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EXPORT MANAGEMENT

(PRACTICAL APPROACH)
Prof. S. H. Nagalkar
M.Sc., BGL, CAIIB, PGDBF, MBA. Ex employee: Indian Overseas Bank HoD: Department of Business Management C.P. and Berar Education Societys College, Ravinagar, Nagpur.

Dr. Milind A. Barhate


M.Com., LLb, MBA, Ph.D. Diploma in Cyber Laws Director: Department of Business Management Principal: C.P. and Berar Education societys College, Mahal, Nagpur.

AUTHOR No part of this book shall be reproduced, stored in retrieval system, or translated in any form or by any means, electronic, mechanical, photocopying and/or otherwise without the prior written permission of the publishers.

FIRST EDITION : 2011

Published By: Sai Jyoti Publication C-9 Shrinath Sainagar, Near Onkar Nagar, Ring Road, Manewada, NAGPUR. Ph. No.: 9764673503, 9923693506. email id: sjp10ng@gmail.com

Type Setter: OmSai Graphics Plot No. 29 Behind T.B. Ward, Indira Nagar, Nagpur 440003.

PREFACE
I was impressed by an article I read in magazine Business Today of September 28, 2003. The article was titled Farm fresh From Fateh Sing Garh by Sahad P.V. A few important and inspiring success stories were mentioned in the article. One of such stories was about Mr. Ankush Aggarwal. He wanted to charter an aircraft for twice a week, to take flight to London from Delhi. On board would be cargo of baby corn, broccoli, snow peas, onions, chilies, okra and yarn from Punjab. The final destination: the fast moving shelves of UK retailers such as Tesco and Sainsburys. Aggarwal had already shipped several consignments to Europe and hopes to export 40 tonnes of vegetables a day. AEZs already founded in 2001 have already exported by 2003, gherkins, mangoes, vegetables and litchis, worth 450 crore and APEDAs projection in this regard was 10,300 crore by 2007. The article also spoke about Mr. Ranjan Kedia of Radha Krishna Impex Pvt. Ltd., who boasted an export turnover of 3 crore, which he believed was merely a scratch of a $ 100 bn ( 4,60,000 crore) international opportunity. A story about Piyush Shah, an aspiring fruit exporter based in Mumbai states, starting this month I expect exporting 150-180 tonnes of grapes every season to West Asia and Europe. Next summer I shall diversify in mangoes. Fruits are alright, but it is vegetables rarely used in Indian Cuisine that is the biggest success story of them all. Satya Priya Mazumdar of Ken Agritech exports gherkins, a mini version of cucumber, worth 17 crore a year to the US, Europe and Australia. Karnataka also scripted a success story in rose onion, a variety that lacks pungency and is popular in South-East Asia. Around 5,000 farmers in 10,000 acres grow this crop. In 200304, the Karnataka AEZ exported 26,000 tonnes of rose onion valued at 51 crore to Malaysia, Singapore, Indonesia and Brunei. There are other success stories also mentioned in the article. The success stories like ones of the kind quoted above, imbibed in me a sort of conviction that, if India has to develop and grow fast, export business is one of such ways. The latest Foreign Trade Policy encourages the exporters by offering various benefits which we have dealt in chapter 11 and also reproduced the policy in the annexure A28 to A32. The entrepreneurs can think of exporting myriad items, information of which is available with Export Promotion Councils / Commodity Boards, details of which are given in Chapter 2 and Annexure A6. Students pursuing MBA or other courses often intend to work for a Multinational Companies on lucrative salaries. They seldom think of pursuing a career as an exporter entrepreneur. The setting up of export business does not really require a huge amount of funds in the initial stage. However it takes huge amount of work in the form of collecting information from EPCs and export marketing sites on the internet. By investing as little as 60,000 and setting up an export unit one can expect to bag and execute an export order and earn huge amount profits. The investment has to be made for a laptop, internet connection and

registration with the DGFT and EPC / CB and initial payments to the marketing sites. Procedure of setting up an export unit is explained in chapter 2 and appendices from A1 to A6. Any business is fraught with different kinds of risks, so is the export business. But there are adequate covers provided in case of each of the perceptible risk. The Insurance companies, ECGC, Authorised dealers come to the help of the exporters. Even the risk of buyer refusing the goods and not paying for the same are covered. Chapters 4,6,7,9 and 10 explain these risks and their more than adequate coverage. As such, I feel, the exporter should fearlessly enter into export entrepreneurship. RBI permits lending by the banks to the exporters at the interest rates below the Base Rate of the bank. RBI and ECGC together encourage the banks to lend to the export sector. To this end RBI has formulated Export Credit Schemes of lending in and also in foreign currencies at concessional rate of interest. These schemes are explained in detail in chapter 5 and appendices A23 to A26. ECGC extends the guarantees to the bank, which covers the risk of loss to the bank, should the exporter fail to repay export credit extended to him. Export is traditionally considered esoteric subject and business. But it actually is not so. The can be studied with ease and the business can be set up by anybody who has an urge and will to do so. A certain amount of basic knowledge and a lot of information is, however, necessary. To ensure that the students who are studying this subject in their curriculum, and the budding entrepreneurs desirous of entering export business, obtain the requisite information and knowledge about this subject, and should also be able to establish and make progress in the business all by themselves, we have enclosed sample forms of the documents. We have also enclosed the latest documents from the banks and printed their images for the better understanding of the subject. In fact half of the book consists of such forms, documents and circulars issued by RBI, DGFT, and Commerce Ministry. I felt this necessary, realizing the students and budding export entrepreneurs needs. Some of the names and price details are masked in order to keep business details confidential in respect of the documents, the images of which are printed. India is emerging as a confident nation. India is staking her claim for the permanent seat in the UNSC. India assumes importance in the discussions of WTO meetings. World Bank and IMF consider India in high esteem. India is the second fastest growing economy in the world next only to China. Neighbouring Asiatic countries are in awe of India. Indias foreign exchange reserves are ever growing and are of the order of $ 300 bn, which shows the Indian prowess in the area of FDI and FII destination. Indian rupee has become stronger as against dollar and other major currencies. To further bolster these efforts, Indian Rupee has adopted a new symbol . This new symbol was adopted in July 2010. The symbol is designed by D. Udaya Kumar, a student of IIT Kharagpur. It represents Indian culture as it has an equality sign and feature of the Devnagari script of letters, peculiar to Indian ancient language Sanskrit, hanging from a line instead of sitting on a line. We have used the symbol of Indian Rupee and also the symbols of

other four currencies in the world namely $, , and throughout the book instead using their names viz USD, Euro, GBP and Yen respectively. India happens to be the fifth country whose currency now has a symbol. We have also used pronouns as he and him for the exporter or importer. These may be also considered as she and her as the case may be. Such use in the book is with the sole purpose of making it more readable. This is my maiden attempt to write the book. Co Author of the book also is venturing to write the book for the first time. He was in the field of teaching to MBA students for the last more than ten years. He had felt the need of the book of this kind which will enable the students to get an elaborate glimpse of all the necessary topics related to export import business in one go. His urge further intensified when RTM Nagpur University rescheduled its syllabus about two years ago and introduced International Business Management as a specialized subject (having five specialization papers). The book is written keeping this aspect also in mind. I feel that the students, budding entrepreneurs and the bankers find this book useful. I very earnestly request all the readers to communicate to us (me, co author or publisher) any mistakes that may have crept in the book inadvertently. They are also requested to send us their suggestions for improvement of the book, such as inclusion of any relevant topic or quoting more examples or change of language, explanation etc. to make the book more lucid and meaningful for the reader. I firmly believe the book is meant for the reader and it must satisfy his needs. Prof. S.H.Nagalkar.

ACKNOWLEDGEMENTS
We, very earnestly thank the student community and exporter entrepreneurs who encouraged us to write this book. We are also thankful to the Publishers M/s Sai Jyoti Publications, who not only encouraged, but persuaded us to write a book on export and import. While writing the book we had to take the help and assistance of so many colleagues of ours. We wish to thank them all. We take this opportunity to thank Dr. Ashish Linge, Prof. Pravin Bagde, Prof. Mahesh Joshi for undertaking the work of proof reading and giving us very valuable suggestions. We are also thankful to the members of Management Committee of C.P. and Berar Education Society, Mahal, Nagpur, who have been the constant source of inspiration to us while writing the book. We would like to extend our special thanks to Shri Kishor Mushrif, Associate Professor, Banking and Finance at ITM Institute of Financial Markets, Vashi, Navi Mumbai and Shri. Ajay Merchant, Assistant General Manager, Indian Overseas Bank, Thane Branch for providing us the latest practical information about the subject, that is incorporated in the book. I also thank a long time colleague of mine, Shri P.Balagopala Kurup, General Manager and Principal, Staff College, Indian overseas Bank, Chennai, for writing a foreword for my maiden book. While writing the book, both of us had to steal away the time from our respective families. We are thankful to them for allowing us to do so. Prof. S.H.Nagalkar. Dr. Milind A Barhate.

Dedication
We dedicate this book to our parents who taught us to be the student and learner, throughout our lives
Prof. S. H. Nagalkar Dr. Milind A. Barhate

FOREWORD
We live in a world where trade has made national barriers redundant, it looks at the entire globe for sourcing its requirements and vending its products and services. Fences and walls created out of differences in languages, currency and legal requirements are getting transcended as a matter of course. In this environment, it is but natural that a banker as well as a businessman gets baffled and looks to a primer to refer to and seek guidance. Besides spelling out the intricacies of international trade and finance, it should also elucidate the appropriate routes to be followed, when you are faced with a challenge. My friend, Shri. Shashikant Nagalkar has precisely achieved this objective in his maiden book. The first 12 chapters of the book cover the essential information an export-import trader needs to know. The methodology adopted by the author helps in de-mystifying the subject. The questions given at the end of each chapter are also quite useful to assess the extent to which one has understood the concepts. As one goes through the reader-friendly narrative style, it can be seen that the confidence level tends to pick up and a small entrepreneur who wants to trade with a foreign country starts feeling that he need not be scared of this esoteric subject. The appendices in Chapter 13 are very useful as the reader gets to see the images of real documents and gets a hands-on experience. This knowledge of the documentation and procedure makes the entire process totally seamless. Since Shri Nagalkar has wide experience, as a banker, of financing foreign exchange transactions he is able to draw widely from his real life experiences. The fact that he was a member of faculty also has helped him deliver the information, without making it tedious. The learning of terminology used in international trade also would help the readers become familiar with the intricacies of the subject. Our country is moving towards Dr. Abdul Kalams vision of 2020 where our nation takes its rightful place in the forefront of global powers. Books like this would help unleash the enormous export potential of this crouching tiger. I have no hesitation in recommending this book to students of international trade and commerce. In fact, I would go a step further in suggesting that the author would try and come out with similar books on other mysterious subjects like Treasury Administration or Risk Management.

28th January, 2011 Chennai P. Balagopala Kurup

CONTENTS

Chapter 1. Export Import Preliminaries:1-18 1.1 Learning Objectives 1.2 Meaning of Export and Import 1.3 Effect of Export and Import on the Economy of the exporting and importing countries respectively. 1.3.1 Effects of exports on the economy of the exporting country 1.3.1.1 When importer makes payment in $ 1.3.1.2 When importer makes payment in 1.3.1.3 When importer makes payment in currency other than $ or 1.3.2 Effects of imports on the economy of the importing country 1.4 Implications of under invoicing in Exports and over invoicing in Imports 1.4.1 Implication of under invoicing in exports 1.4.2 Implications of over in voicing in imports 1.5 Monitoring of Exports and Imports 1.6 Comparison of domestic sale and Exports 1.6.1 Location of Buyers 1.6.2 Modes of payment 1.6.3 Modes of transportation 1.6.4 Customs and RBI formalities 1.6.5 Risks in Exports 1.7 Risks involved in Exports and their coverage 1.7.1 Country Risk: Covering the Risk (ECGC) 1.7.2 Credit Risk: Covering the Risk (Letter of Credit) 1.7.3 Currency Risk: Covering the Risk 1.7.3.1 Forward Exchange Contract 1.7.3.2 Currency Futures 1.7.3.3 Currency Options 1.7.4 Carriage Risk: Covering the Risk (Marine Insurance) 1.8 Summary 1.9 Key Words 1.10 Descriptive Questions 1.11 Objective Questions

Chapter 2. How to Export? : 2.1 Learning Objectives 2.2 Obtaining IEC No. from DGFT 2.3 Features of IEC No. 2.4 Obtaining RCMC from CB / EPC / Authorities 2.4.1Commodity Boards 2.4.2Export Promotion Councils 2.4.3Authorities 2.4.4About EPCs / CBs / Authorities

19-40

2.4.5Role and Functions of EPCs / CBs / Authorities 2.4.6Registration-Cum-Membership Certificate (RCMC) 2.5 ITC(HS) Classification of Export and Import items 2.5.1Prohibited items 2.5.2Restricted items 2.5.3Exports through STEs 2.5.4Free-No Restrictions 2.6 Benefits given to Exporters in Foreign Trade Policy (2009-14) 2.6.1Background 2.6.2Matters Covered under FTP (2009-14) 2.6.2.1 Special Focus Initiative 2.6.2.2 Duty Credit Scrip 2.6.2.3 EPCG 2.6.2.4 Towns of Export Excellence 2.6.2.5 ASIDE 2.6.2.6 MAI 2.6.2.7 MDA 2.6.2.8 Advance Authorisation Scheme 2.6.2.9 Duty Free Import Authorisation (DFIA) 2.6.3Benefits offered to Certain Sectors 2.6.3.1 Agriculture and Village Industry (Benefits under Vishesh Krishi and Gram Udyog Yojana) 2.6.3.2 Handlooms 2.6.3.3 Handicrafts 2.6.3.4 Gems and Jewellery 2.6.3.5 Leather and Footwear 2.6.3.6 Marine sector 2.6.3.7 Electronic and IT Hardware manufacturing Industries 2.6.3.8 Sport goods and Toys 2.6.3.9 Green Products and Technologies 2.6.3.10 Exports from North eastern region 2.7 Other formalities to set up an Export Unit 2.8 Summary 2.9 Key Words 2.10 Descriptive Questions 2.11 Objective questions

Chapter 3. Export Documentation: : 3.1 Learning Objectives 3.2 Need for Export Documentation 3.3 Regulatory Documents 3.3.1 Shipping Bill / Bill of Export 3.3.2 Export Declaration Forms: GR, PP, SDF, SOFTEX 3.3.3 ARE 1 3.3.4 Dock Challan 3.3.5 Receipt for Payment of Port Charges 3.3.6 Vehicle Chit

41-77

3.3.7 Freight Payment Certificate 3.3.8 Insurance Premium Payment Certificate 3.4 Commercial Documents 3.4.1 Invoice 3.4.1.1 Pro forma Invoice 3.4.1.2 Commercial Invoice 3.4.1.3 Customs Invoice 3.4.1.4 Consular Invoice 3.4.2 Packing List or Cargo Manifest 3.4.3 Shipping Instructions 3.4.4 Intimation of Inspection 3.4.5 Certificate of inspection 3.4.6 Insurance Declaration 3.4.7 Certificate of Insurance 3.4.8 Shipping Order 3.4.9 Mates Receipt 3.4.10 Transport Document 3.4.10.1 Bill of Lading 3.4.10.2 Airway Bill 3.4.10.3 Combined Transport Document 3.4.10.4 Post Parcel Receipt 3.4.10.5 Rail or Road ways Receipt 3.4.11 Certificate of Origin 3.4.11.1 Preferential Certificate of Origin 3.4.11.2 Non Preferential Certificate of Origin 3.4.12 Bill of Exchange 3.4.12.1 Demand Bill of Exchange 3.4.12.2 Usance Bill of Exchange 3.4.13 Shipping Advice 3.4.14 Letter of Credit UN Layout Key and Standardization of Export Documents Summary Key Words Descriptive Questions Objective Questions 3.5 3.6 3.7 3.8 3.9

Chapter 4. Letter of Credit: :

78-110

4.1 Learning Objectives 4.2 Methods of Settling Debts 4.3 Emergence of Letter of Credit 4.4 International Chambers of Commerce 4.5 ICC publication UCP 600 4.6 Terminology used (Beneficiary Applicant, Issuing Bank, Confirming Bank Advising Bank, Nominated Bank, Reimbursing Bank complying Presentation). 4.7 Letter of Credit Mechanism 4.8 Role and Responsibilities of Parties to the LC

4.9 Contents of Letter of Credit: 4.9.1 Names and Addresses of the parties to the L/C 4.9.2 Amount and Currency 4.9.3 Expiry dates for Shipment and Negotiation 4.9.4 Mode of Transport 4.9.5 Details of Marine Insurance 4.9.6 Details of Bill of Exchange 4.9.7 Other documents required 4.9.8 Declaration to conform to the provisions of UCP 600 4.9.9 Undertaking given by the Issuing Bank to the Beneficiary 4.9.10 Seal and Signature of the Issuing Bank

4.10 Various Types of Letters of Credit 4.10.1 Revocable and Irrevocable L/C 4.10.2 With Recourse and Without Recourse L/C 4.10.3 Confirmed and Unconfirmed L/C 4.10.4 Payment, Acceptance, Negotiation, Deferred L/C 4.10.5 Fixed and Revolving L/C 4.10.6 Transferrable L/C 4.10.7 Back to Back L/C 4.10.8 Red Clause and Green Clause L/C 4.10.9 Standby or Guarantee L/C 4.11 Summary 4.12 Key Terms 4.13 Descriptive Questions 4.14 Objective Questions

Chapter 5. Export Finance: : 5.1 Learning Objectives 5.2 Various types of financial facilities available to the exporter: 5.3 Pre-shipment Finance or Packing Credit in Rupees 5.3.1 Eligibility (Type of goods and Type of Export) 5.3.2 Type of Accounts (Term Loan and Cash Credit) 5.3.3 Period of Loan and Interest Rate 5.3.4 Quantum of Advance 5.3.5 Sources of Repayment 5.4 Pre-shipment Credit in Foreign Currencies (PCFC) 5.5 Advance against Duty Drawback 5.6 Post-shipment Finance: 5.6.1 Scrutiny of bill drawn under L/C 5.6.2 Dealing with Discrepant Documents 5.6.3 Purchase / Negotiation of Export Bill (Not under L/C) 5.6.4 Post shipment Credit in Foreign Currencies 5.6.5 Advance against Bills under Collection 5.6.6 Export Factoring and Forfaiting 5.6.7 Uniform rules for collection of bills 5.7 Other important issues

111-125

5.8 Summary 5.9 Key Words 5.10 Descriptive Questions 5.11 Objective Questions Chapter 6. Marine Insurance: : 6.1 Learning Objectives 6.2 Cargo Insurance: 6.2.1 Introduction 6.2.2 List of Insurance Companies operating in India 6.2.3 Principles of Marine Cargo Insurance 6.2.3.1 Insurable Interest 6.2.3.2 Utmost Good Faith 6.2.3.3 Indemnity 6.2.4 Nature of Risks: 6.2.4.1 Types of Losses: Total Loss and Partial Loss Particular Average Loss General Average Loss 6.2.5 Features of Marine Insurance Policy 6.2.5.1 Parties to the contract 6.2.5.2 Premium Charged 6.2.5.3 Sum Assured 6.2.5.4 Assignment 6.2.6 Types of Marine Insurance Policy 6.2.6.1 Specific Voyage 6.2.6.2 Open Policy 6.2.6.3 Special Declaration Policy 6.2.6.4 Duty Insurance Policy 6.2.6.5 Sellers Contingency Policy 6.2.6.6 Contents of the Policy 6.3 Risks Covered under Institute Cargo Clauses 6.3.1 ICC C 6.3.2 ICC B 6.3.3 ICC A 6.3.4 Risks not covered in Marine Insurance 6.3.5 Comparison of ICC A, B and C various risks covered under 6.4 Incoterms 6.5 Procedure for lodging Marine Insurance Claim 6.6 Summary 6.7 Key words 6.8 Descriptive Questions 6.9 Objective Questions 126-151

Chapter 7. Export Credit Guarantee Corporation: : 7.1 Learning Objectives 7.2 About the ECGC: 7.2.1 Introduction

152-194

7.2.2Covering the country risk of the exporter 7.2.3 Summary points about ECGC 7.2.4 Main functions of the ECGC 7.2.5 Specific functions of the ECGC 7.3 Schedule of Premium Charges 7.3.1 Categorisation of countries 7.3.2 Modes of payment 7.3.3 Types of Risks Covered 7.3.4 Risks not covered by ECGC 7.3.5 Various types of covers 7.4 Standard Policies 7.5 Small Exporters Policy 7.6 Other Policies: 7.6.1Export Turnover policy 7.6.2 Specific Shipment Policy (Short Term) 7.6.3 Exports (Specific Buyers) Policy 7.6.4 Buyer Exposure Policy 7.6.4.1 Exposure (Single Buyer) Policy 7.6.4.2 Multi Buyer Exposure Policy 7.6.5 Consignment Exports Policy (Stockholding Agent and Global Entity) 7.6.5.1 Consignment Exports (Stockholding Agent) Policy 7.6.5.2 Consignment Export Policy (Global Entity) 7.7 Services Policies 7.8 Software Projects Policies 7.9 IT Enabled Services Policies 7.9.1 IT-Enabled Services (Specific Customer Policy) 7.9.2 IT-Enabled Services Policies (Multi Customer) 7.10 Construction Works Policy 7.11 Specific Policy for Supply Contract 7.12 Policies for SME sector 7.13 Guarantees to the Banks: 7.13.1 Packing Credit Guarantee 7.13.2 Export Production Finance Guarantee 7.13.3 Post-Shipment Export Credit Guarantee 7.13.4 Export Finance Guarantee 7.13.5 Export Performance Guarantee 7.13.6 Export Finance (Overseas Lending) Guarantee 7.13.7 Transfer Guarantee 7.14 Overseas Investment Guarantees 7.15 Exchange Fluctuation Risk Cover 7.16 Factoring Services 7.17 Summary 7.18 Key words 7.19 Descriptive Questions 7.20 Objective Questions

Chapter 8: Quality Control and Preshipment Inspection: 8.1 Learning Objectives

195-204

8.2 Necessity of Quality Control and Preshipment Inspection 8.2.1 Exports (Quality Control & Inspection) Act, 1963 8.2.2 Inspection by Buyers Agency 8.2.3 Voluntary Inspection 8.3 Types of Preshipment Inspection: 8.3.1 Consignment wise Inspection 8.3.2 In-Process Quality Control (IPQC) 8.3.3 Self Certification Scheme 8.3.4 Fumigation of Consignment 8.4 Procedure for Preshipment Inspection 8.4.1 Rejection and Appeal against Rejection 8.5 Powers granted to EIC under the Act 8.6 Summary 8.7 Key Words 8.8 Descriptive Questions 8.9 Objective Questions Chapter 9: Foreign Exchange Rates: 9.1 Learning Objectives 9.2 Reasons for Exchange Rates Fluctuations 9.3 Exchange Rate Quotations: 9.3.1 Buying Rate and Selling Rate 9.3.2 Direct Quotation and Indirect Quotation 9.3.3 Two way Quotations 9.3.4 Cash or Value Today, Spot and Forward Rates 9.3.5Forward Margin / Swap Points 9.3.6Factors affecting Forward Margin / Swap points 9.3.7Interpretation of Interbank Quotations 9.4 Merchant Rates 9.4.1 Merchants Rates for converting $ in (part I) 9.4.1.1 Buying Rate 9.4.1.1.1 TT Buying Rate 9. 4.1.1.2 Bills Buying Rate 9.4.1.1.2.1 Normal transit Period 9. 4.1.1.2.2 Grace period 9. 4.1.2 Selling Rate 9. 4.1.2.1 TT Selling Rate 9. 4.1.2.2 Bills Selling Rate 9.4.2 Merchant Rates converting any for other currency other than $ except and 9. 4.2.1 Dollar / Foreign Currency Quotation 9. 4.2.2 Foreign Currency / Dollar Quotation 9. 4.2.3 Cross Rate and Chain Rule 9. 4.2.4 Buying Rate 9. 4.2.4.1 TT Buying Rate 9. 4.2.4.2 Bills Buying Rate 9. 4.2.5 Selling rate 9. 4.2.5.1 TT Selling Rate 9. 4.2.5.2 Bills Selling rate 9.4.3 Merchant Rates for and

205-239

9. 4.3.1 Buying Rate 9. 4.3.1.1 TT Buying Rate 9. 4.3.1.2 Bills Buying Rate 9. 4.3.2 Selling Rate 9. 4.3.2.1 TT Selling Rate 9. 4.3.2.2 Bills Selling Rate 9.5 Some Important Aspects of Exchange Rates: 9.5.1 Fineness of quotation 9.5.2 Spread between TT Rates 9.5.3 Quoting Better / Best Rates 9.5.4 Rounding off for Card Rates 9.6 Summary 9.7 Key Words 9.8 Descriptive Questions 9.9 Objective Questions

Chapter 10: Hedging Tools for Foreign Exchange Transactions: 10.1 Learning Objectives 10.2 Different Hedging tools 10.2.1 Forward Contracts 10.2.2 Currency Futures 10.2.3 Currency Options 10.3 Forward Exchange Contracts: 10.3.1 Features of Forward Exchange Contract 10.3.2 Date of Delivery 10.3.3 Fixed and Option Forward Contract 10.3.4 Rules regarding Option Forward Contract 10.3.5 Exchange Control Regulations 10.3.6 Execution of Forward Exchange Contract 10.3.7 Rollover of Forward Contracts 10.4 Currency Futures: 10.4.1 Futures Exchanges 10.4.2 Size of Contract 10.4.3 Delivery Dates 10.4.4 Price Movements 10.4.5 Trading by Members 10.4.6 Dealing with Clearing House 10.4.7 Margins 10.4.8 Marking to Market 10.4.9 Liquidity 10.4.10 Delivery 10.5 Currency Options: 10.5.1 Parties to the Options 10.5.2 Call and Put Options 10.5.3 Premium 10.5.4 Strike Price 10.5.5 Maturity

240-257

10.5.6 Execution 10.5.7 Types of options instruments 10.5.7.1 Over the counter (OTC) options 10.5.7.2 Exchange traded options 10.5.7.3 Options on Futures 10.6 Execution of Contracts 10.6.1 In the Money options 10.6.2 Out of the Money options 10.6.3 At the Money options 10.7 Features and options in India 10.7.1 Exchange traded derivatives 10.7.2 OTC derivatives with Authorised Dealers 10.8 Uses of options 10.9 Summary 10.10 Key words 10.11 Descriptive Questions 10.12 Objective Questions

Chapter 11: Salient features of Foreign Trade Policy (2009-14): 11.1Learning Objectives 11.2Introduction 11.2.1 Authority

258-292

11.2.2 11.2.3 11.2.4 11.2.5 11.3

Contents Matters covered by FTP Period of FTP Objectives of FTP

ITC (HS) Classification of Import and Export items 11.3.1 11.3.2 11.3.3 11.3.4 Free unless regulated Restricted goods Exports / Imports through State Trading Enterprises Prohibited goods

11.4

Ten sectors that enjoy specific benefits under the FTP 11.4.1 11.4.2 11.4.3 Agriculture and Village Industry Handlooms Handicrafts

11.4.4 11.4.5 11.4.6 11.4.7 11.4.8 11.4.9

Gems & Jewellery Leather and Footwear Marine sector Electronics and IT Hardware manufacturing Industries Sport goods and Toys Green Products and Technologies

11.4.10 Exports from North Eastern Region 11.4.11 Other Measures 11.4.11.1 Market Diversification 11.4.11.2 Technological Upgradation 11.4.11.3 Support to Status Exporters 11.5 Direct Incentives offered to the Exporters (Promotional Measures in DGFT) 11.5.1 11.5.2 11.5.3 11.5.3.1 11.5.3.2 11.5.3.3 11.5.3.4 11.5.3.5 Status Category of Exporters Duty Credit Scrip Reward / Incentive Schemes in DGFT Focus Product Scheme Focus Market Scheme Market Linked Focus Product Scrip Served from India Scheme Vishesh Krishi and Gram Upaj Yojana (VKGUY)

11.6 Indirect Incentives offered to the Exporters (Promotional Measures in Department of Commerce) 11.6.1 11.6.2 11.6.3 ASIDE (Assistance to State for Infrastructure Development) MAI (Market Access Initiative) MDA (Market Development Assistance)

11.6.4 11.6.5

TEE (Towns of Export Excellence) Brand Promotion and Quality 11.6.6 Test Houses

11.7 Duty Exemption & Remission Schemes 11.7.1 11.7.2 11.7.3 11.7.4 Advance Authorisation Scheme (AA) Duty Free Import Authorisation (DFIA) Duty Entitlement Pass Book (DEPB) Duty Drawback

11.8 EPCG (Export Promotion Capital Goods) Scheme 11.8.1 11.8.2 Eligible Exporters EPCG Schemes based on percentage of Duty Exempted

11.9 SEZ / EOU / EHTP / STP / BTP 11.9.1 11.9.2 Special Economic Zones (SEZ) Electronics Hardware Technology Parks (EHTPs) / Software Technology Parks (STPs) Bio Technology Parks (BTPs) Export Oriented Units (EOUs) Provisions for EOU / SEZ / EHTP / STP / BTP Units

11.9.3 11.9.4 11.9.5 11.10 Deemed Exports 11.11 Summary 11.12 Key Words

11.13 Descriptive Questions Chapter 12: Import Procedures: 313 12.1 Learning Objectives 293-

12.2

Imports Preliminaries 12.2.1 12.2.2 12.2.3 12.2.4 12.2.5 12.2.6 12.3 Foreign Exchange Reserve Position of the Importing Country The need to Protect the Domestic Industry The International Environment Imports Imported Goods India

Types of Importers 12.3.1 12.3.2 Actual User (Industrial) Actual User (Non Industrial)

12.4

Classification of Import goods 12.4.1 12.4.2 12.4.3 12.4.4 12.4.5 ITC (HS) Classification Prohibited Restricted Imports through STEs Free unless regulated

12.5

Modes of Payment: 12.5.1 12.5.2 12.5.3 12.5.4 12.5.5 12.5.6 Advance Remittance Open Account Bills Payment through Letter of Credit Application for making payment: Form A1 Payment through ACU

12.6

Customs Clearance: 12.6.1 IGM

12.6.1.1 Different forms of IGM 12.6.1.2 Regulations relating to IGM 12.6.1.3 Particulars of General Declaration 12.6.2 Bill of Entry 12.6.2.1 Types of Bill of Entry 12.6.2.2 Four Copies of Bill of Entry 12.6.2.3 Declarations in Bill of Entry 12.6.2.4 Assessment of Value of Goods 12.6.2.5 Clearance of Goods 12.7 Customs Duty: 12.7.1 12.7.2 Duty liability in Certain Special Circumstances Components of Customs Duty 12.7.2.1 Basic Customs Duty 12.7.2.2 Additional Duty of Customs 12.7.2.3 Special Additional Duty of Customs 12.7.2.4 Protective Duty 12.7.2.5 Emergency Power to Impose or Enhance Import Duty 12.7.2.6 Safeguard Duty 12.7.2.7 Countervailing Duty on Subsidised Articles 12.7.2.8 Antidumping Duty 12.7.3 12.7.4 12.8 12.9 12.10 12.11 Remission, Abatement and Exemption Customs Clearance Procedure in Nutshell Summary Key Words Descriptive Questions Objective Questions

Chapter

Export Import Preliminaries


1.1 Learning Objectives After reading this chapter the reader will
be able to understand: What is Export and what is Import. He will be able to understand the effect of exports and imports on the economies of the exporting and the importing countries. He will know how and why the Exports and Imports are required to be monitored by the stipulated authorities in the country. He will be able to clearly distinguish between the domestic sale and the exports. He will understand the various risks the exporter is subjected to and how they can be taken care of.

