.

12. Delivered Duty Paid (D.D.P)

The term may be used, irrespective of the type of transport involved, and denotes seller’smaximum obligation as opposed to ex-works. The seller has not fulfilled his obligationssuch time, as the goods are made available at his risk and costs to the buyer at hispremises or any other named destination. In the latter case, necessary documents (e.g.transport documents or warehouse warrant) will have to be made available to the buyerThe term Duty includes taxes, fees and charges. Therefore, the obligation to pay VAT(Value Added Tax) levied upon importation will fall upon the seller. It is therefore advisableto use exclusive of VAT after the words Duty Paid.

Seller’s Primary Obligations

a) Provide worthy packing of goods and pay for checking opens

b) Deliver the goods at the named place of destination

c) Provide all documents to buyer and notify the despatch of goods

d) Obtain any import license and pay import duties taxes and fees

e) Reimburse the buyer for costs incurred for any documents that the sellerhas requited for export and / or import purposes

13. Free Carrier (Named Point) (F.R.C)

The term has been designed particularly to meet the requirement of modern transportlike multi-mode transport such as container or roll-on roll-off traffic by trailers and ferries.The principle on which the term is based is the same as applicable to FOR, except thatthe seller or the exporter fulfills his obligations when he delivers the goods into the custodyof the carrier at the named point.

The risk of loss or damage to the goods is transferred from seller to buyer or thus timeand not at the ships rail. The work carrier for this purpose is defined as any person bywhom or in whose name a contractor of carriage by road rail sea, air or a combinationof roads has been made.

33

Seller’s Primary Obligations

a) Deliver the goods as the named point into the custody of the carrier named bythe buyer

b) Provide documents evidence of such delivery of the goods

c) Provide export license and pay export taxes charges and fees

14. Freight Carriage and Insurance Paid (C.I.P)

Here, insurance also has to be paid by the seller.

Seller’s Primary Obligations

Contract for insurance of the goods during the carriage and pay the insurance premiumand provide insurance documents along with other documents to the buyer.

34

CHAPTER 7

LETTER OF CREDIT

Letter of Credit or Documentary Credit is defined as “an arrangement by means of

which a bank (issuing bank) acting at the request of a customer (applicant), undertakes to

pay to a third party (beneficiary), a pre-determined amount by a given date according to

agreed stipulations and against presentation of stipulated documents”.

Therefore, from a bank’s point of view, it can be merely characterised as “aninstrument for making payment against documents”. But for the seller and the buyer (or the

applicant and the beneficiary) or the commercial parties, it serves as an economic purpose.

The documentary L/C has been developed as a compromise between the seller’s

need for the security of the ownership of goods and speed of payment, and the buyer’s

need for speed of transit but the longest period for payment. The international banking

system and the documentary credit process thus provides both to buyer and seller with the

security they need.

Since the documentary credit procedure affords buyer and seller equal protection,

it has evolved as the method preferred for first - time dealings when buyer and seller are

unknown to each other. The seller is unsure of the buyer’s ability, or intention, to make

payment, while the buyer is unsure that the seller will deliver the correct goods in a timelyfashion.

Other reasons might include:

* The buyer’s country is politically or economically unstable;

* L/C is a regulatory control for foreign exchange or import licence / preshipmentinspection regulations.

* The seller requires a secure form of payment to fund production or purchase

from suppliers (transferable or back to back credits)

One of the methods for eliminating the potential errors between buyer and sellerwhen arranging the first documentary credit transaction is to send the buyer a draft L/C

that contains the conditions agreed in the contract of sale. In particular, the draft should

contain reference to the documentation required, the method and the date for payment

and despatch and the terms of sale (Incoterm 2000)

The draft L/C could form an attachment to a Proforma Invoice or offer presented to

the buyer.

35

It is better to specify the bank costs incurred in the operation of L/Cs. Thecompromise normally accepted is that the buyer (applicant) agrees to pay charges arisingin the country of importation and the seller for the costs in the country of origin.

A letter of credit contains the following characteristics:

* It is an undertaking of a bank

* It is an undertaking to make payment

* It is an undertaking given on behalf of a person

* It is an undertaking given to a third person

* It is a conditional undertaking, payment being subject to compliance withcertain terms and conditions

The parties to a letter of credit arrangement are:

* The importer or the applicant

* The issuing bank

* The advising bank

* The exporter or the beneficiary

* The confirming bank

* The nominated bank

* The reimbursing bank

The applicant is normally the buyer of the goods and who has to make payment tothe beneficiary. The letter of credit is issued at his request.

The issuing bank is the one which issues the letter and undertakes to make payment.

The advising bank is the bank, which advises the letter of credit to the beneficiarythereby assuring the genuineness of the credit.

The beneficiary is normally the seller of the goods and who has to receive paymentfrom the applicant.

The confirming bank is the bank which adds guarantee to the credit issued by theissuing bank, thereby undertaking the responsibility of payment/negotiation/acceptanceunder the credit, in addition to that of the issuing bank.

The nominated bank is the bank nominated and authorised by the issuing bank topay, to incur a deferred payment undertaking or to negotiate. In a freely negotiable credit,any bank is a nominated bank.

36

The Reimbursing bank is the bank authorised to honour the reimbursement claimin settlement of negotiation/acceptance/payment lodged with it by the negotiating,accepting or paying bank, it is normally the bank with which the issuing bank maintains anaccount, from which the payment is made.

The various types of Letters of Credit are:

* Revocable credit* Irrevocable credit* Payment credit* Deferred payment credit* Acceptance credit* Negotiation credit* Confirmed credit* Revolving credit* Instalment credit* Transferable credit* Back-to-back credit* Anticipatory credit (red clause or green clause)* Stand-by credit

Revocable CreditA credit which can be revoked by the issuing bank without the consent of the

beneficiary. However, any payment, acceptance, negotiation or deferred payment againstdocuments which as per terms of the credit and undertaken before receipt of notice ofrevocation by the beneficiary will have to be honoured by the issuing bank.

Irrevocable CreditA credit which is a firm undertaking of the issuing bank and cannot be cancelled or

amended without the consent of all the parties to the letter of credit, particularly thebeneficiary.

Payment CreditA sight credit which will be paid at sight basis against presentation of requisite

documents to the designated paying bank

Deferred Payment CreditAn usance credit where payment will be made by the designated bank on respective

due dates determined in accordance with the terms and conditions of the credit.

Acceptance CreditAnother form of deferred payment credit where drawing of an usance draft is a

must.

37

Negotiation CreditCan be a sight or usance credit. In this credit, the negotiation made be restricted to

a particular bank. It can also be a freely negotiable credit where any bank which is willingto negotiate can do so.

Confirmed CreditA letter of credit to which another bank has added its confirmation or guarantee. In

a confirmed letter of credit the beneficiary will have a firm undertaking of not only the issuingbank but also the confirmed bank.

Revolving CreditOne where under the terms and conditions of the credit, the amount is reinstated

without any amendment to this effect. The amount under the credit can revolve in relationto time or value.

Instalment CreditOne where shipments should be made in specific quantities at stated periods or

intervals.

Transferable Credit

A credit which can be transferred by the original beneficiary in favour of a second

beneficiary or several second beneficiaries.

Back-to-back Credit

A credit which is opened with the security of another credit. It is also called

countervailing credit.

Anticipatory Credit

A credit arrangement in which the payment is made to the beneficiary at pre-shipment

stage in anticipation of actual shipment and submission of documents at a later date.

There are two types of anticipatory credits, Red clause Credit and Green Clause Credit.

In red clause credit, advance can be effected for purchasing raw materials,

processing and/or packing the goods.

A green clause credit is an extended version of red clause credit where additionally

warehousing and insurance charges are also advanced.

Standby Letter of Credit

It is not an ordinary letter of credit. It is generally as a substitute for performance

guarantee or for securing loan, as some countries like USA prohibit issuance of letter of

guarantee.

38

CHECKLIST FOR PREPARING DOCUMENTS

It is important that a good standard of document preparation is maintained in order

to achieve a successful presentation under the credit. By presenting documents that do

not comply with all the terms and conditions, you could forfeit the protection afforded by

the credit and increase your costs. In addition to the specific requirements of the credit,

your Presentation of documents must also meet the teams of UCP 500.

By following the advice below, you should avoid some of the most common discrepancies.

1. Check that all the terms and conditions of the credit are covered by the documents

being presented and that you have taken account of any amendments.

2. Keep detail to a minimum. Excess detail can lead to inadvertent discrepancies.

3. Check that the documents do not contradict each other.

4. Provide all of the required documents and in the correct number of copies. Where

the credit calls for documents in “two copies” “duplicate” or similar, one of the required

copies is to be marked “original”.

5. Ensure that the title of the document presented coincides with the requirement

of the credit. For example, if you have to present a Certificate of Conformity and your

company produces a standard document entitled “Inspection Certificate”, the title must

be amended on your document.

6. Original documents must be signed where required. Invoices must be signed if

they are required to certify something, for example, to certify that the goods are in

accordance with a pro-forma invoice or contract. All certificates must be signed.

7. The goods description on the invoice must be exactly as stated in the credit. If the

description is slightly wrong you can add the correct description within the body of the

invoice. The description of the goods on the other documents may be given in

a briefer format than that on the invoice provided that it is consistent with the description

in the credit.

8. Where documents require endorsement (e.g. drafts, Bills of Lading or Insurance

Certif icates Pol icies) ensure that you sign the reverse “for and behalf

of ............................”

9. Information such as weights, measurements and shipping marks, which may

appear on more than one document, must be consistent across all documents.

10. If required, arrange to have any document certified or legalised by the appropriate

authority and returned in good time.

11. Carefully check any documentation supplied by any other party before presenting

it to the bank.

39

TRANSPORT DOCUMENTS

12. The articles of UCP 500 dealing with documents, particularly transport documents,are quite detailed and need to be fully understood. Note that the issuer of a transportdocument is not necessarily the carrier.13. Transport documents must evidence the name of the carrier and this is oftenarranged by the freight forwarder. Naming the carrier can be undertaken in various ways-usually by “XYZ Ltd. as carrier” or similar. If the document is signed by anagent, we recommend that they state” (name) as agents for XYZ Ltd. the carrier”.14. Original transport documents must be signed and endorsed where necessary. Theymust be dated on or before the latest shipment date quoted in the credit or, if not quoted,within the validity of the credit. If an “on board” document is called for, the transportdocument must state that the goods have been loaded on board, and this must be dated.15. Transport documents must be “clean” i.e. do not bear any clause or notationdeclaring a defective condition of the goods or packaging.

CHECKLIST ON RECEIPT OF A CREDIT

We recommended that a beneficiary checks the terms and conditions carefullypaying particular attention to the following :

1. Is it irrevocable ?2. Is the credit Confirmed or Unconfirmed? Does this meet with your requirements?3. Is the name and address of your company correct ?4. Are the terms of payment (slight or usance) as requested?5. Is the amount of the credit as agreed ? Has the correct tolerance (if any) been

applied?6. Does it correctly describe the goods, their value, unit prices, weight, quantity,

quality?7. Are all the transport details correctly stated, such as place and date of shipment,

the destination, method of carriage, Incoterms ?8. If part shipments and/or transhipment are required, are they permitted ?9. Do the shipment, presentation and expiry dates provide sufficient time for the

manufacture of the goods, any pre-shipment, shipment/despatch and theproduction, certification, legalisation and presentation of the documents ?

10. Are the documents called for readily obtainable in the format requested? Wesuggest that the beneficiary provide their freight forwarder with a copy of the creditto ensure that they can produce the correct transport documents in good time.

11. If charges are for the beneficiary’s account was this agreed as part of the pricingfor the goods.Are there any spelling mistakes ?

Speciman L/cs are given in Annexure

40

UCP 600 is said to be an amended version of the earlier guidelines called UCP 500.The amendments are expected to impart greater transparency to documentary credit andfurther safeguard the interest of exporters vis-a-vis banks. Letter of credit is consideredto be a safer mode of international trade payment and it operates under the ICC framedguidelines, called Uniform Customs and Practice for Documentary Credits (UCP).

Banks are advising us with various foreign exchange risk management tools like futures,and forwards, options, swaps, forward rate agreement, etc.

All those involved in L/C based transactions should fully familiarise themselves with thenew rules, as early as possible.

41

CHAPTER 8

EXCHANGE CONTROL REGULATIONS - EXPORTS

INTRODUCTION

International trade involves movement of goods and matching payment settlementsin various currencies. Export results in depletion of the wealth of a nation and importscreate demand for currencies of other currencies. In our country, the demand for foreignexchange exceeds the supply and hence the foreign exchange is considered a scarecommodity. To preserve foreign exchange, Reserve Bank of India administers exchangecontrol through various Authorised Dealers.

The role of Exchange Control in international trade may be indicated as below;

Statutory Base : Foreign Exchange Regulations Act, 1973

Authority with : Reserve Bank of India

Guidelines : As per Exchange Control Manual (1993 Edition)

and RBI’s ADMA Circulars.

Authorised by : Authorised Dealer / Banks

Registration

The exporter shall register with and obtain importer-exporter code number from theDirector General of Foreign Trade (DGFT).

The role of exchange control and trade control in international trade may be indicated asfollows :

Exchange Control Trade Control

1. Statutory Base The Foreign Exchange Foreign Trade Development

Regulation Act 1973 & Regulation Act 1992

2. Guidelines as per Exchange control manual Export-Import Policy

1987 Edn. & Amendment (Current) Handbook ofprocedures & public notices.

3. Administering Director General of

Authority RBI Foreign Trade, New Delhi& other Regional TradeControl Authority

4. Administered by Authorised Dealers Customs & RegionalLicensing Authority.

42

Declaration

Prior to export of goods to any country, the exporter should furnish a declaration on

i. The full export value of goods, or if

ii. The exact value is not ascertainable, the expected value has been or will bepaid within the period and in the manner as prescribed by Exchange Control.

Submission of this declaration is exempted in instances like,

i. Trade samples supplied free of payment

ii. Personal effects of travellers

iii. Ship’s stores carried on board for own use

iv. Gift parcels, publicity materials where the value of export does not exceedRs.25,000/-

v. Samples for testing

vi. Defective goods for repairs and return or for replacement

vii. Despatch of air-craft engines for overhauling and return

viii. Goods despatched by Air Freight or Post Parcel provided the packet isaccompanied by a declaration by the sender that the value of the goods isnot more than Rs.10,000/- and that the export does not involve anytransaction in foreign exchange.

Declaration Forms

The prescribed export declaration forms concerning bankers are:

i. GR Form : Export to all countries made otherwise than by post.

ii. PP Form : Export to all countries by post parcel, other than on VPCOD basis.

iii. Softex Form : Export of computer software in non-physical form.

While GR /PP forms are made in two copies, VP / COD forms are to be submittedin a single copy, Softex form is prepared in three copies. Where the specified categoriesof shipping bills are processed electronically, the declaration in Form SDF (StatutoryDeclaration Form) in respect of such shipping bills shall be submitted. GR forms(with manualshipping bill) / SDF (with computerised shipping bill) will be submitted to customs, PPforms will be tendered to post office. Softex forms will be submitted to Department ofElectronics (DOE) located in software technological park (STP) or electronic hardwaretechnological park (EHTP)

43

Export of goods and services

RBI has been periodically issuing circulars on foreign exchange which can be assessedthrough our Bankers/Foreign exchange dealers/website of RBI

Access can be had from RBI or through Authorised Dealers in Foreign Exchange.

