structured trade finance
Post on 21-Oct-2014
552 views
DESCRIPTION
Structured Trade FinanceTRANSCRIPT
Author: Partho Chakraborty
STRUCTURED TRADE FINANCE Definition Structured trade and commodity finance is defined as cross-border trade finance in emerging markets where the intention is to get repaid by the liquidation of a flow of commodities. It is an increasingly important area of emerging-markets lending, but its potential pitfalls have given it a poor image among parts of the financial community. However, compared to any other form of lending or investing in the emerging markets, structured trade and commodity deals have demonstrated an enviable track record of "survivability" under extreme testing. By John MacNamara in his book Structured trade and commodity finance: What can go wrong and how to avoid it Case Study
EXPORT & LOCAL BILL DISCOUNTING LINKED TO BACK-TO-BACK L/C Players Simrone Pharmaceuticals Industries Ltd., Mumbai, India Simrone’s Overseas Buyers (4 No – 3 in Africa & 1 in Europe) Simrone’s Local Suppliers (10 No) ICICI Bank, Mumbai, India Role Simrone: They are India based manufacturers and exporters of Pharmaceuticals Simrone’s Overseas Buyers: They are Africa and Europe based buyers Simrone’s Local Suppliers: They are India based manufacturers of goods on behalf of Simrone. Simrone out sources the production to them ICICI Bank: They are India based banker of Simrone, arranging the bills of Simrone to be negotiated and will open the Back-to-Back L/C in US$ for Simrone. Commodity: Pharmaceutical Products Total Amount: US$ 527,442 (Export L/Cs) Rs. 89,46,810 (Domestic Sales) This current order position is for 90 days and will be repeated each quarter.
1
Author: Partho Chakraborty
Details of Export L/C and Back-to-Back L/C
S. No.
Name of Overseas Buyer
Country L/C Opening Bank
L/C Confirming Bank
Value in US$
Value Per Shipment in US$
Tenor of First L/C in Days
Back to Back L/C Value (US$)
Tenor of Back to Back L/C in Days
1. Super Pharmaceuticals Ltd.
Uganda N.A. N.A. 202,600 67,533 + 67,533 + 67,534
N.A. 47,273 + 47,273 + 47,274
40
2. Noble Azania Ltd.
Tanzania Barclays Bank, Tanzania
Barclays Bank, UK
31,557 31,557 90 22,090 120
3. Karnag International (Z) Ltd.
Zambia First Alliance Bank, Zambia
Citibank, New York
73,285 36,643 + 36,642
Sight 25,650 + 25,650
50
4. Ayusa International
Yugoslavia Central European Bank, Yugoslavia
Natwest Bank, UK
220,000 180,000 + 40,000
Sight 126,000 + 28,000
50
TOTAL 527,442 527,442 369,210 Back-to-Back L/C Amount:
1. For Export L/Cs: US$ 369,210 (70% of US$ 527,442) in equivalent Rupees 2. For Domestic Sales: Rs. 62,62,767 (70% of Rs. 89,46,810=00)
Tenor:
1. The first L/C will be at Sight from Karnag, Zambia and Ayusa, Yugoslavia. The L/C from Noble, Tanzania will be for 90 days usance. There will be no L/C from Super, Uganda. Super will release the payment on faxing him the Bill of Lading.
2. The Corresponding Back-to-Back L/C will be for 50 days usance for Sight L/C’s and 120 Days usance for 90 Days L/C. For Super, Uganda the back-to-back L/C will be for 40 days usance.
3. The Rupees transaction will be without L/C. It would be a Purchase Order from German Remedies with a Credit Period of 30 days to make payment after receipt of goods
4. The Corresponding Back to Back L/C will be for 75 days Time Frame
1. 15 Days for Domestic Supplier to Manufacture & Supply the Goods 2. 21Days to Export the Goods
Security:
1. Promoter’s Personal Guarantee 2. PDC’s 3. Asset Collateral (Land, Building) 4. Cash Margin: 20%
2
Author: Partho Chakraborty
Requirement: Simrone has 4 overseas buyers located in Africa and Europe. They have 10 local suppliers of raw materials. Their overseas buyers on a continous basis place the orders against which Simrone sources the materials on a back-to-back basis.