1.2 Meaning of Export and Import:


Suppose Gopal of India sells 1,000 pairs of jean pants to John of USA, we say that Gopal is an exporter and India is an exporting country. We also say that John is an importer and USA is an importing country. This looks a simple sale transaction. But this differs from the domestic sale transaction as the two countries, the exporters country and the importers country are also involved. In such kind of transaction it is to be borne in mind that not only Gopal is selling his product, in this case 1,000 pairs of jean pants, to John, but India is selling i.e. exporting its product to USA. Since two countries are additionally involved in such an international sale the transaction is governed by the rules and regulations of the two countries as well. We may therefore say that the export is intercountry sale transaction. Similarly we say that the import is an intercountry buy transaction.

1.3 Effects of Export and Import on the Economy of the exporting and importing countries respectively:
1.3.1 Effects of exports on the economies of the exporting country: Let us continue with the above example of Gopal of India selling 1,000 pairs of jean pants to John of USA. When this sale takes place, Indias aggregate goods depletes by 1,000 pairs of jean pants. That means the wealth of the exporting country reduces by an amount of the exports. However the exporter (and the exporter country) receives the value of these goods from the importer (and the importer country). This value of the goods can be paid by the importer in three ways. One way is to pay in the currency of the country of the importer, the second way is to pay in the currency of the country of the exporter and the third way is to pay in the currency other than that of the currency of the importers country or the currency of the exporters country.

1.3.1.1. When importer makes payment in $ (currency of the importers country): Let us take the first case when the importer pays in the currency of his country. In this case it is $. Presuming the price per pair of jean pant is $70, the entire sale transaction is for $70,000. So John arranges to send $70,000 through his bank, say City Bank N.Y. to the exporters bank, say Dena Bank, Nagpur. The exporter receives $70,000. However he cannot use these $ in India as the currency of India is `. So he gets the $ converted into ` at the current $/` exchange rate prevailing in the market. At this juncture we presume this exchange rate to be `. 43 per $. So Dena bank acquires $70,000 converts them into ` 30,10,000 ($70,000*43) and pays this amount to Gopal, the exporter. Exporter is free to use this ` amount for whatever purpose he wants. Thus through an export transaction the money has come in the economy of the exporters country (Indian Economy). The export transaction has also reduced the goods to the extent of 1,000 pairs of jean pants in the exporters country (Indian economy). Thus the reduction of goods from the economy coupled with the increased money supply in the economy causes inflation in the exporters country. We therefore conclude that exports are inflationary in nature. Exports cause inflation. More the exports more will be the inflation, all other things remaining constant.

In the case that we discussed above we have said that Dena Bank acquired $70,000 from the exporter and in exchange gave him ` 30,10,000. Now the question is what Dena Bank will do with these $70,000 it got from the exporter. The $ has utility only in USA, as it is the currency of USA. These $ have got to be deposited in USA. Therefore Dena Bank opens an account with one of the banks in USA, say Chase Manhattan Bank, N.Y (CMB). Dena Bank deposits these $70,000 in its own account with CMB N.Y. Dena Bank may use these $ as and when its importer customers require these $ for imports, or when these $ are required to be spent for some other purpose by its customers.

The account that Dena Bank has opened with CMB N.Y. is called as Nostro account. Nostro accounts mean the accounts opened by banks in India with foreign banks situated abroad. These accounts are used for maintaining the foreign currency balances which the banks in India acquire through exports made by their exporter customers or otherwise. These balances are maintained until they are used by the importer customers of the Nostro accounts maintaining banks. These balances can also be utilized for purposes other than imports. These balances then constitute one of the parts of the Foreign Exchange Reserves. At this stage it would be sufficient to understand that the balances in the Nostro accounts are a part of Foreign Exchange Reserves.

More the exports more will be the Foreign Exchange Reserves, all other things remaining same. Earlier, however, we have seen that more the exports more will be the inflation, all other things remaining the same. Therefore logically we may also say that more the Foreign Exchange Reserves more will be the inflation. 1.3.1.2 : Case 2: When importer makes payment in `: In the above case we have seen that the exporter surrenders $ to his bank and receives ` in lieu of that. The amount in ` he receives depend upon the $/` exchange rate prevailing at that time. We have in the instant case taken the exchange rate as `43 per $. But this exchange rate may fluctuate. If ` depreciates the exchange rate could be ` 44 per $. In such a case exporter stands to benefit as he may get higher amount of `. In the instant case he will get ` 30,80,000 instead of ` 30,10,000 in exchange of $70,000. Thus the depreciation in the value of currency of the exporters country benefits the exporter. The converse is also true. If ` appreciates the exchange rate could be `42per$. In such a case exporter stands to lose as he may get the lower amount of ` in the instant case he may get ` 29,40,000 instead of ` 30,10,000 in exchange of $70,000. Thus the appreciation in the value of currency of the exporters country is harmful to the exporter.

Please note that in case the importer is paying only $70,000 irrespective of whether the ` appreciates or depreciates. He is not prone to any risk on account of exchange rate fluctuations. Exporter is however subject to exchange rate fluctuation risk If the exporter does not want to take the risk of exchange rate fluctuations he may ask the importer to make payment in `. The importer in such a case (e.g. instant case, case 2) has to arrange for payment in ` through his bank i.e. City Bank NY. Importer in such a case gives $ to his bank in USA and gets them converted into ` at the current `/$ rate prevailing in the US Exchange markets to get ` 30,10,000. If the `/$ rate in the US is say ` 43 per $, the importer will have to pay $70,000 (30,10,000 / 43) for the imports. However the $ appreciates in the US exchange markets and the exchange rate is say ` 44 per $, then the importer will have to pay $68,409 (` 30,10,000 / 44). The importer has to pay less $ for the same goods and he stands to benefit. Thus the appreciation of the value of the currency of the importers country benefits the importer.

The converse is also true. If the $ depreciates in the US exchange markets and the exchange rate is say ` 42 per $, then the importer will have to pay $71,667 (` 30,10,000 / 42). In this case importer has to pay more $ for the same goods and he stands to lose. Thus the depreciation of the value of the currency of the importers country is harmful to the importer. Please note in both the above situations, whether the $ appreciates or depreciates the exporter gets the same amount of ` i.e. ` 30,10,000 and thus he does not bear any risk of exchange rate fluctuation. However the importer bears such risk. In this situation, where importer makes the payment in ` the importers bank collects the $ from the importer and remits the ` to the exporters bank for onward payment to the exporter. The ` is not kept in the USA as it is not their currency and hence is of no use in USA. ` is the currency of India and therefore it finds its final destination in India. So in fact the City Bank (importers bank) whenever comes in possession of `, keeps this ` in its account opened in some bank in India. The account of the foreign bank opened with the bank in India is called as Vostro account. This is much on the same lines as the Nostro account, which is the account opened by bank in India with the foreign bank. Nostro and Vostro both are German words which mean `our and `their respectively. In short Nostro account means our (banks in India) account with them (banks in foreign countries), and Vostro account means their (foreign banks) account with us (banks in India)

As such when the exporter demands the payment in ` or the importer wants to make the payment in `, the account of the importers bank in the iexporters country i.e. Vostro account of the importers bank is debited and ` is made available to the exporter through his bank in India. Once again, as in case 1, the exporter is free to use this ` and bring it into Indian economy thus increasing the money supply and increasing inflation, all other things remaining constant. The reduction in Vostro account balances has the effect of increasing the Foreign Exchange Reserves.

1.3.1.3Case 3: When importer makes the payment in currency other than $ or `. When importer wants to make payment in currency other than $ or ` for some reason and exporter agrees to receive it, such payment can be received by the exporter in India in one of the RBI permitted currencies. These currencies are also called as convertible currencies. Chapter 2 of Exchange Control Manual published by RBI gives the list of permitted currencies in which payment can be received by the Indian Exporter. The exporter generally does not receive the payment in some other currency unless he has utility of that currency for the sake of imports from that country or other expenses he intends to incur in that currency, whose currency exporter receives.

Generally conversion of one currency into other causes loss as banks converting currencies charge certain exchange on such conversion. Converting back into the same currency also causes loss as the buying and selling rates of the bank are different. We shall study more about this in Chapter No.9 related to Exchange Rate Mechanism. To conclude we can say that exports have following effect on the economy of the exporting country: It depletes the wealth of the exporting country. It increases the Foreign Exchange Reserves of the exporting country. It increases the inflation in the exporting country. 1.3.2 Effect of Imports on the economy of the importing country: The effect of imports on the economy of the importing country is exactly the opposite of the effect of exports on the economy. In an import transaction importer (importers country) receives the goods and services from the exporter (exporters country) and therefore the total quantity of the goods and services in the economy increases. At the same time the importer has to make payment in the currency of his country and this currency gets locked in the coffers of the bank. The payment for the imports made, move from the importers bank to the exporters bank. This reduces the Foreign Exchange Reserves of the importers country. This results in lesser money supply in the economy of the importers country. The effect of this is decrease in the inflation.

To conclude we can say that imports have the following effect on the economy of the importing country: It increases the wealth of the importing country. It decreases the Foreign Exchange Reserves of the importing country. It decreases the inflation in the importing country.

1.4 Implications of Under invoicing in Exports and Over invoicing in Imports:


1.4.1 Implications of Under invoicing in Exports: Generally when the exporter sells his goods to the foreign buyer he prepares a set of documents and sends it to him to enable him to know the details of the goods and how and to whom he is required to make payment. This set of documents contains a transport document which enables him to take the delivery of the goods. Bill of exchange enables him to properly make payment. Commercial invoice is yet another important document which gives him complete idea about the goods their specifications and per unit price and total price required to be paid by him. If the price quoted by the exporter by an oversight, in ignorance or by mistake, is less than the actual value of the goods exported then the importer stands to benefit. The exporter country looses on account of selling the valuable goods at a lower price, and not getting adequate compensation in the form of the foreign exchange. However there have been instances where the exporters deliberately resort to such under invoicing with a view to getting the precious foreign exchange personally while on trip to the importers country. The foreign exchange thus obtained by the exporter from the importer in the importers country while on trip is then utilized for purposes other than stipulated in the Foreign Exchange Management Act. This is a violation.

Let us take an example to elucidate the point mentioned in the above paragraph. Our exporter Gopal from India sells 1,000 pairs of jean pants, the value of which is say $70,000. However he prepares the invoice by mistake only for $50,000. He also therefore receives $50,000 which he surrenders to his bank and gets equivalent `. As the exporters bankers namely Dena Bank got $50,000, Dena Bank will deposit only $50,000 in the Nostro account with CMB N.Y. Exporter country, India will account for receipt of $50,000 (instead of $70,000) in its Foreign Exchange Reserves. India will thus have lesser buying power or lesser power to import goods from abroad. Thus the country of the exporter is put to loss due to under invoicing.

However if this under invoicing is not by mistake but a deliberate act on the part of the exporter (Gopal), the exporters country (India) is deliberately put to loss by $20,000. The exporter (Gopal) may subsequently visit USA and the importer (John) and receive $20,000 in cash. He may use this $20,000 for the purpose other than stipulated in the FEMA. He may alternately deposit this $20,000 in his Swiss Bank account. Exporter Gopal thus generates the black money at the cost of selling Indias valuable goods at a lesser price, cheating his country. 1.4.2 Implications of Over invoicing in imports: In case of imports also the importers country can be put to loss either by mistake or deliberately. Let us take an example where importer Raj from India wants to import machinery from Sam of USA. The machinery is valued at say $2,00,000. However Raj buys it for $ 2,40,000. In this case Raj causes his banker to pay more price for goods

which is less valued. Importers country pays $40,000 more and thus its Foreign Exchange Reserves are reduced by $ 40,000 in excess for which compensation in the form of goods is not received. The exporter from USA receives $40,000 more and may share this amount with the importer when the importer visits the USA. Raj may use these $ for the purposes other than those stipulated in the FEMA. He may also alternately deposit $40,000 in his Swiss Bank account. Importer Raj thus generates black money by spending valuable foreign exchange in excess of the value of the goods, cheating his country.

1.5 Monitoring of Exports and Imports


To control this menace of Under invoicing in exports and Over invoicing in imports, which jeopardize the nations interest, the twin monitoring authorities are set up. Customs Authority is set up to control the menace of valuing the goods whether meant for exports before they are exported or received through imports before they are imported. The Customs evaluate the minimum value of the goods in case of exports that the exporter must quote and receive as per the Sea Customs Act 1962. In case of imports the customs also evaluate the maximum value that can be paid as per Sea Customs Act 1962. Once the evaluation of the goods is done by the Customs, the other important authority comes into picture namely the RBI. Reserve bank of India then monitors whether the payment is received more than the value certified by the Customs in case of exports. RBI also monitors and ensures that the payment made on account of imports is less than the maximum value certified by the Customs. Thus Customs and RBI become the most important monitoring authorities while dealing with the subject of Imports and Exports. The documents stipulated by these two authorities with addition of few others constitute Regulatory Documents, which will be dealt in chapter 3: on Export Documentation.

1.6 Comparison of Domestic sale and Exports:


Export sales are considered difficult and more complicated than the Domestic sales for variety of reasons. Prominent among them are as follows: 1.6.1Location of the Buyers: The buyers are situated in country other than the country of the exporter. Because of this it is difficult to get firsthand knowledge about their credentials and genuineness of the trading transaction. In case the importer buyer defaults in making the payment for the goods or services, it becomes difficult and costly affair to follow up the payment process. Taking legal remedial measures are complicated and are not always fruitful. 1.6.2Modes of Payment: As the buyer and seller are situated in two different countries in export sale, one currency has got to be converted into the other. Either the exporter accepts the currency of the buyers country and then gets it converted in the currency of his own country or if the exporter insists payment in the currency of his own country then the buyer has to convert currency of his country in the currency of the

exporters country and then make the payment. Moreover there are always restrictions or stipulated methods of making payment and accepting payment, imposed by the countries of importer and exporter respectively. Such restrictions couples with the exchange rate fluctuations are the causes of anxiety. 1.6.3Modes of transportation: The voyage of the export cargo is from one (exporters) country to another (importers) country, generally the voyage route is longer and not necessarily covered by railways or roadways. Since the export sales are in bulk the mode of transportation is mostly by waterways. In case of perishable goods or in case where the goods are required to reach the importer urgently, such goods are sent by airways. At times the goods can also be sent through postal department. Softwares are sent via internet. In recent times the containers are used to send the export cargo. However transportation is the cause of concern in export sale.

1.6.4Customs and RBI formalities: as discussed above in 1.4, Customs monitor the movement of goods going out of the country and RBI monitors the receipt of foreign exchange. To enable these two authorities to do their work properly and methodically certain formalities and procedures are required to be followed by the exporter. Exporters find this little complicated. 1.6.5Risks in Exports: Compared to Domestic sale the export sale is fraught with certain additional risks which may be because of a. b. c. d. Political turbulence in the importers country, Failure on the part of the buyer to make payment, Exchange Rate fluctuations or Damage to the cargo as it has to cover long and difficult voyage.

The exporter feels discouraged because of these risks and desists from venturing into the business of export. However adequate safeguards are provided to the exporters and the risks are fully covered, though at cost. These costs can be recovered partially or fully from the importer. The detail discussion about the risks in exports and their coverage is made in the subsequent paragraph.

1.7 Risks involved in Exports and their Coverage:


Exporter is prone to the following four types of risks, which are popularly called as `4 Cs: a) Country Risk b) Credit Risk c) Currency Risk d) Carriage Risk

Each of these risks and the way it is covered is discussed below. 1.7.1Country Risk: This is also called as political risk. Such kind of risk arises when the exporter does not receive his payment or there is an inordinate delay in exporter receiving payment from the importer or from the importers country. The reasons could be any of the following: 1. 2. 3. 4. War, revolution or civil disturbances in the buyers country. New import licensing restrictions in the buyers country. Cancellation of valid import license of the importer in the importers country. Payment of additional handling, transportation or insurance charges occasioned by interruption or diversion of voyage which cannot be recovered from the buyer. Imposition of restrictions on remittances by the government in the buyers country or any government action which may block or delay payment of the exporter. 5. Apart from the above there could be a possibility that the exporters license to export is cancelled in India and the exporter suffers a loss. There is a new export policy in India and exporter is put to loss 6. Any other cause of loss occurring outside India, and beyond the control of the exporter and/or importer. 7. 8.

Covering the Country risk: ECGC helps the exporter in covering these risks under its various risk insurance policies. ECGC earlier when set up in July 1957 by Government of India was known as `Export Risk Insurance Corporation. It was then transformed, in 1964, into `Export Credit Guarantee Corporation. It functions under the administrative control of the ministry of commerce, GOI. It indemnifies 90% of the loss of the exporter. Other policies have varying percentages of indemnifying the loss of the exporter. We shall learn more about this organization, its functions, and policies to the exporters and the guarantees to the banks who lend to the exporters in Chapter 7 on Export Credit Guarantee Corporation.

1.7.2Credit risk: The credit risk is the risk perceived by the exporter. The risk arises when the exporter having sent the goods to the importer does not receive his payment for one or more reasons enumerated below: 1. 2. 3. 4. The importer becomes insolvent, The importer rejects the goods for one reason or the other, The importer willfully does not make the payment, The importer is unable to pay in time.

As has been discussed earlier, the exporter does not have the firsthand knowledge about the importers. The exporter is therefore unable to precisely judge the genuineness and credibility of the trading transactions. As the importers are located in the far flung countries, the exporter finds it difficult to understand the customs and traditions of trade in such countries. Moreover the practices and procedures of trade are diverse in different countries. This makes the exporter cautious and doubtful about the payment for goods exported. Therefore he expects that the importer should make advance payment in full and then after only he will send the goods to the importer.

The position of the importer is not different than that of the exporter. Importer also has similar inhibitions about the exporter for the similar reasons. He feels that once the advance payment is sent to the exporter what is the guarantee that he will dispatch the goods in time? How should I follow up with the exporter who is situated in a far off country? What will be my loss on account of delay in receiving the goods and how to recover this loss from the exporter? And with all this in mind he hesitates to send the advance payment to the exporter. Covering credit risk: The divergent perceptions of the exporter and importer relating to the international trade are resolved by means of an instrument called `Letter of Credit. A letter of credit is an instrument issued by the importer s bank. This instrument substitutes the creditworthiness of the importer by the creditworthiness of the importers bank. Banks are considered quite creditworthy and they do not generally default in meeting their liabilities. In a process of issuing a letter of credit the importers bank assumes the liability of the importer to the exporter. It virtually guarantees the payment to the exporter on submission of the documents as stipulated by the importer. The documents stipulated by the importer which exporter is required to submit are called as commercial documents, which are discussed in detail in chapter 3 on Export Documentation. The entire mechanism of letter of credit, its contents, its various parties and types are discussed in chapter 4 on Letter of Credit.

1.7.3Currency risk: In the case where the Indian exporter intends to receive payment in foreign currency, i.e. currency of the importers country or any currency other than the currency of his country, he needs to convert this currency in `, i.e. currency of his country. This has been discussed in paragraph 1.2 above where three different cases are explained. The rate of conversion of one currency into other is called as exchange rate. This exchange rate keeps fluctuating due to various factors. Some of the factors why the exchange rate fluctuates are given below: 1. Difference in Interest rates prevailing in the economies of the two countries whose currencies exchange rate is under consideration. 2. Difference in inflation rates prevailing in the economies of the two countries whose currencies exchange rate is under consideration. 3. Balance of payment positions of the two countries whose currencies exchange rate is under consideration. 4. Extents of Money supplies of the home currencies in the respective countries. 5. Changes in the National Incomes of the countries whose currencies are under consideration. 6. Monetary gains of the Resource discoveries in the respective countries. 7. Political situations in the respective countries. 8. Technical and market factors affecting the stability of the markets in general and foreign exchange market in particular of the respective countries.

9. Capital movements in and out of the two countries whose currencies are under consideration. 10.Psychological factors and speculative aspects of the participants in the foreign exchange markets in the respective countries whose currencies are under consideration. There are quite a few theories evolved on how the rates of exchange fluctuate in the foreign exchange markets or popularly known as currency markets depending mostly on the factors mentioned above. These are called as Economic Theories of Exchange Rate Determination. These are as follows: 1. Purchasing power parity (PPP) or Law of one price 2. Interest rate parity or International Fisher effect 3. Investor psychology or Bandwagon effects We shall discuss the various factors as to why the exchange rate fluctuates in chapter 9 on Foreign Exchange Rates. Because various factors come into play and exchange rate fluctuates it affects the Indian exporters ` earnings. Let us continue with the example we have already seen in paragraph 1.2 above. Gopal our exporter receives an amount of ` 30,10,000 when the $/` exchange rate is `43per$. He however receives ` 29,40,000 when ` appreciates against the $ (i.e. when $/` rate is ` 42 pe$ and looses ` 70,000 on the transaction. On the other hand when the ` depreciates against the $ (i.e. when $/` rate is `44 per $) he receives an amount of ` 30,80,000 and gains ` 70,000. This loss and gain for the exporter are on account of appreciation and depreciation of ` against $ and exchange rate fluctuations. This possibility of loss or gain causes uncertainty in the mind of an exporter and he perceives this as risk. This is called as currency risk.

Coverage of currency risk: This risk can be adequately addressed if the exchange rate for conversion of foreign currency that will be received by the exporter is known and guaranteed in advance. Such guaranteed exchange rates are quoted by the Authorized Dealer banks generally for a period of six months. Reserve bank has for this purpose authorized certain banks. Authorized Dealers extend this facility to the eligible exporters for their genuine trade transactions. It is extended in the following forms: 1. Forward Contracts 2. Currency Futures 3. Currency Options 1.7.3Forward Exchange Contracts: Forward Contracts are the contracts where the bank quotes the exchange rate in advance and undertakes to convert the foreign currency to be received by the exporter in future at this rate. The amount of foreign exchange and the date on which the currency is to be exchanged are as required by the exporter. This is a tailor made contract. It suits the exporter. However it requires specific performance

on the part of the exporter and the bank, strictly as per the terms of the contract. Therefore on the date of receipt of foreign exchange by the exporter if the rate of exchange rate already decided under the forward exchange contract is not favorable to the exporter compared with the market exchange rate prevailing then, the exporter stands to lose. Exporter needs to surrender the foreign exchange to the bank only and he cannot take the benefit of the more favorable exchange rate quoted in the market. Similarly, when the exchange rate already decided under the forward contract is not favorable to the bank as compared to the exchange rate quoted in the foreign exchange market, the bank cannot avoid the contract. The bank has to convert the foreign currency at the predetermined rate and incur loss.

We take an example and explain the mechanism of forward contract: Let us consider that the forward exchange contract entered into by the exporter and the bank is as follows: Date of entering Forward Exchange Contract: 20.10.2010 Amount of Currency: $70,000 Date of receipt of $ (always in future): 22.12.2010. (This date is also known as due date for delivery of foreign exchange.) Exchange Rate quoted by the bank and agreed by the exporter for conversion of $ into ` on 22.10.2010: ` 43.20 per $ This rate of exchange ` 43.20 per $, is called as Forward Exchange Rate. This rate is irrespective of the rate of exchange prevailing in the market on 20.10.2010. If the rate of exchange prevailing in the market on 20.10.2010 is say `43.00 per $.Then we say that $ is appreciating against ` in the forward market. Conversely we can also say that ` is depreciating against $ in the forward market. Take another case when the exchange rate prevailing in the market on 20.10.2010 is ` 43.50 per $. Then we say $ is depreciating against ` in the forward market. Conversely we can also say that ` is appreciating against $ in the forward market.

The rates of exchange prevailing on the date of contract, are mentioned in the above point only to elucidate the meaning of appreciating $ and depreciating ` in the forward exchange market, and depreciating $ and appreciating ` in the forward exchange market. Now let us move ahead in time and be on 22.12.2010. The exporter has now received $70,000. He has to get these $ converted from the bank with which it has entered the forward contract, and the bank is also obliged to convert these $ into ` at the contracted exchange rate of ` 43.20 per $, irrespective of the $/` exchange rate prevailing in the foreign exchange market on 22.12.2010. Two cases a) and b) now arise as follows:

a) $/` exchange rate in the foreign exchange market prevailing on 22.12.2010 is ` 43.50 per $. This market rate is favorable to the exporter than the forward exchange contract rate, as he can get more ` for $70,000. The difference works out to ` 21,000 [(70,000*43.50) - (70,000*43.20)]. But he cannot sell his $ in the market. He is constrained to sell his $ to the bank only and that too at the contracted exchange rate. This is loss of the exporter and gain for the bank. b) $/` exchange rate in the foreign exchange market prevailing on 22.12.2010 is ` 43.00 per $. This market rate is not favorable to the exporter than the forward exchange contract rate. This rate however is favorable to the bank as the bank gets an opportunity to buy the $ from the market at a rate lower than the forward contract rate. But bank cannot do so. The bank has to buy the $70,000 from the exporter at the contracted exchange rate. The bank thus suffers a loss of ` 14,000 [(70,000*43.20) - (70,000*43.00)]. Therefore in the case of forward contracts, one of the contracting parties suffer a loss and other gets the benefit depending upon in which partys favour the exchange rate has moved. Nevertheless as the exporter knows the ` amount that he will get in advance, the risk on account of the exchange rate fluctuations is completely eliminated. 1.7.3.2 Currency Futures: A Future Contract is a form of Forward Eexchange Contract where in the exporter gets the right to sell a specified quantity of foreign currency at a fixed exchange rate on a specified future date. Whereas in a Forward Exchange Contract the quantum of foreign exchange and the due date are determined by the exporter and the bank mutually, in Future Contracts, however, these (i.e. amount and the date of delivery) are standardized. While Forward Exchange Contract can be entered into by an exporter with any bank at any place, the Future Contracts can be entered into only with the Financial Future Exchanges. Generally the amount specified are as follows: GBP 62,500, CAD 1,00,000, JPY12,50,00,000 and so on. Similarly delivery dates are third Wednesday of March, June, September and December.

In short the Currency Futures are standardized Forward Exchange Contract which eliminate the counterparty risk. They are standardized as to the amount and the date of delivery. They eliminate the counterparty risk means that they are with the standard Financial Future Exchanges which are fairly creditworthy. In Forward Exchange Contract the contracts are between two parties, the bank and the exporter. There is possibility that one of the parties defaults on its commitment and thus causes loss to the other party. This possibility of loss is termed as counterparty risk. Such counterparty risk is not there in the Currency Future Contracts. Moreover Currency Future Contracts are transferrable unlike Forward Contracts.