Time Limit for Realisation of Export Proceeds

In Mar 07, RBI has liberalised rules as under:Software Companies are no longer required to repatriate 30% of the contract value of on-site contracts. However, it has said that these companies should repatriate the profits ofon-site contract after the completion of the said contract.

The central bank has also allowed banks to extend the period of realisation of exportproceeds, beyond six months from the export date, up to a period of six months, at a time,irrespective of the invoice value of the export. Till now, they could extend the period ofrealisation for only three months at a time subject to the invoice being below $1 million.This would mean that exporters can bring in their proceeds after a year of the exports.However, the bank has to be satisfied that the xporter has not been able to realise exportproceeds beyond his control.

The payment must be received through a medium of an authorised dealer in foreignexchange in a currency through an account appropriate to the country of final destination ofthe goods. Permitted methods of receipt are laid down in Chapter 2 of Exchange ControlManual (1993 Edition) which is reproduced below:

Group Permitted Methods

i) All countries other than those a) Payment in Rupees from the account of a bank

listed under (ii) below situated in any country in this group.

b) Payment in any permitted currency.

ii) Member countries in ACU a) Payment for all eligible current transactions (Except Nepal), Bangaladesh, by debit to the ACU dollar account in India of

Myanmar, Sri Lanka, Pakistan & a bank of the participating country in which Iran the other party the transaction is resident or

by credit to the ACU dollar account of theauthorised dealer maintained with the

correspondent bank in the participatingcountry.

b) Payment in any permitted currency in

other cases.

44

Notes :a. In respect of exports, payment must be received in a currency appropriate of the

country of final place of destination of the goods as declared on GR etc., forms,

irrespective of the country of residence of the buyer.

b. Payment for exports out of funds held in NRE / FCNR accounts are also permitted.

Payments out of rupee accounts held in the names of Exchange House

by authorised dealers are also permitted upto Rs.200000 per transaction.

c. Payments received directly by exporters by way of DD / MT / TC / FCN etc.,

without any monetary limit.

d. Payments can be settled out of I.C.C. Mechanism

Reserve Bank of India has since permitted handling of documents by AuthorisedDealers where exporter has received payment directly from overseas buyer, subject to thefollowing conditions:-

i) the exporter should be a customer of the Authorised Dealer

ii) the authorised dealer must be satisfied that the instrument of remittance likeDD BC / Personal Cheque etc., represent payment of exports.

iii) the instrument is tendered to the authorised dealer through whom exportdocuments are routed

iv) the foreign currency instrument is surrendered to authorised dealer within aweek of receipt and currency notes on the next working day of receipt.

v) the payment is received in a currency permitted by Exchange Control

vi) export is made only on realisation of the instrument

(or)

vii) in case exports are made, the GR/PP duplicate form is Certified only afterthe instrument has been realised.

Permitted Method of Payments

The payment must be received through the medium of an authorised dealer inforeign exchange in a currency through an account appropriate to the country of finaldestination of the goods.

Rule 9 of Foreign Exchange Regulation Rules 1974 provides that payment forexport should be received as :

1. Countries in the external group other than Nepal & Bhutan and thosebelonging to ACU (Asian clearing unions-India pass, Iran, Srilanka, Burma,Nepal and Bangladesh. countries.

a. Payment in rupee from the account of a bank situated in any country inthat group.

45

b. Payment in any permitted currency.

2. From member countries in the Asian clearing union i.e.. Nepal, Bangladesh,Burma, Iran, Pakistan & Sri Lanka.

a. In Indian Rupees

b. In Asian Monetary unit

c. In the currency of the participating country in which the other party to thetransaction is resident.

d. Payment in any permitted currency in all other cases.

The Manner in which the Exports Proceeds are to be realised and repatriated hasthree dimensions namely :

RBI has permitted handling of documents by authorised dealers, where exporterhas received payments directly from the overseas buyer, subject to the following conditions.

a. The Exporter should be a customer of the Authorised Dealer

b. The Authorised Dealer must be satisfied that the instrument of remittancelike DD BC/Personal cheque etc. represents payments for exports.

c. The instruments is tendered to the Authorised Dealer through whom, exportdocuments are routed.

d. The foreign currency instrument is surrendered to the AD within a week ofreceipt and currency noted on the next working day of receipt.

e. The payment is received in a currency permitted by Exchange Control.

f. Export is made only on realisation of the instrument.

g. In case exports are made, the GR/PP duplicate form is certified only afterthe instrument has been realised.

I. Foreign Currency Accounts in India

1. Only one account will be allowed to be maintained by the exporter in US$or Pound Sterling. The account will be without cheque facility.

2. The Exporter must route all export documents through the designatedbranch of the bank maintaining the account.

3. RBI will fix ceiling upto which balance can be held in such accounts. Theamount in excess of such ceiling will have to be converted into rupeepromptly.

4. Crediting exports proceeds to the foreign currency account will be treated

46

as one of the approved method of liquidation of post-shipment credit,provided the post shipment credit is liquidated on the date of credit of theproceeds to Exporter’s foreign currency account.

II. Foreign Currency maintained with Banks abroad

Conditions are almost the same as given under I. excepting

a. No Pre-shipment & post-shipment credit will be available to the Exporterexcepting to the extent of rupee expenditure required to be incurred in India.This will have to be liquidated by repatriation of funds held in the overseasaccount.

Exporters desirous of maintaining Foreign Currency Accounts in India or abroadshould submit application in EFC through the designated branch.

Foreign Currency Accounts

Reserve Bank of India may permit on application (EEFC), exporters with good tract record

to maintain foreign currency accounts with bank in India and abroad for credit of export

proceeds in respects of exports to countries other than those in ACU group. Funds held in

these accounts can be utilised for meeting exporter’s own commitments in foreign exchange

on account of imports and other specified purposes.

Delay in Submission of Shipping Documents

It is obligatory for exporters to submit all shipping documents pertaining to every export

passed by customs or postal authorities within 21 days from the date of export of goods.

In case, there is a delay beyond the stipulated period of 21 days, authorised dealer if

satisfied with the reasons for the delay as beyond the control of the exporter, may handle

the documents without prior approval of Reserve Bank of India.

Transfer of Documents

ADs may accept from their constituents for negotiation or collection shipping documents

covering exports even where the original declaration on GR form has been signed by

some other party provided the constituent who is drawing the bill countersigns the duplicate

copy of GR form and an undertaking to deliver to the ADs the foreign exchange proceeds

of the shipment within the prescribed period.

In case the constituent exporter is one who is placed in exporters caution list by RBI, ADs

47

may negotiate the documents provided the shipment is covered by Advance remittance or

by irrecoverable letter of credit where the documents confirm strictly to the terms of the

letter of credit.

Short Shipment Certificate / Shutout Shipment

When part of shipment covered by a GR form already filed with Customs is short shipped,

exporter files a short shipment notice with the customs. Customs on verification forwards

a certified short shipment notice should be attached to the duplicate of GR from and a

record of analysis of export value of goods actually shipped should be made on the GR

duplicate.

When the short shipped portion is subsequently shipped a fresh set of GR forms shall beused for declaration. Where a shipment has been entirely.

Extension of Time Limit

Where an exporter is unable to realise the proceeds within the prescribed period, forreasons beyond his control, he may apply to Reserve Bank of India through his banker, inform ETX together with appropriate documentary evidence for extension of time. RBIgrants permission only in such cases where the exporter is in no way directly or indirectlyresponsible for the delay in realisation of proceeds and that by grant of an extension, theexporter will be able to realise the proceeds.

Change of Buyer / Consignee

Approval of RBI is not necessary; if the goods which have been shipped, are to betransferred to a party other than the original buyer in the event of default by the latter provided.

i) The prescribed period for realisation of export proceeds is not exceededand

ii) Reduction in invoice value, if any, involved, does not exceed 10 percent.

iii) In case of reduction in invoices value exceeds 10% then conditions stipulatedin para. 6C 13 of ECM Vol-I, 1993 Edition should be adhered to.

Part Drawings

In certain lines of trade, exporters leave a small part of invoice value undrawn. This is forpayment by overseas buyer after adjustments due to weight, quality etc. In such cases,authorised dealers shall negotiate bills provided:

i) Undrawn balances does not exceed 10% of full export valueii) An undertaking is given by exporter that he will account for the balance

48

proceeds within the prescribed period for realisation.

The duplicate copy of the GR/ PP forms will be submitted to RBI by the authorised dealeronly on receipt of the amount in settlement of undrawn balance. (As an exception, wherethe authorised dealers are satisfied about the bonafides of the case, submission of GR/PP duplicate to RBI without receipt of undrawn balance is permitted provided the exporterhas realised at-least the value for which the bill was initially drawn (excluding undrawnbalance) or 90 per cent of the value declared on GR/PP form whichever is more and aperiod of one year has expired from shipment). The items should however, continue to bereported in the half yearly statement of outstanding export bills.

Reduction in Invoice Value

If after a bill has been negotiated or sent for collection, the amount thereof is desired to bereduced for any reason, authorised dealer may approve such reduction, on submission ofan application by a letter with full particulars of shipment, an attested copy of invoice anddocumentary evidence in support of the reduction sought for provided,

i) The reduction does not exceed 10%

ii) It does not relate to an export of gold or silver jewellery or articles made outof cut and polished diamonds

iii) The exporter is not on the exporters’ caution list of RBI

iv) The items are not subjected to export quota allocation / or not subject tofloor price restrictions.

In the case of exporters who have been in the export business for more than three years,reduction in invoice value may be allowed, without any percentage ceiling, subject to theabove conditions as also subject to their track record being satisfactory, i.e. the exportoutstandings do not exceed 5% of the average annual export realisations during thepreceding three calendar years. For this purpose, the exporter's declaration, duly certifiedby his auditor or by a Chartered Accountant, indicating the total export realisations duringeach of the preceding three calendar years and the export bills outstanding beyond theprescribed period for realisation of export proceeds and average outstandings in absoluteand percentage terms. Outstanding export in respect of exports made to countries facingexternalisation problems may be ignored provided the payments have been made by thebuyer in the local currency. Authorised dealers should obtain the above declaration dulycertified as on January and July every year.

If exporters approach ADs for reduction of invoice value on account of cash discount forprepayment of usance bills, ADs may allow reduction to the extent of amount of proportionateinterest on the un-expired period of usance calculated at the rate of interest stipulated inthe export contract OR at the prime rate of the currency of invoice where rate of interest isnot stipulated in the contract.

49

Exports of goods and servicesAD banks have been permitted to grant extension of time for realisation of export proceedsbeyond the prescribed period from the date of export, where invoice value does not exceedUS$ 100,000 subject to the conditions prescribed therein. As a measure of furtherliberalisation, it has now been decided to increase the invoice value limit to US$ 1 millionfrom the existing US$ 100,000 with effect from 21st Apr 06.

Trade DiscountADs may permit deduction of trade discount from the bill and where the shipment hasbeen effected by sea or air, if the trade discount is declared in the GR form and acceptedby customs authorities.

In case of post parcels through PP forms, post office will not undertake the scrutiny of tradediscount and ADs only may have to accept the trade discount deductions in PP fromprovided the discount is in conformity with the normal level of discount usually offered inthe particular line of export.

Write Off of un-realised Export BillsIn cases where the exporter has not been able to realise the outstanding export duesdespite his best efforts, he may approach the authorised dealer, who had handled therelevant shipping documents, with appropriate supporting documentary evidence with arequest for write off the un-realised portion. Authorised dealers may accede to suchrequests (the branch concerned should obtain the approval of its controlling office) subjectto the conditions listed in paragraph 6C 14 of Exchange Control Manual (1993 Edition).

Agency CommissionAuthorised dealers may allow remittance of commission of exports within the prescribedlimit (i.e., 12.5% of invoice value) if it is declared in the GR form and accepted by thecustoms. Even in cases where the amount of commission has not been declared on ExportDeclaration form by the exporters, Ads may allow without insisting for ‘NOC’ from Customs/ Department of Electronics, after satisfying themselves about the reasons given by theexporter for not declaring the amount of commission on GR/PP/Softex and provided avalid agreement/written understanding between the exporter and the overseas agent/beneficiary for payment of commission subsists.

XOS StatementAuthorised dealers should closely watch the realisation of bills and in case where billsremain outstanding beyond the due date for payment, they should take up the matter promptlywith the exporter concerned.

Authorised dealer should furnish to RBI half yearly consolidated statement in form XOSgiving details of all export bills outstanding beyond the prescribed period for realisation atthe end of June and December every year. This Statement should be submitted within 15days from the close of the relative half year.

50

Participation in trade fairs abroadExporters may open foreign currency account abroad and operate during their stay. Butthey should repatriate the balance amount within one month from the date of closure oftrade fair.

Project Exports and service exportsExport on elongated service termsGR/PP/Softex ProcedureDisposal of copies of Export Declaration FormsCounter Signature on PP FormsTerms of Payment - Invoicing (Software)Disposal of Softex Forms

For details of above, please visit the website of RBI or contact the authorised dealer inforeign exchange.

As per supplementary FT Policy 05-09 (Apr 05), EOUs are permitted to claim IT exemptionin respect of income within a period of twelve months.

In the process of simplification and liberalisation of procedure, RBI, effective for exportsfalling due from 1 Jan 04, has allowed all exporters to write off (including reduction ininvoice value) outstanding export dues, and extend the prescribed period of realisationbeyond 180 days or further period as applicable.

GR FormsAt present, GR Forms (to be completed in duplicate for export otherwise than by Postincluding export of software in physical form) can be obtained by exporters from RegionalOffices of the Reserve Bank.

As part of simplifying the procedures, it has been decided to make the GR Forms availableonline on the Reserve Bank’s website www.rbi.org.in. Accordingly, the exporters havenow the option to use GR Forms available online as well. While downloading the GRForms, the exporter may ensure to use ‘Legal’ size paper i.e. 8.5x14 inches. Further, boththe printer (printing preference) and the paper size in the page setup option have to be setto legal size before printing. The GR number will be automatically allotted when the documentgoes to the print queue.

The exporters will continue to have the facility of purchasing the GR Forms from the RegionalOffices of the Reserve Bank, as hitherto. However, this facility would be phased out withina period of one year.

Liberalisation - GR approval for exportAD banks have been delegated powers to approve GR form for export of items for displayor display-cum-sale in trade fairs/exhibitions outside India subject to the conditions specified

51

therein.

They can also grant approval in cases where goods are exported for reimport after repairs/maintenance/testing/calibration, etc.

For details, please refer to A.P (DIR series) Cir. no. 21 dated 10th Jan 06 of RBI, in theirwebsite.

The global financial crisis and the economic slowdown in 08-09 has opened up the needfor learning the currency risk management.

The increased globalisation of trades and services and volatility in financial markets requirecompanies to be aware of the risks associated with currency fluctuations.

SMEs rely on banks for covering foreign exchange requirement and coverge of currencyexposure. Currency fluctuation may affect adversely the price realisation for the exporterand the price of raw materials for the importer.

The company has to have a view of the $/ INR rate while budgeting for the year and has tocontinuously monitor the prevailing exhange rate. A company may budget the annual sales/raw material requirements and cover the currency exposure in the forward market withbanks. The futures markets of currency offers standardised contracts to cover thecompany’s foreign exchange exposure.