Simrone needs a limit to be set in place as the Export L/C’s varies per transaction. Thus the back-to-back L/C’s cannot be accurately quantified. But by and large it will be as mentioned above. A Revolving Limit can be considered with a Cap. Transaction:
Export L/C’s
This transaction has 2 legs. The first leg is to open a Back-to-Back L/C and the second leg is to Discount the Bills backed by the Export L/C.
1. Simrone and Overseas Buyer enter into a contract where Simrone will sell the Pharmaceutical goods and Overseas Buyer will buy the same.
2. Simrone and Domestic Suppliers enter into a contract where Simrone will outsource the production to the Domestic Manufacturers.
3. The Overseas Buyer sends a Purchase Order to Simrone 4. Against the first Purchase Order, Simrone sends a Purchase Order to
Domestic Suppliers
5. The Overseas Buyers open a L/C favouring Simrone. 6. Against this L/C ICICI Bank will open a Back-to-Back L/C on the Domestic
Suppliers. 7. The Domestic Suppliers send the goods to Simrone. 8. The Domestic Suppliers then present the documents to their bank for
payment. 9. The Domestic Suppliers bank pays the Domestic Supplier and sends
documents to ICICI Bank to be forwarded to Simrone for acceptance. 10. Simrone accepts the documents and takes delivery of the goods. 11. Simrone exports the goods and sends documents to ICICI Bank for payment
against the first L/C. 12. ICICI Bank discounts the L/C backed bills and pays Simrone. 13. ICICI Bank sends the documents to Overseas Buyer through their bankers for
acceptance. 14. The Overseas Buyer accepts the documents and takes delivery of the goods 15. On due date the Overseas Banks remits the funds to ICICI Bank 16. Transaction Ends
Note:
1. The tenors will vary as for Sight L/C’s it will be less and for Usance L/C’s it will be more.
2. The transaction for Super Pharmaceuticals Ltd., Uganda will be as follows
3
Author: Partho Chakraborty
Super Pharmaceuticals Ltd., Uganda
1. Simrone and Super enter into a contract where Simrone will sell the Pharmaceutical goods and Super will buy the same.
2. Simrone and Domestic Suppliers enter into a contract where Simrone will outsource the production to the Domestic Manufacturers.
3. Super sends a Purchase Order to Simrone. 4. Against this Purchase Order ICICI Bank will open a Back-to-Back L/C on the
Domestic Suppliers. 5. The Domestic Suppliers send the goods to Simrone. 6. The Domestic Suppliers then present the documents to their bank for
payment. 7. The Domestic Suppliers bank pays the Domestic Supplier and sends
documents to ICICI Bank to be forwarded to Simrone for acceptance. 8. Simrone accepts the documents and takes delivery of the goods. 9. Simrone exports the goods. 10. Simrone faxes the Bill of Lading to Super for Payment and sends documents
to ICICI Bank for onward dispatch to Super. 11. Super credits the account of Simrone with ICICI Bank. 12. ICICI Bank sends the documents to Super through their bankers for
acceptance. 13. The Overseas Buyer accepts the documents and takes delivery of the goods 14. Transaction Ends
Domestic Transaction German Remedies Ltd., Mumbai
1. Simrone and German enter into a contract where Simrone will sell the Pharmaceutical goods and German will buy the same.
2. Simrone and Domestic Suppliers enter into a contract where Simrone will outsource the production to the Domestic Manufacturers.