However they come with the following drawbacks. The amount is standardized and exporter has to sell only the standard amount of the foreign currency. Often the export bills are not made for standard amounts. In such a case the exporter has to cover little more than his bill amount or little less than his bill amount. This may cause a loss to the exporter. Such problem does not arise in the Forward Contracts as they are for the exact amounts of the export receivable.

Moreover the date of delivery is specified. Often the exporter receives the foreign exchange either before or after this specified day. He has to make certain alternate arrangement in order to keep his commitments on the delivery date. Such problem does not arise in the Forward Contracts as they are generally for the full month, valid for delivery from first day till the last day of the month. Like the Forward Exchange Contract, the Currency Future Contract can cause benefit to the exporter if the exchange rate moves in his favour or it may cause him loss if the exchange rate moves against him on the date of delivery. Exporter can, however, sell his Future Contract, if he finds a buyer, unlike Forward Exchange contract. However since the currency futures are cheaper and offer more liquidity than the forward exchange contracts, and they also cover the risk of exchange rate fluctuations, exporters can resort to covering their risk by means of currency future contracts. 1.7.3.3 Currency Options: Currency (put) Option offers the exporter the right to sell the specified amount of foreign currency at a predetermined rate on a future date, without investing him with an obligation to do so. On the due date the exporter may elect to sell or not to sell the foreign currency he receives on account of the exports. If the exchange rate prevailing in the market on the due date is favorable to the exporter he has choice to sell his foreign currency in the market. In such a case he may not use the Option Contract that he has entered into with the bank. This decision of the exporter is binding on the banker who is another party to the Option Contract. The Option remains unutilized in this case. On the other hand if the exchange rate prevailing in the market on the due date is not favorable to the exporter, he has the right to go to the banker and ask for the performance of the contract from the banker. In such a case the banker has to buy the foreign currency in already agreed specified amount, which exporter wants to sell, at the predetermined rate of exchange. The banker in such a case incurs loss. The bank agrees to such contracts, which appear detrimental to its interests for some consideration. This consideration is called as premium, and is payable upfront by the exporter to the banker at the time of entering into the contract.

Essentially an Option Contract serves the similar purpose as a Forward Exchange Contract (or Currency Futures). They firm up the future receipt in foreign currency with regard to exchange rate in terms of local currency. The difference between the Forward Exchange Contract (or Currency Futures) and the Ooption Contract is that, under the Forward Exchange Contract (or Currency Futures) the exporter is expected to sell the foreign currency on the due date at the forward exchange rate decided in the Forward Exchange Contract (or as specified in the currency futures) , irrespective of the market rate prevailing on the due date. Under the Option Contract, on the due date, the exporter can make the reassessment of the situation and seek to either execution of the contract or its non execution as may be advantageous to him.

We shall study more about these products in chapter 10 on Hedging Tools for Foreign Exchange Transactions.

1.7.4Carriage Risk: This risk is variously known as carrier risk or risk in transportation of goods (cargo) from exporter to the importer. In the export sales the goods have to be transported from the exporters country to the importers country. This voyage is most of the time very lengthy, tedious and time consuming depending upon the locations of the importers country and the exporters country. There is often a possibility of use of different modes of transportation such as water, air, road, rail etc in completing one trading transaction. Proper coordination among the various transport modes is essential for safety of the cargo. It takes longer time for cargo to reach the importers destination, if the importer and exporter are situated at a far distance. Depending upon the modes of transport there is greater possibility of loss or damage of the export cargo. And therefore the risk perceived by the exporter and importer is also greater in such case.

Coverage: This risk is covered by the Insurance Companies. The Public Sector Insurance Companies which cover these risks are 1) National Insurance Company Ltd. 2) New India Assurance Company Ltd. 3) Oriental Insurance Company Ltd. and 4) United India Insurance Company Ltd. There are many private insurance companies that cover the kind of risks associated in the transportation of the export cargo. Some of them are: 1) ICICI Lombard General Insurance Company Ltd. 2) HDFC Chubb General Insurance Company Ltd. 3) Universal Sompo General Insurance Company Ltd. 4) Bajaj Allianz General Insurance Company Ltd. 5) IFFCO- Tokyo General Insurance Company Ltd. 6) Reliance General Insurance Company Ltd. 7) Royal Sundaram Alliance Insurance Company Ltd. 8) Tata AIG General Insurance Company Ltd. 9) Cholamandalam General Insurance Company Ltd. 10) Export Credit Guarantee Corporation 11) Apollo DKV Insurance Company Ltd. 12) Future General India Insurance Company Ltd. 13) Star Health and Alliance Insurance Company Ltd. 14) Shriram General Insurance Company Ltd. 15) Bharti AXA General Insurance Company Ltd. 16) agriculture Insurance Company of India.

Generally the insurance companies cover these risks under the ICC-A, ICC-B, ICC-C and the Extraneous risk clauses. London Institutes of Underwriters, UK first introduced these clauses. These clauses explain the risks those are covered in the ICC-A, ICC-B, ICC-C clauses. They also explain the risks those are not covered by these clauses. The exporter can get the additional risks covered, if they are not included in the ICC-A, ICC-B, ICC-C clauses by paying additional premium. Insurance claims in India are settled on the basis of these Institute Cargo Clauses. The insurance that is available to cover these risks in transportation is called as Marine Insurance. Marine Insurance is available in all the modes of transportation viz. waterway, airway, roadway and railway including post parcel.

How the losses arise, what are the various types of losses, what are the Incoterms used in the transportation and how the risks transfer from the exporter to the importer, what are the various types of risks and the marine insurance policies are dealt in Chapter 6 on Marine Insurance.

1.8 SUMMARY ________________________________________________ In this chapter we have tried to understand the meaning of export and import and there effects on the economy of the importers and exporters country. Exports build up the precious foreign exchange reserve, which can be subsequently used for importing the necessary products for the country like technology, know how, capital goods etc. However it has the effect of increasing the inflation rate in the country. Imports consume the foreign exchange of the importers country. As it reduces the domestic currency money supply in the country it has a soothing effect on the inflation rate in the importers country. In exports the wealth of the country depletes and in imports it increases. The compensation for this is in the form of receiving and consuming the foreign currency. Outflow and inflow of the wealth is monitored by the Customs department and the corresponding inflow and outflow of the foreign currency is monitored by RBI.

There is difference between the Domestic sale and the exports. This is because the importer is situated in different country and therefore the exporter lacks the knowledge about that country in general and the importer in particular. Exporter therefore perceives a credit risk. Moreover the exporter has to adopt different kinds of modes of transport, which are likely to cause damage or loss to the goods. This gives rise to the risk during transportation. The foreign currency rate fluctuation is yet another cause of concern for the exporter. The importer countries internal political and economic situation and their hostile relationship with other countries add to the woes of the exporter. However there are various organizations that help the exporter in mitigating the risks perceived by him in the export business.

Banks world over, who engage themselves in the international business, issue on behalf of the importer, Letters of Credit which guarantees payment to the exporter should the importer fail to pay for one reason or the other. Similarly the Export Credit Guarantee Corporation, a Government of India undertaking, help the exporter by indemnifying his loss on account of political risks to which the exporter is prone. Authorized Dealers in India offer the various derivative products such as Forward Exchange Contract, Currency Futures and Currency Ooptions and their various combinations to ensure that the exporter is not subjected to the risk on account of exchange rate fluctuations. General Iinsurance Companies in private sector as well as public sector extend the marine insurance to the exporters and relieve them of the anxiety of loss or damage of the export cargo while in transit.

All these facilities and the host of other facilities and benefits are available to the exporter so that he exports the variety of goods and help the country mobilize the precious foreign exchange so that the country can embark on the path of development and progress by importing much needed, latest technology, knowhow and capital goods.

1.9

KEY WORDS 1. Nostro account, 3.Home Currency, 5. Depreciation of currency, 7. Under invoicing, 9. Country risk, 11. Currency risk, 13. Letter of credit, 15. Marine Insurance, 17. Institute Cargo Clauses A,B and C, 19. Currency Futures, 2.Vostro account, 4. Foreign Currency, 6. Appreciation of currency, 8. Over invoicing, 10. Credit risk, 12. Carriage risk, 14. ECGC, 16. London Institute of Underwriters, 18. Forward Exchange Contract 20. Currency Options.

1.10 Q.1: Q.2: Q.3: Q.4:

DESCRIPTIVE QUESTIONS How does export affect the economy of the exporters country? Differentiate between Domestic sale and export sale. What are the additional risks that exporter perceives in export sale over and above the risks in Domestic sale? How are these risks covered? What are the evils of Under invoicing in exports and Over invoicing in imports? How are these evils taken care of in India? OBJECTIVE QUESTIONS Exports contribute to the Foreign Exchange Reserves of the exporting country. The effect is: a) Exports decrease the Foreign Exchange Reserve b) Exports increase the Foreign Exchange Reserve c) Exports do not have any effect on the Foreign Exchange reserve d) None of the above

1.11 Q.1:

Q.2:

All other things remaining constant, Exports, a) Increase the inflation in the exporting country b) Increase the inflation in the importing country c) Decrease the inflation in the exporting country d) Does not have any effect on inflation.

Q.3:

Under invoicing in exports means: a) Buying less valued goods and paying less amount

b) Buying less valued goods and paying more amount c) Selling more valued goods and receiving less amount d) Selling less valued goods and receiving more amount Q.4: Over invoicing in imports means: a) Buying more valued goods and paying less amount b) Buying less valued goods and paying more amount c) Selling more valued goods and receiving less amount d) Selling less valued goods and receiving more amount Q.5: The two most important authorities who monitor the export and import are: a) ECGC and EXIM Bank c) DGFT and EPC Q.6: Exporter stands to benefit if the, a) Home currency appreciates against foreign currency b) Foreign currency appreciates against home currency c) Home currency remains stable against foreign currency d) None of the above Q.7: Letter of Credit is an instrument issued by: a) Exporters Bank c) By World Bank Q.8: b) Importers Bank d) By RBI b) IBRD and IMF d) RBI and Customs

Marine Insurance covers the risk in transportation by: a) Only ocean c) Ocean and air b) Only air d) Any mode

Q.9:

The risk on account of exchange rate fluctuation can be covered by: a) Forward Exchange Contract c) Currency Options b) Currency Futures d) All the above

Q.10: Exporter faces the risk of non receipt of payment if the importing countrys existing government is toppled and the new government refuses the payment to the exporting country. This risk is covered by: a) UNO c) ECGC b) WTO d) UNCTAD

Chapter

How to Export?

2.1 Learning Objectives On reading this chapter the reader shall be conversant with
the following: He will know what is IEC number, and its importance in imports and exports. He will also know how to obtain IEC number from DGFT. He will know the various Export Promotion Councils and Commodity boards and the ways in which they help the exporter in exporting and how to obtain registration cum membership certificate from them. He will also know how the import and export products are classified. He will also know which products can be imported and exported and which cannot be imported or exported. He will know the benefits the Government of India extends to the exporter under the Foreign Trade Policy 2009-14. He will know the other formalities that he is expected to complete as any other domestic seller is required to complete.

2.2 Obtaining IEC No. from DGFT:


Before commencing the business involving either import or export one has to necessarily obtain Importer Exporter Code Number (IEC No.) from the office of the Director General of Foreign Trade (DGFT). This provision is made effective from 1st January 1997, as required under the EXIM policy prevailing then. DGFT is an apex body constituted under Ministry of Commerce. It is responsible for administering Indias Foreign Trade Policy under Foreign Trade (Development and Regulation) Act 1992. DGFT has its Headquarter situated at Udyog Bhavan, H-Wing, Gate No.2, Maulana Azad Road, New Delhi -110011. DGFTs 33 regional directorates are situated at 1) Mumbai, 2) Kolkata, 3) Chennai, 4) New Delhi, 5) Ahmedabad, 6) Bangalore, 7) Kanpur, 8) Ludhiana, 9)Hyderabad, 10) Cochin, 11) Jaipur, 12) Varanasi, 13) Moradabad, 14) Pune, 15) Bhopal, 16) Gauhati, 17) Rajkot, 18) Patna, 19) Madurai, 20) Coimbatore, 21) Panipat, 22) Cuttack, 23) Chandigarh, 24) Pondecherry, 25) Vishakhapattanam, 26) Amritsar, 27) Vadodara, 28) Surat, 29) Jammu, 30) Tiruvanantpuram, 31) Shillong, 32) Goa, and 33) Deharadun. Addresses of these offices are given in the Appendix A1, at the end of the book. Besides this, DGFT has representative offices situated in some other cities. The person intending to engage in the business of import or export has to submit the `Ayat Niryat Form to the office of the DGFT under whose jurisdiction the persons address falls. (Ayat Niryat Form is exhibited in the Appendix C2, A2). The applicant needs to furnish the following along with the Ayat Niryat Form, in order to get the IEC No.: 1. Applicant needs to obtain Permanent Account Number (PAN) from the Income Tax authority and submit the self certified copy of the same. 2. Applicant also needs to open an account with the bank, which is Authorized Dealer bank, and obtain a certificate from such bank as prescribed in the form and also get the photograph attested by the bank. 3. Demand Draft of ` 250 evidencing payment of application fee in favor of the concerned regional office of DGFT. Money can also be paid through Electronic Fund Transfer (EFT). 4. Two passport size photographs of the applicant. 5. Company registration number or partnership deed. 6. Address proof. 7. Self addressed envelope with postal stamps of ` 30 8. Applicant needs to sign all pages of the Ayat Niryat Form 9. Applicant needs to submit only one copy of the Ayat Niryat Form. 10. The Ayat Niryat Form can be sent by post or can be hand delivered in the concerned regional office of the DGFT.

DGFT would issue the ten digit IEC No. expeditiously on receipt of all the information. Such IEC No. is issued in the format as given in the Ayat Niryat Form part A. A copy of such IEC number is also endorsed to the concerned banker as per the details given in the application form. A consolidated statement of IEC numbers issued by the regional authorities shall be sent to the offices of the Exchange Control Departments of RBI, refer Appendix A3 for the format in which IEC number is issued by DGFT. 2.3Features of IEC No.: The following are the important features of IEC. Only one IEC: Only one IEC can be issued against a single PAN. In case there are more than one IEC No. allotted, the same may be surrendered to the concerned DGFTs office for cancellation. Validity of IEC: An IEC No. allotted to an applicant shall be valid for all its branches, divisions, units, factories as indicated while applying for the IEC in Ayat Niryat Form. Duplicate IEC: Where the IEC is lost or misplaced, the issuing authority may consider requests for grant of duplicate copy of IEC number, if accompanied by an affidavit. Surrender of IEC: If an IEC holder does not wish to operate or use the allotted IEC number, he may surrender the same by informing the issuing authority. Upon receipt of such information, the issuing authority shall immediately cancel the same and electronically transmit it to DGFT for onward transmission to the Customs and Regional Licensing Authorities. In case of Software Technology Park/ Electronic and Hardware Technology Park / Biotechnology Park units: The regional office having jurisdiction over the district in which the Regional / Head office of the Software Technology Park / Electronic and Hardware Technology Park / Biotechnology Park unit is located shall issue or amend the IEC. Amendments to IEC: If any amendment is required in the IEC Number, an application can be made to the concerned DGFTs regional office. No fee is payable if the modification is sought within 60 days. Otherwise a fee of ` 200 is payable. Original copy of existing IEC number allotted should be enclosed with the application for modification of IEC. IEC does not require renewal: IEC once obtained can be used for ever, unless such number is cancelled or debarred by the DGFT for the activities of the importer / exporter in contravention to the provisions of the FEMA / FTP. The following categories of Importer as well as Exporter are exempted from obtaining IEC. They have been given a separate permanent IEC Numbers, which they can use: 1. Ministries and Departments of Central or State Governments. 2. Persons importing or exporting goods for their personal use and not connected with any trade or manufacture or agriculture. 3. Persons importing / exporting goods from / to Nepal, provided the CIF value of a single

consignment does not exceed ` 25,000 4. Persons importing / exporting goods from / to Myanmar through Indo-Myanmar border areas provided the CIF value of a single consignment does not exceed ` 25,000 5. Importers and Exporters as stipulated in clause 3 of the FTP 2009-14.

2.4 Obtaining RCMC from EPC / CB / Authorities:


Once the IEC Number is obtained from the DGFT, the next step for the Exporter is to obtain Registration-Cum-Membership Certificate (RCMC) from the Export Promotion Council (EPC), the Commodity Board (CB), or the Export Development Authority. Obtaining RCMC is not compulsory unlike IEC which is compulsory. But the benefits those are granted under the Foreign Trade Policy are available to only those exporters who are registered with any one of the EPCs / CBs / Authority. There are in all 27 Export Promotion Councils, 6 Commodity Boards and 4 Authorities engaged in the development of exports, as of now. The brief details are as follows: 2.4.1 Commodity Boards (CB): 1. Coffee Board. 2. Coir Board. 3. Spices Board. 4. Tea Board. 5. Rubber Board. 6. Tobacco Board. 2.4.2 Export Promotion Councils (EPC) 1. Apparel Export Promotion Council. 2. Basic Chemicals, Pharmaceuticals, & Cosmetics Export Promotion Council. 3. Carpet Export Promotion Council. 4. Cashew Export Promotion Council. 5. CAPEXIL. 6. The Cotton Textile Export Promotion Council. 7. Council for Leather Exports. 8. EEPC India (Formerly Engineering Export Promotional Council). 9. Electronics and Computer Software Export Promotion Council. 10. Export Promotion Council for Handicrafts. 11. Export Promotion Council for EOUs and SEZ units. 12. Federation of Indian Exporters Organisation (FIEO).

13. Gem and Jewellery Export Promotion Council. 14. Handloom Export Promotion Council. 15. Indian Oilseeds and Produce Export Promotion Council. 16. The Indian Silk Export Promotion Council. 17. Jute Manufacturers Development Council. 18. Pharmaceuticals Export Promotional Council. 19. The Plastic Export Promotion Council. 20. Powerloom Development and Export Promotion Council. 21. Projects Export Promotion Council of India. 22. Services Export Promotion Council. 23. The Sport goods Export Promotion Council. 24. Shellac and Forest Products Export Promotion Council. 25. Synthetic and Rayon Textile Export Promotion Council. 26. Wool and Woolens Export Promotion Council. 27. Wool Industry Export Promotion Council. 2.4.3 Authorities:

1. Agriculture & Processed food products Export Development Authority. 2. Marine Products Export Development Authority. 3. Coconut Development Board. 4. Telecom equipment and services Export Promotion Council. REfer appendix A4 for addresses and telephone numbers of all these EPCs/CBs and Authorities. 2.4.4 i. About EPCs / CBs / Authorities: They are the professional bodies registered as companies under the Indian Companies Act or societies under Societies registration Act.

ii. They are registered as non-profit making organizations. iii. They are managed by the persons with professional background in commerce, management and international marketing and having experience in Government or Industry. iv. They are autonomous bodies and regulate their own affairs. v. They are not required to obtain the approval of the Central Government for participation in international trade fairs, exhibitions etc. or for sending sales teams / delegations abroad. vi. However the Ministry of Commerce and Industry and the Ministry of Textiles interact

with the managing committee of the council twice a year. Once for approving their annual plans and budget and second time after six months for appraising their performance as they are supported by the financial assistance from the Government of India. 2.4.5 i. The Role and Functions of EPCs / CBs / Authorities: They project Indias image abroad as a reliable supplier of high quality goods, services.

ii. They encourage and monitor the observance of international standards and specifications by the exporters. iii. They keep abreast of the trends and opportunities in international markets for goods and services and assist their members in taking advantage of such opportunities in order to expand and diversify exports. iv. In furtherance of iii.) above they provide commercially useful information and assistance to their members in developing and increasing their exports. v. They offer professional advice to their members in areas such as technology upgradation, quality and design improvement, standards and specifications, product development and innovation etc. vi. They organize visits of delegations of the members abroad to explore overseas market opportunities. vii. They also organize the participation in trade fairs, exhibitions and buyer-seller meet in India and abroad. viii.They promote the interaction between the exporting community and the Central / State Governments. They build up the statistical base and provide data on the exports and imports of the country, exports and imports of their members and also the other important international trade data. 2.4.6 Legistration-Cum-Membership Certificates: The exporter has to first of all decide on the main line of his business. He can then apply to the EPC / CB / Authority relating to that line of business for registration as a member. He however also has an option to apply to FIEO. The Status Holder Exporters have an option to apply and obtain RCMC from FIEO. Service exporter, except software service exporters, are required to obtain RCMC from FIEO. If the exporters product does not relate to any of the EPC / CB / Authority he can still apply to FIEO and get RCMC from FIEO. An exporter is granted RCMC immediately. Even the prospective exporters can apply to EPC / CB / Authority and become associate members.

Application Form for RCMC: The form for registration is given in the Appendix A5. Supporting Documents that are required to be sent with the application form: o Self certified copy of the IEC Number issued by the DGFT. o Bank Certificate in support of the applicants financial soundness. o In case the exporter wishes to register himself as manufacturer exporter, he is required to submit evidence to that effect. o Demand Draft for the fees: The fees vary from ` 5000 onwards depending upon the status of the exporter and his export turnover. Their fees differ from one registering entity to the other registering entity. As such they are required to be ascertained beforehand. Validity of the RCMC: The RCMC is deemed to be valid from 1st of April of the licensing year in which it was issued and shall be valid for five years ending 31st March of the licensing year, unless otherwise specified. The exporter is required to furnish the returns / details of his exports of different commodities to the concerned registering entity. Utility of RCMC: The exports made by the exporter holding RCMC are counted for the benefits provided under FTP. As a corollary the exports made by the exporters without holding RCMC will not be counted for the benefits under FTP. De-Registration: The registering authority may de-register the RCMC holder for a specified period for violation of conditions of registration. The concerned EPC / CB will also intimate the same to all concerned authorities. 2.5 ITC(HS) Classification of Export and Import items:

ITC (HS) stands for Indian Trade Classification (Harmonized System), as notified by the DGFT in the foreign Trade Policy. This classification gives an unique number to all the goods that can be imported as well as exported. There are greater restrictions on imports compared to exports. FTP 2009-14 classifies the import and export items in the following four categories: 1. Free- no restrictions on imports / exports of these items (earlier known as OGL i.e. Open General License items). 2. Prohibited goods. 3. Restricted through authorization or in terms of public notices issued. 4. Importable or Exportable only through State Trading Enterprises (STE). These were earlier known as Canalized items. We give below certain illustrative list of the items falling in the above four categories. The detail list can be obtained from the website of the DGFT. The importer / exporter needs to know in advance in which category the item he intends to deal in falls and then comply with the provisions of the procedure stipulated in this regard by the DGFT.

2.5.1

Prohibited Items:

Prohibited items cannot be exported by the exporter. These are the items related to conservation of our natural resources. Some of the items are given in the list below. Before finalizing the item for exports, one has to necessarily peruse the latest list as revised by the DGFT and then decide upon the item to be exported. The following items are notified as prohibited items for exports: 1) Wild life including their products and parts. 2) Exotic birds. 3) Endangered plants. 4) Beef, pig fats, carcasses of buffalo. 5) Milk, skimmed milk, milk food for babies. 6) Peacock feathers and handicrafts of peacock feathers. 7) Dried leguminous (pod type of) vegetables. 8) Guar seeds, lentils, wheat and meslin. 9) Sea weeds, tallow or fat or oil of any animal origin, excluding fish oil. 10) Sugar. 11) Sea shells, ivory, bovine semen. 12) Seeds. 13) Margarine (butter) of animal origin. 14) Human skeletons. 15) Wood and wood products, wood pulp, sandal wood and red sanders wood.

2.5.2

Restricted items (exports of which require export license from DGFT):

These items can be exported only against authorization (Export License) obtained from DGFT, as per the public notices issued from time to time. Illustrative list of items falling under restricted category and those requiring authorization for exports or those can be exported after obtaining export license are given below: 1) Cattle, horses, camel, jawa sparrow. 2) Sea weeds, fresh and frozen silver pomfrets. 3) Dried vegetables. 4) Textile/dress material with imprints of holy Quaran. 5) Bone and bone products. 6) De-oiled groundnut cakes, fodder, rice bran.

7) Sand and soil. 8) Chemicals that deplete ozone layer. 9) Wheat/paddy seeds of wild variety. 10) Sandal wood products. 11) Seed and planting material. 12) Sea shells. 13) Urea, certain fertilizers. 14) Silk worms. 15) Vintage motor cars and motor cycles. 16) Whole human blood plasma. 17) Waste of special minerals. 18) Viscose staple fibre. 19) Chemicals for weapons.

2.5.3

Exports through State Trading Enterprises (earlier known as Canalized items):

The State Trading Enterprises are expected to make the exports in accordance with commercial considerations. They should act in non discretionary manner. The state trading regime does not apply to EOU manufacturing units (except for chrome ore / chrome concentrate). The provisions of exports through State Trading Enterprises have been held valid and are not considered as violation of article 14 of the constitution. Some of the items those can be exported through State Trading Enterprises along with the name of such State Trading Enterprise are listed below: 1) Crude oil through IOC (Indian Oil Corporation). 2) MICA waste through MMTC Ltd. (Minerals and Metal Trading Corporation Ltd.). 3) Minerals, ores of rare earths, iron ore, bauxite, manganese ore etc. through either Indian Rare Earths Ltd. or MMTC Ltd. 4) Seeds of maize through National Agricultural Marketing Federation of India ltd. (NAFED), Tribal Cooperative Marketing Development Federation of India ltd. (TRIFED), National Dairy Development Board (NDDB). 5) Gum Karaya through TRIFED. 6) Onion through NAFED and specified State Agencies.

2.5.4

Free no restrictions (earlier known as OGL i.e. Open General License):

All other items, which are not mentioned in the updated list of Prohibited, Restricted, or Exportable through STE, can be freely exported by the exporter. The general principal is free

unless restricted, prohibited. An exporter should select the item from this list for lesser complications in exporting.

2.6 2.6.1

Benefits given to Exporters in Foreign Trade Policy (2009-14): Background:

India had a long history of adverse balance of payment. To cope up with this problem the following measures were taken: 1. Import Trade Control was first introduced in early stages of Second World War-II, by notification under Defense of India Rules (DIR). 2. Imports and Exports (Control) Act was passed in 1947, during which period foreign exchange rate was artificially controlled by RBI. 3. Foreign Exchange Regulation Act was introduced in 1947. 4. Later this act was amended in 1973. Amended FERA came into effect from 1st of January 1974. 5. Now, with effect from 1st of June 2000, more liberal Foreign Exchange Management Act (FEMA) is in force. However it was observed that the Import Trade Control act (1947) was not adequately furthering the cause of foreign trade under the changed circumstances and therefore it was replaced in August 1992, by Foreign Trade (Development and Regulation) Act. The Act is designed to authorize the Government of India to formulate the Export Import Policy and to carry out the amendments to it as per changing situations. The authority is also granted to Government of India to implement the Export Import Policy. The Government of India therefore appoints the Director General of Foreign Trade (DGFT) and the policy is supervised and controlled by the DGFT. The Hand book of Procedures (HBP) empowers the DGFT to specify the procedures to be followed by the importer, exporter and the Licensing Authorities. Under these powers Standard Input Output Norms (SION), Schedule of Duty Entitlement Pass Book (DEPB) rates and Indian Trade Control (Harmonized System) ITC (HS) are notified by means of the public notices by DGFT.

Ministry of Commerce issues policy for Imports and Exports for five years, which is amended from time to time depending upon the changing circumstances. The policy was earlier termed as EXIM Policy. It was named as Foreign Trade Policy for 2004-09. The same name continues for the policy for the next five years period 2009-14. The policy announced on 27.08.2009, is contained in 9 Chapters. It is given in Appendix A43. It contains the following: 1. Handbook of Procedures for Volume 1, which gives the procedural aspects of the policy. 2. SION in Volume 2, for various products for Duty Exemption Scheme. 3. ITC (HS) Classification of imports and Exports items and 4. Handbook of DEPB Rates.

2.6.2

Matters covered under FTP 2009-14

The following matters are covered by the FTP 2009-14: 1. Policy for regulating Import and Export of goods and Services. 2. Export Promotional Measures. 3. Duty Remission and Duty Exemption Schemes. 4. Export Promotion Capital Goods Scheme. 5. EOU / EHTP / STP / BTU schemes. 6. Special Economic Zones. 7. Deemed Exports.

2.6.2.1 Special Focus Initiative:


The exporter needs to bear in mind that the benefits are passed on to the exporters of products from the sectors under the Special Focus Initiative. This scheme is implemented with a view to doubling our percentage share of global trade within five years and expanding employment opportunities, especially in the semi urban and rural areas. The government of India shall make concerted efforts to promote exports in these sectors by specific sectoral strategies that shall be notified from time to time. The sectors mentioned under the special focus initiative are: 1. Agriculture and Village industry. 2. Handlooms. 3. Handicrafts. 4. Gems & Jewellery. 5. Leather and Footwear. 6. Marine Sector. 7. Electronics and IT Hardware Manufacturing Industries. 8. Sports Goods and toys. 9. Green products and technologies. 10. Exports from the North Eastern Region. Benefits Available to Exporters: The following benefits are extended to the sectors mentioned above. The brief details of these benefits are explained below. They will be dealt in detail in Chapter 11: Benefits available to Exporter under Foreign Trade Policy (2009-14): 2.6.2.2Duty Credit Scrip: Duty Credit Scrip benefits are granted with an aim to compensate high transport costs, and to offset other disadvantages that the exporter has to bear.