Professional service providers can be of help.

Invoicing in RupeeWhile invoicing in rupee was allowed a few years ago, foreign traders have not beenaccepting such export or import orders in the absence of a mechanism to cover risksarising out of rupee fluctuations.

For Indian traders, however, invoicing in rupee eliminates exchange risks built into all cross-border transactions. Whenever the rupee surged against the dollar, Indian exporters haveraised demand for rupee invoicing. But it never took off with most foreign buyers andsellers, often with more bargaining power, fearing possible losses in a volatile currencymarket.

52

CHAPTER 9

IMPORTS - EXCHANGE CONTROL ASPECTS

INTRODUCTION

Import trade is regulated by the office of the Director General of Foreign Tradeand its Regional Offices functioning under the Ministry of Commerce. The current EXIMpolicy (1997-2002) lays down the trade control aspects. Sale of foreign exchange towardspayment for import of goods into India under the prevailing import trade control policymay be made by authorised Dealers without reference to Reserve bank of India subjectto the conditions set out in the exchange control manual. Sale of foreign exchange inpayment for imports from Nepal and Bhutan is not permitted. The rupee accounts inIndia of banks functioning in Nepal and Bhutan are treated as Resident Accounts andrupee transfer may be made to such accounts against imports into India from thesecountries without reference to RBI.

ADs perform the following functions while handling import business:

i) Establishment of letters of credit

ii) Handling of documents received under LC

iii) Handling collection bills covering imports

iv) Making remittances towards payment of import bills

v) End use verification etc.

While performing these functions, ADs have to adhere to the exchange controlregulations contained in the Exchange Control Manual (particularly Chapter 7) asamended from time to time by ADMA circulars. ADs are also required to follow theprocedures contained in AD GP series of circulars. The principal aspects of exchangecontrol regulations relating to imports are discussed below:

1. Establishing LCs

LCs are to be established only for bank's own customers who are known to beparticipating in the trade, particularly with reference to the item of import. LCs are to beestablished in accordance with provisions of UCPDC 500/URR 525. When a bill oflading is called for in the LC, the LC should stipulate among other conditions, that theBL should indicate the name and address of the importer as well as the AD opening thecredit. Remittances for imports under letters of credit or otherwise should be madeagainst shipping documents lorry/railway receipts/exchange control copies of bills ofentry/postal/courier wrappers etc.

53

2. Import of Designs & Drawings

Import of designs and drawings is freely permitted as provided by the Exim Policyin force. In addition to the usual exchange control regulations relating to imports the followingconditions have to be complied with:

a. The entire remittance should relate to the cost of drawings & designs importedonly and not any other cost.

b. NOC/Tax clearance certificate from Income Tax authorities should beproduced.

c. R&D cess has to be paid. If not already paid, evidence for payment shouldbe submitted to AD within 30 days from date of remittance.

d. The value remitted should be verified for agreement with the value declaredin the exchange control copy of bill of entry certified by customs.

e. The importer should keep the customs informed about such imports.

3. Manner of Rupee Payment

Payment in retirement of bills drawn under LC as well as bill received from abroadfor collection against imports into India, must be received by AD, irrespective of amountby debit to the account of importers with themselves or by means of a crossed chequedrawn by the importer on their other bankers. Payment against bills should not be acceptedin cash. This procedure will apply to private imports also where the amount involved isRs.20,000/- or over.

4. Import Licences

While opening letter of credit or allowing remittance for the import of goods includedin the negative list, AD should obtain from the importer exchange control copy of theimport licence. All such licences are issued for CIF value, which also includes commission,if any import licences can not be used to the full amount in cover of FOB cost of the goodsleaving insurance, freight and commission to local agent of supplier, as additional chargesto be paid in rupees over the amount specified in import licences.

All such remittances should be endorsed on the exchange control copy of importlicence. Interest remitted need not be endorsed in the import licence. Fully utilised licence(exchange control copy) should be forwarded to RBI, by the Banks along with R-Returnspertaining to the period during which the last remittance under the licence was made.

5. Attestation of invoices by authorised dealers

Under customs regulations importers have to submit to customs at the time ofclearance of goods a copy of the invoice attested by the authorised dealer through whomremittance has been made or will be made as corroboratory evidence of the value of the

54

goods declared on the customs Bills of Entry. To enable the importer to comply with such

requirement, AD should furnish to the importer a duly attested copy of the invoice.

6. Time limit for settlement of import payments

Remittance against import should be completed not later than six months from date

of shipment. Hence any deferred payment arrangements involving payments beyond six

months from date of shipment need approval of RBI. Sometimes, settlement of import

dues may be delayed due to disputes, financial difficulties of importers etc. ADs are

permitted to make remittance in such cases even if the period of six months has expired

provided

a) AD is satisfied about the bonafides of the circumstances leading to the delay

in payment

b) No payment of interest is involved for the additional period.

However, if the overseas seller insists for payment of interest it may be allowed

subject to provisions for payment of interest in EC Manual for a maximum period of 60

days beyond 180 days provided the bill is paid within this 60 days.

Remittances against import of books may be allowed without restrictions as to

time limit, provided no interest payment is involved nor the importer has foregone any part

of the discount/rebate normally allowed to importers towards compensation for delay in

settlement of dues.

7. Interest on Import Bills

ADs may make remittances on account of interest accrued on usance bills or

overdue interest paid on sight bills for a period not exceeding 6 months from the date of

shipment in respect of imports without prior approval of RBI under “normal interest clause”.

In case of prepayment of import bills under usance terms, remittance may be made only

after reducing the proportionate interest for the un-expired portion of usance at the rate of

which interest has been claimed or the ̀ prime rate’ of the country of the currency in which

the goods are invoiced, whichever is higher. Where interest is not separately claimed,

remittance may be allowed after deducting the proportionate interest for the un-expired

portion of usance at the prevailing prime rate.

‘Normal Interest Clause’ means interest at the ‘prime’ rate of the country in the

currency of which goods are invoiced.

55

8. Remittance of Commission

ADs may on application and supported by particulars including relevantcorrespondence/buying agency agreement, allow remittance of commission to overseasbuying agents of Indian importers provided the rate of commission does not exceed2.5% of FOB value of imports. The amount of commission should also be endorsed inthe import licence. In case of the commission payable in Indian rupees also it shouldbe endorsed in the licence.

9. Imports under penalty

ADs are permitted to make remittances against goods imported without authority– but later on allowed to be cleared by Customs Authorities against payment of penalty.Such remittance may be made to the extent of CIF value of the goods indicated in therelative Exchange control copy of the customs bill of entry evidencing import of goodsinto India.

10. Postal Imports

ADs are permitted to make remittances against bills received for collection coveringimports by post parcel, provided the goods imported are such as one normallydespatched by post parcel. In these cases the relative postal receipt should be producedto AD as evidence of despatch through post and the importer should furnish anundertaking to AD to submit the post parcel wrapper within three months from date ofremittance. A.Ds. may allow remittances up USD 250/- equivalent per transaction, withoutinsisting on the relative parcel receipt / postal wrapper. In cases, where goods importedare not of a kind normally imported by post parcel for remittance where AD is notsatisfied about the bonafides of the application the case should be referred to RBI forprior approval.

11. Imports through courier

Imports of goods through courier are permitted in accordance with the CourierImports Clearance Regulation 1995 under the current Exim Policy 1997-2002.

12. Advance Remittance

ADs are permitted to allow advance, remittance without any ceilings for import ofgoods subject to the following conditions:

i) Documentary evidence indicating the cost of the goods and the insistenceof the overseas seller an advance payment should be submitted.

ii) The importer should hold the EC copy of a valid import licence, if the goodsto be imported require a licence.

56

iii) Remittance should be made direct to the suppliers.

iv) Physical import into India be made within 3 months (12 months in the caseof capital goods) from the date of remittance and the importer should givean undertaking to furnish documentary evidence of import within 15 daysfrom the close of the relevant period. A.Ds. under their discretion, can allowextension of time up to one month for such physical import to take place(beyond 3 months) in case of other than capital goods and up to three months(beyond 12 months) in case of capital goods.

v) If the amount of advance remittance exceed USD 15,000/- a guaranteestand by letter of credit from an international bank of repute situated outsideIndia or a guarantee of an authorised dealer in India if such a guarantee isissued against the counter guarantee of an international bank of reputesituated outside India should be obtained. In case of extension of time allowedfor physical import of goods, guarantee clauses should be suitably amended.

vi) In case of import of capital goods; certified copy of importer’s contract withthe supplier or any other evidence indicating terms of payment should besubmitted.

vii) In case of import of books, a list of books to be imported should be obtained,which should be attached to Form A1 while submitting it along with therelevant R-Return.

Further a separate register titled ‘advance remittance for imports’ should bemaintained for ensuring compliance with the various conditions. ADs should ensurethat in the event of goods not imported the amount of advance remittance is repatriatedto India.

13. Form A1

Applications by persons, firms and companies for making payments towardsimports into India must be made in Form A1.

14. Evidence of Import

a) It is obligatory on the part of importers to submit exchange control copy ofBill of entry/postal wrapper/courier wrapper to AD through whom relative remittancewas made as evidence that the relative goods for which payment was made has actuallybeen imported into India. ADs should acknowledge receipt of such evidences by issuingacknowledgement slips to the importers.

In case of imports by 100% EOU/Units in EPZ/ETZ for store into bonded warehouseADs can accept EC copy of INTO-BOND BILL OF ENTRY for warehousing purposesas evidence of import.

57

In case of imports though courier if the amount imports is Rs.100000/- and abovethen ADs can accept the custom attested EC copy and B/E from the actual importer.

If the value of import is less than Rs.100000/- ADs can accept the photocopy ofthe custom attested EC copy B/E submitted by the courier company to customs, dulycertified by the courier company itself. In respect of imports on D/A basis if the importer isunable to produce the documentary evidence before the due date for remittance due togenuine reasons such as non arrival of consignment, delay in delivery/customs clearanceof consignment, ADs may on merits allow reasonable time not exceeding three monthsfrom the date of remittance to the importer to submit the evidence of import.

In case the importer fails to furnish the exchange control copy of bill of entry withinthree months from date of remittance from the ADs should issue a reminder to theimporter to produce it forthwith. If there is still no response entry the AD should issueanother reminder by registered post acknowledged due not later than one month fromthe date of first reminder.

If still the importer fails to furnish to AD the EC copy of bill of entry within 21 daysof the issue of the second reminder, such transactions should be reported in the BEFstatement to be submitted to RBI within 15 days from the end of the quarter to whichthe statement relates.

ADs should report the default to RBI in statement BEF only if the amount isexceeding Rs.300000/-. For imports up to and inclusive of Rs.300000/- ADs shouldvigorously follow up and the evidence of import and if not submitted by the importerthe ADs should report it to RBI in a special report.

58

CHAPTER 10

EXPORT FINANCING

1. Why Export Financing?

* To improve the exports portfolio.

* To augment the Foreign Exchange Reserves. Because exchange earnedout of Exports is not repatriable and freely usable by the exporting country.

* Exporters may sometimes feel that inland sales are more profitable, becauseof the various procedures to be followed for export trade.

* Again they are better off in the inland sales, the counterparts / buyers arelocal people and the market is familiar to them.

2. What are the various incentives made available to the exporters?

* Special licences issued by D.G.F.T. to meet their import requirements

* Profits from their export business are exempted from I.T. requirements

* Duty Drawback scheme for Customs and Excise duties

* Fast track credit made available by Banks and financial institutions

3. What are the various types of exports?

* Cash Exports - proceeds of which are realised within six months from thedate of shipment

* Deferred Payment Exports - Payment for which is spread beyond a periodof six months

* Project Exports

* Deemed Export - Exports that are basically import substitution.

* Software Exports (in non-physical form)

4. Who are the various agencies that are involved in Export financing?

* Ministry of Commerce; Director General of Foreign Trade;

* Joint Director of Foreign Trade

* Department of Customs

59

* Ministry of Finance

* Reserve Bank of India

* Authorised Dealers (Banks)

* Exim Bank

* Export Credit Guarantee Corporation of India

* Foreign Exchange Dealers Association of India

* General Insurance companies

* Commodity Boards

* Export Promotion Council

* International Chamber of Commerce

5. What are the important guidelines that should be available with the departmentdealing in exports?

* Exchange Control Manual (updated by A.D.(M.A.) Circulars )

* FT Policy 2009 - 2014 (With amendments)

* Public Notices

* Uniform Customs and Practices for Documentary Credits (ICC publicationNo.500)

* Uniform Rules for Collection (ICC publication No.522)

* Uniform Rules for Bank-to-Bank Reimbursement (ICC publication No.525)

* E.C.G.C. Guarantee and Policy guidelines

There are rupee export credits to: -

1. Specific sectors/segments

2. Sub suppliers

3. Construction contractors.

Full details can be had from banks dealing in foreign exchange.

Finance and credit are available to help not only export production but also to sell tooverseas customers on credit. There are different schemes like pre-shipment or packingcredit, post-shipment credit and/or finance for deferred payment exports. Both pre-shipmentand post-shipment credit are also available in foreign currency.

60

There are rupee export credits to

♦ Specific sectors/ segments

♦ Sub suppliers

♦ construction contractors

Full details can be had from banks dealing in foreign exchange.

61

CHAPTER 11

EXPORT - PRE-SHIPMENT FINANCE (PACKING CREDIT)

INTRODUCTION

The exporter on receipt of the Letter of Credit / Confirmed Order, approaches thebank for necessary finance. Normally the export financing is done at two levels viz. atthe time of Pre-shipment and at the time of Post-shipment.

EXPORT FINANCING

Export Packing Credit

Export Bills Purchase / Discount / Negotiation

Packing Credit:

The Packing Credit is granted to procure the raw materials, process them, andpack them to suit the buyers’ needs. Sometimes the exporter may need packing creditto buy semi-finished / finished goods and pack them to requirements and export them.From these we come to a conclusion, Packing Credit can be granted either to aManufacturer Exporter / Merchant Exporter.

Who are eligible?

The exporter should be one:-

* who is your customer

* who holds an Importer – Exporter Code Number issued by Joint Director ofForeign Trade / Director General of Foreign Trade

* who has the capacity to perform and fulfil the export commitment, within thetime stipulated

* who is not in the Caution-listing by Reserve Bank of India

* Who is not in the Specific Approval List of Export Credit GuaranteeCorporation of India Ltd.

Basis of extending packing credit

* Letter of Credit : The LC should be irrevocable and issued by ourcorrespondent bank abroad or a bank of international repute. Genuinenessor authenticity of the LC should have been verified.

62

* Firm Order : The firm order is one which has been issued by the overseasbuyer and duly confirmed by the exporter. Buyer should be preferably oneon whom the banks are holding credit report from reputed credit ratingagencies / or their correspondents / E.C.G.C.

* Banks will insist for Shippers’ Comprehensive Policy issued in the name ofExporter by E.C.G.C., preferably with a Drawee Limit.

* Merchandise : The goods called for export should be under Non-negativelist, as per the present EXIM policy in force. If it is under Negative – Restrictedcategory, banks shall call for the necessary licence issued by D.G.F.T. /J.D.F.T. The F.O.B. price quoted by in the LC Order should not be less thanthe Floor Price if any, fixed by the Trade control authorities.