3. German sends a Purchase Order to Simrone. 4. Against this Purchase Order ICICI Bank will open a Back-to-Back L/C on the
Domestic Suppliers. 5. The Domestic Suppliers send the goods to Simrone. 6. The Domestic Suppliers then present the documents to their bank for
payment. 7. The Domestic Suppliers bank pays the Domestic Supplier and sends
documents to ICICI Bank to be forwarded to Simrone for acceptance. 8. Simrone accepts the documents and takes delivery of the goods. 9. Simrone sends the goods to German and sends documents to ICICI Bank for
payment against the Purchase Order. 10. ICICI Bank sends the documents to German through their bankers for
acceptance. 11. German accepts the documents and takes delivery of the goods 12. ICICI Bank pays Simrone a further 15% of Invoice Value. 13. On due date the German remits the funds to ICICI Bank
4
Author: Partho Chakraborty
14. ICICI Bank deducts its charges and credits the balance to the account of Simrone
17. Transaction Ends Indicative Cost: EXPORT TRANSACTION
There are various costs here as some L/Cs are Back-to-Back L/Cs against Sight L/Cs and some are Back-to-Back L/Cs against Usance L/Cs. Also there is a case of Back-to-Back L/C against Overseas Factoring. Receipts: ICICI Bank - 1st Leg against Sight L/Cs S.No. Particulars Amount (Rs) 1. Export L/C Advisory Fees – 3 L/Cs (Flat Fee) 4,000=00 2. Back to Back L/C opening Charges for
a) Commitment Charges - 0.25% per quarter 24,122=75 b) Usance Charges - 0.10% usance per month 19,298=20 c) Commission – 0.15% (Flat Fee) 14,473=65
TOTAL 61,894=60
Receipts: ICICI Bank - 1st Leg against Usance L/Cs S.No. Particulars Amount (Rs) 1. Export L/C Advisory Fees – 1 L/Cs (Flat Fee) 1,000=00 2. Back to Back L/C opening Charges for a) Commitment Charges - 0.25% per quarter 5,191=15 b) Usance Charges - 0.10% usance per month 4,152=92 c) Commission – 0.15% (Flat Fee) 1,557=35 TOTAL 11,901=42 Receipts: ICICI Bank - 1st Leg, where there are no L/Cs S.No. Particulars Amount (Rs) 1. Back to Back L/C opening Charges for
a) Commitment Charges - 0.25% per quarter 16,663=85 b) Usance Charges - 0.10% usance per month 13,331=08 c) Commission – 0.15% (Flat Fee) 9,998=31
TOTAL 39,993=24 Total Receipts: ICICI Bank – 1st Leg: Rs. 1,13,789=26
5
Author: Partho Chakraborty
Receipts: Simrone - 2nd Leg S.No. Particulars Amount (Rs) 1. Reimbursement of Export L/C Value
a) Sight L/Cs of Karnag (Less 9.5% Per Annum for 25 days) 34,43,911=52 b) Sight L/Cs of Ayusa (Less 9.5% Per Annum for 25 days) 1,02,71,784=72 c) Usance L/Cs of Noble (Less 9.5% Per Annum for 90 days) 14,47,953=50 d) Payments by Super 95,22,200=00
TOTAL 2,46,85,849=74 Payments: Simrone - 2nd Leg S.No. Particulars Amount (Rs) 1. Payments to ICICI – 1st Leg 1,13,789=26 2. Management Fee @ 0.5% Flat on US$ 369,210 86,764=35 3. Reimbursement of Back to Back L/C 1,73,52,870=00
TOTAL 1,75,53,423=61 Net Earnings to Simrone: Rs. 71,32,426=13
Receipts: ICICI Bank - 2nd Leg
S.No. Particulars Amount (Rs) 1. Spread on Sight L/Cs (1% for 25 days) 9,572=50 2. Spread on Usance L/C (1% for 90 days) 3,707=95 3. Management Fee @ 0.5% Flat on US$ 369,210 86,764=35
TOTAL 1,00,044=80 Total Receipts: ICICI Bank: Rs. 2,13,834=06 DOMESTIC TRANSACTION Receipts: ICICI Bank