Duty Credit Scrip is an instrument that grants benefit to the exporter in the form of payment of customs duty on the items that he imports. An Exporter need not pay the customs duty to the extent of balance that is available to him under Duty Credit Scrip. This balance that is available to him is to the extent of certain percentage of the FOB exports made by him during the previous financial year. The percentage depends on the various schemes explained in the FTP. For example under Vishesh Krishi Gram Udyog Yojana (VKGUY) scheme it is 7%, 5% or 3% of the FOB value of the exports depending upon the product that is exported. Duty Credit Scrip and the items imported against it would be freely transferable. However this benefit of transferability is not available to the Duty credit Scrip issued under Serve From India Scheme (SFIS) and Status holders Incentive Scrip. Import of inputs, goods including capital goods are permitted provided the same are freely importable or restricted items under ITC (HS). Duty Credit Scrips can also be used for Export Promotion Capital Goods (EPCG) imports, as well as for meeting Export Obligation default. They are valid for 24 months. 2.6.2.3EPCG: EPCG scheme enables Indian manufacturers to import Capital Goods either at [a] 0% or [b] 3% rate of customs duty as described before against commitment of Export Obligation. [a] 0% duty EPCG scheme has been introduced in the FTP 2009-14 for a limited period ending 31st March 2011. Under this scheme Capital Goods can be imported for pre production, production and post production activities at zero customs duty (i.e. without paying customs duty) subject to an Export Obligation of 6 times of duty saved. The Export Obligation has to be fulfilled in 6 years from authorization issue date. The scheme is available for exporters of: 1. 2. 3. 4. 5. 6. 7. Engineering and electronic products. Basic chemicals and pharmaceuticals. Apparels and Textiles. Plastics. Handicrafts. Chemicals and allied products. Leather and leather products.

[b] Those exporters that are not eligible under 0% duty EPCG scheme can avail the benefit under 3% EPCG scheme. Normal duty payable under EPCG scheme is 3% (as against more than 10% customs duty generally applicable on import of Capital Goods). Under 3% EPCG scheme an authorization holder can import Capital Goods (i.e. plant, machinery, equipment, components and spare parts of the machinery) at concessional rate of customs duty of 3%. Export Obligation is 8 times of duty saved and the Export Obligation has to be fulfilled in 8 years. Consumables cannot be imported under EPCG. 2.6.2.4 Towns of Export Excellence (TEE): A number of towns in specific geographical

regions have emerged as dynamic industrial clusters, contributing handsomely to Indias exports. It is necessary to grant recognition to these industrial clusters with a view to maximizing their potential and enabling them to move higher in the value chain and tap new markets. Selected towns producing goods of ` 1,000 crore or more will be notified as Towns of Export Excellence on the basis of potential for growth in exports. However for the Handloom, Handicrafts and Agriculture sector this threshold limit stands at reduced export performance at ` 150 crore. List of Terms of Export Excellance is given in appendix A46. The assistance extended to these areas comprise of the following facilities: Common service Providers in these areas shall be entitled for the facility of the EPCG scheme. The recognized association of units in these areas will be able to access the funds under MAI scheme for creating focused technological services. Such areas will receive priority for assistance for rectifying critical infrastructure gaps from the ASIDE scheme. 2.6.2.5 ASIDE (Assistance to State for Infrastructure Development of Exports): This scheme has been planned and devised with the objective of coordination in the efforts of Central as well as State Governments for optimizing the utilization of resources of the country. The scheme basically targets infrastructural improvements in critical areas to achieve the objective of export growth through a coordinated efforts of the Central and State Governments. The objective of the scheme is also to involve the State Governments in promotion of exports, by providing assistance to State Governments for creating the appropriate infrastructure for the development and growth of exports. The State Governments can use the funds thus provided by the Central Government for the following purposes:

For developing roads connecting production centers to the ports. Setting up inland container depots and container freight stations. Creation of new state levels export promotion industrial parks / zones. Augmenting common facilities in the existing zones. Equity participation in infrastructure projects Development of minor ports and jetties. Assistance in setting up of common effluent treatment facilities. Stabilizing power supply. Any other activity as may be notified by the department of commerce from time to time.

2.6.2.6 MAI: The Market Access Initiative (MAI) scheme is intended to provide financial assistance for medium term export promotion efforts with a sharp focus on a particular country and

product. Financial assistance is available for EPC (Export Promotion Councils, Industry and Trade Association, Agencies of State Government, Indian Commercial Missions abroad and other eligible entities as may be notified from time to time. Assistance under this scheme shall also be available to Export Promotion Organization / Trade Promotion Organization / National level Institutions / Research Institutions/ Universities / Laboratories / Exporters etc. for enhancing of exports through accessing new markets or through increasing the share in the existing markets. A whole range of activities can be funded under the MAI scheme, such as: Market studies. Setting up of show rooms / warehouses / Display in international departmental stores. Sales promotion campaigns / publicity campaigns. Participation in international trade fairs. Brand promotion. Registration charges for pharmaceutical companies. Testing charges for engineering products. etc. Each of these export promotional activities can receive financial assistance from the Government ranging from 25% to 100% of the total cost depending upon the activity and the implementing agency. 2.6.2.7 MDA: The Market Development Assistance (MDA) scheme is intended to provide financial assistance for a range of export promotion activities implemented by Export Promotion Councils, Industry and Trade Association on a regular basis every year. As per revised guidelines, assistance under MDA is available to the exporters with annual turnover up to ` 15 crore and for activities mentioned below: For participation in trade fairs. For attending buyer seller meet in India or abroad. For attending Export Promotion seminars. For exploring new market for their specific products and commodities from India in the initial phase. Assistance would be available on air travel on economy class. Reimbursement of charges of the built up furnished stall. Assistance for participation in trade fairs abroad and travel grant is available to exporters if they travel to countries in one of the four focus areas, such as, Latin America, Africa, CIS region or ASEAN countries, Australia and New Zealand.

For participation in trade fares in other areas, financial assistance without travel grant is available. 2.6.2.8 Advance Authorization Scheme: Under this scheme inputs required to manufacturer export products can be imported without payment of customs duty under Advance Authorization Scheme. Advance Authorization Scheme can be granted to the merchant exporter or manufacturer exporter to import inputs, fuel, oil, energy sources and catalysts. Since the raw material can be imported before the export of the final product, the authorization issued for this purpose is called as Advance Authorization. Advance authorization is not transferable. There should be 15% value addition. Value Addition for this purpose is VA = [(A-B) / B] * 100. Where VA is Value Addition. A is the FOB value of the export realised and B is CIF value of the imports covered by the authorization, plus any other imported materials used on which the benefit of DBK (Duty Drawback Scheme where import duty, paid on import of raw materials, used in export terms, is refunded back to the exporters) is claimed. 2.6.2.9 Duty Free Import Authorization (DFIA): DFIA is issued to allow duty free import of inputs, fuel, oil, energy sources, catalysts required for export products. DFIA is initially issued with actual user condition. However it is transferrable after fulfillment of export obligation. There should be 20% value addition. DFIA can be issued only for products for which SION have been notified. 2.6.3 Benefits offered to certain sectors:

Benefits available to the exporters in exporting the products covered by each of the following sector under FTP 2009-14 are given below. (These sectors were also mentioned in the beginning of this section): 2.6.3.1 Agriculture and Village industry. Benefits under Vishesh Krishi and Gram Udyog Yojana: i. The objective of the scheme is to promote agricultural and forest based value added products and the products coming from Gram Udyog.

ii. Duty Credit Scrip benefit of 5% of FOB value of exports in free foreign exchange is granted with an aim at compensating the high transport cost w.e.f. 27.08.2009. These Duty Credit Scrips can be used for importing inputs and capital goods which are freely importable and can be used for payment of customs duty. The Duty Credit Scrips are valid for a period of 24 months. iii. The Status Exporters shall be eligible for Duty Credit Scrip equal to 10% of FOB value of agriculture exports, for import of Capital Goods / equipment such as Cold Storage units, Pack Houses (including facilities for handling, grading, sorting and packaging etc.) or Reefer Van/ Containers. iv. Capital Goods imported under EPCG will be permitted to be installed anywhere in the AEZ (Agriculture Economic Zone).

v. Imports of restricted items are allowed under various export promotion schemes. Import of inputs such as pesticides are permitted under Advance Authorization Scheme for agro exports. vi. New Towns of Export Excellence with a threshold of ` 150 crore shall be notified. vii. Certain specified flowers, fruits and vegetables are entitled to Special Duty Credit Scrip, in addition to the normal benefit under VKGUY. 2.6.3.2 Handlooms. i. Specific funds are earmarked under MAI/MDA scheme for promoting handloom exports.

ii. Duty Free Import Entitlement of specified trimmings and embellishments is 5% of FOB value of Exports during the previous financial year. iii. Duty Free Import Entitlement of a hand knotted carpet samples 1% of FOB value of exports during previous financial year. iv. Duty Free Import of old pieces of hand knotted carpets on consignment basis for reexport after repairs is permitted. v. New Towns of Export Excellence with a threshold of ` 150 crore shall be notified vi. Machinery and equipment for effluent treatment plants is exempt from customs duty. 2.6.3.3 Handicrafts. i. Duty Free Import Entitlement of tools, trimmings and embellishment is 5% of FOB value of exports during previous financial year. Entitlement is broad banded and shall also extend to merchant exporters tied up with supporting manufacturers.

ii. Handicraft EPC is authorized to import trimmings, embellishments and consumables on behalf of those exporters for whom directly importing may not be viable. iii. Specific funds are earmarked under MAI & MDA schemes for promoting handicraft exports. iv. CVD is exempted on Duty Free Import of trimmings, embellishment and consumables. v. New Towns of Export Excellence with a reduced threshold limit of ` 150 crore shall be notified. vi. Machinery and equipment for effluent treatment plants are exempt from customs duty. vii. All handicrafts exports would be treated as Special Focus Products and are entitled to higher incentives. 2.6.3.4 Gems & Jewellery. a) Import of Gold of 8k and above is allowed under replenishment scheme subject to import being accompanied by an Assay Certificate specifying purity, weight and alloy content. b) Duty Free Import Entitlement, based on FOB value of exports during the previous financial year, of consumables and tools, for:

1. Jewellery made out of: i) Precious metals (other than Gold and platinum) 2% ii) Gold and platinum 1% iii) Rhodium finished silver 3% 2. Cut and polished diamonds 1% is available. i) Duty free import entitlement of commercial samples shall be ` 3,00,000. ii) Duty free re-import entitlement for rejected jewellery shall be 2% of FOB value of exports. iii) Import of diamonds on consignment basis for certification / grading & re-export by the authorized offices / agencies of Gemological Institute of America (GIA) in India or other approved agencies will be permitted. iv) Personal carriage of gems and jewellery products in case of holding/participation in overseas exhibitions increased to $ 5 million and to 1 million in case of export promotion tours. v) Extension in number of days for re-import of unsold items in case of participating in an exhibition in USA increased to 90 days. vi) In an endeavour to make India a diamond international hub, it is planned to establish Diamond Bourse(s). 2.6.3.5 Leather and Footwear: i. Duty Free Import Entitlement of specified items is 3% of FOB value of exports of leather garment in the preceding financial year.

ii. Duty Free Entitlement for Import of trimmings, embellishment and footwear components for footwear (leather as well as synthetic), gloves, travel bags, and handbags is 3% of FOB value of exports of previous financial year. Such entitlements shall also cover packing material, such as printed and non printed shoe boxes, small cartons made of wood, tin or plastic materials for packing footwear. iii. Machinery and equipment for effluent treatment plants shall be exempt from Basic Import Duty. iv. Re-export of unsuitable imported materials such as raw hides and skins and wet blue leathers is permitted. v. CVD is exempted on lining and interlining material notified at S.No.168 of customs notification no. 21/2002 dated 01.03.2002. vi. CVD is exempted on raw, tanned and dressed fur skins falling under chapter 43 of ITC (HS). vii. Re-export of unsold hides, skins, and semi finished leather shall be allowed from public bonded warehouse at 50% of the applicable export duty.

2.6.3.6 Marine Sector: i. Imports of technological upgradation under EPCG in fisheries sector (except fishing trawlers, ships, boats and other similar items) exempted from maintaining average Export Obligation.

ii. Duty Free Import of specified specialized inputs / chemicals and flavouring oils is allowed to the extent of 1% of FOB value of preceding financial years export. iii. To allow import of monofilament long line system of tuna fishing at a concessional rate of duty and Bait Fish for tuna fishing at nil duty. iv. A self removal procedure for clearance of seafood waste is applicable subject to prescribed wastage norms. v. Marine products are considered for VKGUY scheme. 2.6.3.7 Electronics and IT Hardware Manufacturing Industries: i. Expeditious clearance of approvals required from DGFT shall be ensured.

ii. Exporters and Associations would be entitled to utilize MAI and MDA schemes for promoting Electronics and IT Hardware Manufacturing Industry exports. 2.6.3.8 Sports Goods and Toys: i. Duty Free Imports of specified specialized inputs allowed to the extent of 3% of FOB value of preceding financial years exports.

ii. Sport Goods and Toys shall be treated as a priority sector under MDA / MAI scheme. Specified funds would be earmarked under MAI / MDA scheme for promoting exports from this sector. iii. Application relating to Sports Goods and Toys shall be considered for fast track clearance by DGFT. iv. Sports Goods and Toys are considered as Special Focus Products and are entitled to higher incentives. 2.6.3.9 Green products and technologies: India aims to become a hub for production and exports of green products and technologies. To achieve this objective, special initiative will be taken to promote development and manufacture of such products and technologies for exports. To begin with, the focus would be on items relating to Transportation, Solar and Wind Power generation and the other products as may be notified which will be incentivized under the Reward Scheme of Chapter 3 of FTP. 2.6.3.10. Exports from the North Eastern Region: In order to give a fillip to exports of products from the North-Eastern states, notified products of this region would be incentivized under the Reward Schemes of Chapter 3 of FTP.

2.8 SUMMARY ______________________________________________________ This chapter explains the formalities that exporter has to complete to become successful exporter and enables him to select a product line in view of the benefits extended under the FTP 2009-14. The exporter needs to apply to the relevant regional office of the DGFT on ANF 2A, to obtain the IEC number, without which the exporter cannot export. Before he applies for IEC number he is expected to obtain PAN from IT Authorities and open an account with the Authorized Dealer Bank. The exporter has to route all his export related transactions through this bank. Once the IEC number is received by the exporter he should select a product he intends to export. This process is same as is in the domestic sale. However he has to additionally look for the benefits that are granted to the exporters under the Foreign Trade Policy announced by the ministry of commerce and subsequent notifications issued in this regard. He then should get himself registered, depending upon the product he has selected, with the relevant EPC / CB / Authority. On registration with such Export Promotion Agency he gets the RCMC. The RCMC is required to be quoted when the exporter wishes to avail the benefits accorded to him under the FTP. Though obtaining RCMC is not compulsory, it becomes necessary for the exporter to obtain RCMC as exporter wants to claim the benefits under FTP.

The exporter, in order to remain fully equipped with the procedures and the entitlements of the export business should remain abreast with the following: Exchange Control Manual, published by RBI, which contains the provisions of FEMA. FEDAI booklet, published by FEDAI, which contains the charges levied by the Authorized Dealers. Handbook of Procedures Volume 1, which give procedural aspect of imports and exports. Handbook of Procedures Volume 2, which give SION for various products for the purposes of duty exemption. Handbook of DEPB rates. ITC (HS) classification of Import and Export Classification

Foreign Trade Policy 2009-14, along with the latest public notices issued by DGFT. One can find this information on the website of the relevant authorities also, which is sufficient to begin with. Formalities that are common in the domestic sale, though necessary, are not discussed in length in this chapter.

2.9

KEY WORDS 2) DGFT, 6) FTP, 10) BTP, 14) RCMC, 18) CIF, 22) MAI, 26) TEE, 3) PAN, 7) Ayat Niryat Form, 11) AD, 15) FIEO, 19) Duty Draw Back, 23) MDA, 27) Status Exporters, 4) E 8) STPI, 12) EPC, 16) FTP, 20) DEPB, 24) SEZ, 28) VKGUY, 31) CVD,

1) IEC, 5) EXIM Policy, 9) EHTP, 13) CB, 17) FOB, 21) ASIDE, 25)AEZ, 29) ITC (HS), 32) Advance Authorization, 35) FEMA, 39) EPCG, 43) IOC, 47) NDDB, 51) CVD, 55) Canalized items

30) State Trading Enterprise, 33) FT (D&R) Act, 36) ECM, 40) EO, 44) MMTC, 49) FEDAI, 52) CIS, 56) Restricted items 34) FERA, 37) HBP, 41) Duty Credit Scrip, 45) NAFED, 50) DIR, 53) ASEAN,

38) SION, 42) DFIA, 46) TRIFED,

54) OGL,

2.10

DESCRIPTIVE QUESTIONS

Q.1: Explain the procedure for obtaining the IEC Number. Q.2: List the categories exempted from obtaining the IEC No. Q.3: Why should exporter obtain RCMC? Explain in detail the procedure of obtaining RCMC. Q.4: What is the significance of ITC (HS) classification of import and export items for the exporter? Q.5: Write short notes on the following: 1) MDA, 2) MAI, 3) EPCG and 4) ASIDE.

Q.6: What is the objective of the Sectoral Approach under Special Focus Initiative mentioned in the FTP 2009-14? What are the sectors mentioned in this regard in the FTP and what are the benefits for the exporters in this sector? Q.7: Write short note on the following: 1) Duty Credit Scrip, 2) Advance Authorization, 3) Towns of Export Excellence and 4) DFIA. 2.11 OBJECTIVE QUESTIONS

Q.1. IEC stands for: a. Indian Exporters Code c. Importer Exporter Code Q.2. DGFT stands for: a. Deputy Governor of Foreign Trade c. Deputy General of Foreign Trade Q.3. RCMC stands for: a. Registration Cum Membership Certificate b. Regional Council Membership Certificate c. Reserve Cost and Material Cost d. Road Carriage Maintenance Center Q.4. EPC stands for: a. Export Processing Certificate c. Export Product Cost Q.5. CB stands for: a. Common Brand c. Commodity Board Q.6. To be able to export one must possess: a. Prescribed degree in foreign trade from recognized institution. b. RCMC c. IEC d. Contacts in the foreign countries Q.7. RCMC enables an exporter to: a. Maintain his road carriage at lower cost c. Reduce costs and make profit b. Use resources of the regional council d. Get benefits under FTP b. Civil Base d. Customs Boat b. Export Promotion Council d. Export Price and Cost b. Director and Governor of Foreign Trade d. Director general of Foreign Trade b. Indian Excise and Customs d. Imports Excise and Customs

Q.8. ITC (HS) Classification of import and export items has the following categories: a. Prohibited and Not prohibited c. Restricted, Prohibited, through STE and Free. Q.9. EPCG scheme allows the exporter to; a. Export the Capital Goods for Profit at concessional duty b. Import the Capital Goods for manufacturing Export Products at concessional duty c. Export the Goods whose Price is more than the manufacturing Cost d. Import the Goods whose Price is less than the manufacturing Cost Q.10. Duty Credit Scrip is valid for: a. 12 months c. 30 months b. 24 months d. 36 months. b. Restricted and Prohibited d. a and b.

Chapter

Export Documentation

3.1 Learning Objectives After reading this chapter the reader will understand
the importance of the export documents. He will know the various authorities in India that come in picture while exporting, their role in brief and reason why they require particular He will also know that the importers country also document needs to monitor the imports and the documents that importer and importer He will know various regulatory and country needs commercial documents.

3.2 Need for Export Documentation:


We have already discussed in Chapter 1 that in the business of Exports and Imports i.e. International trade the economy of the Exporters country as well as the economy of the Importers country gets affected. Both these countries therefore make all out efforts to govern the conduct by controlling and regulating the international business. Since the two countries regulations are required to be followed by both the importer as well as exporter the international trade business looks more complicated than the domestic business. Exporter and Importer are not known to each other, they are also unaware of the regulatory environment prevailing in each others countries. However they wish to control the risks perceived by them at every stage of the trade deal. Hence the importer as well as the exporter has to do the trade on the basis of mutually agreed and acceptable international legal and regulatory framework governing international trade as none will agree to accept the others jurisdiction due to potential risks involved in its interpretation and adverse judicial and bureaucratic views. And hence they have to follow the internationally acceptable regime for the documentation.

Various organizations such as Customs, Excise, Shipping Companies, Insurance Companies, Insurance Agencies, Chambers of Commerce, and Authorized Dealers etc. get involved at various stages in preparation of the Export documents. The exporter has to keep various aspects like the trade practices, legal and commercial requirements in the importers country. The following points may be borne in mind while preparing export documents: 1. Export documents are prepared to comply with the regulatory requirements in the exporters as well as importers country besides complying with the international conventions for the transportation of the goods from one country to another country. Such essential documents are: a. b. c. d. e. f. g. Bill of Lading (or Transport Document in general) Packing List, Commercial Invoice, Import License, Certificate of Origin, Inspection certificate, Insurance Certificate.

2. Foreign Exchange is quite precious for countries having low levels of Foreign Exchange Reserves. Such countries would like to conserve their Foreign Exchange Reserve by avoiding the unnecessary imports into the country. These countries therefore need the data in specific formats to enable them to maintain their statistical data. Failure to submit such data may invite penalties or delay in clearance of goods at the importers end. Such data are country specific and importer is required to inform the exporter about this requirement while finalizing the export contract. 3. Export documents also help the importing country to administer the Exchange Control

regulation in that country and to monitor the Import Quotas. Any document to this effect if asked while finalizing the export contract should be prepared and submitted. 4. Importing country is concerned about the ill effects of the imported material on the health of general public and animals. It is also concerned with the ill effects on the plants, flora and fauna of the country. The importing country may require safeguarding herself in this regard. Such Sanitary and Phyto-Sanitary export documents are therefore required to be furnished by the exporter. 5. Customs officials have to keep vigil on the export cargo and ensure that the provisions of the FTP and FEMA are strictly followed. They also have to ensure that the threat is not caused to national and international security due to nefarious activities of smuggling of prohibited and hazardous goods. To ensure this the exporter is required to submit the following documents: a. b. c. d. e. f. g. Shipping Bill or bill of Export Exchange Declaration forms Commercial Invoice Packing List ARE I Pre Shipment Inspection Certificate Export Sales Contract

These documents help the customs to see, verify and inspect the cargo of the exporter. 6. The transportation of the goods in international trade is full of risks. There are a few entities other than the exporter who have interest in goods and its safe journey till the final destination. One such party is the Shipping Company who is in possession of the goods and is responsible for safety of the goods against all odds. Shipping Company has to ensure safety of the goods till they reach the destination. The other party is the bank who has paid money to the exporter against the export receivable until such time as importer makes the payment. The export goods constitute security for such an advance. And therefore bank is also interested in safe reaching of the goods to the final destination. Therefore the risks in transportation need to be covered. This is done by the insurance company, who assumes the risk for the consideration of the premium. The certificate issued by the insurance company to this effect is one of the important export documents.

7. There are certain countries which, in order to control their imports and to keep a check on them through sound information system, require that the commercial invoice by the exporter has to be prepared on the forms of these importing countries. In international trade such forms are known as `Customs Invoices. On the other hand certain other countries require the `Consular Invoice along with the Commercial Invoice (or legalization / visaed of Commercial Invoice) so as to get the details of the export shipments coming to their country. Such documents are:

a. b.

Customs Invoice Consular Invoice or Legalized / visaed Invoice

8. If the entire shipment as mentioned in the Sales or Export Contract or L.C., could not be effected for one reason or the other reason, then the exporter is required to obtain `Short Shipment Certificate. This is a proof that only the part of goods was only shipped and enables the exporter to obtain the part payment. Hence the export documentation is an essential and integral part of the international trade. If the exporters do well in preparing the export documents the international trade relations between the trading countries shall be harmonious, sustainable and growth oriented. Because of this the export documentation assumes great importance.

3.3 Regulatory Documents:


Regulatory documents are those documents that are required by the government authorities and as per the regulations in force. The exporter is constrained to prepare these documents in order for him to be able to make export or avail the benefits detailed in the FTP. The relevant acts in this connection are: Foreign Exchange Management Act 1999 Indian Customs Act 1962 Foreign Trade Policy 2009-14. We shall see below the important documents in this regard. 3.3.1 Shipping Bill / Bill of Export (Refer Appendix A7, A41 (14)) As per the provisions of the Indian Customs Act 1962, the goods cannot be loaded on the board of the carrier unless the permission from the Customs Authority has been obtained. Such permission is accorded by the Customs Authority to the Exporter on the document prescribed by the Customs Authority. In case where the goods are sent by sea, the document prescribed by the Customs Authority is called as Shipping Bill. And when the goods are sent by land or rail, the document prescribed by the Customs Authority is called as Bill of Export. They are also known as Application for Export. Shipping Bill / Bill of Exports is the document required by the Customs Authority to enable them to allow or permit the exports. The Customs Authority allows such exports by affixing their seal `let export on the shipping bill / bill of export that are prepared by the exporters. Customs Authority requires the following other documents for processing the Shipping Bill: 1. SDF / GR (in duplicate) for shipment to all countries. 2. Packing list (in Quadruplicate) or cargo manifest mentioning the contents, quantity, gross and net weight of each package of the cargo to be exported.

3. Commercial Invoice (in Quadruplicate) containing relevant particulars like number of packages, quantity, unit rate, total FOB / CIF value, full and correct description of the goods to be exported. 4. Export Sales Contract / L.C. or Purchase Order of the overseas buyer as the case may be. 5. ARE I and ARE II (both original and duplicate) and commercial invoice / customs invoice / consular invoice as the case may be. 6. Pre shipment Inspection / Examination Certificate of Quality Control from the Export Inspection Agency. There are following four types of Shipping Bills: 1. For Export of Duty / Cess Free goods : White coloured in 3 copies. 2. For Export of Dutiable goods : Yellow coloured in 3 copies 3. For Exports with entitlement of Duty Drawback : Green coloured in 4 copies 4. For Exports with entitlement under DEPB scheme : Blue coloured in 7 copies 5. Re export of imported goods. For the goods to be cleared by the Land Customs, the Bill of Exports is used instead of Shipping Bill. The colour scheme of various types of Bill of Export is same as in case of Shipping Bill. The main purpose of the Shipping Bill is: To assess value of the export goods according to the Indian Customs Act 1962, and check the menace of under invoicing in exports as discussed in Chapter 1. To assess the Export Duty and Cess if payable on the export of goods. To ensure compliance with the provisions of the various regulations in connection with the exports such as Indian Customs Act 1962, FEMA 1999, FTP etc. To accord permission for export of the goods, on compliance, by endorsing the Shipping Bill with the Customs seal Let Export. This Shipping Bill can then be used by the exporter in transporting the export cargo from his country to the importers country. The contents of Shipping Bill are: While preparing the Shipping Bill the exporter should ensure that it contains the following information: Exporters Name and Address. Importers Name and Address. The exporter might have booked the space for transportation of the goods on a ship. He should give the name of this ship / vessel, the name of the master or agent of the ship / vessel, and the name of the country whose flag it flies.

Country and the Port at which the goods shall be finally discharged. Description of the goods and its quantity. Details of the packages, their numbers and markings. Total number of packages and their weight. FOB price of the goods and its real value as defined Sea Customs Act. He should also state whether the goods are foreign merchandise meant for re export or is it Indian merchandise meant for re export. Freight declaration is also required to be attached irrespective of the fact as to whether importer or exporter agrees to pay the freight. 3.3.2 Export Declaration Forms: GR, PP, SDF, SOFTEX (Refer Appendix A8, A9 and A41 (13)) The FEMA 1999 and subsequent rules have prescribed certain forms to be used by the exporters for declaring the foreign exchange that they shall bring to the country. The declaration is required to be made to RBI in the appropriate form as follows: GR Form: SDF Form: PP Form: is used for declaring exports otherwise than by post, including export of software in physical form i.e. magnetic tapes, discs and paper media. Exports through Customs Offices with EDI system Exports through Post.