* Licence : The licence issued by the authorities concerned shall be validwith regard to merchandise, value and of course, genuineness.

* Country : The political / economic climate in the country of import, shouldbe conducive for exports from India and the country should not have anyExternalisation problems.

* Conditions in the LC / Order : They should not contravene any TradeExchange Control provisions, in force.

Quantum of Advance :

Normally the quantum of advance is decided upon the FOB value of exports. Ifthe export LC / order is for CIF / CFR value, banks shall ascertain the insurance premium/ freight charges payable from the exporter / insurance companies / C & F agents or tobe verified from the previous transactions and shall be deducted from the value of order /LC.

The financing banks will deduct appropriate margin on the quantum of finance.

As per RBI guidelines, banks may also grant up to 100% FOB value of the Order/ LC. Sometimes, if the Cost of Production is more than the FOB value, bank may alsogrant for the entire COP. Though the PC (up to FOB portion) will be allowed the normalrepayment period, the portion of PC beyond FOB value, will be allowed a maximum of 30days for repayment, to be eligible for concessionary rate of interest.

Mode of Financing :

Generally the Packing Credit is released by way of Demand Loan. Though thesanction of Export advances is done like a sanction of Working Capital facility, disbursaldoes not take place, at one go, but is made available, as and when the exporter producesthe LC / order.

63

The repayment is fixed as per the terms of sanction, but within 180 / 270 days, asper RBI stipulation and within the permissible time of LC / order, viz. Last date for shipment.

Nowadays, the party can avail “Running Account Facility” also. Bank shall sanctionthis facility, to the exporters who track record is satisfactory and when the requirement forsuch facility is established by the exporter. Under this facility, customer need not producethe LC / order, abinitio, but shall be produced to the bank within a reasonable time, but notexceeding 30 days in case of selective control commodities.

Packing Credit can be shared by the Export order holder with other exporters.Packing credit can be extended to the sub suppliers also, but only up to the first stage ofthe production cycle.

Duration :

Though the PC is normally granted for a period of 180 / 270 days, depending uponthe operating / production cycle, Packing credits can be allowed to be extended beyondthe specified period also. If PC is allowed to remain outstanding for 360 days or more,bank shall report to RBI and ECGC. (Under W.T.P.C.G., packing credit should not be keptoutstanding beyond 360 days.)

Due dates and / or extended due dates are to be properly diarised and noted forfurther follow up like timely submission of export bills.

Interest :

The banks shall charge Interest as per the guidelines given by Reserve bank OfIndia from time to time.

Documentation :

As per the documents prescribed by the financing banks

Adjustment :

PC loans are normally adjusted only out of the bills under relative order / LC. If forreasons beyond the control of exporter, the order is cancelled, substitution of orders ispermitted; the substituted may be for different goods, from different buyer, from differentcountry. A bill given against which no PC has been availed earlier, can also be utilised toadjust any other outstanding Packing credit.

64

CHAPTER 12

EXPORT-POST SHIPMENT FINANCE

Post shipment finance is also an export finance extended to an exporter ,but afterthe export has taken place. Normally it is extended upto the time of realisation of theexport bills.

The characteristics of the post shipment finance1. Finance after the shipment of goods.2. It is extended to those exporters in whose name the documents stand. ( He

may be the original exporter or the documents would have been transferredin his name.)

3. It can be a short term finance (for cash exports), or long term finance (fordeferred exports)

4. It is a working capital finance since it is against receivables.5. It is extended only against the evidence of authenticated documents

evidencing shipment of goods.6. Only a fund based finance.7. Concessionary rate of interest upto due dates (for normal transit period for

sight bills and upto notional due date in case of usance bills). Rate of interestas per RBI guidelines.

8. Finance can be extended upto 100 % of the bill.

Classification of post shipment finance.

a) Negotiation/Payment/Acceptance of export documents under Letters ofcredit.

b) Purchase/Discount of export documents under confirmed order or exportcontract.

c) Advance against bills sent for collection.d) Advance against exports on consignment basis.e) Advances against undrawn balance on exports.f) Advances against Government receivables.g) Advances against retention money (by foreign buyer) relating to exports .h) Advances against approved deemed exports.

Methods

Post shipment finance is granted under various methods. Hence, the exporter maychoose the type of facility which is most suitable to his needs. However, whatever be thetype of facility granted, banks would scrutinise the documents submitted for compliance ofexchange control provisions like

* The documents are drawn in permitted currencies and payment receivable aspermitted method of payment.

65

* The relevant GR/PP form duly certified by the customs is submitted and particularsas stated in the GR/PP form are consistent with the documents tendered as well as thesale contract / firm order etc. / letter of credit.

* The documents are submitted within the time limit stipulated and in case of delaysuitable explanation is made.

* Then period of usance is in consonance with the time limit prescribed for realisationof export proceeds.

ProcedureFor availing themselves of the post shipment finance facilities, the exporters are to

follow the undermentioned procedure.

a) they should enclose the documents with covering letter ( signed by the authorisedsignatory ) indicating the type of facility required i.e. negotiation, purchase or discountetc., the proceeds to be credited to current / packing credit account, any forward rate to beused for the transaction, instructions regarding collection charges from drawees, documentsto be released against payment / acceptance, etc.,

b) documents should be correctly drawn and authenticated.

c) obtain a sellers contingency policy in case of c.& f / f.o.b. contracts.

Finance against Bills sent on Collection BasisPost shipment advance can also be granted against bills sent on collection basis in

the following situations.

When the accommodation available under the foreign bills purchase limit is exhausted.

When some export bills drawn under L/C have discrepancies.Where it is customary practice in the particular line of trade and in the case of exports

for countries where there are problems of externalisation.

Exporters may avail themselves of the forward exchange facility where they do notwish to be subjected to exchange risk on account of the new procedures for overdue exportbills. The banks will obviously advance only a certain percentage of the total outstandingbill amount. It implies that margin will retained. The advance will be liquidated out of therealisation of proceeds of the bills.

Finance against goods sent on Consignment BasisMany a times exports are effected on consignment basis i.e. where payment is

receivables subject to sale of goods. Goods are exported under this scheme at the risk ofthe exporter for sale and eventual remittance of sale proceeds by the agent / consignee indue course. A suitable limit for the purpose will have to be extended by the bank. Theoverseas branch / correspondent of the bank is instructed to deliver the documents against"Trust Receipt".

66

R.B.I

In Apr 06, RBI has increased the ceiling interest rate on export credit inforeign currency by 25 basis point to LIBOR plus one percent. (formerly itwas LIBOR plus 0.75 percent)

67

CHAPTER 13

S I D B I

Small Industries Development Bank of India

SIDBI is an apex institution for promotion, financing and development of industriesin small scale sector and for coordinating the functions of other institutions engaged insimilar activities.

It commenced operations on April 2, 1990. SIDBI extends direct/indirect financialassistance to SSIs, assisting the entire spectrum of small and tiny sector industries on AllIndia basis.

The range of assistance comprising financing, extension support and promotional,are made available through appropriate schemes of direct and indirect assistance for thefollowing purposes :-

* Setting up of new projects.

* Expansion, diversification, modernisation, technology upgradation, qualityimprovement, rehabilitation of existing units.

* Strengthening of marketing capabilities of SSI units.

* Development of infrastructure for SSIs and Export promotion.

Direct Assistance Schemes

SIDBI directly assists SSIs under Project Finance Scheme, Equipment FinanceScheme, Marketing Scheme, Vendor Development Scheme, Infrastructural DevelopmentScheme, ISO-9000, Technology Development & Modernisation Fund, Venture CapitalScheme, assistance for leasing to NBFCs, SFCs, SIDCs and resource support toinstitutions involved in the development and financing of small scale sector.

These Schemes are mainly targeted at addressing some of the major problems ofSSIs in areas such as high tech. project, marketing, infrasturctural development, delayedrealisation of bills, obsolescence of technology, quality improvement, export financing andventure capital assistance.

Indirect Assistance Schemes

Under its indirect schemes, SIDBI extends refinance of loans to small scale sectorby Primary Lending Institutions (PLIs) viz. SFCs, SIDCs and Banks. At present, such

68

refinance assistance is extended to 892 PLIs and these PLIs extend credit through a network of more than 65,000 branches all over the country.

All the Schemes of SIDBI both direct and indirect assistance are in operation in allthe States of the country through 41 regional/branch offices of SIDBI.

Promotional and Development Activities

SIDBI is actively involved in promoting tiny and small scale industries by means of itspromotional and developmental activities through suitable professional agencies fororganising Entrepreneurship Development Programmes. Technology Upgradation &Modernisation Programmes, Micro Credit Schemes and assistance under Mahila Vikasto bring about economic empowerment of women specially the rural poor by providingthem avenues for training and employment opportunities.

SIDBI has the following schemes :

Lending schemes :* ISO 9000* Tech. Dev. and Modernisation Fund* Credit linked Capital Subsidy Scheme for Tech. Upgradation of SSIs* Scheme of Direct Assiatance under Tech. Upgradation Fund for Textile Industries.

Bills Schemes* Direct Discounting Scheme

Tech. upgradation is for the following products

* Leather and Leather products including footwear and garments* Food processing* Information Technology (hardware)* Drugs and pharmaceuticals* Auto parts and components* Electronic Industry particularly relating to design and measuring* Glass and Ceramic items including tiles* Dyes and intermediates* Toys* Tyres* Hand Tools* Bicycle parts* Foundries - Ferrous and Cast Iron* Stone Industry* Medicinal and Aromatic plants

69

* Combustion devices / appliances* Gold plating and jewellery* Common Effluent Treatment Plant* Biotech Industries* Plastic Moulded / Extruded Products and Parts / Components and* Corrugated Boxes

Out of the total schemes, the following will be of interest to exporters:

1. Foreign Currency Term Loans (FCTL) Scheme

a. For acquisition of Fixed Assets

b. For Working Capital

2. Pre-shipment Credit in Foreign Currency (EBF)/Rupee (PCR) to SmallScale Industries

3. Post-shipment Credit in Foreign Currency (EBF)/Rupee (PSCR) to Small ScaleIndustries

4. Opening of Foreign Letters of Credit (FLCs)

5. Booking of Forward Contract

6. Foreign Currency Term Loan scheme (FCTL)

70

CHAPTER 14

QUALITY CONTROL AND PRE-SHIPMENT INSPECTION

Compulsory Preshipment Inspection

Under the Export Quality Control Inspection Act 1963, there are as many as 1057commodities under major groups of foods & agriculture, fisheries etc. By amendmentact of 1984, Directorate of Inspection and Quality Control has been given wide powersof seizure and search of goods etc. Provision of confiscation of goods have beenstrengthened more to keep Exporters in discipline and improve the Indian Export Trade.

To ease Pre-shipment inspection system for Exports the Government reviewedthe procedure in July 1991. According to the revision the trading houses, includingthe star trading houses, and export houses that are recognised by the CentralGovernment would be exempted from the purview of compulsory pre-shipmentinspection for all products covered under Export (Quality and Inspection) Act of 1963.

In Process Quality Control (I P Q C) units for all such notified, products wouldbe authorised to issue statutory certificates of inspection on their own.

Buyers Agency :

At times the foreign buyers, lay down their own standards/specifications whichmay or may not be in consonance with the Indian standards including the stipulationunder the quality control regulation. Similarly the overseas buyers may nominate theirown agencies/persons for inspection before shipment.

Compulsory Inspection of Textile Goods :

For Textile goods and also for ready made goods inspection, has to be conductedby the textile committee inspectors.

1. For Hand Woven Cotton/Mixed Yarn goods voluntary inspection has to be doneespecially for export to EEC countries and U.S.A. The certificate meant for EECcountries should be in five languages.

2. Handloom certificate and certificate of origin for handloom goods for export toEEC countries.

3. ESP certificates for items entitled to tariff concession under the Generalisedsystem of preference operated by almost all the developed countries.

4. Endorsement of U.S. Special customs invoice otherwise known as visa-certificate.

5. Certification of Indian items.

71

CHAPTER 15

EXPORT- IMPORT (EXIM) BANK OF INDIA

EXIM Bank caters mainly to medium and large scale exporters. In addition, they are

constantly engaged in promotion of international trade involving in foreign direct

investment, joint ventures, etc.

Exim Bank is also involved in financing and promoting joint ventures overseas, creatingexport capability in SMEs, grass-root rural business enterprises and agro-industries.

MAIN POINTS

1. Exim Bank of India came to being in 1982 and is wholly owned by Govt. .of India

2. Its resources are:

a) Issues of bonds and debentures

b) Loan from Govt. of India

c) Loan from RBI

d) Loan from International Markets

3. Operations of EXIM Banka) Direct financial assistance to exporters

b) Pre-shipment credit

c) Line of credit

d) Overseas buyers credit

e) Refinance of export credit

f) Rediscounting export bills

g) Relending facility

h) Technology and consultancy credit

i) Overseas investment financing

4. Major financial groups in Exim Bank

a) Project finance group

b) Trade finance group

c) Planning group

d) Co ordination group

Overseas investment finance group

72

CHAPTER 16

EXPORT CREDIT GUARANTEE CORPORATION OF INDIA

ECGC is a Corporation set up by the government of India for providing export creditinsurance and guarantee facilities to India’s exporters. It functions under the administrativecontrol of the Ministry of Commerce. This organisation is offering its services to theexporting community for more than 47 years. It has evolved different credit insuranceproducts to suit the requirements of Indian exporters and commercial banks.

ECGC is essentially an export promotion organisation, seeking to improve the competitivecapacity of Indian exporters by giving them credit insurance and guarantee supportcomparable to those available to their competitors from most other countries. It keepsits premium rates at the lowest level possible.

Standard policy - An exporter whose annual export turnover is more than Rs.50 lakhsis eligible for this policy.

Small Exporters’ policy - for exporters whose annual export turnover is upto Rs.50 lakhs

Specific shipment policies - Short Term (SSP-ST) - These policies can be availedof by exporters who do not hold their Standard Policy or by exporter having StandardPolicy, in respect of shipments permitted to be excluded form the purview of the Standardpolicy. Exporter can pick and choose the contract/shipment to be covered and indicatethe type of cover required.

Exports (Specific Buyers) Policy - The specific buyers policy provides cover forshipments made to a particular buyer or set of buyers. An exporter not holding theStandard Policy can avail of this to cover their shipments to one or more buyers. Exportersholding Standard Policy can also availe this policy for covering shipments to individualbuyers, if all shipment to such buyers have been permitted to be excluded from the purviewof the Standard Policy.

Exports Turnover Policy - Turnover policy is for the benefit of large exporters whocontribute not less than Rs.10 lakhs per annum towards premium. The policy envisagesprojection of the export turnover of the policyholder for a year and the initial determinationof the premium payable on that basis, subject to adjustment at the end of the year basedon actual.

Buyer Exposure Policy - The Buyer Exposure Policy is to insure the epxorters havelarge number of shipments with simplified procedure and rationalised premium. Anexporter can choose to obtain exposure based cover on a selected buyer. The coverwould be against commercial and political risks. The option to exclude LC shipment isavailable. If the exporter has opted for commercial and political risks cover, failure of LCopening bank with World Rank up to 25,000 as per latest Banker’s Almanac is available.If exporter opts for only political risks for LC exports premium a less rate is offered.