S.No. Particulars Amount (Rs) 1. Back to Back L/C opening Charges for
a) Commitment Charges - 0.25% per quarter 15,656=92 b) Usance Charges - 0.10% usance per month 8,788=30 c) Commission – 0.15% (Flat Fee) 9,394=15
TOTAL 33,839=37 Receipts: Simrone - 2nd Leg
S.No. Particulars Amount (Rs) 1. Reimbursement by German (Less 11% Per Annum for 75 days) 87,41,778=94 TOTAL 87,41,778=94
6
Author: Partho Chakraborty
Payments: Simrone - 2nd Leg
S.No. Particulars Amount (Rs) 1. Payments to ICICI – 1st Leg 33,839=37 2. Management Fee @ 0.5% Flat on Rs. 62,62,767 31,313=84 3. Reimbursement of Back to Back L/C 62,62,767=00
TOTAL 63,27,920=21 Net Earnings to Simrone: Rs. 24,13,858=73 Receipts: ICICI Bank - 2nd Leg
S.No. Particulars Amount (Rs) 1. Spread on PO of German (2% for 75 days) 37,278=38 2. Management Fee @ 0.5% Flat on Rs. 62,62,767 31,313=84
TOTAL 68,592=22 Total Receipts: ICICI Bank: Rs. 1,02,431=59
Flowchart: Export Transactions under Sight and Usance L/C’s 27 26 7 5 1 3 8 28 6 25 29
30 22 9 11 18 19 2 4 12 23 24 20 10 17 21 31
14 13 15 16
SIMRONE’S OVERSEAS BUYERS
OVERSEAS BUYER’S BANK
SIMRONE PHARMACUETICALS INDUSTRIES LTD., MUMBAI, INDIA
ICICI BANK, MUMBAI, INDIA
SIMRONE’S DOMESTIC SUPPLIERS
DOMESTIC SUPPLIER’S BANK
7
Author: Partho Chakraborty
Note:
1. The Goods from the Domestic Suppliers in India are sent by Road 2. The Goods exported to Overseas Buyer are sent by Air/Ship
Table.
STEP NO.
DAY NO.
EVENT
1. 1 Contract Between Simrone and Overseas Buyer 2. 2 Contract between Simrone and Domestic Supplier 3. 3 Overseas Buyer sends a Purchase order to Simrone 4. 4 Simrone sends a Purchase Order to Local Supplier 5. 6. 7. 8.
6 6 6 6
Overseas Buyer requests their bank to open a L/C favouring Simrone Buyer’s Bank opens L/C favouring Simrone and sends it to ICICI Bank Overseas Buyer’s Bank gives a copy of the L/C to Buyer Overseas Buyer faxes L/C copy to Simrone
9. 10.
11. 12.
7 7
7 7
ICICI Bank notifies Simrone of receipt of L/C ICICI Bank opens a Back to Back L/C favouring Domestic Supplier and sends it to their Banker ICICI Bank gives a copy of the L/C to Simrone Simrone Faxes the L/C copy to Domestic Supplier
13. 8 Domestic Supplier’s Banks notifies Domestic Supplier of the receipt of L/C 14. 23 Domestic Supplier sends the goods to Simrone by Road 15. 24 Domestic Supplier presents documents to his bank for payment 16. 17.
25 25
Domestic Supplier’s Bank pays Domestic Supplier Domestic Supplier’s Bank sends the documents to ICICI Bank for acceptance by Simrone
18. 19.
20. 21.
27 27
27 27
ICICI Bank receives documents and notifies Simrone for acceptance Simrone accepts Bill of Exchange at the counters of ICICI Bank and takes the other documents to clear his consignment Simrone takes custody of goods ICICI Bank notifies Domestic Supplier’s Bank on acceptance of Bill of Exchange by Simrone
22. 48 After Processing and Packaging, Simrone exports the exports to Overseas Buyer 23. 49 Simrone presents the documents to ICICI Bank for payment 24. 25.
50 50
ICICI Bank purchases/negotiates the documents and pays Simrone, less their charges and costs ICICI Bank sends the documents to Buyer’s Bank for acceptance by Overseas Buyer
26. 27.