SOFTEX Form: Export of Software otherwise than in physical form. Exemptions: The procedure of Export Declaration Form is dispensed with in the following cases. a. Trade samples of goods and publicity material supplied free of payment. b. Personal effects of travelers, whether accompanied or unaccompanied. c. Stores required by the ship, trans-shipment cargo and the goods supplied under orders of Central Government for Defense requirements. d. Goods or software accompanied by a declaration by the exporter that they are not more than ` 25,000 in value. e. Gifts of goods not more than ` 1,00,000 in value. f. Aircrafts or its parts for overhauling or repairs abroad. g. Goods imported free of cost on re export basis. h. Goods not exceeding $ 1,000 per transaction to Myanmar under barter trade agreement. i. From Export Processing Zones, re export of: i. Imported goods found defective, for replacement by foreign suppliers ii. Goods imported from foreign suppliers on loan basis.

iii. Goods imported from foreign suppliers free of cost, found surplus after production operations. Replacement goods exported free of charge in accordance with the provisions of FTP in force, for the time being. One has to however continuously keep watch on the fresh guidelines / amendments made by RBI in this regard by means of their circulars. Purpose: Export Declaration Forms are important set of documents through which realization of export proceeds are monitored. Customs verify the value of the goods as declared in the form and allow the exports only when satisfied. Customs department sends the original of this form to RBI direct and Reserve Bank keeps a watch on the realization of the export proceeds by following up the receipt of the duplicate of the form from the Authorized Dealer. The detail procedure is as follows: Procedure for GR form: GR form is a set of two copies, in a printed format as given in the ECM volume III of RBI. These are filled up by the exporter and submitted to the Customs department along with the Shipping Bill at the port of shipment. Customs will give their special number on both the copies after admitting the corresponding Shipping Bill. Customs will certify the value of the goods declared by the exporter on both the copies of the GR form at the space earmarked and also record the assessed value. They will then return the duplicate copy of the GR form to the exporter and retain the original for onward transmission to the RBI. When the original GR form is received direct from the Customs, the RBI is informed that the export has been allowed by the Customs. This is the first report to the RBI about the permission given by the Customs for the export.

Within 21 days from the date of Shipment, exporter should lodge the duplicate copy of the GR form together with the other relevant and requisite documents with the Authorised Dealer (AD) named in the GR form. The documents tendered by the exporter to the Authorised Dealer may be purchased, negotiated or taken for collection by the AD. In any case the details of the documents handled should be sent to RBI on a fortnightly basis in the ENC Statement. This ENC Statement is sent under the cover of R returns, which every AD has to send to RBI every fortnight, giving the details of the GR form. This is the second report to the RBI about the export made by the exporter. The duplicate copy of the GR form should be retained by the AD till full export proceeds have been realised by the AD. Once the full value of the export is realised by the AD, AD should certify such receipt on the GR form at the appropriate place and send this details of realization to the RBI again under the cover of R return. This is the third report to RBI about the realization of the value of the exports. Thus RBI gets first stimulus of export allowed by the customs, from the customs by means of GR form and the details of the value of the export goods as certified by the customs and the amount in foreign exchange to be received by the exporter.

RBI gets the second stimulus from the AD mentioned in the GR form, when such AD receives the export bill from the exporter and the AD sends the ENC statement to RBI. RBI now comes to know that the export allowed by the Customs has indeed taken place. RBI gets the intimation of realization of the export proceeds on receipt of the certified GR form from the AD mentioned in the GR form. This is the third and final stimulus to RBI. There is specified time frame within which RBI expects the entire export transaction to complete, from the time Customs permit the export and the AD receive the export realization. In case of any delay or breach in the procedure RBI takes up the matter with the concerned AD. In case the delay or breach is of serious nature then the RBI takes up the matter with AD as well as the exporter. The procedure for GR form is also applicable mutatis mutandis to other export declaration forms viz. PP, SDF and SOFTEX. This is how RBI monitors the export realization by means of the Export Declaration Forms. Procedure for SDF: SDF stands for Statutory Declaration Form. GR form has been replaced by SDF in case of clearance of export goods through customs offices which have introduced EDI (Electronic Data Interface) system of processing Shipping Bills etc. SDF form in respect of such Shipping Bills should be submitted to Customs in duplicate. After verifying and authenticating the SDF form, Customs will hand over to the exporter one copy of the SDF form along with the Shipping Bill marked Exchange Control Copy. The exporter and the AD should deal with the SDF form in the same manner as is followed in case of GR form. Procedure for PP form: Postal Transportation is regulated under the Universal Postal Union Parcel Agreement. Post Parcels for shipment of export goods are sent through Foreign Post Offices who act as department of Customs for the postal transactions. They allow the exports by affixing a stamp of Customs Pass on the Customs Declaration Form, i.e. (CDF) PP Form where the exporter has to declare the details of the goods its value, size and the manner of addressing. PP form is required to be presented by the exporter to the AD for counter signature even before the exporter approaches the Foreign Post Office for transporting the export goods through post. The AD ensures that post parcel is addressed to their branch or correspondent bank in the country of the importer. This post parcel is to be delivered to the consignee against payment or acceptance of the relative bill. However the post parcel may be addressed direct to the consignee if the full value has already been received or irrevocable letter of credit for full value of the export goods has already been established. The manner of disposal of PP form is same as that of the GR form. The original of the PP form, `countersigned by the AD will be returned by the bank to the exporter who will submit it to the designated Foreign Post Office along with the postal packet. The Foreign Post Office will scrutinize the countersignature of the AD and permit the export on CDF. There is no Shipping Bill

in this case. CDF serves the purpose of Shipping Bill. Foreign Post Office shall send the original PP form to RBI. The duplicate of the PP form shall be retained by the AD. AD will send this duplicate PP form after the export proceeds are realised, certifying such realization on the duplicate PP form under the cover of related R return. Procedure for SOFTEX form: A. Export of software in physical form i.e. magnetic tapes, CDs or DVDs and paper media should be declared on GR / PP forms as is appropriate. The procedure prescribed in this regard should be followed B. Export of software in non physical form, i.e. direct data transmission through dedicated earth stations / satellite links should be declared on SOFTEX form. C. In respect of long duration contracts involving series of transmission, the exporters should bill their clients periodically, i.e. once in a month or reaching the `milestone as provided in the contract. The last invoice should be raised not later than 15 days from the date of completion of the contract. A combined SOFTEX form for all invoices raised on a particular overseas client in a month may be submitted. D. In respect of contracts involving only one shot operation, the invoice should be raised within 15 days from the date of transmission. E. SOFTEX form comprises three copies marked Original, Duplicate and Triplicate, all of which carry identical printed number. All copies should be completed and along with relevant documents submitted for valuation to the concerned officials of Government of India at STPI / EPZ not later than 30 days from the date of invoice or the date of last invoice raised in a month, as the case may be. F. These Government officials act as the Customs for the purpose of evaluating the value of software exported and certify so on the SOFTEX form. G. After verifying all the copies of SOFTEX form, the official will directly forward the original to the RBI. The certified duplicate SOFTEX form will be returned to the exporter together with all supporting documents, and the third copy will be retained by the designated official for records. H. The duplicate of the SOFTEX form along with the supporting documents should be submitted by the exporter to the designated branch of the AD along with the bill drawn on the overseas importer. I. On realization of the export proceeds, the duplicate copy of the SOFTEX form should be sent by the AD duly certifying the receipt of the export proceeds to the RBI, under the cover of R return. J. The full value of each of the export of the software, whether made in the physical form or non physical form should be realised on the due date for payment or within six months of export, whichever is earlier.

Essential Contents of Export Declaration Forms: Original and Duplicate: All the Export Declaration Forms are prepared in duplicate bearing the same identification number, except for the SOFTEX form which is prepared in triplicate. The third copy of the SOFTEX form is retained by the STPI, who is an export allowing authority, as office copy for the record purpose. Such third copy is neither available nor retained by the export allowing authorities in case of other declaration forms viz. GR, SDF, and PP. Export Allowing Authorities: The export allowing authorities in respect of various modes of transportation are as follows: o For Airways, Water ways mode of transportation of the export cargo: Customs. o For Railways mode of transportation of the export cargo: Rail Customs. o For Roadways mode of transportation of the export cargo: Land Customs. o For Postal mode of transportation of the export cargo: Designated Foreign Post Offices. o For Data Transfer through Dedicated Earth Stations / Satellite Links: STPI. Basic Details: The exporter fills up all the copies of the Export Declaration Forms giving the basic details of the export cargo, its value, his name and address, importers name and address, the details of mode export cargo shall be shipped from the destination in the exporters country to the destination in the importers country etc. Customs Assessment: The Export allowing Authorities assess the value of the exported goods and certify so on all the copies of the Export Declaration Form. Exporters Declarations: Exporter makes the declaration on the Export Declaration Form to the following effects: o The exporter shall realise the full value of the export. o That he will surrender the foreign exchange so received to the Authorised Dealer named in the Export Declaration Form. o That the receipt of Foreign Exchange shall be on the due date or within a period of six months whichever is earlier. o That his name is not mentioned in the caution list of exporters published by the RBI. Authorised Dealers Certificate: On receipt of the Foreign Exchange the authorised dealers shall certify on the duplicates of the export declaration forms the receipt and the mode of this receipt of such Foreign Exchange.

3.3.3 ARE 1 (Application for Remission of Excise) (Refer Appendic A10)


Excise Duty is levied by the Government of India on all excisable items as specified under the Central Excise Act. It is collected at source i.e. at the time of manufacturing stage of the goods. The manufactured products as soon as they are ready for dispatch from the factory attract the excise duty levy. Only on payment of this excise duty levy can the goods be removed from the factory. As we intend to export the goods and not the duties, export items are exempted from the imposition of the excise duty. A simple procedure is adopted for this purpose. Excisable goods are exported either under the claim of rebate of excise duty paid or under a bond without payment of excise duty. For the purpose of claiming rebate, when excise duty is paid, exporter is required to submit to the superintendent of Central Excise of the locality the form called as ARE 1. CopyCopy
Original

ColourC olour
White

Duplicate

B uff

Triplicate

Pink

PurposePurpose Given to the exporter for submission at the port to the CustomsAuthority. Exportergetssuitable endorsement from Customs on this form. The form is then submitted again to the excisedepartmentfor refund of the excise duty. Given to the exporter for submission at the port to the CustomsAuthority. Exportergetssuitable endorsement from Customs on this form. The form is then submitted again to the excisedepartmentfor refund of the excise duty. Sent by the export goods inspecting officer of the Central Excise Department to the Maritime Collector of Central Excise in charge of the port specified in the ARE 1 form. Retained by the Central Excise Department for their records. Given to the Exporter as his copy for his records.

Quadruplicate

Green

Quintuplicate

B lue

This form is required to be filled up by the exporter for claiming the excise duty paid on the export of the goods. It is required to be filled up along with the Shipping Bill and the Export Declaration Forms for export clearance. ARE 1 is prepared in five copies. This form was earlier known as AR 4. ARE 1 shall bear the serial number beginning from the first day of financial year so as to facilitate the duty drawback claims and to ensure the continuity. The exporter is required to give certain declaration as stipulated under the Central Excise Manual. The above table indicates the colour scheme used in the Central Excise for clearing Exports. As opposed to this procedure mentioned above, the manufactured products can also be cleared for exports from the factory under the excise bond without payment of any excise duty whatsoever. For this purpose the exporter has to execute a bond with the Excise Authorities. The bond is usually backed by the Bank Guarantee. ARE 2 is an application the exporter has to make to the Central Excise Department requesting them to inspect the export goods, details of which are given in the ARE 2. On receipt of the ARE 2 the Excise Department arranges the inspection and the certification of ARE 1 as stated above. Contents of ARE 1 form: ARE 1 form contains the following details: Particulars of the manufacturer of the export goods Particulars of the manufacturer and his excise registration number Address of the excise authorities from whom the excise duty is claimed Certification by Central Excise that the excise duty has been paid, that the goods have been physically verified and sealed, that the requisite records have been verified and that the three duly sealed samples from the export cargo have been handed over to the exporter. Certification by Customs that the export cargo has been identified and exported under their supervision.

3.3.4 Dock Challan:


Port Trusts in India have prescribed their own document for payment of port charges and handling shipment through their respective ports. This document is known differently at different ports such as in Kolkata it is called as Dock Challan, in Chennai and in Cochin it is called as Export Application and in Mumbai it is called as Port Trust Copy of Shipping Bill. The details of receipts, shipment of cargo and payment of port charges etc. can be recorded on the back side of this document.

3.3.5 Receipt for Payment of Port Charges:


The exporter pays some charges for use of Port facilities to the port authorities so that they can maintain the port in proper way. The port authorities use this money for port development and to provide better facilities to the exporter and importer. Usually the freight forwarder pays such charges on behalf of the exporter and claims this amount from him as his fees.

3.3.6 Vehicle Chit: The Customs officials give vehicle chit when the goods enter customs designated areas, so that the duty can be assessed and the Let export seal can be affixed from the Customs for loading the cargo on to the ship. 3.3.7 Freight Payment Certificate: This is the certificate which shows that the freight for the goods meant for exports has been paid. This document shows that the freight for the consignment in the CIF and CFR contracts is paid by the exporter to the shipping company. In case of FOB contract, the exporter is not required to pay the freight. In such contract the freight is paid by the importer.

3.3.8 Insurance Premium Payment Certificate:


The Shipping Company demands an Iinsurance Payment Certificate for insurance cover of the export goods. The carriage of goods through ship is fraught with various risks and the Shipping Company does not want to be held responsible for the loss or damage of the cargo. Shipping Company therefore insists for the Negotiable Insurance Cover to be taken by the exporter. Such cover is taken by the exporter in case the contract is on CIF basis. In case the contract is on FOB or CFR basis then the insurance of the export cargo is covered by the importer from their end.

3.4 Commercial Documents:


3.4.1 Invoice:
Generally in export documentation we speak of the four kinds of invoices namely the Pro forma invoice, Commercial invoice, Customs invoice and Consular invoice. We shall distinguish between them and shall also find the purpose for which they are prepared.

3.4.1.2 Pro forma Invoice:


The Proforma invoice is in the nature of the Quotation. It is not a demand for payment from the seller to the buyer. It serves the purpose of providing the details of the export goods to the importer and the terms and conditions on which such goods shall be exported. The Proforma invoice forms the basis for evolution of the export contract eventually. Sometimes the Proforma invoice is required by the importer in order for him to obtain import license from the authorities of his country before the importer can import the goods.

3.3.1.2 Commercial Invoice:


The Commercial Invoice specifies the description of the goods, and the terms and conditions on which the export transaction takes place. It is sometimes referred to as the bill for the export of the goods from the exporter to the importer. The governments worldwide use Commercial invoices to control / restrict and regulate the imports and exports. The Customs department uses it for assessing the actual value of the goods and the export duty payable on it if any. Chambers of Commerce use Commercial Invoices while issuing the Certificate of Origin, Shipping Companies use them to ascertain the freight, Insurance Company use them for assessing the risk and determining the premium payable for insuring the export goods and so on.

Contents of the Commercial invoice: The Commercial invoice, prepared by the exporter and addressed to the importer contains the following details: 1. 2. 3. 4. 5. 6. 7. 8. 9. Name and Address of the Exporter along with IEC number. Name and Address of the importer along with the import license if any. Name of the consignee. ITC (HS) Classification of the export goods. Consular, customs declaration if applicable. Terms of transportation such as mode of transportation and the Incoterms namely FOB, CFR or CIF. Date of shipment of the export cargo, port of loading and port of unloading. Transport document details such as the name of the transport company, their number and date. Details of packing, number of packages and packing marks as per the importers requirement. Description of export goods such as Quantity , Quality, Specification, Measurement etc.

10. Number of units sold, per unit price, and total price of the export goods. 11. Order acceptance , Export Contract number and date. 12. Country of Origin of the export goods. 13. Terms of Payment. 14. Jurisdiction, arbitration in case of dispute. 15. Signature of the exporter and the date. 16. Any other terms.

3.4.1.3 Customs Invoice (Refer appendix A14, A15 and A41 (6))
In certain countries of the world, commercial invoice is demanded in a specified form of that (importers) country. This specified invoice is referred to as Customs Invoice. USA, Canada, Australia require such Customs Invoice. This invoice is required to be certified as correct by the exporter.

3.4.1.4 Consular Invoice:


In case of certain other countries the importing country insists on legalization/visa-ed commercial invoice. Such invoice is known as Consular Invoice. Such Consular Invoice is required by these countries in order to keep track of imports the country. If at any point of time the country realizes that the imports are increasing and it does not have the requisite foreign exchange to pay

for such imports, it can control or restrict certain items of import by suitably amending its import trade policy. Such arrangement of obtaining legalized / visa-ed or Consular Invoice can also be used for providing preferential tariffs to friendly countries. This can also be similarly used for discouraging the imports from the hostile countries. This is considered as a non tariff barrier. The countries that mandate the use of Consular Invoice into their countries are generally the land locked countries and island nations. They would like to monitor / control / regulate the imports into their countries through their porous borders by keeping a close watch on the import statistics it generates expeditiously. This Consular Invoice requires swearing in, by the exporter, as being correct in all particulars, before the consul of the importing country in exporters country. A few countries which need Consular Invoice are: Countries like Kenya, Uganda, Tanzania, Mauritius, New Zealand, Myanmar, Iraq, Australia, Fiji, Cyprus, Nigeria, Ghana, Guinea, Zanzibar etc. In short the Consular Invoice is one of the most important documents prepared, dated and signed by the exporter, containing all the details that are required by the importer and the regulatory authorities of the exporters as well as importers countries, so that the trade is smoothly facilitated and the customs formalities are expeditiously completed.

3.4.2 Packing List or Cargo Manifest (Refer Appendix A16, A41 (7))
Packing List or Cargo Manifest provides all the information with respect to all the items in the box, crate, palate and container including their type dimensions and weight so as to help Customs to know what is inside the box, carton or packet, without opening the same. The Customs officials use the Packing List to check what is being imported and exported. The importer uses the Packing List to know that the goods are of specified nature as requested by him. In certain countries Packing Listt is not a mandatory document required by the Customs authority. However it supplements the Commercial Invoice. It helps the customs authorities in cross checking and comparing the import cargo from various countries. Export Packing List is more detailed and more informative than the domestic packing list as it summarises the material in each carton / packet / box / crate / drum etc.

3.4.3 Shipping Instructions (to the freight forwarder):


Of late the role of freight forwarder has become very important in the process of export. The freight forwarders undertake jobs related to the booking of space in the ship for the export cargo and ensuring their safe reaching the importers destination. In the process they have to take care of transportation formalities, custom clearance formalities, marine insurance formalities etc. As such the proper shipping instructions must be passed on to him by the exporter so that the importer receives the goods without any problem and the exporter receives hassle free payment for the exported goods.

3.4.4 Intimation of Inspection (to the Export inspection Agency):


According to the Export Quality Control and Inspection Act 1963, an exporter is required to get the export goods inspected, before they are exported, from the Export Inspection Agency or

their approved agents. Commodities in which the safety or health of the consumer is at stake will not be permitted for exports exporter therefore has to get the pre shipment quality inspection done from the inspection agencies before they are exported. Exporter therefore makes an application in duplicate in the prescribed form to the Export Inspection Agency requesting them to carry out the inspection of the export cargo. The exporter is required to attach the following documents along with such application. Copy of the Commercial Invoice. Payment of fees for the inspection of the export cargo. Copy of the Letter of Credit. Description of the packing specification as are required by the importer. Copy of the Export Contract. The Export Inspection Agency shall issue a Certificate of Inspection within about a week, after it is satisfied about the quality of the goods as per the standard norms and compliance with the importers specification.

3.4.5 Certificate of inspection:


Export Inspection Agency on being satisfied about the compliance of the export cargo with the standard norms for quality for such goods and also compliance with the requirement of the importers specifications issues certificate of inspection as mentioned above. This Certificate of Inspection is issued in prescribed pro forma in five copies. These five copies are disposed off as follows: 1st copy is submitted to the Customs Authorities along with the Shipping Bill and the Export Declaration Forms at the time of getting clearance from the Customs for the exports. 2nd copy is sent to the importer while sending the shipping advice along with various export documents. 3rd copy is retained by the exporter for his records. 4th copy is sent to the Export Inspection Council at its Head Quarters at New Delhi. 5th copy is retained by the concerned Export Inspection Agency for their records.

3.4.6 Insurance Declaration:


The exporters can take an open policy to cover their regular exports covering the regular risks. The open cover is not a policy but is a contract for a particular time, usually 12 months, and for an agreed ceiling amount. The Insurance Company agrees to grant insurance cover not exceeding the specified amount per vessel with a view to avoid accumulation of liability in any one vessel or location. It is cargo policy expressed in general terms and effected for an amount to cover the number of shipments. It covers all shipment of the exporter until the ceiling amount of the sum insured as agreed before hand is exhausted. The names of the steamers may not be available when

the open policy is issued. Therefore the insurance company stipulates that the shipment should be made by First Class Steamer (not more than 20 years old). When the export goods are ready for dispatch, the exporter should apply to the Insurance Company for availing insurance under the open policy contract. This application is made in the prescribed `Declaration Form available with the Insurance Company. In this prescribed application form the Insurance Declaration is made by the exporter by giving the details about the goods, numbers and the kinds of packages, its value, transportation details from its present place till the place of its final destination, names and addresses of the importer and exporter and the details of the risks to be covered.

3.4.7 Certificate of Insurance:


Transportation of the export cargo from exporters place to the importers place via ocean is full of risks. These risks could be on account of loss or damage of the cargo or it could be risk of pilferage or piracy. The ocean carriers would not like to assume such risks. Ocean carriers consider it as an act of negligence if the exporter exports the cargo without insurance cover. Hence it is mandatory for an exporter to arrange for marine insurance cover for his export cargo. Exporter therefore obtains a specific insurance cover indicating the amount of the insurance cover and the coverage of various risks under various institute cargo clauses. 3.4.8 Shipping Order: Shipping Order is issued by the conference shipping lines, intimating the exporter about the reservation of the space for shipment of the export cargo. Shipping order specifies particular vessel along with shipping date and the port of departure. 3.4.9 Mates Receipt: The Mate is an officer of a merchant ship in charge of taking custody of the export goods for the purpose of transporting them to the importers country. Therefore Mates Receipt is the declaration / intimation / receipt issued by such officer evidencing that the goods have been received on the board on his vessel for shipment to the importers country / port of destination. Mates Receipt is the document signed by the Mate of the vessel whereby he acknowledges receipt of the cargo by the vessel. The person who is holding the Mates Receipt is entitled to receive the Bill of Lading from the Shipping Company. The Mates Receipt is required to be exchanged with the Bill of Lading. A Claused or Dirty Mates Receiptt is issued in case theMate of the ship has received the export cargo, that are not properly packed or insurance cover is not taken. Such Dirty or Claused Mates Receipt results in shipping company issuing a Dirty or Claused Bill of Lading subsequently. The Mates Receipt is not a document of title to goods. The transfer of Mates Receipt does not pass the title in the goods. Its possession is also not equivalent to the possession of the goods. Its statement does not bind the Shipping Company. It is however, prima facie evidence of the quantity and the condition of the goods received. The possessor of the Mates Receipt is the person entitled to have the Bill of Lading issued to him.

3.4.10 Transport Document:


3.4.10.1 Bill of Lading:
In international trade, transporting goods via sea / ocean i.e. waterways as mode of transport occupies a place of immense importance. The document evidencing the transport of goods by sea/ ocean is called a Bill of Lading. Bill of Lading is the document issued by the shipping company or its agent, acknowledging the receipt of goods for carriage by sea, which are deliverable to the consignee or to his assignee in the same condition as they were received.

Nature of the Bill of Lading:


The Bill of Lading has been defined as a document which evidences a contract of carriage by sea and the taking over of the goods by the carrier, by which the carrier undertakes to deliver the goods against surrender of the documents. The Bill of Lading renders the following three functions: 1. It is an evidence of contract of carriage. 2. It is a receipt of the goods received by the carrier. 3. It is a document of title to goods. 1. It is an evidence of contract of carriage:

The contract of carriage by sea is known as the contract of affreightment. The contract of affreightment is concluded well before the B/L is issued. This is because the practice is to book the shipping space in advance. The B/L thus serves as an evidence of the terms and conditions under which the contract is concluded. 2. It is a receipt of the goods received by the carrier:

The primary function of the Bill of Lading (B/L) is to serve as a receipt by the Shipping Company acknowledging that the goods have been received for transportation. The Shipping Company, on receipt of the goods and on demand by the shipper (i.e. exporter), issues to him a Bill of Lading showing among other things the following: a) The leading marks necessary for the identification of the goods. b) Number of packages or pieces or the quantity or the weight as the case may be. c) The apparent condition of the goods. Such B/L is considered as the prima facie evidence of the receipt of the goods as therein described. The Indian B/L act provides that every B/L shall be conclusive evidence of such shipment notwithstanding that such goods or some part thereof may not have been so shipped, unless the holder of the B/L shall have had actual notice at the time of receiving the same that the goods had not in fact been taken on board.

3.

It is a document of title to goods:

A B/L is a document of title to goods and is recognized as such by the Indian Sale of Goods Act. Because of such recognition the possession of the B/L confers the right to the goods covered by it. Therefore the person holding the B/L can claim the delivery of the goods to him. During transit the holder can deliver the goods by merely transferring the B/L. Bill of Lading is transferrable by endorsement and delivery. The transferee, who has become the holder of B/L for value and in good faith, has the right to sue the parties to the B/L in his own name. Still the B/L cannot be called as Negotiable instrument, for the reason that in case of Negotiable instruments the transferee gets better title than the transferor, but in B/L that is not the case. Section 1 of Indian Bills of Lading Act provides that: Every consignee of the goods named in the Bill of Lading and every endorsee of the Bill of Lading whom the property mentioned in the Bill of Lading shall pass, upon or by reason of such consignment or endorsement shall have transferred to and vested in him all rights of suit, and be subject to the same liabilities in respect of such goods as if the contract contained in the Bill of Lading had been made with himself. Because of this the B/L is often called as Quasi Negotiable Instrument.

Types of Bills of Lading:


There are various types of Bills of Lading: 1. Ocean Bill of Lading. 2. Straight (non-negotiable) or Order Bill of Lading (negotiable document). 3. Through or Port to Port Bill of Lading. 4. House Bill of Lading (Groupage Bill of Lading). 5. Liner Bill of Lading. 6. Charter Party Bill of Lading. 7. Non-negotiable Sea Waybills. 8. Short form Bill of Lading. 9. Third party Bill of Lading. 10.Freight paid and Freight collect Bill of Lading. 11.On board and Received for shipment Bill of Lading 12.Shipped on Deck Bill of Lading 13.Clean and Claused Bill of Lading 14.Trans-shipment Bill of Lading 1. Ocean Bill of Lading (Refer Appendix A27 for format) Ocean going vessels are large vessels as compared to the vessels used for inland transport. Ocean going vessels are steady and safe. Such vessels are seaworthy ships and their services should be availed by the shipper wherever possible.

2.

Straight (non-negotiable) or Order Bill of Lading (negotiable document): A Bill of Lading which provides the delivery of the goods only to a person named in the B/L as the consignee is called as Straight Bill of Lading. A Straight B / L is not negotiable and is generally taken in the name of the importer. It cannot be endorsed or transferred in the name of any other person. Presentation of this type of B / L to the shipping company may not be necessary. The title to goods passes on to the named consignee on issuance of the B / L. The Shipping Company may therefore part with the goods to the named consignee even without the presentation of the B / L. On the other hand a Bill of Lading which provides the delivery of the goods to a person named in the B/L as consignee or his order is called as Order Bill of Lading. This B/L is negotiable and therefore it can be endorsed and transferred in the name of some other person who becomes entitled to receive the goods mentioned therein. Order Bill of Lading is generally taken in the name of the exporter. The shipping company requires the presentation of this B/L as it has to deliver the goods to the last endorsee of the B/L.

3.

Through or Port to Port Bill of Lading: In case the goods are required to be carried by two or more ships or partly by ship and partly by rail or road so as to reach the final destination, it becomes difficult, complicated and expensive for the exporter to arrange for the onward transportation. Consider the case of Indian exporter exporting the goods to an importer in Chad, North African country. The ship will transport the goods up to Cairo port (Egyptian Port) and then the goods have to be transported to Chad via Libya or Sudan as Chad is a landlocked country. The exporter finds such transportation difficult. But there are shipping companies which undertake the responsibility of all shipping companies as well as the responsibility of all other transport companies by whichever mode and issue a B/L to the exporter. Such B/L is called as `Through B/L or Port to Port B/L. Such practices are on increase as the spread of Indian Exporter is geographically increasing and they need to reach the far flung places in the world. This has eventually give(Refer A30)

4.

House Bill of Lading (Groupage Bill of Lading): Freight Forwarders receive information from various exporters regarding transportation of goods from one place to another. They are therefore in a position to club the goods having similar nature and same destination and use this information for the mutual benefit of the shipping company as well as the exporters. They usually collect the cargo from the exporters, consolidate the shipments and issue their own B/L in favour of the exporter. Such B/L is called as House Bill of Lading. As this is beneficial to the exporter such practices are on increase. The small exporters find that the charges on account of transportation are high and can resort to such House Bill of Lading. Hiring the entire container is also not economical for the small exporter. Therefore the freight forwarders can hire a container and ship the goods of two or more exporters and issue them House Bills of Lading. Thus the small exporters as well as the container corporation both stand to benefit.

5.

Liner Bill of Lading (Refer Appendix A29) A liner vessel is a ship operating on a fixed route between two ports or series of ports. It operates a regular scheduled service and the freight charges can be quoted from the fixed schedule. A conference is an arrangement between the liners operating on the same route to avoid unhealthy competition among them. A Liner B/L or a Conference Liner B/L ensures regular service and is welcomed by the shippers. As against liner vessel is a tramp which is a Chartered ship prepared to carry anything anywhere, there are no regular trips. The freight charges vary and depend upon the demand and supply.

6.