73

Multi-Buyer Exposure Policy - Some exporters export to large number of buyers. Thenumber of shipments made by them is also quite high. In order to meet the needs of suchexporters, Multi-buyer Exposure Policy is introduced. Cover would be available for exportsti the buyers in countries listed under open cover category as long as the buyer is not in“default buyers list” maintained by the Corporation and available on its websitewww.ecgcindia.com. If the transaction is on LC terms, failure of the LC opening bank inrespect of exports against LC will also be covered, for banks with World Rank up to 25000as per latest Banker’s Almanac. Cover in respect of exports to restricted cover countrieswould not be available under this policy.

IT- Enabled Services policy - IT-enabled services (Specific Customer) policy would begiven in respect of contracts for rendering service during a defined period with billing onthe basis of service rendered during a period say, a week, a month or a quarter.Policies to be offered♦ IT-enabled Services (Specific Customer) policy

Software Projects Policy - The Software projects policy will provide protection to exportersof software and related services where the payments will be received in foreign exchange.Software Services Exports covered under software projects policy♦ Supply of software products and packages, or♦ Staffing and programming services, or♦ Both off-shore and on-site development

Consignment Exports Policy (Stockholding Agent) - Economic liberalisation andgradual removal of international barriers for trade and commerce are opening up variousnew avenues of export opportunities to Indian exporters of quality goods. A methodincreasingly adopted by Indian exporters is consignment exports where goods are shippedand held in stock overseas ready for sale to overseas buyers, as and when orders arereceived. Thus, a separate credit insurance policy is introduced to cover exclusivelyshipments on consignment basis taking into account their special features, providingadequate incentives and simplifying the procedures considerably.

Consignment Exports Policy (Global Entity) - A method adopted by Indian exportersis consignment exports where goods are shipped to their own branch office overseasready for sale to overseas buyers, as and when orders are received. Thus, a separatecredit insurance policy is introduced to cover exclusively shipments by the exporters totheir branches overseas on consignment basis taking into account their special features,providing adequate incentives and simplifying the procedures considerably.

Services Policies - Services Policies offer protection to Indian firms against paymentrisks involved in rendering services to foreign parties. A wide range of services liketechnical or professional services, hiring or leasing can be covered under these policies.The exporters can opt for Whole Turnover Services Policy or for Specific Services Policy

74

depending on the nature of service provided. The premium ratesapplicable to Standard Policy will be applied for Whole Turnover ServicesPolicy and Specific Shipment Policy (SSP-ST) premium rates will beapplied for Specific Services Policy.

Maturity Factoring - The Maturity Factoring Scheme, as designed byECGC has certain unique features and does not exactly fit into theconventional mould of matural factoring. The changes devised areintended to give the clients the benefits of full factoring services throughthe Maturity Factoring Scheme, thus effectively addressing the needs ofexporters to avail of pre-finance (Advance) on the receivables, for theirworking capital requirments. One important feature is the very importantrole and special benefits envisaged for banks under the scheme.

SMEs:Despite an increase of over 23% in merchandise in 02-06 period, thesaleable cash flow for every SME exporting unit is not increasing.

ECGC, in an effort to become an active player in contributing to the growthof SMEs in exports, has tied up with the National Small IndustriesCorporation (NSIC), offering its products to a number of SMEs spread allover India.

ECGC has introduced a network of more than 50 branches for customersupport, including exclusive branches for SMEs in Mumbai and New Delhi.

Products for SMEs are:• Turnover Policies• Specific Policies• Standard and Small Exporters’ Policies• Exposure Policies• Consignment Policies• Service Sector Policies

Visit: www.ecgcindia.com for further details.

Government of India under stimulus package has sanctioned up to Rs.350

75

crore out of the corpus available under National Export Insurance Account.This will result in additional benefits to the exporters and banks. Thepercentage of cover is enhanced by 5% under Export Credit InsurancePolicies issued to exporters and by 10% under Export Credit InsuranceCovers for Banks. The maximum percentage of cover for the exportersis enhanced to 95% and for the banks to 85%.

Significant additions and changes from September 091. GR Approval for Exprot Goods for Re-import after repairs/

maintenance/ testing calibration, etc.2. Where the export goods are destroyed abroad, Banks may have a

certificate from the testing agency in lieu of Bill of Entry.3. For purchase of forex banks/ FFMCs may accept debit cards/ credit

cards/ prepaid cards in addition to payment of rupees throughcheques/ DDs, etc.

76

CHAPTER 17

DEMAND GUARANTEES AND STANDBY LETTER OF CREDIT

Demand Guarantees

Bank guarantees are regular features in international tenders covering constructioncontracts, import and export of capital equipment, bulk commodities such as mineral ores,petroleum products, sugar and rice. Bank guarantees play an important role in thesetransactions because the interval between bidding for and completing a contract canextend from a few months to a few years.

From the time of bidding to final execution several imponderables involvingtechnical, economic and political factors can affect the supplier’s ability to fulfil the contract.When buyers found that it was difficult and time consuming to claim damages fromdefaulting contractors by proceeding against them as per contract terms they soughtprotection from financial risks by insisting on the provision of unconditional bankguarantees.

Bank guarantees payable on first demand issued on behalf of the supplier affordgood protection to the buyer as demand guarantees are independent of the contract andenforceable by making a written demand on the issuing bank. This insistence on bankguarantees is almost universal in high value international transactions entered into by publicsector and quasi-government organisations which are subject to rigid operatingprocedures laid down by their national governments.

The words ‘guarantee’ and ‘bond’ have distinctly different legal definitions andimplications. However, in the matter of tender and contract guarantees these are usedinterchangeably and should be regarded as simply meaning a ‘promise’. Whichever wordis used to describe the instrument of payment, all bank guarantees include an undertakingto pay a certain sum of money only when the beneficiary demand payment on the groundsthat the person on whose behalf the guarantee is issued has not fulfilled his contractualobligations.

Different types

There are several types of guarantee which exporters may be called upon toprovide in favour of buyers at different stages of the sale transaction.

(A) Tender guarantee or bid bond:

The purpose here is to protect the buyer from the failure of the bidder in the eventof his failure to fulfil various obligations he undertakes at the time of submitting the tender.It may vary from 0.5 to 5 per cent of the tender value. The bid bond usually provides an

77

assurance to the buyer that on award of the contract subsequent guarantee requirementsto secure performance and/or advance payments will be forthcoming.

(B) Advance payment guarantees: Advance payments are often made to thesupplier in large value construction contracts or transactions relating to high valuecapital equipment and machinery that are manufactured to meet the specificrequirements of the buyer. The buyer may agree to make advance payment/progress payments provided the supplier provides a bank guarantee which enables thebuyer to recover all or part of his advance payment in the event of the supplier failing tofulfil the terms of the contract.

(C) Performance guarantee or bond: This ensures the satisfactory completionof a contract in time. It provides the buyer with effective and often unilaterallyenforceable security against the seller’s failure to perform.

(D) Retention money bond: Contracts for supply of plant and machinery usuallycontain a provision that 5 to 10 per cent of the contract price will be retained by thebuyer pending final acceptance of the machinery or expiry of the warranty period asper the contract. The retention of payment is to ensure that the seller will completefinal tests or perform rectification work after installation of machinery. Many buyersare willing to accept a suitably worded bank guarantee and release the money retainedto the supplier.

Implications of demand guarantees.

A demand guarantee becomes payable to the beneficiary immediately on thebeneficiary making a formal demand on the issuing bank. The demand guaranteesissued by banks are independent of the underlying commercial contracts. In this respectthey are almost on a par with documentary letters of credit.

Under demand guarantee the issuing bank must unconditionally pay to thebeneficiary the claimed amount up to the value of the guarantee when a demand ismade in accordance with the terms of the guarantee. Non-compliance with theunderlying contract terms by the beneficiary of the tendency of any dispute cannot be usedas a defence to avoid payment under the guarantee.

Mechanism of issuing guarantee

Books normally require that guarantees issued by them should comply with thefollowing criteria.

1) The guarantee should be for a finite sum only in Indian rupees or a specifiedforeign currency.

78

2) The wording should be precise and unambiguous. In particular thecircumstances under which the bank has to pay a claim under theguarantee must be clear.

3) The guarantee should provide for termination on a specified date or on anindisputable event.

4) The guarantee should not contain any provision which contravenes theIndian law and the current exchange control regulations.

The applicant for a guarantee has to execute a counter-guarantee in favour of thebank which issues the guarantee. While executing the counter-guarantee, the applicantshould also furnish a text of the guarantee to be issued.

Care should be taken to draft guarantees in precise terms and to check earlywith the issuing bank that the proposed text is acceptable and effective in the way theapplicant intended it to be.

All guarantees should contain minimum information such as name of thebeneficiary; name of the guarantor; name of the applicant; purpose of guarantee; thedate guarantee comes into effect; the date guarantee expires and becomes void;maximum amount guaranteed; any reduction provisions; manner of claiming payment;documents to support claim; and law and jurisdiction applicable to the guarantee.

The normal requirement of the beneficiary is that a guarantee be issued in hisfavour by a bank in his own country. This is arranged by the applicant’s bank issuinga counter-guarantee to its foreign branch/foreign correspondent bank which in turnissues the guarantee to the beneficiary.

In many countries the form of wording of a guarantee, validity period and methodand timing of claim and the like are often imposed by local lows or banking regulations.Formal tenders usually incorporate the text of the guarantees. These are seldommodified to suit the needs of the bidder. In such circumstances the supplier/tendererhas to evaluate the risks involved prior to making the bid.

Banks normally take margin money deposits for issuing guarantees. The margindemanded may vary from 10 to 100 percent of the guarantee amount depending onthe risks involved and the standing of the applicant and other collateral securityavailable to the issuing bank.

In India, the charges for issue of bank guarantees related to import/exporttransactions are specified by the Foreign Exchange Dealers Association of India(FEDAI). In many countries, banks have their own scale of charges and applicantsshould ascertain in advance the likely cost of issuing guarantees by banks outside

79

India. If considered necessary these costs should be factored in the terms quoted to theforeign buyer.

Exchange control regulations

1. Banks authorised to deal in foreign exchange (ADs) have generalpermission of the RBI to issue performance bonds and guarantees in favour of overseasbuyers. They may also issue counter-guarantees in favour of their own branches/correspondents abroad to enable them to issue the requisite guarantees.

2. ADs also have general permission to issue guarantees in favour ofresidents of India on behalf of persons resident outside India. Such guarantees are issuedagainst the counter-guarantees provided by the AD’s foreign branch/foreigncorrespondent. Till recently ADs were allowed to honour claims under such guaranteesonly after receipt of reimbursement from the overseas branch/correspondent. FromFebruary 15,1998, AD’s may make rupee payments to the resident beneficiariesimmediately when the guarantees are invoked without awaiting reimbursement fromthe overseas branch/bank.

3. Whenever importers have to make advance payment towards import ofcapital goods of other items, the importer must obtain a guarantee from an internationalbank of repute situated outside India before effecting advance remittance. As of nowthis provision applies to advance remittances exceeding $ 15,000 of its equivalent inother currencies. In respect of capital goods if the advance remittance exceeds 15per cent of the value prior approval of the RBI is required.

Certain practical considerations

Experienced exporters are reluctant to provide demand guarantees whereasinexperienced exporters tend to believe that bank guarantees are one of the formalitiesto be completed in bidding for a contract and leave the details to be discussed in thefinal stage of the contract negotiation.

This is very much so in the case of supply of machinery and spares to buyers inthe African continent and West Asian countries by small exporters. Many letters ofcredit received by beneficiaries in India from buyers in these countries contain aprovision that the credit will be operative only after the Indian exporter arranges forthe issue of a performance guarantee prior to shipment of goods. Some contractsstipulate that letters of credit will be issued only after receipt of a guarantee issued onbehalf of the Indian exporter.

It is advisable that the risks in issuing these guarantees are evaluated in advanceand the text of the guarantees is drafted and mutually agreed in early stages. If such

80

preliminary care is not taken, the buyers will be in a strong position to specify the natureof the guarantee as per his terms. Often exporters prefer to concede the guaranteeas specified by the buyer rather than losing the contract.

Demand guarantees are not willingly issued but are usually given in order to winto contract against stiff competition. To an applicant, a bank guarantee issued andpayable on simple demand is of real concern.

Under majority of guarantees there may not be any claim where the transactionshave gone through smoothly to the mutual satisfaction of the parties concerned. Wherethere are defaults the guarantees are certain to be invoked. However, in the hands ofan unscrupulous beneficiary, the demand guarantee could become a powerfulmanipulative tool.

He can make unreasonable demands particularly after the contract is completed.While the possibility of unfair demand is an inherent risk in demand guarantees such

contingencies could be avoided to a large extent if the exporter satisfies himself aboutthe business practices and standing and integrity of the buyer prior to signing the

contract or bidding for the tender.

Stand-by letters of credit

The stand-by letter of credit is very similar in nature to a bank guarantee. Stand-by letters of credit were first issued by banks in the U.S. as an alternative to guarantee

bonds because of legal restrictions on banks from issuing bonds and guarantees.Japanese banks also issue stand-by letters of credit for similar reasons.

In a traditional letter of credit, the beneficiary obtains payment against documents

evidencing performance. In a stand-by credit, the beneficiary obtains payment from a bankwhen the applicant for the credit has failed to perform as per contract. Payment

is usually realised by the beneficiary against presentation of a sight draft and writtenstatement that the applicant for the credit has failed to fulfil his obligations.

Suitably worded stand-by credits can perform the functions of various guarantees

such as advance payment guarantees, and performance guarantees. In addition, they canbe used to ensure payment of outstanding invoices under open account trading.

Stand-by credits are usually issued by the applicant’s bank in the applicant’s country

and advised to the beneficiary by a bank in the beneficiary’s country. In contrast, it is usualfor demand guarantees to be issued by a bank in the beneficiary’s country. Some

beneficiaries are reluctant to accept stand-by credits as they have to dependon a bank outside their country. This could be overcome by arranging for confirmation

81

of a stand-by credit by a bank in the beneficiary’s country. The parties to the creditshould agree in advance who should bear the confirmation charges.

Stand-by letters of credit are independent of the underlying contract and providethe beneficiary the same degree of protection as a bank guarantee. The issuing bankis not concerned with the performance or otherwise as per underlying contract. Theonly fact which masters is whether the documents presented entitle the beneficiary topayment or not.

In a stand-by credit the responsibilities of the issuing bank are clearly set out asregards payment of claims. In particular, there can be no confusion about validity andexpiry dates. In contrast, in the case of guarantees, the laws of many countries providethat a claim could be made even after the expiry of the guarantee if the default under theguarantee took place within the validity of the guarantee.

Under a stand-by credit, payment by the bank can be made only on receipt by itof a compliant demand by the beneficiary. This can be either in the form of a simplerequest for payment, a request supported by a statement containing the reasons forthe claim or a request with a statement plus supporting documentary evidence. Thisgives the applicant an opportunity to specify in the credit the documents that are tobe presented by the beneficiary for claiming payment.

It is preferable if a stipulation to the effect that the beneficiary must present asigned statement that the applicant is in breach of his obligations and the nature ofsuch breach is included in the credit. This will provide some protection against unfairdemands by beneficiaries. If payment is obtained by the beneficiaries by making afalse statement, the applicant may be better placed to take legal action against thebeneficiary.