28. 29.
53 53
53 53
Overseas Bank receives documents and notifies Buyer for acceptance Overseas Buyer accepts the Bill of Exchange at the counters of Overseas Bank and takes the other documents to clear his consignment Overseas Buyer takes delivery of goods Overseas Buyer’s Bank notifies ICICI Bank that documents have been accepted by Overseas Buyer
30. 73/128 On due date Overseas Buyer’s Bank remits funds to ICICI Bank 31. 75/145 ICICI Bank remits funds to Domestic Supplier’s Bank 32. 75/145 TRANSACTION ENDS
Note:
1. Under Step No. 30 and 31, the days mentioned are 73/128 and 75/145, where 73 and 75 are for Export Sight L/C’s and 128 and 145 are under Export Usance L/C
8
Author: Partho Chakraborty
2. The Computation of Payments under Step 30 and 31 are calculated from The B/L Date
Flowchart: Export Transactions where there are NO L/C’s 28 27 24 22 1 3 29 21 23
25 18 19 20 14 7 5 2 4 8 15 26 16 6 13 17 30
10 9 11 12 Note:
1. The Goods from the Domestic Suppliers in India are sent by Road 2. The Goods exported to Super Pharmaceuticals, Uganda are sent by Air/Ship
SUPER PHARMACUETICALS LTD., KAMPALA, UGANDA
STANDARD CHARTERED BANK, KAMPALA, UGANDA
SIMRONE PHARMACUETICALS INDUSTRIES LTD., MUMBAI, INDIA
ICICI BANK, MUMBAI, INDIA
SIMRONE’S DOMESTIC SUPPLIERS
DOMESTIC SUPPLIER’S BANK
9
Author: Partho Chakraborty
Table.
STEP NO.
DAY NO.
EVENT
1. 1 Contract Between Simrone and Super 2. 2 Contract between Simrone and Domestic Supplier 3. 3 Super sends a Purchase order to Simrone 4. 5. 6.
7. 8.
4 4 4
4 4
Simrone sends a Purchase Order to Local Supplier Simrone requests ICICI Bank to open a L/C favouring Domestic Supplier ICICI Bank opens a Back to Back L/C favouring Domestic Supplier and sends it to their Banker ICICI Bank gives a copy of the L/C to Simrone Simrone Faxes the L/C copy to Domestic Supplier
9. 5 Domestic Supplier’s Banks notifies Domestic Supplier of the receipt of L/C 10. 20 Domestic Supplier sends the goods to Simrone by Road 11. 21 Domestic Supplier presents documents to his bank for payment 12. 13.
22 22
Domestic Supplier’s Bank pays Domestic Supplier Domestic Supplier’s Bank sends the documents to ICICI Bank for acceptance by Simrone
14. 15.
16. 17.
24 24
24 24
ICICI Bank receives documents and notifies Simrone for acceptance Simrone accepts Bill of Exchange at the counters of ICICI Bank and takes the other documents to clear his consignment Simrone takes custody of goods ICICI Bank notifies Domestic Supplier’s Bank on acceptance of Bill of Exchange by Simrone
18. 19.
45 45
After Processing and Packaging, Simrone exports the exports to Super Simrone faxes the Bill of Lading to Super
20. 21. 22. 23. 24. 25.
46 46 46 46 46 46
Simrone presents the documents to ICICI Bank for forwarding it to Super ICICI Bank sends the documents to Super through their banker Super requests their banker to pay Simrone through ICICI Bank Super’s Banker remits the funds to ICICI Bank favouring Simrone Super’s Bankers gives a copy of remittance to Super Super Faxes the copy of Remittance to Simrone
26. 48 ICICI Bank receives the remittance sent by Super’s Banker and credits the account of Simrone less their charges and costs
27. 28. 29.