Charter Party Bill of Lading: Shipping company makes a contract with the shipper to make its entire ship available to the shipper for the particular voyage or for a particular period. The shipper who has chartered the ship may enter into contracts with other exporter / shippers to carry their goods in the ship and may issue a Bill of Lading in their favour for such an arrangement. The B/L thus issued is subject to the charter contract. This is also called as Tramp Shipping.

7.

Non-negotiable Sea Waybills: In order to simplify the documentary process, the Bills of Lading are replaced by the non negotiable documents, which are similar to the documents used in case of other (other than sea) mode of transport. These documents are called as `Sea Way Bill or `Liner Way Bill or `Freight Receipts. The main advantage of the non negotiable way bill is that the presentation of the original document of the title to goods is not necessary. The named consignee can get the delivery of the goods even without the production of the transport bill or on Xerox or Fax copy of the transport bill. This is beneficial to the importer as he does not have to wait to take the delivery of the goods till the receipt of the original documents. Shipping Company can also expeditiously deliver the goods to the named consignee.

8.

Short form Bill of Lading: Bill of Lading is a contract of carriage of goods between the two parties namely the Shipping Company and the Exporter (Shipper). It contains full terms and conditions usually in fine print and on the backside of the Bill of Lading. A B/L, which contains some or all terms and conditions of the carriage by reference to a source or document other than the Bill of Lading itself is called a `Short Form Bill of Lading or `Blank Back Bill of Lading.

9.

Third party Bill of Lading: It is a Bill of Lading where the Consignor is a party other than the seller or exporter of the goods. Rest of the things remains the same.

10.

Freight paid and Freight collect Bill of Lading: If the export contract between the buyer (importer) and the seller (exporter) requires that the buyer shall pay the freight, then the seller while shipping the goods need not pay the

freight. This freight shall be collected from the buyer of the goods at the time of delivery of the goods to him. Such contracts are called as contract on FOB terms. The Bill of Lading in this case is called as `Freight Collect Bill of Lading or `Freight to Pay Bill of Lading. On the other hand the export contract between the buyer and seller requires that the freight charges to be paid by the seller, then the exporter has to pay the freight while shipping the goods and this fact is noted on the Bill of Lading. Such contracts are called as contract on CFR or CIF terms. The Bill of Lading issued in this case is called as `Freight Paid Bill of Lading. 11. On Board and Received for Shipment Bill of Lading: The `On Board Bill of Lading is the one which states that the export goods are actually loaded on to the ship. It indicates that the ship is ready to sail shortly. At times it may so happen that the goods are delivered to the Shipping Company but the Shipping Company is not able to load the goods on to the ship for the reason that the space for transportation of the goods is not available or that the vessel which carries the goods has not arrived in the port. In such case the Shipping Company issues a Bill of Lading with remark goods `Received for Shipment. Such Bill of Lading is called as `Received for Shipment Bill of Lading. Once the goods are loaded on the ship, the Shipping Company affixes the stamp On Board on the `Received for Shipment Bill of Lading. And thus the `Received for Shipment Bill of Lading is converted into `On Board Bill of Lading. 12. Shipped on Deck Bill of Lading: In this case the Shipping Company informs the shipper that the goods are stored on the deck of the ship. This means that they are prone to the risk of damage / loss. Unless the nature of the goods requires storing on the deck, such as coal or iron ore, such B/L are fraught with risk. 13. Clean and Claused Bill of Lading Bill of Lading, which contains a clause or notation which expressly mentions the defective condition of the goods and / or packaging of the goods, is called as `Claused or `Dirty or `Foul Bill of Lading. Therefore the `Clean Bill of Lading is the one which either states that the goods are received in good condition or one which does not bear any remark mentioning the defective condition of the goods or its packing. 14. Trans-shipment Bill of Lading: This type of Bill of Lading is issued by the Shipping Companies when there is no direct service between the two ports, i.e. the port of loading in the exporters country and the port of unloading in the importers country, but where the shipping company is ready to transport the goods through an intermediary port. In such a case the goods are unloaded from the first ship on the intermediary port and then again reloaded on the other ship, which takes the goods to its final destination.

Contents of the Bill of Lading: The following are the important contents of the Bill of Lading: Name and Address of the Shipping Company. Date of the Bill of Lading. Terms of Payment of Freight, such as: o Freight to Pay or Freight Collect o Freight Paid. `On Board or `Received for Shipment Bill of Lading. `Clean, `Dirty or `Claused Bill of Lading. Description of goods. Value of the goods. Port of Loading and Port of Discharge. Number of Original Copies issued. All the originals together form a `Full Set of the Bill of Lading. And each of the original copy issued is a negotiable copy and the delivery of the goods can be taken on its production. Name of the vessel carrying the goods. (Refer Appendix A28 and A41(8) for sample B/L)

3.4.10.2 Airway Bill (Refer Appendix A31)


In case the goods are required to be expeditiously reached to the importer, the airway is used as a mode of transportation. This may happen when the life saving medicines or costly and sophisticated items is required to be transported. In case of perishable items, such as ornamental flowers, fruits or vegetables also airway is used. For transporting costly gems and jewellery airway is used. The Air Way Bill (AWB) is prepared in three copies, all of which are originals. The consignor also furnishes such information and attaches such documents to the AWB as are necessary to meet the formalities of Customs, Octroi or Police before the goods can be delivered to the consignee. The three original AWB are dealt with as follows: The first original is intended for the carrier and is signed by the carrier. The second original is intended for the consignee and is signed by both carrier and the consignor. It is sent along with the cargo. The third original is a receipt for the consignor. It is signed by the carrier. The AWB serves the following purposes: i. It is a prima facie evidence of the conclusion of the contract, of the receipt of the cargo and the condition of the cargo.

ii. It serves as an instruction sheet giving all the instructions needed for moving the goods

and handling them at all stages of their journey from departure to destination. iii. It is customers declaration and bill for the freight. iv. If the amount of and the extent of insurance is included in it, it becomes a certificate of insurance. It may however be noted that the, AWB is not a negotiable instrument. AWB is not a document to title to goods. The carrier should give the notice of arrival of cargo to the consignee Consignee is entitled to the delivery of goods. In FOB contracts the freight charges are paid by the consignee. In CIF and CFR contract the freight charges are paid by the consignor.

House Air Way Bill:


International Air Transport Association (IATA) has approved certain agents and given them an IATA code number. These IATA agents consolidate the cargo of individual exporters, after completing the necessary customs formalities such as Shipping Bill and the Export Declaration Forms. After consolidation of the cargo IATA agent prepares a Master Air Way Bill in which the description of the goods appear as `consolidated cargo as per list attached. The list attached contains in respect of each consignment the name of the exporter, the description of the goods, Shipping Bill number and House Air Way Bill number. This House Air Way Bill is the bill issued by the IATA approved agent to each exporter in respect of their export cargo. The House Air Way Bill contains all the particulars of the consignment of export goods of the individual exporter as is given in the normal AWB. The cargos are carried out on the basis of the Master Air Way Bill.

3.4.10.3 Combined Transport Document (or Multimodal Transport Document) (Refer


Appendix A30) An era of containerized transportation commenced with the Government of India establishing Inland Container Depot at Bangalore. The FEDAI in consultation with the Government of India and RBI brought out two brochures (Brochure no.81 and 82) titled FEDAI rules for Combined Transport Documents. Both the brochures are based on and incorporate to a great extent the Uniform rules of Combined Transport Documents of International Chambers of Commerce. The Combined Transport is known as Multimodal Transport. Now a days export cargo is transported by using 20 container or 40 container. These containers are the big huge and strong boxes which hold the export cargo and reach it safely to the destination. These boxes are of following two sizes: 1) 20*8*8.5 and 2) 40*8*8.5. The Government of India has passed the Multimodal Transportation of Goods Act, 1993. This act provides for the regulation of the multimodal transportation of the goods, from any place in India to a place outside India on the Basis of Multimodal Transport Contract.

Multimodal Transportation means carriage of goods by two or more modes of transport from the place of acceptance of goods in India to a place of delivery of goods outside India. A Multimodal Transport Document may be Negotiable or Non Negotiable. A Negotiable Multimodal Transport Document means one which is: i. ii. iii. Made out to order or to bearer, or Made out to order and is transferrable by endorsement, or Made out to bearer and is transferrable without endorsement.

A Non Negotiable Multimodal Transport Document means one which indicates one named consignee.

3.4.10.4

Post Parcel Receipt:

This is the receipt issued by the Post Office, evidencing that the Postal Authorities have received the goods for transportation. Small samples, gems and jewellery, medicines etc. can be sent by post. The Post Office issues a receipt, which is stamped, authenticated and dated. The date of the receipt is considered as the date of transportation. If the Post parcel Receipt is on VP basis (i.e. Value Paid) then the exporter pays the freight charges. However if it is on COD (Cash On Delivery) basis then the importer pays the freight charges.

3.4.10.5

Rail or Road ways Receipt:

If the exports are to such a country where they can be sent by Roadways or by Railways, these modes of transport can be used. These modes of transportation can be safe and cheaper. However exports to countries which are connected by Road or Rail are far less. Nevertheless when such a mode of transport is used Railway or Roadways issue a Railway Receipt (RR) and the Roadways issue Lorry Receipt (LR). Both these indicate that the goods have been received for transportation from the place of the exporter to the place of the importer. The date of issuance is deemed as the date of shipment. If the contract is on FOR basis (i.e. Free on Railway) the importer or the consignee pays the freight. If the contract is on CFR or CIF basis then the exporter pays the freight. 3.4.11 Certificate of Origin: Purpose: Certificate of Origin is required by the importer when he imports the goods. This Certificate of Origin is used by importers country for the following purposes: For classifying the imported goods (Country wise, product wise) by the customs authority in the importing country. For the purpose of monitoring import quota (country wise, product wise). For maintaining the statistical data on imports which can be further used by the importing country for formulating their international trade policy. In case of food items, it can be used for ensuring adherence to the health regulations in the importing country.

For determining the levy of the import duty on the goods imported into the country. For granting certain other preferential treatment in respect of speedy clearance from the customs in the importing country, to the goods imported from certain countries.

Issuing Authorities:
This certificate is issued by the entities specifically authorised by the DGFT and the Ministry of Commerce and Industry, Government of India. Such entities are Recognised Chamber of Commerce, Export Promotion Councils, Commodity Boards, Federation of Indian Exporters Organisation, Export Inspection Council of India or the Government Departments. They charge a small amount of fees for issuing such certificate. (Refer Appendix A23, A24, A25, A26, A51). Types of Certificate of Origin: There are two types of Certificate of Origins: Preferential Certificate of Origin Non Preferential Certificate of Origin 3.4.11.1 Preferential Certificate of Origin (Refer Appendix A41 (10))

Generalized System of Preferences (GSP) Certificate:


The European Economic Community countries namely France, Germany, Luxembourg, Belgium, Netherlands, Italy, UK, Ireland, Denmark and Greece have adopted Generalised System of Preferences. Under this System, manufacturers and semi manufacturers from developing countries including India are entitled to a concessional rate of import duty in these countries. Because of reduced rate of import duty into the importing country, the price of the imported goods in these importing countries gets reduced. This helps the exporting country to compete in the international markets. The Ministry of Commerce and Industries authorised Export Inspection Council of India and its offices at Mumbai, Kolkata, Chennai and Cochin for issuing GSP certificates. Similarly the heads of the heads of the Regional Licensing Authorities of the DGFT are also authorised to issue GSP certificates. Refer Appendix A49. Other Preferential Certificates of Origin: There is a growing trend in the international market to promote the regional trade by forming a trading block that includes the countries whose trade policies are compatible and help each other in promoting international trade within the block. The countries in such block extend the preferential treatment to the other countries within the block. Such preferential treatment is extended to few other countries as well, by entering into a trading agreement with that country. And therefore there is an emergence of various Preferential Certificates of Origin, some of which are mentioned below: SAARK Preferential Trading Agreement (SAPTA) Bangkok Agreement of Global System of Trade Preferences (GSTP)

ASEAN Free Trade Area (AFTA) North American Free Trade Agreement (NAFTA) 3.4.11.2 Non Preferential Certificate of Origin (Refer Appendix A19, A20, A21 & A22)

This kind of certificate does not enjoy the benefit of preferential treatment in the importing country in the form of remission in customs duty. Nevertheless they are required to be issued as per the article ii of the international convention of simplification of customs formalities. These serve the other purposes as mentioned above.

3.4.12

Bill of Exchange:

Bill of Exchange is a negotiable instrument made by the Exporter (also known as Drawer of Bill of Exchange, Seller or Consignor of the goods), a person who is entitled to receive the value of the goods. It is addressed to the Importer or it is said to be drawn on the Importer (also known as Drawee of the Bill of Exchange, Buyer or Consignee of the goods) who has to pay the price for the goods bought by him. Importer has to make such payment to the Banker (also known as the Payee of the Bill of Exchange) or his order. Such Banker or Payee would have earlier paid the price of the goods to the exporter and by virtue of this he is entitled to receive the price of the goods from the Importer. The Bills of Exchange are of two types: Demand Bill of Exchange Usance Bill of Exchange 3.4.12.1 Demand Bill of Exchange (Refer Appendix A18 (A), A41 (5))

This is the Bill of Exchange which the Importer (Drawee) is required to pay as soon as the demand is made by the Banker (Payee). The payment is therefore required to be made on demand of the Payee, and hence it is called as Demand Bill of Exchange. 3.4.12.2 Usance Bill of Exchange (Refer Appendix A17, A18(B))

Usance Bill of Exchange on the other hand allows certain period as has already been agreed between the Importer and the Exporter. This could be considered as the credit period extended by the Exporter (Seller) to the Importer (Buyer) to arrange for the payment to be made to the Payee. This period is for example may be of 15 days, 30 days, 45 days, 60 days and so on. This period is required to be counted from the date of the Bill of Exchange or from the date of demand made by the Payee on the Drawee, which is called as the date of presentation. Granting of such period for payment is called as period of Usance. And the Bill of Exchange in which such period is granted is called as Usance Bill of Exchange. While in case of Demand Bill of Exchange the Drawee of the Bill of Exchange is required to make payment to the payee on demand, in case of the Usance Bill of Exchange the Drawee is required to make payment to the Payee only on the Due Date. This Due Date is calculated by counting the number of days of Usance Period and adding to it the Normal Transit Period and the Period of Grace. The Normal transit period depends upon the geographical distances between the exporters country and the Importers country. It also

depends upon the currency that the importer is required to pay the exporter. Normally this varies between 20 days to 35 days. If the exporter requires payment in `, then the Normal Transit Period varies between 3 days to 20 days. These Normal Transit Periods are determined by the Foreign Exchange Dealers Association of India (FEDAI). The Period of Grace is, if applicable in the importers country is always 3 days. If the period of grace is not applicable in the importers country then such period need not be added while calculating the Due Date. In countries like Australia, Canada, Hongkong, Ireland, Korea, Malaysia, Mauritius, New Zealand, Nigeria, Pakistan, Singapore, Sri Lanka, Thailand Period of Grace of 3 days is allowed. However in countries like USA, UK, Japan, France, Germany, Italy, Russia, Brazil, Argentina period of grace is not applicable.

3.4.13 Shipping Advice: Shipping advice is prepared in order to provide information to the overseas importer about the shipment of goods. This serves the intimation to the importer that the goods as per the terms and conditions of the export contract are shipped by the exporter. 3.4.14 Letter of Credit: Letter of Credit is an instrument in writing issued by the Importers Bank guaranteeing the payment of the goods exported to the exporter on submission of the documents stipulated in the Letter of Credit. With such guarantee coming from the bank of the Importer, exporter is assured of the payment and finds himself comfortable in carrying out the international trade. In fact while issuing Letter of Credit the Importer Bank substitutes the creditworthiness of the importer by its own credit. These instruments are governed by the Uniform Customs and Practices in Documentary Credits evolved by the International chambers of Commerce. We shall deal with this instrument in greater detail in the next chapter. 3.5 UN Layout Key and Standardization of Export Documents:

So far we have seen the various documents that are required to be prepared by the exporter with the help of the various government and semi government agencies. Many of these documents collect most of the information repeatedly from the exporter and from each other. Similarly the countries in the world have different formats for the documents and the particular information is seen printed at different location on the format. Because of this processing of the export documents takes longer time. Therefore the countries are now moving towards a new system of documentation where all the documents are standardized. This system is called as Aligned Documentation System. Aligned Documentation System was first introduced in Sweden in 1956, and later accepted in 1960 by the United Nations Economic Commission for Europe. At present most of the European countries, U.S.A., Australia, Hong Kong etc. have adopted the same. Under this Aligned Documentation system, the required information is created on a set of standardised forms on same size paper in such a way that items of identical information occupy the same position in each form. The different documents are aligned to one another in such a way that common items of information are in the same relative slots in each document. This enables preparation of a Master Document containing all the information common to all the documents. The required aligned documents can be easily prepared by using suitable masking and reproduction technique. This method avoids repetitive typing of same information in the aligned documents which is time

consuming and error-prone. By the above revised method, speed and accuracy are better ensured. Further, any information data, specific to a particular document can either be pre-printed or added as and when required. Masking helps to blank out such information as is not required in a particular document.The pre-shipment documents are broadly of two types viz.a) Commercial documents required for transferring the goods from exporter to the Importer (Foreign Buyer) andb) Regulatory documents prescribed by the Government Departments or bodies incorporated for enforcing various rules and regulations and relevant laws governing Export Trade, for processing the goods for export and eventual shipment of the same. These include Export Information, Export Trade Control, Customs Formalities, FEMA Regulations etc.As regards Commercial Documents, there are 16 documents in use as described above, out of which 8 are sent to the Importers (Foreign Buyers) abroad and these are known as Principal Export Documents. These are :

i. ii. iii. iv. v. vi. vii.

Commercial Invoice Packing List Bill of Lading / Combined Transport Document Certificate of Inspection / Quality Control Certificate of Insurance / Policy (in case of CIF contracts) Certificate of Origin Bill of Exchange

viii. Shipment Advice The remaining 8 documents are called as Auxiliary Documents, which have only a supportive role as these are required for preparation and procurement of the Principal Export Documents. These are : i. ii. iii. iv. v. vi. vii. Pro forma Invoice Intimation for Inspection Shipping Instruction Insurance Declaration Shipping Order Mates Receipt Application for Certificate of Origin

viii. Letter of Bank of Collection / Negotiation of Documents Out of the above 16 Commercial Documents, 14 (all except Shipping Order and Bill of Exchange) have been standardised and aligned to one another, through Master Document-1. The two remaining could not be aligned mainly due to different date elements and little common data among others.

Regulatory Documents :Generally there are 9 Regulatory Documents in use for the preshipment stage of an export transaction.They are prescribed by i. ii. iii. iv. tv. vi. vii. viii. ix. Central Excise Invoice - Central Excise Authorities ARE 1 - Central Excise Authorities Shipping Bill/Bill of Export - Customs Authorities Export Application - Port Trust Receipt for payment of Ports Charges - Port Trust Vehicle Ticket - Port Trust Exchange Control Declaration / GR Form/ PP Form / SDF / SOFTEX - RBI Freight Payment Certificate - From Steamer Agents Insurance Premium payment Certificate - From Insurance Co. Out of the above, 3 documents viz. Shipping Bill/Bill of Export, Exchange Control Declaration (GR Form) and Export Application have been aligned and standardised. Besides, Receipt for Payment of Port Charges has been incorporated in the Export Application / Dock Challan / Port Trust copy of Shipping Bill. Document Preparation: For Commercial Documents, the standard A4 size paper is used. It should measure 297mm x 210 mm with standard margins 10 mm top, 20 mm left, 6 mm right and 7 mm bottom leaving inside paper of size 280 mm length and 184 mm width. A master document containing all the common information for the 14 documents aligned is typed out in light blue ink, compared and verified for correction. The measurement for individual boxes as indicated in the Master Document should be strictly adhered to. Thereafter the individual aligned document is prepared by using suitable masks made of polyester transparent film and reproduced by photocopying method. The masks being transparent enables in having only the required information for that particular aligned document being copied on to that. Additional information specifically required for a particular document can be inserted in the appropriate slot as and when required.

For Regulatory Documents, the foolscap size paper is used. This would measure 345 mm x 215 mm and with margins 15 mm on top and bottom, 18 mm left and 5 mm right. Inside measurement would be 315 mm length and 192 mm width. A Master Document (Master DocumentII) is prepared containing all the information, in the three aligned regulatory documents viz. Shipping Bill, GR Form and Export Application. It is so aligned that all the common data is accommodated on the front side so that all the three documents can be reproduced without using any mask but with only blanking the heading Master Document - II. However, necessary provision is made to have the specific requirements for the 3 aligned documents, provided for on the reverse side. This facilitates preparation of the Regulatory Documents from the Master Document. The following aspects should however be kept in view:

i.

The complete data should be typed (not handwritten) in the respective column of the Master Document.

ii.

Each copy of the three documents should be signed in ink by the Exporter / Forwarding Agent so that it becomes a legally valid document. There are 6 versions of the Master Document -

Master Document II (A) :

For Shipping Bill for Export of Dutiable Goods and Shipping Bills for Export of Goods under claim for Duty Drawback. For Shipping Bill for Export of Duty Free Goods. For Shipping Bills for Export of Goods Ex-Bond. For Bills of Export for Dutiable Goods and Bills of Export for Goods under claim for Duty Drawback. For Bills of Export for Duty Free Goods. For Bills of Export for goods Ex-Bond.

Master Document - II (B) : Master Document - II (C) : Master Document - II (D) :

Master Document - II (E) : Master Document - II (F) :

As can be seen from the above, the Exporters and other concerned agencies get the benefits of Systems Approach by adopting the Aligned Documentation System (A.D.S). Other Important Information Exporter ought to know: ICEGATE: Customs Dept. have infused transparency in the filing of documents and streamlined the process of cargo clearance.In mid 2003, they have introduced ICEGATE (Indian Customs and Excise Gateway) a net enabled user interface. The importers and exporters can file documents using this software from their offices or homes.If the documents are in order, the duty can be paid in a single visit.To access the ICEGATE facility, exporters and importers have to log on to the Website, register themselves and file their documents. Such a filed document is transferred to the Delhi gateway, which sends an acknowledgement of receipt to the party. The document is then transferred on the underlying EDI network to the Customs or Port handling the consignment for further processing.The software is in operation in Delhi Air Cargo Complex, Inland Container Depot. at Tughlakabad, Mumbai Air Cargo Complex, Nhava Sheva Port, Mumbai, and Bangalore Air Cargo Complex.

X-ray Scanning of export cargo from 1-1-04: The Civil Aviation authorities have made X-ray scanning of export cargoes moving out of international airports across the country mandatory effective from Jan 1, 04 to further bolster the precision security.This will end the present system of physical checking of all export cargo including the urgent / perishable cargoes or the system of holding the cargoes on the mandatory `cooling off periods.

FLOW - CHART OF SHIPPING BILL:


EXPORT DOCUMENTATION CENTRE DOCKS APPR. OFFICE IV Collection of Duty/ Assignment of Duty Free Number. V Duplicate Bill & other copies passed on to Ex porter for carting goods to Docks. STEAMER AGENTS

II

III Retention of Original of GR Forms.

VI Examination of the goods & let Export Order.

VII Loading and issue of Mates Receipt / B/L

CodeScrutin y of checkingS/Bill for DateV alue, Control StampingVerification of Documents and assessment.

3.6 SUMMARY ______________________________________________________ In this chapter we have seen the need and the purpose export documents serve. It is very important for the exporter to master preparing the export document. Initially he finds it tedious and complicated to understand and prepare the plethora of the documents required to effect the exports. But he will soon realise that they are not as difficult as he originally thought as he effects second and then third export consignment. Exporters as well as importers countries are also involved in the international trade, and they need to keep the track of exports and the imports of their respective countries for variety of reasons. They may keep watch on the wealth of the country moving out or on depletion of the precious Foreign Exchange Reserves. They may look at the inflationary trends or recessionary trends in their economy because of the increase or decrease in exports and the imports, and would like to control and regulate the same. They need a robust documentation system to cull out the appropriate statistics from such documents and take the remedial measures. These are Regulatory Documents.

The exporter and importer are situated in two different countries, not knowing each other, not knowing each others customs, not knowing the trade practices followed in each others countries. However both are interested in carrying trade with each other as per the dictums of Adam Smith and David Ricardo that the international trade helps and benefits both the buyer (buyer country included) and the seller (seller country included). It is a win-win situation for both. Many entities come to their help and facilitate the international trade. We may name the Transportation companies, Insurance companies, Bankers, Inspection agencies as some of them. The documentation that these facilitators and the exporter and the importer need in order to create a semblance of faith in each other is commercial documentation.

3.7

KEY WORDS
2) Packing List, 5) Import Quota, 8) GP, 11) SOFTEX, 3) Invoice, 6) Shipping Bill, 9) SDF,

1) Bill of Lading, 4) Certificate of Origin, 7) Bill of Exports, 10)PP,

12) Pro forma Invoice, 13) Commercial Invoice, 15) Customs Invoice, 16) Legalised Invoice, 18) ARE 1, 19) Letter of Credit,

14) Consular Invoice, 17) Visaed Invoice, 20) Regulatory Documents, 22) FOB, 27) ECM, 23) CFR, 28) ENC,

21) Commercial Documents, 24) CIF, 29) CDF, 25) EDI, 30) Dock Challan, 26) STPI, 31) Vehicle Chit,

32) Open Policy, 33) ICC, 36) Non-Negotiable, 39) Through or Port to Port B/L, 42) Conference Vessel, 46) Freight Paid B/L, 49) House AWB, 52) PP, 57) FOR, 62) NAFTA, 65) NTP, 53) VP, 58) GSP,

34) Mates Receipt, 35) Negotiable, 37) Ocean B/L, 38) Straight or Order B/L, 41) Liner B/L,

40) House or Groupage B/L, 43) Charter Party,

44) Tramp Shipping, 45) Seaway B/L, 48) AWB,

47) Freight Collect B/L, 50) CTD, 54) COD, 59) SAPTA,

51) Multimodal Transport, 55) RR, 60) GSTP, 56) LR, 61) AFTA,

63) Demand Bill of Exchange, 66) Grace period, 67) Due Date, 70) ICEGATE,

64) Usance Bill of Exchange, 68) UNLK, 71) EDC.

69) Aligned Documents,

3.8

DESCRIPTIVE QUESTIONS

Q.1: Explain the importance of the Export Documents in the International Trade. Q.2: What are the Regulatory and the Commercial Documents? List out the Regulatory documents and Commercial documents. Q.3: What are the contents of Shipping Bill? Why is it so important in the process of the exports? Q.4: How does RBI monitor the entire process of exports by means of the Export Declaration Forms? Q.5: What are the different kinds of export transactions that are exempt from submission of Export Declaration Forms? List them. Q.6: What are the essential contents of the Export Declaration Form?

Q.7: When the exporter Applies for the Remission of Excise Duty, how does the Excise Department deals with such an application? Explain the procedure in detail. Q.8: What are the uses / purposes of the Commercial Invoice? What are its important contents? Q.9: Why and when are Customs and Consular Invoices used by the exporter? Q.10: Explain the nature of Bill of Lading issued by the shipping company to the exporter on accepting his export cargo for shipment?

Q.11: Explain the various types of Bills of Lading? What is the significance of each of them? Q.12: Explain in detail the contents of Bill of Lading. Q.13: What are the various types of Certificate of Origin? Explain the purpose of each type of Certificate of Origin? Who can issue the Certificate of Origin? Q.14: Write a brief note on United Nations Layout Key and the Aligned Documents used in the international trade transactions. 3.9 OBJECTIVE QUESTIONS

Q.1: Shipping Bill is prepared by: a) Shipping Company c) Exporter Q.2: Customs Invoice is issued by: a) Importers country c) DGFT Q.3: Consular Invoice is an: a) Invoice prepared by the exporter countrys consulate in importers country b) Invoice prepared by the importer countrys consulate in exporters country c) Affidavit sworn by the importer before the consul of exporters country d) Affidavit sworn by the exporter before the consul of the importers country Q.4: Exchange Declaration Forms GR, PP, SDF are prepared in: a) One original copy only c) Triplicate b) Duplicate d) Quadruplicate b) Customs Department of Exporters country d) It is the invoice issued by tradition b) Importer d) Mate of the ship

Q.5: SOFTEX is also an Exchange Declaration form and is prepared in: a) Duplicate c) Quadruplicate b) Triplicate d) It is not an Exchange Declaration form.

Q.6: EDF is processed by the RBI, Customs and Authorised Dealer in the following order: a) RBI, AD, Customs c) RBI, Customs, AD Q.7: ARE stands for: a) All Round Exporters b) Announcements Regarding Export benefits b) AD, RBI, Customs d) Customs, AD, RBI

c) Application for Remission of Excise Duty d) Assistance Regarding Exports Q.8: Proforma Invoice is a: a) Contract between importer and the exporter b) Quotation given by exporter to importer c) Invoice prepared by the exporter as per the format provided by the importer d) Format of an invoice Q.9: Certificate of Origin is issued by: a) Exporter b) Authorities designated by DGFT c) Authorities designated by Ministry of Commerce and Industry d) b and c above Q.10: Preferential Certificate of Origin is provided by the exporter to the importer so that: a) Importer has to pay lesser customs duty in his country b) It expedites the clearance of goods in the importers country c) a and b above d) none of the above Q.11: `Clean Bill of Lading means a Bill of Lading which is: a) Written without any cuttings or amendments on it b) Which is not mutilated c) Which is Blank d) Which does not indicate that the goods and their packaging is defective Q.12: House AWB is issued by the: a) Importer sitting in his country b) Exporter sitting in his country c) Airways transport company from its Headquarters d) Issued by IATA approved agents.