Stand-by credits are increasingly used to guarantee payments of invoicesoutstanding in open account trading. They are particularly used in international oil trade.The issuing bank under takes that it will pay against the written statement of the sellerthat documents complying with the underlying contract have been presented to thebuyer but payment has not made. Alternatively copies of some or all the documentspresented by the buyer may be required. This way, the sellers is assured of paymentfor goods already supplied for which payment has not been made. Where there areproblems, trade continues outside the letter of credit and the buyer is able to getcontinuous supply of goods without opening letters of credit for each and everyshipment while the seller stands protected against outstanding payments if the buyeris not able to pay as and when payments fall due. Stand-by credits are subject to theUniform customs and Practices for Documentary Credits, 1993 Revision, InternationalChamber of Commerce (ICC), Paris Publication No. 500 (UCP 500). In terms of article1 of UCP 500, the Uniform Customs will apply to all documentary credits (including to

82

the extent to which they may be applicable to Stand-by letters of credit). The UniformCustoms will apply to a stand-by credit only when they are incorporated in the creditas provided in Article 1 of UCP 500. The provisions of UCP 500 have been adoptedby banks in almost all countries, including India. All articles which refer generally tothe rights and obligations of the parties to a credit will apply to stand-by credits also.In particular, Article 9 setting out the under takings of the issuing bank and confirmingbank will be applicable. Articles 3,4 and 15 which relate to the principles of autonomyof the credit will apply.

The stand-by credit is to be operated in the same manner as traditional credit,namely, without regard to the terms or the performance of the underlying contract.Articles 13 & 14 as to the duty of the banks examining documents and an issuingbank in taking up or refusing documents are also important. Precision of instructionsas to the documents which are to be presented as per Articles 20 and 21 needs specialattention while issuing credits. Articles 42 and 44 which cover expiry dates and date forpresentation are applicable. The applicability of various articles of UCP 500, ofcourse, will be ultimately determined by the actual wording of the stand-by credit.

In respect of demand guarantees also, the ICC, Paris, brought out a set ofguidelines titled Uniform Rules for Demand Guarantees (URDG) in April 1992 (ICCPublication No. 458). These rules are meant for adoption by users of demandguarantees governing the issue and operation of demand guarantees. To be effective,the URDG provisions are to be incorporated in the guarantees in the same manneras UCP 500 is incorporated in a letter of credit. However, unlike UCP 500, the URDGis yet to gain wide acceptance, Banks in India have not yet adopted URDG in respectof guarantees issued by them.

The mechanism of issue and operation of stand-by credits is similar to that ofguarantees. As in the case of demand guarantees, stand-by credits are also open forabuse by a beneficiary without scruples. The applicant has to satisfy himself aboutthe credentials of the beneficiary prior to entering into business transactions. Thedictum prevention is better than cure is admirably applicable in the matter of providingguarantees or stand-by credits.

83

CHAPTER 18

FORFAITING & FACTORING

Proper financing is a crucial part of any business, more so in exports where thecost of finance is affected by domestic as well as international factors. Availability of avariety of suitable financing options can encourage small and medium export businesseswhere raising of money to finance exports is often more an issue than actual receipt oforders. Conventional financing methods like bank loans, equity financing etc. comewith a lot of conditions and strings attached which new or small exporters find difficult tomeet. For instance new firms may find it difficult to raise bank loans (since there is noproof that business will be viable, no balance sheets to show healthy profits). Equityparticipation implies a more long-term commitment and accountability towards theshareholders.

In this context the two financing methods of factoring and forfaiting could provideviable options. Both provide immediate cash to the exporter that virtually wipes out(for the exporter) the credit period extended to the importer. This credit period extendsfrom the time of shipment of goods to the time of receipt of payment from the buyerabroad. The credit period can extend from a couple of months to several years (inthe case of deferred payment contracts, project exports etc.) and hits the liquidity ofmany export businesses. Forfaiting and factoring are similar in that a third (factoringor forfaiting) agency takes over the accounts/trade receivables of the exporter at acertain discount. The exporter in turn receives immediate reimbursement of thereceivables less the discount due to the factoring or forfaiting agency. However theconditions and stipulations governing factoring and forfaiting are a little different.

Forfaiting

The Government of India has recently permitted a new form of post shipmentfinancing called Forfaiting as part of its efforts to promote exports from the country.

Definition :

Forfaiting is the sale by an exporter of export trade receivables, usually bankguaranteed, without recourse to the exporter. Such receivables include Letters of Credit(with or without Bills of Exchange) Promissory Notes with Aval (guarantee), Bill ofExchange with Aval, Bank Guarantees Payable to an Exporter in one country from anImporter in another country.

Forfaiting as a financing concept has been in use across the world since the1960s. The word forfait means to forgo one’s right to something. In the context ofexport finance, the exporter forgoes his right to receive payment from the importer atlater date and surrenders the right to collect payment to a third party or agency (known

84

as forfaiter). Instead the exporter receives an immediate reimbursement of his paymentless certain discounts from the forfaiter. Normally, these payments are due at a laterdate, forcing the exporter to bear the cost for the intervening period, as well as beingexposed to the risks of exchange rate fluctuations, political situations etc. These arerisks which expose a small or medium exporter to significant erosion of profits. Withforfaiting finance, the exporter passes on his debts as well as attendant risks to theforfaiting agency. This form of financing is referred to as without recourse financing(in case the debt cannot be recovered there is no risk for the exporter). Forfaiting is amedium term financing option typically for the three to seven year time frame.

Forfaiting comes with the following terms and conditions

* there is a discounting of the amount to be received from the importer* discounting is on a fixed rate* debt is in the form of bills of exchange or promissory notes guaranteed by

a bank* such financing is without recourse to the seller* 100% of the amount receivable can be financed in this manner

Forfaiting – The Modus Operandi

The parties/agencies involved in a forfaiting transaction include the exporter, theimporter, a forfaiting agency, a bank that stands guarantee (aval) for the bills ofexchange or promissory notes (this is normally the importers bank) and the Exim bank inIndia acts as the facilitating agency between the Indian exporter and the forfaiting agency…Typically the exporter negotiates terms like price, payment currency, credit period andthe like with their overseas buyer. The exporter then approaches the Exim Bank with theseterms. The Exim Bank obtains a tentative forfaiting quotation from a forfaiting agency.Armed with this quote the exporter can now finalise the contract with the buyer. Theexporter should ensure that most of the forfai ting charges are passedon to the buyer. Once the terms have been settled with the buyer, a final forfeitingquote is obtained by the Exim Bank. If this quote is acceptable, the exporter signs thecontract with the buyer as well as a separate one with the forfaiting agency. Onceshipment of goods has taken place the exporter obtains availed (guaranteed) bills ofexchange from the importer (through a bank) or availed promissory notes. Thesebills of exchange or promissory notes are endorsed by the exporter and are routed tothe forfaiting agency through the Exim Bank. The forfaiting agency will then remit thepayment due to the exporter to an account of the exporter’s bank in the country wherethe forfaiting agency is based. This bank then transfers the amount to the exporter in India,and the exporter will be provided with a Certificate of Foreign Inward Remittance as proof.When the promissory notes/bills of exchange reach maturity, the forfeiting agency collectsthe payment from the aval (the bank or agency that stands guarantee irrespective ofwhether the importer has paid the aval).

85

FORFAITING COSTS

In a forfaiting transaction the exporter has to bears the following costs

A commitment fee has to be paid to the forfaiter for the period of time from whenthe commitment is entered into upto the date of discounting or date of expiry of thecontract. The commitment fee typically ranges between 0.5 to 1.5 per cent per annum ofthe utilised portion of the forfait amount. This fee has to be paid irrespective ofwhether the export takes place or not. The second, is the actual discount fee which is theinterest on the receivable amount for the entire period of credit as well as a premium forthe various risks involved. This fee is based on prevailing market interest rates includingLIBOR (London Inter Bank Offered Rate). These are the two main costs involved. Inaddition there could be documentation costs in case of a lot of paperwork, penalties,handling charges, etc. The Exim Bank which acts as the faci l i tator alsocharges a service fee which can be paid in Indian rupees.

As per RBI regulations it is mandatory that the discount fees and anydocumentation fees charged by the forfaiter should be passed on to the overseasbuyer. During shipping, it is not necessary that any of the forfaiting fees be shownseparately, they can be included in the FOB value indicated in the invoice. The exportcontract can be executed in any of the major convertible currencies of the world, inorder to be eligible for forfeiting.

FACTORING

Factoring is a rather more general term for a concept similar to forfaiting. Factoringis the non-recourse sale of accounts receivables of a business on a daily, weekly, ormonthly basis in exchange for payment.

It is a more short term financing based on accounts receivables of a business.Factoring is prevalent in business in various ways. For instance in retailing, the creditcard business is a clear example of factoring. Factoring is often more short-term thanforfaiting and is applicable where receivables are due within around 180 days. Simplyput factoring is the process of purchasing accounts receivable, or invoices, from a businessat a discount. Factors provide a vital financing service to mostly small and medium-sizedcompanies who are short of working capi tal. The factor fi l ls the moneygap between the time a manufacturer or seller makes a sale and the time the customerpays the bill. For this the factor charges a fee equal to percentage of the invoicespurchased.

In the context of the export business, unlike forfaiting, factoring is often withrecourse. In a recourse agreement, the exporter has to repurchase or pay for anyinvoices the factor cannot collect from the exporter’s customers. The factor still agreesto advance money, take on the collection responsibility, and earn a fee for it. But if

86

the customer doesn’t pay, the invoices are returned back to the exporter for payment.This eliminates any financial risk for the factor, but unlike forfaiting increases the riskfor the exporter. Since the risk for the factor is less, factoring fees tend to be a lowerpercentage as compared with forfaiting fees. Factoring does not provide safety fromnon-payment, political risks and exchange rate fluctuations. Factoring is not fixed ratediscounting but depends on the prevalent exchange rate and political conditions attime of maturity of payment.

The need for cash is common to every business. Factoring rescues thesecompanies by providing them with the liquid assets, or cash, they need to fuel theirgrowth. Factoring can be particularly valuable for companies with growth potential, butwho need an accelerated cash flow to realize that potential. It is additionally valuablefor firms that are seeking new ways to reduce bad debts, and small and mid-sizecompanies that require working capital or are engaged in seasonal industries. At thesame time factoring is not for all companies. While the advantages of factoring canbe great, for some companies the cost would outweigh the value of the servicesextended by factoring companies. For example, a company serving a few majorcustomers with excellent credit ratings would probably not benefit from factoring.

A company with no history, no assets, and no credit couldn’t hope for a bankloan, but as long as their customers are creditworthy, a factor or forfaiter would bekeen to do business with them. In essence the factor/forfaiter is not extending creditto the exporter, but actually purchasing their invoices.

-invoices which represent cash due from their customers. So the factor isconcerned with the creditworthiness of the importer customer and not the exporter.

As we have seen, factoring and forfaiting are two forms of post shipment financingthat help exporters to overcome the hurdle of delay in repatriation of export salepayments. This in turn increases liquidity and cash flow for the exporters business.Forfaiting in particular does not curtail other borrowing since it is without recourse tothe seller and hence does not increase debt. Hence this is an additional rather thanan alternate financing method. Forfaiting and factoring are thus means by which smallan medium businesses can raise short to medium term finance that will help themextend credit to their customers with low or no risks to themselves. This is yet anotherkey to helping Indian exporters get competitive in the international marketing arenawhere not just quality and price but even payment terms can be deciding factors.

Canbank Factors Ltd. (a subsidiary of Canara Bank) offers “Export Factoring” as asubstitute for L/C. Details can be had from their website.

www.canbankfactors.com

87

CHAPTER 19

CASE STUDIES

Negotiable Instruments

Bill of Exchange

1. Case

1. Does the instruction Documents on acceptance (D/A) or Documents on

Payment (D/P) written on a bill or on a slip attached to it make the Bill a conditional order

under section 3 of the Bills of Exchange Act, and is the instruction binding on any holder

into whose hands the bill may come.?

Solution

It is considered that such a instruction is merely a memorandum not rendering

the bill a conditional order, and that it is binding on all holders who take the bill and

documents. Precise information should be obtained in the remittance itself.

2. Case

May a Bill expressed in foreign currency be drawn in such a manner as to serve

a fixed rate of exchange?

Solution

Yes, under section9(I)(D) of the Bills of Exchange Acts, a bill may be drawn payable

at an indicated rate of exchange.

3. Case

A bill is received for collection by a banker through the post days after maturity.

Has he the right to hold it over one day or should be return it, if unpaid the same day it is

received?

Solution

Though in practice on a bill bankers could not generally hold over, they have the

legal right to do so.

4. Case

A bill is due to be presented for payment on Monday 6th

May, but is delayed

through a strike of postal workers; What is the presenting bank's position?

Solution

Section 46(1) of the bills of exchange Act applies and the delay in making

presentation for payment is excused since the delay is caused by circumstances beyond

the control of the presenting bank, and cannot be imputed to its default, misconduct or

negligence.

88

5. Case

Is a banker protected in having paid a bill drawn upon and purporting to beaccepted by a customer payable at his bank, if it is after wards discovered that.

a) The acceptor’s or

b) An endorsers

Signature is a forgery

Can the banker, on discovering the forgery, recover the amount of the Bill fromthe person to whom he has paid it, If that person received the money in good faith andwithout knowledge of the forgery?

Solution

These is no statutory protection in respect of the forgery of the acceptor's signature,nor is there where an endorser’s signature is forged unless the endorser is a fictitious ornon existent person in which case the Bill may be treated as payable to bearer.

Thus if the Case is the payment of a Bill affected by the exchange controlregulations of this country?

Solutions

The House of Lords rejected the contents while admitting that the debt could notbe paid without exchange control consent. As the 1947 Act controlled only the immediate,destination of the money funds could, however, be paid into court, discharging the debtorand then held until exchange control clearance had been obtained before making paymentto the foreign creditor.

6. Case

Can the drawer of a dishonoured foreign bill demand the cost of protest from the

acceptor?

Solution

Yes, if he has been charged with such cost (Bill of Exchange Act, Sec. 57(1)(C)

7. Case

A Bill of Exchange is Crossed and Co. Does this prevent a holder from

demanding payment over the counter?

Solution

Section 76 to 82 of the Bills of Exchange Act apply only to cheques unless the

bill is drawn on a banker, payable on demand, and therefore a cheque, under section

73, the holder may demand payment of it over the counter.

8. Case

A bill falls due for payments on April 10 which is a holiday when is the bill payable?

Solutions

If a bill falls due for payment on a non business day, it is payable on the succeeding

89

business day. The bill in question could therefore be payable on the next business day.

Under Bill of Exchange documentary.

9. Case

A bank accepts a bill under a letter of order and receives the documents that were

attached to it. In the event of the customer at whose request the letter of credit was

issued not supplying the goods is the bank responsible for the goods to the holder of

the bill?

Solutions

No

10. Case

Does a bank in presenting a documentary bill for acceptance or payment,guarantee the authenticity of the documents attached to it or the existence of the goodstherein mentioned?

Solution

No. Refer Act 9 of uniform customers and practice for documentary credits 1974.

11. Case

A bank holds an accepted bill with shipping documents attached to be deliveredagainst payment. Some time before maturity the acceptor offers part payment of the billand asks that a proportionate past of the goods shall be released. What is the usualpractice where such a request is made?