49 49 49
Super’s Bankers notifies Super of receipt of Documents Super takes the documents from their bankers Super takes delivery of goods
30. 60 ICICI Bank remits funds to Domestic Supplier’s Bank 31. 60 TRANSACTION ENDS
Note:
Super Pharmaceuticals Ltd. Bankers are Standard Chartered Bank, Kampala, Uganda
10
Author: Partho Chakraborty
Flowchart: Domestic Transactions where there are NO L/C’s 23 22 26 1 3 24 21 25 27
25 18 19 20 14 7 5 2 4 8 15 20 16 6 13 17 28
10 9 11 12 Note:
1. The Goods from the Domestic Suppliers in India are sent by Road 2. The Goods will be sent to German Remedies by Simrone by Road
GERMAN REMEDIES LTD., MUMBAI
GERMAN REMEDIES’ BANKERS
SIMRONE PHARMACUETICALS INDUSTRIES LTD., MUMBAI
ICICI BANK, MUMBAI, INDIA
SIMRONE’S DOMESTIC SUPPLIERS
DOMESTIC SUPPLIER’S BANK
11
Author: Partho Chakraborty
Table.
STEP NO.
DAY NO.
EVENT
1. 1 Contract Between Simrone and German 2. 2 Contract between Simrone and Domestic Supplier 3. 3 German sends a Purchase order to Simrone 4. 5. 6.
7. 8.
4 4 4
4 4
Simrone sends a Purchase Order to Local Supplier Simrone requests ICICI Bank to open a L/C favouring Domestic Supplier ICICI Bank opens a Back to Back L/C favouring Domestic Supplier and sends it to their Banker ICICI Bank gives a copy of the L/C to Simrone Simrone Faxes the L/C copy to Domestic Supplier
9. 5 Domestic Supplier’s Banks notifies Domestic Supplier of the receipt of L/C 10. 20 Domestic Supplier sends the goods to Simrone by Road 11. 21 Domestic Supplier presents documents to his bank for payment 12. 13.
22 22
Domestic Supplier’s Bank pays Domestic Supplier Domestic Supplier’s Bank sends the documents to ICICI Bank for acceptance by Simrone
14. 15.
16. 17.
24 24
24 24
ICICI Bank receives documents and notifies Simrone for acceptance Simrone accepts Bill of Exchange at the counters of ICICI Bank and takes the other documents to clear his consignment Simrone takes custody of goods ICICI Bank notifies Domestic Supplier’s Bank on acceptance of Bill of Exchange by Simrone
18. 45 After Processing and Packaging, Simrone sends the goods to German 19. 20. 21.
46 46 46
Simrone presents the documents to ICICI Bank for payment ICICI Bank negotiates the documents and pays Simron, less their charges and costs ICICI Bank sends the documents to German’s Bank for acceptance by German
22. 23.
24. 25.
47 47
47 47
German’s Bank receives documents and notifies German for acceptance German accepts the Bill of Exchange at the counters of their Bank and takes the other documents to clear his consignment German takes delivery of goods German’s Bank notifies ICICI Bank that documents have been accepted by German
26.
27.
75
75
On due date German requests their Bank to remit funds to ICICI Bank favouring Simrone German’s Bank remits funds to ICICI Bank
28. 95 ICICI Bank remits funds to Domestic Supplier’s Bank 29. 95 TRANSACTION ENDS
Note:
German Remedies has a lot of bankers. The banker through whom the documents to be routed would be informed subsequently
12
Author: Partho Chakraborty
Note: Names, if any are Suggestive and are strictly not to be taken on Face Value. It is only to give a feel and touch of how transactions can be structured and names are indicative
This article is meant for education purposes only and it is not be
reproduced for any commercial purpose by print or electronic medium whatsoever
This case study is written by: Partho H. Chakraborty A - 305, DSR Spring Beauty Apts., 124/1, ITPL Main Road, Brookefields, Kundalahalli, Bangalore - 560 037, India Tel: +91 80 420 50293, Cell: +91 99863 22504 email: [email protected]; [email protected] Skype: parthohc01
13