Q.13: Which one of the following is not true with respect to SAPTA, NAFTA, AFTA are all types of: a) Trade Agreements between the countries b) Prohibited chemicals in the international trade c) Preferential Certificates of Origin d) Regional Trading blocks Q.14: Normal Transit Period depends on: a) The geographical locations of the exporters country and importers country b) Currency of the payment by the importer to the exporter c) a and b above d) time taken by the goods to reach the destination Q.15: Normal Transit Period varies between: a) 15 days to 60 days c) 30 days to 90 days Q.16: Grace Period is applicable in case of: a) Usance Bills of Exchange c) In case of natural calamities Q.17: ICEGATE is: a) Way opened in Himalayas to develop the exports to Nepal b) Way opened in Himalayas to develop the exports to China c) Way opened in Himalayas to develop the exports to Pakistan d) Software which enables the importers and exporters to file documents from their offices or homes. Q.18: UNLK stands for: a) United Nations Lock and Key c) United Nations Layout Key Q.19: CTD is issued in case when: a) Customs Transport is used b) Common Transport is used by two or more exporters c) Multimodal Transportation of goods is necessary d) Export goods are Carried To Dock. b) United Nations Lost Kite d) United Nations Liberty of Knowhow b) Demand Bills of Exchange d) Any unforeseen circumstances b) 20 days to 35 days d) 30 days to 60 days

Q.20: Vessel used in Ocean Bill of Lading is: a) Larger than the vessels in Liner Bill of Lading b) Smaller than the vessels in Liner Bill of Lading c) Same as used in Liner Bill of Lading d) None of the above

Chapter

Letter of Credit

4.1 Learning On reading this chapter Objectives the reader will come to know
the immense importance of the instrument called as letter of credit in international business. He will understand the meaning of various terms used in the operation of the letter of credit. He will also know the various parties to the letter of credit their duties and responsibilities. He will know what are the various types of the letters of credit and what additional rights and responsibilities are on the various parties to the letter of credit Finally as an exporter he will be able to choose a letter of credit that he should demand from the importer while developing export contract and how to find out the cost of such a letter of credit.

4.2 Methods of Settling Debts:


When the exporter (seller) exports the goods to the importer (buyer), either of them have anxiety. For the seller sending the goods first without receiving the advance payment, the anxiety is, Will the buyer pay for my goods? For the seller who makes the advance payment for the goods, the anxiety is, Will the seller send the goods? Depending upon whether it is a sellers market or buyers market the method of settling the debt is decided. The exporter may demand advance payment if it is sellers market. This is known as advance remittance system of settling the debt on account of trade. Even if the importer is ready to pay for the goods in advance, his country may impose exchange control restrictions and he may not be able to make advance payments in such a case. On the other hand if it is a buyers market then the importer may demand delivery of the goods and may take some time for making payment for the goods already received. This is known as settling the debt on open account. Even though the exporter is ready for sending the goods before receiving the payment, his country may impose restriction on such kind of trade, and the exporter may not be able to export the goods. Both the methods namely the advance remittance method as well as open account method put the buyer and the seller respectively under financial and psychological stress. Besides, the trade should be in conformity with the exchange control and trade control regulations of both the buyers and sellers countries. These trade conditions dampen the enthusiasm of the exporter and the importer to go for international trade. The Bills methods is therefore evolved as an alternative to the above two methods namely the advance remittance and the open account. The Banks come to the immense help to the exporter and the importer in the Bills method. The exporter exports the goods to the importers country but prepares the transport document in the name of the importers Bank. Thus, giving constructive possession of the goods to the importers Bank. Exporter also sends the transport document along with the other documents to the importers Bank with the instruction to hand over the transport document to the importer on receipt of payment for the goods. He (exporter) also instructs the Bank to send the payment thus received to him (exporter), deducting the importers Bank charges for this service. This process greatly reduces the stress of the exporter and the importer as the importer makes the payment only after he receives the constructive possession of the goods, and the exporter is sure that the importers Bank will obey his instruction and will not part with the goods before receiving the payment for the goods.

Though this looks a good arrangement, there is a possibility that the exporter is put to loss if the importer refuses the goods and also the payment. The exporter will have to arrange for transportation of the goods back from the country of the importer and the insurance. He has to incur this additional expenditure. He has already incurred the transportation and insurance expenditure while sending the goods at the first instance from his country to the importers country. Though we have in this Bills process reduced the anxiety of the importer altogether, the anxiety of the exporter to a lesser extent still remains. This anxiety of the exporter can also be eliminated if the payment is assured to him. The instrument which eliminates this anxiety of the exporter is

called as Letter of Credit (L/C).

4.3 Emergence of Letter of Credit:


Continuing with the above discussions, if the payment is assured to the exporter irrespective of the fact whether the importer accepts the goods or rejects them, the anxiety of the exporter can also be taken care of. In such a case the importer and the exporter come on the same footing and will be similarly enthusiastic to carry on the international trade transactions. Therefore the Letter of Credit should assure the payment of the exported goods to the exporter, without any reference to the goods or its acceptance by the buyer. Such assurance is given by the Bank, the importers Bank to be more precise. The article 5 of UCP 600 states Banks deal with documents and not with goods, services or performance to which the documents may relate. Article 4 of UCP 600 states that, a credit by its nature is a separate transaction from the sale or other contract on which it may be based. Banks are in no way concerned with or bound by such contract, even if any reference whatsoever to it is included in the credit. Consequently, the undertaking of the Bank to honour, to negotiate or to fulfil any other obligation under the credit is not subject to claims or defences by the applicant resulting from its relationships with the Issuing Bank or the beneficiary. Issuing Bank should discourage any attempt by the applicant to include, as an integral part of the credit, copies of the underlying contract, pro forma invoice and the like. With such clauses the Letters of Credit have become now the integral part of the international business. Now, finally the difficulty, faced by the exporter and the importer in respect of the exchange or trade restrictions in their respective countries, remains. This difficulty cannot be addressed by means of Letter of Credit. The exchange or trade restrictions may change during the course of international trade transaction, which takes a time of about three months to complete. This kind of risk is called as political or country risk and is addressed separately, in India by the ECGC. This is being dealt separately in Chapter 7 of this book.

4.4 International Chambers of Commerce:


International Chambers of Commerce was first established in 1919. Its Head is situated at Paris, France. Its primary objective is to facilitate international trade at the time when nationalism and protectionism posed a serious threat to the world trading system. This institution is working for bringing out uniformity in the international business. Among other things ICC has contributed a great deal to facilitate the international business by: 1. Evolving the Incoterms (International Commercial Terms) in 1936 and subsequently revised them in 1953, 1967, 1976, 1980, 1990 and 2000 and recently in 2010. These are the international rules for the interpretation of the terms related to transportation in the international trade contracts. 2. Evolving Uniform Rules for Collection in 1956 and subsequently revising them 1967, 1978, and 1995. These are the common code of understanding and standardised procedure

and practice for collection of commercial documents by the Banks. (Refer Appendix A39). 3. Evolving the Uniform Customs and Practice for Documentary Credit as detailed below.

4.5ICC Uniform Customs and Practice for Documentary Credits ICC Publication (UCP 600):
In 1933 most of the countries were promoting their own rules keeping with the high spirit of nationalism and protectionism prevailing then just after the end of First World War. This was detrimental to the interest of furthering the international trade. Countries were having the rules conflicting with the rules of other countries. They were having divergent economic and judicial system. In the absence of uniformity in rules and regulations the international trade was bound to suffer. Keeping this in view the ICC worked out the Uniform Customs and Practice for Documentary credits first in 1933. The objective for promulgating the UCP was to create a set of contractual rules that will ensure the uniformity in the operation of the Letters of Credit. It was subsequently revised five times in 1951, 1962, 1974, 1983 and 1993. The latest and sixth revised version abbreviated as UCP 600, is effective from 01.07.2007. It contains 39 articles. It is included in the Appendix A 38.

4.6

Terminology used:

While studying this subject, most of the time we find it difficult to clearly comprehend for the reason that the terminology used has certain more meaning in legal sense than is known to us according to our usage of normal English Language. The attempt is therefore made to study at least a few commonly used terms and understand their comprehensive meaning that is envisaged in dealing with this topic. 1) Beneficiary: In international business, it takes time for the goods to reach the importer, when the exporter sells his goods to the importer in other country. Importer is reluctant to make payment unless he receives the goods and satisfies himself about their condition. However the exporter is not ready to wait for such a long time. Therefore under the Letter of Credit arrangement it is envisaged that the exporter, when he parts with the goods for the sake of transportation in his country he should be paid immediately. Thus it is thought that the main benefit of the L/C is derived by the exporter and he is called as the Beneficiary of the L/C. As exporter also is selling the goods to the importer under the export contract already executed / finalized between the exporter and the importer, exporter is also called as Seller of the goods. As he (exporter) arranges the transportation of the goods from his country to the importers country he also called as consignor of the goods. The exporter having received the payment immediately on parting with the goods, directs / instructs or orders the importer to make payment to the Banker from whom he has received the payment. This direction / instruction/ order is given in writing to the importer and such instrument is called Bill of Exchange (or

Draft). (Refer Article 2 of UCP 600) Exporter is thus called as drawer of the Bill of Exchange (or Draft). In nutshell the: The Exporter is the Beneficiary of the Letter of Credit The Exporter is also the Seller of the goods in Export Contract The Exporter is also the Consignor of the goods in Transport Document The Exporter is also the Drawer of the Draft 2) Applicant: As the exporter is the beneficiary of the L/C, in the sense that he gets paid as soon as he parts with the goods for the sake of transportation in his country, he should be the one who insists that the export import transaction be covered under the L/C arrangements. Such insistence by the exporter must be at the time when sale contract is being finalized. This should be one of the essential terms of the export contract. Exporter rather demands that the importer arranges the L/C and ensures that his (exporters) position is safe, while selling the goods and that he does not have to wait for a long time to receive payment for the goods transported by him. As most of the times exporters are reluctant to sell the goods without such kind of L/C arrangement, importer has to make this arrangement of issuance of the L/ C. The L/C can be issued only by Banks of repute and having presence in the international business. Therefore the importer approaches such Bank. Generally he already has the account relationship with such Bank, and requests such Bank to issue a L/C.

The importer has to make a written application to the Bank and give the entire details as to the terms and conditions on which the L/C is to be issued. He also has to stipulate the commercial documents that he will need the exporter to submit, against which he is ready to make the payment. These are generally the terms already agreed between the exporter and the importer on the basis of which the export contract is executed. The importer also has to mention as to how and when he will make the payment to his Banker, to whom he is making the application for issuance of L/C. As the importer is the one who makes the arrangement of L/C he is called as the applicant of the L/C. (Refer Article 2 of UCP 600) In nutshell The Importer is the Applicant of the Letter of Credit The Importer is also the Buyer of the goods in Export Contract The Importer is also the Consignee of the goods in Transport Document The Importer is also the Drawee of the Draft 3) a. Banks: Issuing Bank:

Letter of Credit is issued by the Bank of the importer. This Bank since it issues a Letter of Credit is called as Issuing Bank. Issuing Bank substitutes the creditworthiness of the importer by its own creditworthiness. Issuing Bank assures the payment to the exporter immediately on making complying presentation to a Bank in his country. The exporter relies on such an assurance of the Issuing Bank and feels more comfortable in carrying out the international trade transaction. The assurance given by the Issuing Bank is not in the nature of a guarantee, in the sense the Issuing Bank does not say that it will pay in the event importer fails to pay. The assurance is therefore not collateral in the nature but is primary. The Issuing Bank obligates itself to the exporter making a complying presentation.

This nature of the assurance given by the Issuing Bank to the exporter cast duty on both the Issuing Bank as well as the exporter. The duty of the Issuing Bank is to ensure the payment to the exporter immediately on making complying presentation irrespective of the fact whether the importer makes payment for the goods or not. Issuing Bank therefore has to incur this liability, make the payment to the exporter and then recover this amount from the importer. Issuing Bank therefore properly credit appraise the importer for the amount of the Letter of Credit. Issuing Bank may obtain collateral securities from the importer in order to safeguard its position. And only if the Issuing Bank finds importer sufficiently creditworthy will it issue the Letter of Credit in favour of the exporter on behalf of the (on the application of the) importer. As a general rule therefore we may say that the Issuing Bank issues the Letter of Credit in favour of exporter only on behalf of its creditworthy importer customer and only after adequately securing its own position while issuing such credit.

Issuing Bank only acts on behalf of its importer customer and only at his instance it becomes ready to substitute his creditworthiness with its own. And therefore it follows all the instructions given by the importer and includes them in the Letter of Credit. These terms and conditions are based on the export contract entered between the exporter and the importer earlier. Thus the export contract forms the base of the Letter of Credit. Charges for issuing L/C: Since the Issuing Bank assumes the primary liability on account of the importer and for the benefit of the exporter, it charges the commission for this purpose. This commission varies from Bank to Bank and has to be ascertained as it builds up into the cost of export import transaction. In India the commission to be charged on issuance of L/C is recommended by the Foreign Exchange Dealers Association of India (FEDAI). It depends on the amount involved in the L/C transaction and the time period it takes to complete the transaction under the L/C. For a 3 months period it works out to 0.25 per cent of the amount of the L/ C. Exporter really needs to check this amount from the L/C Issuing Bank as it is situated in the importers country and not situated in India. Such commission is also subject to revision. These charges are required to be borne by the importer (on whose behalf the L/C is being issued) or the exporter (for whose benefit the L/C is issued) as has been agreed between them (i.e. importer and exporter) in the export contract.

As far as the exporter is concerned, he secures the assurance of immediate payment for the

goods exported, from the Issuing Bank on complying presentation. He is better secured as he has an assurance from the Bank, which is much more creditworthy than the importer is. But how good is this assurance? How creditworthy this Issuing Bank is? Instances of the Issuing Banks refusing to honour its commitment or even delaying the payment are only rare. But it is necessary for the exporter to ensure that the Issuing Bank itself is creditworthy. As the exporter may lack this knowledge, this can be ascertained from his own Bank, which is the Authorised Dealer and has presence in the international business. It can also be ascertained from the Reserve Bank of India or the Bank for International Settlement (BIS) (Refer Article 2 of UCP 600)

About BIS
The Bank for International Settlements (BIS) is an international organisation which fosters international monetary and financial cooperation and serves as a Bank for Central Banks of the Countries. The BIS fulfils this mandate by acting as: a forum to promote discussion and policy analysis among Central Banks and within the international financial community a centre for economic and monetary research a prime counterparty for Central Banks in their financial transactions agent or trustee in connection with international financial operations The head office is in Basel, Switzerland and there are two representative offices: in the Hong Kong Special Administrative Region of the Peoples Republic of China and in Mexico City. Established on 17 May 1930, the BIS is the worlds oldest international financial organisation. As its customers are Central Banks and International Organisations, the BIS does not accept deposits from, or provide financial services to, private individuals or corporate entities. The BIS strongly advises caution against fraudulent schemes. b. Confirming Bank: In case the exporter is not satisfied about the creditworthiness of the L/C Issuing Bank he has a choice of getting it vetted by one more Bank, which once again now substitutes the creditworthiness of the Issuing Bank by its own creditworthiness. This Bank could be the one with whom the Issuing Bank has such arrangements and situated in the country of the exporter and therefore exporter is more comfortable in getting such confirmation from a Bank in his own country. Such Bank which substitutes the creditworthiness of the Issuing Bank is called as the Confirming Bank. Confirming Bank is either the agent of the L/C Issuing Bank or has the correspondent relationship with the L/C Issuing Bank. Charges of the Confirming Bank: Confirming Bank, as it assumes the liability under the L/C arrangements, also assumes the risk, and therefore charges its own commission. This commission has to be borne by the

exporter or the importer as has been agreed in the export contract earlier executed by both of them. This commission is almost equal to the commission charged by the Issuing Bank. Therefore getting the L/C confirmed is costly affair and therefore generally not resorted to. If the L/C requires confirmation then generally the Confirming Bank is the Advising Bank and the Nominated Bank. (Refer Article 2 of UCP 600) c. Advising Bank: We are now aware that the L/C is issued by the Bank in the importers country at the instance of the importer, but the beneficiary is exporter who is situated in some other country. The fact that the L/C is issued, the terms and conditions (mostly as per the terms and conditions agreed in the export contract between the exporter and the importer) of the L/C, and that the exporter shall get the benefit of the immediate payment on making complying presentation discussed elsewhere in this chapter has got to be communicated to the exporter authentically and by expeditious means. Issuing Bank therefore carries out this job by getting the help of its own agent Bank or the Bank with whom it has correspondent relationship, situated in the exporter country. This agent Bank or the Bank having correspondent relationship with the Issuing Bank then undertakes the job of authenticating the L/C and informing such fact to the exporter, who is the beneficiary of the L/C. This act of the agent Bank of the Issuing Bank or the Bank having correspondent relationship with the Issuing Bank is called as Advising the L/C to the exporter and the Bank who undertakes this job of authenticating the L/C issued by the Issuing Bank and informing the entire L/C to the exporter (beneficiary) is called as Advising Bank (Refer Article 2 of UCP 600).

The Advising Bank, as soon as it receives the L/C from the Issuing Bank, authenticates it by affixing its seal and signature on the hard copy as a token of authentication after verifying the seal and signatures of the authorised officials of the Issuing Bank and duly satisfying as to the genuineness of the L/C. If the L/C is received by the Advising Bank by electronic mode, then the Advising Bank satisfies itself about such issuance by decoding the private key between the Issuing Bank and itself and on satisfaction advises such L/C to the beneficiary. Because of this process of authentication of the L/C by the Advising Bank before it is advised to the exporter, the exporter is rest assured that the L/C is genuine and not the fraudulent one. There are instances in the international business where the fraudulent L/Cs are received to the exporters. On receipt of such L/Cs they dispatched the goods. And when they subsequently approached the Bank for getting payment it came to their notice that the L/C was never issued. The payment cannot be made under such fraudulent L/Cs. And the exporter suffers a huge loss as he has already shipped the goods.

Charges of Advising Bank: Advising Bank charges its commission for rendering these services to the exporter. This is about `500 per advice. This is also recommended by the FEDAI. However the amount of commission is subject to change. The Advising Bank generally acts as a Confirming Bank, if it is so requested by the Issuing Bank. In such case Advising Bank will advise the credit to the beneficiary adding its

Confirmation to the L/C and thereby assuming liability under the L/C to make immediate payment to the beneficiary on making complying presentation. Advising Bank may subsequently act as the Nominated Bank, if the beneficiary approaches it with the entire set of documents as required in terms of the L/C and make the complying presentation and asks for the payment against the complying presentation. d. Nominated Bank: We have seen that it is the responsibility of the Issuing Bank to make payment available to the exporter on making a complying presentation. But the Issuing Bank and the exporter are situated in two different countries. Therefore Issuing Bank has to make appropriate arrangements to make such payment to the exporter. It therefore appoints a Bank in the country of the exporter and authorises such Bank to make payment to the exporter after ensuring the complying presentation. Exporter then approaches such Bank, makes the complying presentation and obtains the payment immediately. Such kind of L/C is called as Restricted L/C as exporter is compelled to approach only this named Bank and restricted in approaching the other Banks for this purpose.

On the other hand, the Issuing Bank may not authorise any particular Bank as in the case mentioned above. However the Issuing Bank may invite any Bank, to whom the exporter (beneficiary of L/C) approaches, to make payment to the exporter after ensuring the complying presentation. In such a case the exporter (beneficiary) is free to approach any Bank, make a complying presentation and obtain the payment. In this case the Bank which makes the payment to the exporter on complying presentation is called as the Nominated Bank. (Refer Article 2 of UCP 600) The Nominated Banks, however, are not under obligation to make payment to the exporter on his making complying presentation. The Issuing Bank and the Confirming Bank, however, are under the obligation to make such payment to the exporter on his making a complying presentation. Both of them cannot refuse payment to the exporter once the exporter makes the complying presentation. Nevertheless the Banking industry acts in cooperation and furthering mutual interest and help each other in this regard. The Bankers are generally willing to make payment to the exporter on his making complying presentation. Nominated Bank gets itself reimbursed for the payment it has made to the exporter from the Issuing Bank. Besides this it can charge interest and commission from the exporter (or as is decided in the export contract) as per the FEDAI recommendations in this regard. Nominated Bank acts as an agent of the Issuing Bank / Confirming Bank in this regard.

Generally the Issuing Bank, makes an arrangement to make payment to who-so-ever may be the Nominated Bank. Such arrangement is spelt clearly in writing in the L/C and is called as Reimbursement Clause. The Nominated Bank reads the reimbursement clause and gets itself reimbursed as per the instructions contained therein. e. Reimbursing Bank: During the finalization of the export contract, the exporter (seller) and the importer (buyer) would have already decided how and in which currency the payment for the goods is required

by the exporter. The terms and conditions of issuance of L/C are dependent on these terms and conditions of the export contract. The importer therefore must indicate this payment terms while applying for L/C to the Issuing Bank. Issuing Bank therefore gets a good idea about the amount and the currency that it will have to pay, besides the time of payment at the time of issuing the L/C. As it is the obligation of the Issuing Bank to make payment on first demand made on it after the exporter makes the complying presentation, it keeps itself in readiness to meet such an obligation as soon as it arises. Issuing Bank also knows that such a claim may be made on it by the named Nominated Bank or the Bank which makes the payment to the exporter on ensuring complying presentation. And therefore Issuing Bank keeps sufficient amount / balance deposited in the required currency in the relevant Bank and in the relevant country, from where the Nominated Bank can withdraw the amount after ensuring the complying presentation. The necessary instructions authorizing the Bank, where the amount / balance is kept, to make payment to the Nominated Bank are already given by the Issuing Bank. The Bank where the amount / balance is kept is called as the Reimbursing Bank.

Reimbursing Bank on receiving the authorization from the Issuing Bank keeps waiting for the claim from the Nominated Bank, and makes the payment as soon as the claim is received by it in this regard. The clause indicating such an arrangement is called as reimbursement clause referred in the d above. (Refer Article 13 of UCP 600).

4)

Complying Presentation:
Article 2 of the UCP 600 defines the Complying Presentation as the presentation in accordance with the terms and conditions of the credit, the applicable provisions of these rules and international Banking practices. The Nominated Bank has to adhere to the doctrine of strict compliance. That means the documents presented by the beneficiary should agree with the stipulation of the credit in toto. Non compliance with the terms of the credit, however minor such discrepancy may be, may provide ground for the Confirming Bank, Issuing Bank or the Importer to reject the documents and refuse the payment under the credit. Nominated Bank should verify the credit to ensure that The credit is valid i.e. it has not expired There are no onerous clauses on the Nominating Bank and the payment is not made conditional. If the payment is made conditional then the conditions stipulated are duly complied. All the documents asked for in the credit are tendered by the beneficiary, and they are agreement with the terms of the credit. Any alteration in the document is authenticated. All the documents should agree with each other and that they are consistent with each other.

4.7

Letter of Credit Mechanism:

A Letter of Credit is an undertaking given by the Issuing Bank, according to Article 7 of the UCP 600, which reads as follows: a)Provided the stipulated documents are presented to the Nominated Bank or the Issuing Bank and that they constitute a complying presentation, the Issuing Bank must honour if the credit is available by: i. ii. sight payment, deferred payment or acceptance with the Issuing Bank; sight payment with a Nominated Bank and that the Nominated Bank does not pay;

iii. deferred payment with a Nominated Bank and that Nominated Bank does not accept a draft drawn on it or having accepted a draft drawn on it, does not pay on maturity; iv. v. acceptance with a Nominated Bank and that Nominated Bank does not accept a draft drawn on it or, having accepted a draft drawn on it, does not pay at maturity; negotiation with a Nominated Bank and that Nominated Bank does not negotiate.

b) An Issuing Bank is irrevocably bound to honour as of the time it issues the credit. c) An Issuing Bank undertakes to reimburse a Nominated Bank that has honoured or negotiated a complying presentation and forwarded the documents to the Issuing Bank. Reimbursement for the amount of a complying presentation under a credit available by acceptance or deferred payment credit is due at maturity, whether or not the Nominated Bank prepaid or purchased before maturity. An Issuing Banks undertaking to reimburse a Nominated Bank is independent of the Issuing Banks undertaking to the beneficiary. The following important points emerge out of this article: That the Issuing Bank is fully committed to make payment to the beneficiary on his making a complying presentation. If such payment is made by the Nominated Bank to the exporter on making complying presentation, situated in the exporters country, the Issuing Bank is fully committed to reimburse the Nominated Bank. Understanding this will facilitate the understanding of the mechanism of the Letter of Credit. The following are the stages in operation of the Letter of Credit: (Please refer to the opening example in chapter 1 for the names used here) 1. The transaction originates when the exporter in Nagpur (say Gopal) and importer (say John) in New York USA enter into an export contract. The contract covers all important particulars such as the description, quantity and value of the goods, the due date for shipment, method of payment etc. this export contract among other particulars also stipulates that the importer should open a Letter of Credit issued by a prime Bank in his country, in favour of the exporter. 2. John then applies to his Bank say City Bank NY requesting and authorizing the Bank to

open a Letter of Credit in favour of Gopal and pay the bills drawn by Gopal under the Letter of Credit. The application is generally a format of the Issuing Bank and is a stamped contract between the importer and the Issuing Bank. This application stipulates the terms and conditions, especially with regard to the documents to be submitted by Gopal with the bill. 3. As the City Bank has to assume liability / commitment under a Letter of Credit as per the Article 7 of UCP 600, to irrevocably pay to Gopal or to his Bank called as Nominated Bank (Dena Bank Nagpur in this case) the City Bank will adequately credit appraise John, obtain adequate securities from him, safeguard its own position and decide to open a Letter of Credit as requested by John. 4. On the strength of the application from John (Applicant), City Bank (Issuing Bank) issues a Letter of Credit. This Letter of Credit is addressed to Gopal (exporter and beneficiary) and contains an undertaking by the Issuing Bank that the bill drawn under the credit would be paid by it on complying presentation. This is in terms of the article 7 of the UCP 600. It should now be clearly understood that though the export contract forms the basis of the Letter of Credit, the Banks who deal with this Letter of Credit are bound only by the stipulations in the credit and the export contract in no way affects them. Article 4 and Article 5 of UCP 600 provides that such credits are the separate transactions from the export contracts on which they might have been based; and the Banks are in no way concerned with or bound by such export contracts, even if the reference in whatever manner to such contract is included in the credit. 5. Though the Letter of Credit is addressed to the beneficiary (Gopal), it would be sent to the correspondent Bank of City Bank in India, with a request to forward it to Gopal (beneficiary). This is necessary because (the beneficiary) Gopal may not be able to know the genuineness of the Letter of Credit. We at this moment presume that Dena Bank Nagpur is the correspondent of City Bank NY. So the City Bank NY on issuance of the Letter of Credit sends it to Dena Bank Nagpur for onward transmission of the same to Gopal, after verifying the genuineness of the Letter of Credit. Indian Bank, Chennai or Punjab national Bank, New Delhi could also be the correspondent of City Bank in place of the Dena Bank Nagpur in such case Indian Bank, Chennai or Punjab national Bank, New Delhi will verify the genuineness of the Letter of Credit and send it to Gopal.