Solutions

Sometimes the instructions accompanying a documentary bill authorized the holderto release part of the goods in exchange for payment of a proportionate part of the amount,but in the observe of such instructions no such release can safety be made.

90

ANNEXURE

SMALL INDUSTRIES DEVELOPMENT BANK OF INDIAAddresses of Offices

Head Office10/10, Madan Mohan Malviya Marg, Lucknow - 226 001.

Tel. : 209517 - 21 / 209565 Fax : (0522) 209513-14, 209542, 209506SIDBI Website : http://www.sidbi.com

REGIONAL OFFICESKolkata GuwahatiTel. : 2479809, 2404183 Tel. : 529222, 524020Fax : (033) 2404093 Fax : (0361) 529545

New Delhi ChennaiTel. : (011) 3682473-77 Tel. : 4361893, 4330286, 4330964Fax : (011) 3682464 Fax : (044) 4340348

MumbaiTel. : 2872508, 2872475Fax : (022) 2872490

91

ANNEXURE

ECGC SERVICE NETWORK

REGISTERED OFFICE :Em : ecgcedp@bom2.vsnl.net.in

NATIONAL MARKETING DIVISIONEm : ecgcmktg@bom5.vsnl.net.in

www.ecgcindia.com

ECGC + D&B ALLIANCE CELLEm : ecgctis@vsnl.com

www.indiaexportegister.com

BRANCH OFFICES

WESTERN REGION :

MUMBAI METRO BRANCHEm : ecgcmUMB@bom5.vsnl.net.in

PROJECT EXPORT BRANCHEm : ecgcped@bom4.vsnl.net.in

www.ecgcindia.com

LARGE BUSINESS BRANCHEm : ecgcibbm@ecgcindia.com

BANK BUSINESS BRANCHEm : mmmondal@ecgcindia.com

CHURCH GATE BRANCHEm : chb@ecgcindia.com

THANE BRANCHEm : ecgcthb@vsnl.net

AHMEDABAD BRANCHEm : bmahemdabad@ecgcindia.com / gangasaran.gupta@ecgcindia.com

92

PUNEEm : ecgcpune@giaspn01.vsnl.net.in

INDOREEm : bmindore@ecgcindia.com

EASTERN REGION :

KOLKATAEm : ecgccal@cal.vsnl.net.in

VARANASIEm : ecgc@hclinfinet.com /ecgccal@cal.vsnl.net.in

BHUBANESHWAREm : ecgcbbu@satyam.net.in

GUWAHATI SUB-OFFICETel : (0361) 263 5983

SOUTHERN REGION - I

CHENNAIEm : ecgcchen@md3.vsnl.net.in

COIMBATOREEm : ecgc_cbe@koval.in.nic.in

MADURAIEm : ecgcmdu@sancharnet.in

SALEMEm : slm_ecgcslm@sancharnet.in

TIRUPUR SUB-OFFICEEm : tirupur@ecgcindia.com

SOUTHERN REGION - II

BANGALOREEm : ecgcbang@blr.vsnl.net.in

KOCHIEm : ecgckoch@giasmd01.vsnl.net.in

HYDERABADEm : ecgchyd@hd1vsnl.net.in

NORTHERN REGION

NEW DELHI METRO BRANCHEm : ecgcdel@del2.vsnl.net.in

LARGE BUSINESS BRANCHEm : ecgclbb@vsnl.com

LUDHIANAEm : ecgcldh@sify.com

KANPUREm : ecgckan@nda.vsnl.net.in

MORADABADEm : ecgcmbd@sancharnet.in

JAIPUREm : ecgcjkpr@jp1.net.in

AGRAEm : ecgcagra@sancharnet.in

PANIPATEm : ecgc@pnp.nic.in

93

SALES PROMOTION AGENTS

SHAH TRADING CORPORATIONEm : spaecgc@hotmail.com

FUND POINT FINANCE LTD.Em : fundps@vsnl.com

94

APPENDIX

Warehouses abroad

RBI allowed in May 03 individual exporters to hire warehouses abroad, subject to certain

conditions, such as that the applicant’s export outstanding does not exceed 5 percent of

exports made during the previous year.

For details please contact authorised dealers in foreign exchange.

SPECIMEN - AIR MAILLETTER OF CREDIT

Advice for beneficialryName and address Irrevocable / Revocableof the issuring Bank : Documentary Credit No. :

Place & YY MM DD YY MM DDDate of Issue : Expiry Date :

Place for presentationof documents :

Name of the Applicant Name of the Beneficiary& Address : & Address :

Name of the Advising Bank Amount :& Address (In figures)

Amount :(In words)

Partial Shipment : Allowed Credit available with :

Not allowed By payment at sight

Transshipment : Allowed By acceptance of draft

Not allowed at (days)

By negotiationShipment from :Shipment to :Not later than : YY MM DDDescription of goods : Against the presentation of documents

detailed herein.

95

Documents required :

Beneficiary’s draft in duplicate drawn at ____________(sight/ usance) on_______

Signed Commercial invoices, original plus _______ copies indicating import licenseNo._______ dated / or Import Trade Control (H.S.) Classification No.__________

Full set of “On Board” Ocean Bills of Lading made out of the order of _______Bankaddress ______________________________________________and applicantM/s_____________________________________________________________address _____________________________________marked “Freight prepaid /Freight payable at destination.

OROriginal Airway bill indicating actual date of despatch, evidencing goods consignedto ______________ Bank / Applicant and notify __________ (Bank with full address)and Applicant _________________(with full address).

Marine / Air Insurance policy or certificate in full set unto order or blank endorsed inthe currency of the credit for full invoice value plus ________ % age covering InstituteCargo Clauses (A) / Institute Cargo Clauses (Air) Institute War Clauses, Cargo / AirCargo, Institute Strikes clauses Cargo / Air Cargo with claims payable in India.

ORInsurance covered locally. Immediately after shipment full details of shipment shouldbe advised to applicant and insurance company ____________ (name with fulladdress by Fax/Telex/Telecommunication quoting their cover note number/policynumber _______.A copy of such telex/Fax/Telecommunication should accompanythe documents.

Other documents :a. Shipping company’s/shipping Agents certificate that the vessel is registered with

an approved classification Society as per the Institution Classification Clause andclass maintained equivalent to Lloyds 100A1 and Vessel is seaworthy.

b. Certificate of origin issued by __________________ in __________ copies.

c. Inspection certificate issued by ___________________________________

d. Test certificate issued by ________________________________________

e. Quality certificate issued by ______________________________________

f. Packing list in ________________________________________________

g. Weight list in _________________________________________________

h. Any other documents, if any.

All documents to be marked “Drawn under Documentary Credit No. ______ dt. _______issued by ________________.”

96

Additional Conditions :All Bank charges outside India are for account of ______________

Documents Despatch Instructions :Paying/accepting/negotiating Bank should forward original set of documents by courier/registered airmail to ____________ Bank (full address) and other set of documents byfollowing courier/registered air mail.___________________________________________________________________Documents should be presented within _______ days after the date of shipment/airdespatch but within the validity of the credit.___________________________________________________________________This irrevocable documentary credit issued by us is subject to the Uniform Customs andPractice for Documentary Credit (1993) Revision. International Chamber of Commerce,Paris, France, Publication No. 500 and engages ourselves in accordance with the termsthereof. If the credit is available by negotiation, each presentation must be noted on thereverse side of this advise by the Bank where the credit is available. This documentarycredit is also subject to Uniform Rules for Bank to Bank reimbursements under DocumentaryCredits. International Chamber of Commerce, Paris, France, Publication number 525wherever applicable.

- Sd - - Sd -(Name and signature Number) (Name and signature Number)

(Authorized signatory of issuing Bank)

Instructions to the Advising Bank

We request you to advise this letter of credit to the beneficiary.Without adding your confirmation

Adding your confirmation

Adding your confirmation if requested by the beneficiary.

Instruction to Negotiating Bank :a) Please claim reimbursement for the negotiated amount along with charges if any

from our account No.4567-6780-8090-0901 maintained with ---ABC Corporation,LC Reimbursing Division4th Floor, 4th BlockWall Street, New York, NY 100015USA

under advise to us

97

b) On receipt of documents in terms of this Documentary Credit, we undertake toreimburse you in currency of this documentary credit in accordance with yourinstructions.

- Sd - - Sd -(Name and signature Number) (Name and signature Number)

(Authorized signatory of issuing Bank)

Back portion of Original letter of Credit :___________________________________________________________________Date of Presentation Amount Balance Stamp & Signature of Bank___________________________________________________________________

___________________________________________________________________

Notes :1) Every page of Letter of Credit to be signed by two officials besides every page shall

bear the Letter of Credit number, names of applicant and beneficiary. Every pageshall bear the page numbers as 1/3, 2/3, 3/3.

2) First page shall bear the “notation” as under :This document consist of ________ signed pages

3) There will be minimum four copy sets of Letter of Credit viz.

a) Original meant for beneficiary

b) Second copy for advising bank

c) Third copy for the applicant

d) Fourth is meant for office copy

Advising Bank’s copy and office copy of the Letter of Credit to bear following additionalclauses at the end of the credit.

We request you to advise this letter of credit to the beneficiary.

Without adding your confirmation

Adding your confirmation

Adding your confirmation if requested by the beneficiary.

98

If the L/C is freely negotiable one, then reimbursement clause to appear on the body oforiginal L/C under document despatch instructions. Otherwise, should appear on the copyof advising Bank.

SPECIMENDOCUMENTARY CREDIT ADVISED

BY SWIFT / CABLE

From : ABC International Bank,Overseas Branch49, Makers BuildingNariman Point, Mumbai - 400 001.

To : Republic Bank of Chicago42, First SquareCHICAGO - USA

Date : 31st Dec. 2003

Test : 49678 for US $ 250,000/-

Sir,

We hereby issue our Irrevocable Documentary Credit No. LC 4578 M 432 for an amountUS $ 250,000/- CIF Mumbai.(US Dollars - Two hundred fifty thousands only CIF - Mumbai)

Favouring : XYZ Garment Co.,Garment House56, Second SquareCHICAGO

Accountee : Mumbai Garment Exports90, Makers StreetNariman PointMumbai - 400 001

Available by their drafts at sight for 100% invoice value drawn on us marked as drawnunder Credit No. LC 4578 M 432 and accompanied by the following documents :

1. Signed commercial invoices in four copies indicating Contract No. 890 dt. 30th Nov.2002 and this Letter of Credit number along with Shipping marks, name of carryingvessel.

99

2. Full set of Clean on Board ocean bills of lading made out of order and Blankendorsed marked “Freight prepaid” Notifying ABC International Bank, 49, MakersBuilding, Nariman Point, Mumbai - 400 001 and Mumbai Garment Exports, 90,Makers Street, Nariman Point, Mumbai - 400 001.

3. Packing list / weight memo in three copies showing quantity / gross and net weightfor each packages indicating contract number and shipping marks.

4. Certificate of origin in three copies.

5. Inspection certificate in three copies issued by Apparel Export Council certifying thatthe goods manufactured are in accordance with the Contract No. 890 dt. 30thNovember, 2002 of Mumbai Garment Exports, Nariman Point, Mumbai.

6. Marine Insurance Policy in duplicate made to the order of shipper and blank endorsedin the currency of the Credit for full invoice value plus 10% covering institute of cargoclauses, Institute of War clause Cargo, Institute of Strike Clauses Cargo with claimspayable in India.

Covering shipment of :1. 10,000 Pcs of Men’s summer ware shirts “XL” size at $ 5 per piece

2. 5,000 Pcs of Ladies Warmer Garments “L” size at $ 15 per piece

3. 10,000 Pcs of Ladies frocks “L” size at $ 10 per piece

4. 5,000 Pcs of gents half pants “XL” size at $ 5 per piece

Goods are to be of USA origin.

Packing should be sea worthy and to protect from seawater during entire journey and acertificate to this effect issued by Steam ship company to company the documents induplicate. Shipment from any US Ports to Mumbai, India.

Not later than 15th March 2003

Partial shipment and transshipment prohibited.

This credit is valid for negotiation in USA until 31st March, 2003

All banking charges outside India are for the Beneficiary’s account. We hereby undertakethat all drafts drawn under and in compliance with the terms and conditions of this creditwill be duly honoured on presentation.

100

Documents should be dispatched by courier in two alternative sets to us. On receipt ofdocuments in terms of this documentary credit, we undertake to reimburse the negotiatedamount in currency of this documentary credit in accordance with your instructions.

This message is an operative instrument and no confirmation follows and subject to theUniform Customs and Practice for Documentary Credit (1993) Revision ICC Paris,Publication No. 500.

Note : If credit is communicated by SWIFT, then there is no need to place test key numberas well as UCPDC provision, since they are inbuilt in the SWIFT system itself.

SPECIMENISSUANCE OF DOCUMENTARY CREDIT

IN SWIFT MT FORMAT

From : XYZ International Banking Corpn.,500 Sausome, Sanfrancisco,California - 94001 USA.

To : ABC Overseas BankOceana BuildingNariman PointMumbai - 400 001India.

MT 700 issue of documentary credit.FLD TEXT Contents

27 : Sequence number 1/2

40A : Form of DC Irrevocable Letter of Credit

20 : DC Number XYZ 680421

31C : Date of Issue 02 12 31 (YY MM DD)

31D : Expiry date and place 03 05 31 (YY MM DD) at the counters ofAdvising Bank

50 : Applicant Dragonwings International,

99, Sausome, Sanfrancisco,

California - 94001 USA

59 : Beneficiary Brindavan Alloys Ltd.,

Alloyed Towers

Parel, Mumbai, India

101

32B : DC Amount US $ 250,000. CIF Mumbai

41 D : Available with/by ABC Overseas BankOceana BuildingNariman point, Mumbai, India

27 : Sequence number 2/2

41E : Drafts at/drawn on Drafts at sight for full invoice value, drawn onissuing Bank

43P : Partial shipment Allowed

43T : Transshipment Prohibited

44A : Shipment from Any US Sea port

44S : Latest shipment date 03 05 15 (YY MM DD)

44D : For transportation to Mumbai, India

45G : Goods 4000 Tons of wires of

25 meters length pieces.

46A : Documents required :

1) Signed commercial invoice in six copies

2) Full set of original Clean on Board ocean bills of Lading plus two nonnegotiable copies of Bill of Lading to order of shipper blank endorsed,marked freight prepaid notify applicant.

3) Packing list in triplicate

4) Certificate of quality in triplicate issued by SGS

5) Insurance will be covered by applicant. Upon completion of loading theshipper shall immediately advise the applicant by cable/telex of the contractnumber, number of packages, quantity, name of steamer, date of shipmentand amount quoting this letter of credit number and copy of this advise toaccompany the original documents.

6) US Customs invoice five copies.

47A : Additional conditions :

a) All banking charges outside US are for the account of Beneficiary.

b) Documents must be despatched by Regd. Airmail or by DHL courier intwo lots to us.

c) All documents shall bear this letter of Credit number

d) Except so far as otherwise expressly stated this documentary credit issubject to Uniform Customs and Practice for Documentary Credits (1993Revision) International Chamber of Commerce Publication Number 500.

102

49 : Confirmation instructions : without

78 : Information to presenting Banker : On receipt of documents at our counterconfirming to the terms of this credit, we undertake to reimburse you in thecurrency of this credit in accordance with your instructions.

SPECIMEN - RED CLAUSE

LETTER OF CREDIT

From : XYZ International Banking Corpn.,500 Sausome, Sanfrancisco,California - 94001 USA.

To : ABC Overseas BankOceana BuildingNariman PointMumbai - 400 001India.

MT 700 issue of documentary credit.___________________________________________________________________

FLD TEXT Contents___________________________________________________________________27 : Sequence number 1/3

40A : Form of DC Irrevocable Letter of Credit

20 : DC Number XYZ 680421

31C : Date of Issue 02 12 31 (YY MM DD)

31D : Expiry date and place 03 05 31 (YY MM DD) at the counters ofAdvising Bank

50 : Applicant Dragonwings International,

99, Sausome, Sanfrancisco,

California - 94001 USA

59 : Beneficiary Brindavan Alloys Ltd.,

Alloyed Towers

Parel, Mumbai, India

32B : DC Amount US $ 250,000. CIF Mumbai

103

41 D : Available with/by ABC Overseas BankOceana BuildingNariman point, Mumbai, India

27 : Sequence number 2/3

41E : Drafts at/drawn on Drafts at sight for full invoice value, drawn onissuing Bank

43P : Partial shipment Allowed

43T : Transshipment Prohibited

44A : Shipment from Any US Sea port

44S : Latest shipment date 03 05 15 (YY MM DD)

44D : For transportation to Mumbai, India

45G : Goods 4000 Tons of wires of

25 meters length pieces.

46A : Documents required :

1) Signed commercial invoice in six copies

2) Full set of original Clean on Board ocean bills of Lading plus two nonnegotiable copies of Bill of Lading to order of shipper blank endorsed,marked freight prepaid notify applicant.

3) Packing list in triplicate

4) Certificate of quality in triplicate issued by SGS

5) Insurance will be covered by applicant. Upon completion of loading theshipper shall immediately advise the applicant by cable/telex of the contractnumber, number of packages, quantity, name of steamer, date of shipmentand amount quoting this letter of credit number and copy of this advise toaccompany the original documents.

6) US Customs invoice five copies.

47A : Additional conditions :

a) All banking charges outside US are for the account of Beneficiary.

b) Documents must be despatched by Regd. Airmail or by DHL courier intwo lots to us.

c) All documents shall bear this letter of Credit number

d) Except so far as otherwise expressly stated this documentary credit issubject to Uniform Customs and Practice for Documentary Credits (1993Revision) International Chamber of Commerce Publication Number 500.

27 : Sequence number 3/3

104

47B : This is a RED CLAUSE letter of credit and the Negotiating Bank is authorisedto make an advance to the beneficiary upto 50% of the documentary creditvalue against a draft sighed by the beneficiary, accompanied by writtenundertaking that the advance is to be used to purchase and ship the merchandisecovered by this documentary credit and that beneficiary undertakes to deliverthe documents stipulated in this documentary credit to the negotiating bank,within the validity of the credit.

49 : Confirmation instructions : without

78 : Information to paying and presenting Banker :

a) Issuing bank undertakes to repay you an first demand any amount soadvanced with or without presentation of shipping documents as calledfor in this credit, within its validity.”

b) On receipt of documents at our counter confirming to the terms of thiscredit, we undertake to reimburse you in the currency of this credit inaccordance with your instructions.

SPECIMEN - REVOLVING

LETTER OF CREDIT

Commercial Bank LTD.,

1/F, Commercial Street, Busan, Korea.

Irrevocable Transferabledocumentary credit No. :

Date and place of issue30th Nov. 2002, Busan, Korea

Credit pre-advised bySWIFT today

ApplicantPolytex garments20, Business CornerBusan - Korea

Advising Bank :Export Banking Corpn. Ltd.,Export Trade Center,Bangalore - India

FLC $ 01465

Date and Place of Expiry28th Feb. 2003, India

Page 1 of 3

BeneficiaryMillennium Garment ExporterGarment House50, Double Road, Bangalore, India

Amount :In figures : US $ 45000/- CIF KoreaIn words : United States Dollars Forty Fivethousand only. CIF Korea

105

Credit available with any Bank bynegotiation of beneficiary’s draft at sightdrawn on Commercial Bank Ltd.,1/F,Commercial Street, Busan, Korea for fullinvoice value accompanied by thefollowing documents in duplicate unlessotherwise stipulated.

Partial Shipments : ProhibitedTransshipment : ProhibitedAirfreight from : BangaloreAirfreight to : BusanLatest date forAir freight : 20th Feb 2003

Documents required :1) Clean on board airway bill made out to the order of Commercial Bank Ltd., notifying

opener ad applicant with full address mentioning this letter of credit number anddate marked freight paid.

2) Signed commercial invoice in quadruplicate

3) Packing list in triplicate showing colour, size assessment, gross weight,measurement and net weight in each carton and showing goods are in standardexport carton packing.

4) Air Insurance Policy endorsed in blank for 110% of invoice value with claim payableat destination in the currency of draft covering Institute of Cargo Clauses (A), Instituteof War Clauses (Cargo), Institute of Strike Clauses (Cargo).

5) Certificate of origin issued by Chamber of Commerce and Industry, showingapplicant as the consignee.

6) Beneficiary’s certificate certifying that one full set of non-negotiable copies ofshipping documents has been sent to applicant by courier after air freight.

7) Inspection certificate issued and sighed by Apparel Export Council, mentioningthat the fabric shade and performance of goods are in accordance with the samples.

Evidencing shipment of : 65 Pct polynosic, 35 Pct polyester, No. Caracas usable width :142 Cms/weight : 186 G/M2 at US $ 4.60 / MTR CIF Korea as per order no. KRE. 4133(KX-078/97).

Colour Assortment : Heater - 8365 Mtrs. Steet - 1615 Mtrs.

We hereby issued this documentarycredit in your favour. It is subject to theUniform Customs and Practice forDocumentary Credits (1993) Revision,International Chamber of CommercePublication Number 500

The number and date of credit and thename of our bank must be quoted on alldocuments.

Yours faithfully,

For Commercial Bank Ltd.

Sd/- Sd/-Name and Serial No Name and Serial No.

Authorized Signatories

106

Note : This is an operative letter of credit in continuation of brief Swift messagecommunicating the establishment of letter of credit.

Other terms & conditions

1. This is a revolving Letter of Credit, upto an aggregate amount of US $ 45,000, non

cumulative per month. The amount of this documentary credit will be reinstated on

receipt of our reinstatement instructions for the earlier drawings.

2. 5% more or less in credit amount and quantity of goods are acceptable.

3. Beneficiary to notify applicant by FAX within three days or air freight furnishing

name of the carrier, freight number and date, quantity of goods airlifted.

4. All charges are for the account of shipper including reimbursing banks handling

fees, if any.

5. Documents to be presented within seven days after airfreight of goods.

Instructions to Negotiating Bank :

1) Negotiating Bank to forward the full set of documents in one lot to our bills Centre at

1/F, Commercial Street, Bussan Korea via courier services without any cost to us.

2) In reimbursement, we shall remit the proceeds in accordance with your instructions

upon receipt of the documents. We hereby engage with the drawers, endorsers,

and bonafide holders that drafts drawn and negotiated in compliance with the terms

and conditions of this credit will be duly honoured on presentation.

We hereby issued this documentary creditin your favour. It is subject to the uniformcustoms and practice for documentarycredits (1993) Revision. InternationalChamber of Commerce PublicationNumber 500

The number and date of credit and thename of our bank must be quoted on alldocuments.

Yours faithfully,

for commercial Bank Ltd.

Sd/- Sd/-

Name & Serial No. Name & Serial No.

Authorised Signatories

Note: This is an operative letter of credit in continuation of brief Swift messagecommunicating the establishment of letter of credit.

107

Other terms & Conditions

1. This is a revolving Letter of Credit, upto an aggregate amount of US $ 45,000, noncumulative per month. The amount of this documentary credit will be reinstated onreceipt of our reinstatement instructions for the earlier drawings.

2. 5% more or less in credit amount and quantity of goods are accepted.

3. Beneficiary to notify applicant by FAX within three days of air freight furnishingname of the carrier, freight number and date, quantity of goods airlifted.

4. All charges are for the account of shipper including reimbursing banks handlingfees, if any.

5. Documents to be presented within seven days after airfreight of goods.

Instructions to Negotiating Bank :

1) Negotiating Bank to forward the full set of documents in one lot to our bills Centre at1/F, Commercial Street, Business Korea via courier services without any cost tous.

2) In reimbursement, we shall remit the proceeds in accordance with your instructionsupon receipt of the documents. We hereby engage with the drawers, endorsers,and bonafide holders that drafts drawn and negotiated in compliance with the termsand conditions of this credit will be duly honoured on presentation.

Yours faithfully,

for Commercial Bank Ltd.

Sd/- Sd/-

Name & Serial No. Name & Serial No.

We hereby issued this documentary creditin your favour. It is subject to the uniformcustoms and practice for documentarycredits (1993) Revision. InternationalChamber of Commerce PublicationNumber 500.

The number and date of credit and thename of our bank must be quoted on alldocuments.

SPECIMEN - AIRMAIL DOCUMENTARYCREDIT - FREE FORMAT

Commercial Bank LTD., 1/F, Commercial Street, Busan, S Korea

Irrevocable documentary credit No.

Date and place of issue

30th Nov. 2002, Busan, Korea

Irrevocable documentary credit No.

Date and place of Expiry

28th Feb. 2003. INDIA

108

Credit pre-advised by

SWIFT today

Applicant

Polytex garments

20, Business Corner,

Busan - Korea

Advising Bank :

Export Banking Corpn. Ltd.,

Export Trade Center,

Bangalore - India

Partial Shipment : Prohibited

Transshipment : Prohibited

Airfreight from : Bangalore

Airfreight to : Busan

Last date for Air freight : 20th Feb. 2003

Page 1 of 2

Beneficiary

Millennium Garment Exporter

Garment House, 50, Double Road

Bangalore - India

Amount :

In figures ; US $ 45,000/- CIF Korea

In words : United States Dollars Forty fivethousand only. CIF Korea

Credit available with any Bank bynegotiation of beneficiary’s draft at sightdrawn on Commercial Bank Ltd., 1/F,Commercial Street, Busan, Korea for fullinvoice value accompanied by thefollowing documents in duplicate unlessotherwise stipulated.

Documents required :

1) Clean on board airway bill made out to the order of Commercial Bank Ltd., notifyingopener and applicant with full address mentioning this letter of credit number anddate marked freight paid.

2) Sighed commercial invoice in quadruplicate

3) Packing list in triplicate showing colour, size assessment, gross weight,measurement and net weight in each carton and showing goods are in standardexport carton packing.

4) Air Insurance Policy endorsed in blank for 110% of invoice value with claim payableat destination in the currency of draft covering Institute of Cargo Clauses (A), Instituteof War Clauses (Cargo), Institute of Strike Clauses (Cargo).

5) Certificate of origin issued by Chamber of Commerce and Industry, showingapplicant as the consignee.

109

6) Beneficiary’s certificate certifying that one full set of non-negotiable copies ofshipping documents has been sent to applicant by courier after air freight.

7) Inspection certificate issued and signed by Apparel Export Council, mentioningthat the fabric shade and performance of goods are in accordance with the samples.

Evidencing shipment of 65 Pct polynosic, 35 Pct polyester, No. Caracas usable width :142 Cms/weight : 186 G/M2 at US $ 4.60 / Mtr CIF Korea as per order No. KRE.4133(KX - 078/97).

ANNEXUREFew Tips on Export Receivables

* Don’t let your customer develop the bad habit of not paying in time. In this process,you have to deal with cultural differences, unfamiliar legal issues and language barriers.

* One company refuses to ship new products to new customer, no matter how big,once an account goes more than 45 days due. In such cases, you must have themanagement’s backing for such tough action.

* One of the best ways to cement relationship with customer is customer visit. Thoughsuch trip to see international customers is more time consuming and costly, they are stillone of the best investments an international credit professional can make.

* Try to correspond in their language, to avoid misunderstandings, which may resultin delay in payment. The Internet has made simple translations inexpensive or even free.Two good Websites are:

worldblaze.com

and babelfish.altavista.digital.com

* Sometimes, when all your actions have failed, you may take a tough stand. Thismay mean cutting the Customer’s line of credit, taking them off open account and switchingthem to sight draft or letter of credit.

* Pay attention to major accounts, before they to bad. Continually investing time willpay off when the customer remits regularly on time.

* Unless you have a monopoly type of export product, you cannot put all new accountson credit hold, till the earlier ones are cleared. Still, you ensure the backing of yourmanagement for this action.

* In case you fail to recover due monies from overseas clients, you are well advisedif you hire a local attorney of buying country to try out various methods before legal actionto liquidate dues. Consider the legal costs before attempting recovery.

The above are some of the techniques which increase the chances of turningthose collection failures into successes and ongoing profitable accounts.

Foreign Exchange rateswww.dna.Ith.se/cgi-bin/kurt/rates

110

IT Department under Section 80 HHC offers various concessions on ex-port payments and gains. This can be accessed in their website as alsothat of Ministry of Finance, Department of Revenue.

Broad features are:-♦ Concessions on projects inside and outside India.♦ Section 10 A - Tax Holiday for EPZ/SEZ/Electronic Hardware/ Soft

ware Park units.♦ Tax Holiday for approved EOUS and Handmade articles of artistic

value.♦ No tax in India on commission to Foreign Agents of Indian

exporters.♦ Services rendered outside india - Tax rebate on remuneration -

Section 80 RRA.

CGTMSE SchemeThe Credit Guarantee Fund Scheme for Micro, and Small Enterprises(CGMSE) allows collateral free credit to the micro and small enterprisessector, under a Trust Scheme. There are 32 member lending institutions.

For details, commercial banks, SIDBI and NABARD can be contacted.

As on April 10, 2010, Indian Banks have agreed with FIEO to display intheir websites their credit rates and processing fees.

EXPORT - IMPORT FINANCE

CONTENTS

1. INTRODUCTION 1

2. BASIC CONCEPTS OF FOREIGN EXCHANGE 2

3. FOREIGN EXCHANGE RATES 8

4. FORWARD RATES & CROSS RATES 13

5. METHODS OF INTERNATIONAL PAYMENT SETTLEMENT 18

6. INTERNATIONAL COMMERCIAL TERMS 24

7. LETTER OF CREDIT 34

8. EXCHANGE CONTROL REGULATIONS - EXPORTS 41

9. IMPORTS - EXCHANGE CONTROL ASPECTS 52

10. EXPORT FINANCING 58

11. EXPORT - PRE-SHIPMENT FINANCE (PACKING CREDIT) 61

12. EXPORT-POST SHIPMENT FINANCE 64

13. SIDBI 67

14. QUALITY CONTROL AND PRE-SHIPMENT INSPECTION 70

15. EXPORT- IMPORT (EXIM) BANK OF INDIA 71

16. EXPORT CREDIT GUARANTEE CORPORATION OF INDIA 72

17. DEMAND GUARANTEES AND STANDBY LETTER OF CREDIT 76

18. FORFAITING & FACTORING 83

19. CASE STUDIES 87

ANNEXURE 90711

Students and Exporters must please note that they should check with the authorities

regarding the functioning of any of the various schemes enumerated in the following chapters.

This is because additions, deletions and amendments to such promotional schemes are

quite common.