6. Within the stipulated date of shipment Gopal will ship the goods to the port named by John in USA. he will obtain the Bill of Lading (or a relevant Transport Document) from the shipping company. 7. Gopal will draw a Bill of Exchange on John* (or City Bank NY) and make it payable to Dena Bank Nagpur. In such a case Gopal is the Drawer, John is the Drawee and Dena Bank is the Payee of the Bill of Exchange. The credit generally stipulates drawing the bill on the Issuing Bank* instead of the importer. In such a case the Gopal is the drawer, City Bank is the Drawee and the Dena Bank is the Payee. the bill can also be drawn by

Gopal on John and make it payable to City Bank. in this case Gopal is the drawer, John is the Drawee and City Bank is the Payee. However the Bill must be drawn in accordance with the instructions given in the Letter of Credit. Since the bill is drawn under the Letter of Credit and payment is assured, any Bank in the exporters country would be willing to pay against it. * It should be noted that the L/C should not be issued available by Bill of Exchange drawn on the applicant. If the L/C nevertheless calls for the Bill of Exchange drawn on the applicant, then the other Banks dealing with such L/C, will consider such Bill of Exchange as an additional instrument. This provision emphasizes that the obligation to pay under the L/C is primarily that of the Issuing Bank and not of the applicant. 8. The exporter would normally approach his Bank in such a case. Gopal therefore approaches Dena Bank, Nagpur, which was also the advising Bank in our case. Gopal submits all the documents to Dena Bank, Nagpur. Dena Bank, Nagpur scrutinises all the documents submitted by Gopal to make sure that they satisfy the conditions stipulated in the Letter of Credit. If they satisfy all the terms and conditions of the credit, i.e. there is no discrepancy in the documents then they make a complying presentation. Dena Bank pays the amount to Gopal (the beneficiary). Then the documents are forwarded to City Bank NY. 9. City Bank on receipt of the documents verify if they make a complying presentation. Once City Bank decides that they make complying presentation, City Bank NY makes the payment to Dena Bank. the amount of the bill will be then after recovered from the importer (John) and the documents will be delivered to him. It is important to note that the parties mentioned in the above process of Letter of Credit mechanism deal only with the documents stipulated in the credit. Article 4 of UCP 600 very clearly underscores this point. Thus though the exporter (Seller) is assured of payment under the Letter of Credit arrangement, the importer (Buyer) has no guarantee that he will receive the goods that are required by him will only be delivered to him. To address this concern the importer generally specifies some other documents to accompany the bill. These documents could be weight list, packing list, quality certificate, inspection certificate etc. these document do offer a protection to the importer. Diagram / Chart on the next page

4.8

Role and Responsibilities of Parties to the Letter of Credit:


The following are the parties to the Letter of Credits: 1. Applicant / Buyer / Consignee / Importer 2. Issuing Bank / Importers Bank 3. Confirming Bank / Correspondent or Agent of the Issuing Bank 4. Advising Bank / Bank situated in the exporters country 5. Beneficiary / Seller / Consignor / Exporter 6. Nominated Bank / Bank situated in the exporters country 7. Reimbursing Bank

These are the seven parties to the Letter of Credit, two of them are the traders namely the Importer (buyer of the goods) and the Exporter (seller of the goods) and remaining five are the Bankers namely the Issuing Bank, Confirming Bank, Advising Bank, Nominated Bank and the Reimbursing Bank. Their roles and responsibilities are as follows:

1.
i. ii.

Applicant:
He applies to the Issuing Bank for issuance of L/C and ensures that the L/C is issued as per the terms and conditions agreed between the exporter and him in the export contract. In case, the exporter subsequently feels that some of the terms are required to be changed, this may be because of the changed circumstances or as an afterthought, then he may approach the importer to get such change incorporated in the terms of L/C. Such request may come from the exporter on finding that the terms of L/C are not in accordance with the terms agreed between the importer and him, or such terms are erroneously or inadvertently incorporated in the L/C. The importer may agree with the exporter and may decide to get such changes incorporated in the L/C that has already been issued. This is called as amendment to an L/C already issued. The importer once again approaches the Issuing Bank and requests it to amend the L/C. So the role of the applicant is to carry out the amendments to the L/C, through the Issuing Bank, if he also consents to such amendments as requested by the exporter.

iii.

When the importer later on receives the documents tendered by the exporter to the Nominated Bank, through the Issuing Bank, he has to ensure that these documents make a complying presentation. Once the applicant is satisfied about the complying presentation, then he has to accept the documents and make payment to the Issuing Bank for the amount of L/C. If the applicant is not satisfied about the documents and feels that they do not agree with the terms and conditions of the L/C, in other words they do not make complying presentation, he points out such discrepancy to the Issuing Bank and refuses the payment under L/C. In case of iv above, the applicant shall deal with the documents and with the exporter in terms of the export contract executed between him and the exporter. Such dealing is outside the purview of the L/C mechanism.

iv.

v.

2.
i.

Issuing Bank:
When the applicant makes an application to his Banker for issuance of L/C, the Bank considers it and credit appraise the applicant. If the Bank finds that the application is worth considering then it takes adequate precautions in the eventuality of the applicant not paying his liability on account of the L/C and the Bank has to meet such liability. The Bank then issues a Letter of Credit strictly keeping in view the terms and conditions stipulated by the importer account holder in his application for issuance of L/C. The Bank does not really take the cognizance of the export contract signed by the exporter and the importer. All the terms of the application however are taken into consideration and the L/C is issued. In case there is a request for amendment in terms of L/C from the applicant, the Issuing Bank may consider the same. However Issuing Bank is not obliged to amend the L/C. Nor can applicant compel Issuing Bank to amend the L/C, if L/C Issuing Bank is not willing to do so. If Issuing Bank decides to amend the terms of L/C, then it advises such amendment to the beneficiary through the same advising Bank / confirming Bank through whom it has advised the original L/C. If the Issuing Bank chooses not to amend the L/C, then it advises so to the applicant and does not amend the L/C. Issuing Bank does not consider request for amendment of L/C from any person, other than the applicant as issuance of L/C and its subsequent amendment is the subject matter between the applicant and the Issuing Bank. It is a contract between the applicant and the Issuing Bank.

ii.

iii.

In case the beneficiary has already requested the applicant for issuance of confirmed L/C, then the Issuing Bank has to arrange for getting it confirmed by the other Bank. It then requests the other Bank to add its confirmation to the L/C. Adding confirmation means incurring liability under the L/C. The Confirming Bank undertakes to make the payment to the beneficiary on making a complying presentation much as the same way as the Issuing Bank undertakes. Therefore confirming Bank must have this kind of arrangement with the Issuing Bank. In such case Issuing Bank sends the L/C to the confirming Bank requesting the confirming Bank to add its confirmation to the L/C and then advise it to the beneficiary. In case the confirmation is not required, then the Issuing Bank sends the L/C to its correspondent Bank or the Bank with whom it has agency arrangements, and asks it to advise the Letter of Credit to the beneficiary without adding confirmation. At a later stage the Issuing Bank receives the documents prepared by the exporter in terms of the L/C, either from the confirming Bank if the L/C is a confirmed L/C or from the Nominated Bank if the L/C is not confirmed. In either case the Issuing Bank has to ensure that the documents presented to it comply with the terms of the Letter of Credit. Or in other words it has to ensure that the presentation made to it is a complying presentation. Once the Issuing Bank is satisfied that the presentation made to it is a complying presentation then it makes the payment. In fact the Issuing Bank, as soon as it issues / opens the L/C, keeps the amount of L/C, available with the Reimbursing Bank. It also gives the instruction to the Nominated Bank or the Confirming Bank to get in touch with the Reimbursing Bank and get itself reimbursed for the amount it would have already paid to the beneficiary on ensuring complying

iv.

v.

presentation. Issuing Bank also gives the necessary authorization to the Reimbursing Bank, to make payment to the Nominated or Confirming Bank, as the case may be. vi. vii. Issuing Bank then sends the documents thus received to the applicant and recover the amount of L/C from him In case the Issuing Bank finds that the documents that it received from the Confirming Bank or the Nominated Bank are not a complying presentation then it informs the concerned Bank from whom the documents were received about the non compliance. It also takes up the matter with the applicant and informs him about the non compliance and holds the documents pending the instructions from the applicant and the confirming Bank or the Nominated Bank as the case may be. There is no obligation to make payment under L/C in such case of non complying presentation.

3.
i.

Confirming Bank:
The duties and responsibilities of the Confirming Bank are similar to that of the Issuing Bank. When the request to confirm the Letter of Credit comes from the Issuing Bank to Confirming Bank along with a Letter of Credit, as per the prior arrangements between these Banks, the Confirming Bank confirms the Letter of Credit. Thereby it assumes the liability and the responsibility to pay the amount of credit on complying presentation by Nominated Bank or the beneficiary. It also then acts as an Advising Bank and advises the L/ C direct to the beneficiary. Alternately it can take help of some other Bank to advise the Letter of Credit to the beneficiary. However the Issuing Bank cannot compel the other Bank to add its confirmation and undertake liability consequent upon confirming the L/C. The other Bank who is asked by the Issuing Bank to add its confirmation may refuse to add its confirmation to the L/C. The other Bank may choose to advise the Letter of Credit to the beneficiary without adding its confirmation. But in such a case it should advise the fact of advising credit without adding confirmation to the Issuing Bank.

ii.

In case there are any amendments to the L/C, and such amendments are received by it from the Issuing Bank, then Confirming Bank has a choice to accept such amendments or reject them. Issuing Bank cannot compel the Confirming Bank to accept the amendments. Confirming Bank also need not take any cognizance of instructions regarding amendments of the terms of L/C from anybody else. If the Confirming Bank chooses to accept the amendments then it should advise the same to the beneficiary. If the Confirming Bank chooses not to accept the amendments to the L/C then it should not advise such amendments to the beneficiary. It may, however choose to advise the amendment to the beneficiary without adding its confirmation and inform so to the Issuing Bank.

iii.

Later on, when the Confirming Bank receives the documents from the beneficiary direct or from the Nominated Bank, ensure that they constitute complying presentation. If the Confirming Bank is satisfied about the complying presentation then it should make payment to the beneficiary and send the documents complying presentation to the Issuing Bank. It should also claim the reimbursement of the amount of L/C as per the reimbursement clause in the L/C. If, however the Confirming Bank is not satisfied with the documents, and feels that they are not in conformity with the terms of the L/C, then it should refuse the payment

to the beneficiary or the Nominated Bank as the case may be, inform them so and seek their instructions as regards the disposal of the documents.

4.
i.

Advising Bank:
When the Bank is requested to advise the credit or amendments to the beneficiary it may do so. However this does not mean that it has also undertaken to negotiate the documents under the L/C. By advising credit or amendment, the advising Bank signifies that it has satisfied itself as to the apparent authentiCity of the credit or amendment and that they accurately reflect the terms and conditions of the credit or amendments received. The advising Bank can utilize the services of another Bank to advise the credit or amendments to the beneficiary. If a Bank is requested to advise the credit or amendments but elects not to do so, it must so inform, without delay the Bank from which the credit amendment or advice has been received. If a Bank is requested to advise the credit or amendment but cannot satisfy itself as to the apparent authenticity of the credit or amendment, it must so inform, without delay, the Bank from which the instructions appear to have been received. The advising Bank may elect to advise the credit or amendments to the beneficiary in such a case it must inform the beneficiary that it has not been able to satisfy itself as to the apparent authentiCity of the credit or the amendments.

ii.

iii. iv.

v.

5.
i.

Nominated Bank:
The Issuing Bank may specifically mention the name of a Bank which is authorised to make payment to the beneficiary on ensuring the complying presentation. Such Bank is however not under any obligation to make payment to the beneficiary irrespective of whether he makes a complying presentation or not. If the Issuing Bank does not mention the name of any Bank for the purpose of such payment to the beneficiary on complying presentation, then any Bank can evince interest and make payment to the beneficiary on ensuring complying presentation. Such Bank will be deemed as the Nominated Bank. Nominated Bank must ensure that the documents conform to the terms and the conditions of the Letter of Credit. Once the Nominated Bank is sure that the presentation is a complying presentation then it will make payment to the beneficiary. Nominated Bank will then send the documents to the Confirming Bank if there is a Bank which has added confirmation to the L/C or to the Issuing Bank. Nominated Bank will seek the reimbursement of the L/C amount from the Reimbursing Bank in accordance with the reimbursement instructions contained in the L/C. If however the Nominated Bank finds that the presentation is not a complying presentation, then it refuses the payment to the beneficiary under the terms of the L/C. Such documents can be taken on collection basis and the payment from the importer can be demanded, but this demand of payment will not be under the protection of the L/C.

ii.

iii. iv. v.

6.
i.

Reimbursing Bank:
In terms of the contract between the applicant and the Issuing Bank at the time of issuance of L/C, the applicant would have given the instructions to the Issuing Bank as to how the payment should be made available to the beneficiary, as already had been agreed between the exporter and the importer under the export contract. In tune with this, the Issuing Bank arranges to make payment to the beneficiary. Issuing Bank keeps the desired currency ready at the desired Bank, and makes it known to the Nominated Bank by means of the Reimbursement clause in the L/C. This Bank where the desired currency is kept by the Issuing Bank is the Reimbursing Bank. The Reimbursing Bank holds this amount in trust for the Issuing Bank. Issuing Bank gives the authorization to the Reimbursing Bank to make payment to the Nominated Bank on receiving a claim from such a Bank. On receipt of such claim from the Nominated Bank the Reimbursing Bank makes the payment to the Nominated Bank.

ii.

iii.

7.
i.

Beneficiary:
Beneficiary of the L/C, the exporter would have already entered into an export contract with the importer. One of the terms of this contract is issuance of the L/C. This term is the genesis of the issuance of the L/C. L/C therefore should contain all relevant terms and conditions those appear in the export contract. Therefore when the beneficiary receives the L/C from the advising Bank he has to ensure that it is authenticated as genuine L/C by the Advising Bank and that it contains all the terms and conditions as has been previously agreed between him and the importer. If the beneficiary is satisfied with the terms and conditions of the L/C, then he can proceed for arranging the export goods and its consequential clearance from customs for exports and shipment etc. However if he is not satisfied with the terms of the L/C, i.e. some terms are omitted or altered then the exporter at this stage takes up the matter with the importer and request him to correct these omissions and alterations by suitably amending the L/C. Once he receives the amendments he then proceeds to arranging the export goods, the customs clearance and shipment of the export cargo.

ii.

iii.

He then gets all the requisite and necessary regulatory documents and the commercial documents meticulously prepared as are necessary for customs clearance and also as are required to comply with the terms of the L/C. He then approaches the specifically Nominated Bank in the Letter of Credit or his Banker in case there is no such specifically Nominated Bank, with the entire set of the complying documents and ensures that he makes complying presentation. When the Nominated Bank is satisfied with the documents and it ensures that they make a complying presentation the beneficiary gets the payment under the L/C.

iv.

4.9 Contents of Letter of Credit:


Unlike in the past, Letters of Credit are mostly now transmitted via electronic mode as it is cheaper and faster. They are advised through an exclusive network SWIFT. SWIFT is an acronym for Society for Worldwide InterBank Financial Telecommunications. It is a cooperative society owned by about 250 Banks in Europe and North America. Its head office is at Brussels and it is registered under the Belgian Law. About 9000 Banks worldwide spread in 209 countries use the services of SWIFT for authentic telecommunications. It helps the users to telecommunicate the financial, secured message with confidentiality and integrity. It has its regional processing center situated in Mumbai. Letters of Credit may also be communicated by other means such as telegrams, telex, airmail etc. However, if the telecommunicated L/C does not bear any wordings suggesting full details to follow or mail confirmation to follow, then such telecommunicated L/C should be considered as an operative credit and the parties to it should act as per their roles and responsibilities as described above. Article 11 of UCP 600 may be referred in this connection. The Letter of Credit should contain the following: 4.9.1 Names and Addresses of the parties to the L/C: a. b. c. d. e. f. g. Applicant (Importer, Buyer of goods, Drawee of the draft and Consignee in Transport document) Beneficiary (Exporter, Seller of the goods, Drawer of the draft and Consignor in Transport document) Issuing Bank (this is importers Bank and a Letter of Credit is issued on the letter head of the Issuing Bank) Confirming Bank (only in case the Letter of Credit is required to be confirmed) Reimbursing Bank (as this is required by the Nominated Bank to claim reimbursement of the amount paid to the beneficiary) Advising Bank (as the Letter of Credit is sent to this Bank, though it is addressed to the beneficiary, with instructions to advise it to the beneficiary) Nominated Bank (only in case of the restricted L/C)

4.9.2 Amount and Currency:


a. b. The details of the maximum amount available under the credit and The currency of the payment.

4.9.3 Expiry dates for Shipment and Negotiation:


a. b. For Shipment: For making the shipment of the goods and For Negotiation: For obtaining the payment by the beneficiary from the Nominated Bank

4.9.4 Mode of Transport: a. b. c. d. e. f. Airways, Waterways, Roadways, Railways, Container, Postal transport or telecommunication in case of software. Place of loading and place of discharge Terms of transportation such as FOB (Free On Board), CFR (Cost and Freight) or CIF (Cost, Insurance and Freight) Whether Trans shipment is allowed Whether Part shipment is allowed Details of the transport document required

4.9.5 Details of Marine Insurance: a. b. c. Currency and the amount of insurance to be covered (generally this is 110% of the invoice value) Whether the exporter covers this insurance (under CIF contracts) or importer covers this (under FOB and CFR contracts) Types of risks required to be covered.

4.9.6 Details of the Bill of Exchange: The Bill of Exchange is to be drawn by the beneficiary as per the details contained in the L/ C viz. a. b. c. The names of the Drawee and Payee. Whether it Bill of Exchange should be Demand or Usance Whether it is required or not required

4.9.7 Other documents required: The documents those are required should be stipulated in detail along with the authorities issuing such documents. These documents could be as follows: a. b. c. d. Invoice Packing List Inspection Certificates Certificate of Origin, etc.

4.9.8 Declaration to conform to the provisions of UCP 600: Clause declaring that the credit is issued under UCP 600 and that it is subject to the provisions contained therein. 4.9.9 Undertaking given by the Issuing Bank to the Beneficiary: Undertaking given by the Issuing Bank and confirming Bank in case of confirmed credits,

to the beneficiary to honour the Bill of Exchange as per its tenor, or ensuring him payment on making a complying presentation. 4.9.10 Seal and Signature of Issuing Bank: Seal and signature of the Issuing Banks authority or in case of telecommunication or communication by electronic mode its cipher, code, public and private keys as is applicable, to enable the advising Bank to establish the authenticity of such communication.

4.10 Various Types of Letters of Credit:


4.10.1 Revocable and Irrevocable Letters of Credit:
Revocable credit is one which can be cancelled or amended by the Issuing Bank at any time without prior notice to the beneficiary or the Confirming Bank. However if Nominated Bank has already made the payment to the beneficiary on complying presentation, before it has received the instruction of cancellation of the credit, then the Issuing Bank is bound to reimburse such Nominated Bank. Since there is no definite undertaking by the Issuing Bank in revocable credits, such credits are of no use to the exporters. If the credit is advised to the beneficiary by the Issuing Bank direct, it may be cancelled by the Issuing Bank any time. In such a case exporter / beneficiary is not sure till he gets the payment whether he will get the payment and whether the credit is current or stands cancelled. He will also find it difficult to obtain payment from the Nominated Bank in his country as such Banks are not aware if the credit is cancelled by the Issuing Bank. On the other hand if such revocable credit is advised through some Bank, then generally there would be a clause under which the Issuing Bank holds itself liable to reimburse Nominated Bank for the payments made to the beneficiary on complying presentation, before the instructions of cancellation are received by the Nominated Bank. In spite of this the revocable credit does not confer the benefit that the exporter expects under the L/C arrangements namely the assured payment on shipping the goods and making a complying presentation. Such credits generally have the clause addressed to the advising Bank, reading as follows. Please advise the beneficiary that the credit is revocable and therefore subject to cancellation at any time. We undertake to reimburse you for all the payments made by you to the beneficiary on his making complying presentations, in terms of the credit, but before your receiving the instructions of cancellation. Article 10 of the UCP 600 provides that the Irrevocable Credit can neither be amended nor cancelled without the agreement of the Issuing Bank, Confirming Bank, if any, and the beneficiary. Irrevocable credits constitute a definite undertaking of the Issuing Bank to reimburse the Nominated Bank which has paid to the beneficiary on ensuring complying presentation. Under the Irrevocable credit the beneficiary is safe with the knowledge that he will receive the payment under L/C on making a complying presentation. This Irrevocable credit cannot be amended or cancelled unless the beneficiary also agrees to such amendment or cancellation. Banks are ready to play the role of a Nominated Bank in case of Irrevocable credits.

If the credit does not mention whether it is revocable or irrevocable then as per the article 3 of UCP 600, it will be considered as Irrevocable. Exporters should therefore ask for Irrevocable Letters of Credit.

4.9.2 With Recourse and Without Recourse LC:


There is difference between the With Recourse and Without Recourse Bill of exchange and With Recourse and Without Recourse L/C. According to Negotiable Instrument Act 1881, the Bill of Exchange is considered as With Recourse to the drawer if no endorsement stating Without Recourse to the drawer appears on the Bill of Exchange. That means the drawer is liable to the parties to the Bill of exchange in case of dishonor. To be more precise when the payee of the Bill of Exchange is not able to recover the amount of Bill of Exchange from the Drawee, the payee gets back to the Drawer and demands the amount that he has already paid to the Drawer. This is known as the Payee is having recourse to the drawer. The Drawer may specifically exclude his liability in case of dishonor, by writing in the Bill of Exchange the wordings reading Without Recourse. Section 52 of the Negotiable Instruments Act 1881 provides for drawing this kind of Bill of Exchange. In such case, if the Drawee refuses to make the payment of the amount of Bill of Exchange already paid by the Payee to the Drawer, the payee does not have any recourse to the Drawer. Payee has to bear the loss or in other words he cannot recover it from the Drawer of the Bill of Exchange. The terms of the L/C stipulates the way Bill of Exchange should be drawn by the Drawer. Therefore if drawing a Without Recourse Bill of Exchange is not stipulated in the L/C, then the Drawer should not draw such Bills of Exchange. Drawing such Bill of Exchange could also be superfluous, as the payment made against the complying presentation made by the beneficiary, by the i) Issuing Bank, ii) Confirming Bank, iii) Named Nominated Bank in case of the restricted L/C and the iv) Bank making payment in case of Payment L/C in which the Bill of Exchange is not asked for by the applicant and therefore by Issuing Bank are always Without Recourse to the beneficiary. Without Recourse endorsement on the Bill of Exchange is useful in the following two cases: When the Bill of Exchange is Usance: In this case all the documents are given to the applicant against his acceptance on the Bill of Exchange. In this case the chances of dishonour are more and therefore beneficiary would like to exclude his obligation by ensuring that he should not be asked to pay back the amount that he received from the Nominated Bank. The payment made by the Nominated Bank, acting on an open invitation of the Issuing Bank to negotiate: In this case the Nominated Bank acts as principal for the beneficiary. Therefore the payment made by the Nominated Bank to the beneficiary is not the final payment. If

the Nominated Bank is not reimbursed by the Issuing Bank then it has recourse against the beneficiary to whom the Nominated Bank has made the payment. Similarly, another case where the beneficiary has inadvertently or by mistake has tendered the documents with discrepancy, but they were considered as the documents complying presentation by the Nominated Bank and the Nominated Bank has made payment on such documents, in such case the Nominated Bank should be able to recover the amount paid under L/C, from the beneficiary as this amount was paid under mistake of fact, unless the Nominated Bank has expressly contracted not to have recourse to the beneficiary. Keeping the above discussion in view the L/C, and not the Bill of Exchange to be issued under the L/C, can be issued as Without Recourse. In such case the Banks dealing with the L/C specifically waive their rights to have recourse to the beneficiary. Such L/C is called as Without Recourse L/C. Exporter, as a beneficiary, should try to get the Irrevocable and Without Recourse L/C opened in his favour so that he is safe in the international business transactions.

4.10.3 Confirmed and Unconfirmed Letter of Credit:


When a Letter of Credit is being advised to the beneficiary through a Bank in beneficiarys country, the Issuing Bank may request such advising Bank to add its confirmation to the L/C, or merely advise the L/C to the beneficiary without adding its confirmation. When the advising Bank adds its confirmation then it becomes a Confirming Bank and the L/C becomes a confirmed L/C. such confirmation is a definite undertaking of the Confirming Bank guaranteeing payment to the beneficiary on making a complying presentation. Confirmed L/C is generally an Irrevocable L/C, because the advising Bank situated in the exporters country would be unwilling to take additional responsibility of confirming an L/C, which itself is indefinite. The Confirmed L/C ensures the following two advantages to the beneficiary: It insures the beneficiary not only against the failure of the importer but also from the failure of the Issuing Bank It saves the beneficiary from the changes in the government policies / political disturbances in the importers country. The beneficiary is assured of the payment on making complying presentation from the Confirming Bank irrespective of such changes. Therefore it should be the endeavour of the exporter, as beneficiary of the L/C to obtain Irrevocable, Without Recourse and Confirmed L/C in his favour.

4.10.4 Payment, Acceptance, Negotiation, Deferred Letter of Credit:


Payment L/C: In certain countries even the sight / demand Bill of Exchange attract stamp duty. Therefore the parties to the L/C agree to a payment L/C, wherein the payment is made to the beneficiary against the documents which do not accompany a Bill of Exchange.

Payment L/C is generally a restricted L/C, in which the Nominated Bank is specified by the Issuing Bank, which acts as an agent of the Issuing Bank. This specified Nominated Bank makes the payment to the beneficiary on his making complying presentation and gets reimbursement from the Issuing Bank. Acceptance L/C: Under this type of L/C, the beneficiary is required to draw Usance Bill of Exchange, which provides certain time to the importer to make payment for the goods that he will receive beforehand. Importer, however, accepts his liability under the L/C, while collecting the documents related to the transaction and those submitted by the beneficiary making a complying presentation, except for the Usance Bill of Exchange. Importer accepts his liability on the Usance Bill of Exchange and undertakes to make payment on due date. The beneficiary gets this accepted Bill of Exchange and can discount it with his Bank and gets the payment. Negotiation L/C: Under this type of L/C, the beneficiary is required to draw At Sight or Demand Bill of Exchange. This Bill of Exchange is generally drawn on the Issuing Bank or any other Bank as stipulated in the credit. The Bank that negotiates the documents under such kind of credit purchases the Bill of Exchange, and makes the payment to the beneficiary, on his making a complying presentation. The negotiating Bank / Nominated Bank is then reimbursed by the Issuing Bank. Article 2 of UCP 600, provides that unless the L/C stipulates that it is available with the Issuing Bank, the L/Cs must nominate a Bank which is authorised to negotiate. In such case it will be called as Restricted L/C. If such restriction is not specified and the Issuing Bank makes an open offer to any Bank to negotiate under the L/C on beneficiary making a complying presentation, and that such Bank on negotiation shall be reimbursed, then such L/C is called as an Open L/C. Issuing Banks generally resort to restricting the L/C on the instructions from the applicant, or if they want to favour a particular Bank and pass on the business to such Bank. Deferred Payment Letter of Credit: This type of L/C carries an undertaking of the Issuing Bank to pay on the dates determinable in advance in terms of the L/C. the arrangement is similar to the Acceptance L/C with a difference that in this case the Bills of Exchange are not drawn. Therefore generally the beneficiary considers this inferior to the acceptance credit. Deferred L/C is generally used where the exporter allows the importer time to make payment or make payment in pre determined installments. The documents (and therefore the goods) will be delivered to the importer immediately. This type of L/C is used in case of the trade of capital assets such as plant, machineries etc.

4.10.5 Fixed and Revolving Letter of Credit:


The Fixed or Non-Revolving L/C is one, where the limit of drawing is reduced permanently

to the extent of amount drawn under the L/C. For example if the amount of L/C is `50 Lakhs, then the maximum payment that can be drawn under this L/C is `50 Lakhs, which beneficiary can draw either in one lump sum or in installments as per the terms of the L/C, of course on making a complying presentation. The amount available for drawing goes on permanently reducing with each drawing or in installments as the case may be. Once the amount of `50 Lakhs is drawn the Fixed or Non-Revolving L/C expires. On the other hand there can be an L/C, in which the limit of the drawing under the credit gets reduced with the payment made by the Nominated Bank to the beneficiary, but also gets reinstated as soon as the importer makes the payment and the Nominated Bank is reimbursed. Such kind of L/C is called as Non-automatic Revolving L/C. There can also be the Automatic Revolving L/C where the limit of drawing is renewed with specific amount, at specific intervals, irrespective of the fact that the payment is made by the importer or Issuing Bank to the Nominated Bank. The amount that can be drawn, is controlled by fixing a ceiling on the total amount that can be drawn under L/C, or the period / number of times for which the fixed amount will get renewed. Such type of L/C can be either cumulative or non cumulative. Under the cumulative automatic revolving L/C the amount unutilized during one period is carried over to the subsequent period. Under non-cumulative, automatic, revolving L/C the amount not utilized during one period gets expired and cannot be carried over to the subsequent period.

Revolving L/C is useful where continuous transactions between the exporter and the importer are expected and the terms and conditions of the trade remain the same over the period of L/C.

4.10.6 Transferrable Letter of Credit:


Under this type of L/C, the beneficiary has the right to make the credit available to the third parties. The beneficiary may only be an intermediary, who procures the goods from the suppliers and arranges them to be sent to the importer. Article 38 of UCP 600 governs the Transferrable credits. The exporter is called as the first beneficiary The third parties / suppliers from whom the goods are arranged are called as second beneficiaries The Nominated Bank is the Transferring Bank The Nominated Bank is under no obligation to transfer a credit. However it may agree to transfer credit if it is specifically stated in the credit that it is transferrable by the Issuing Bank. The credit may be transferred in part and to more than one beneficiary, provided partial drawing or shipments are allowed. The second beneficiary cannot transfer the credit to subsequent beneficiaries. The transferred credit must accurately reflect the terms and conditions of the credit, including confirmation, if any with the exception of the following (any or all of which can be curtailed):

i.

The amount of the credit may be reduced. (The difference would be the profit of the first beneficiary)

ii. Any unit price stated therein iii. The expiry date iv. The period for presentation v. The latest shipment date. (the difference of time is required by the first beneficiary to enable him to substitute his invoices in place of the invoices of the second beneficiary)

4.10.7 Back to Back Letter of Credit:


Consider a case when the beneficiary of the L/C is the intermediary as in the case of the Transferrable L/C, but the L/C does not authorize transfer in favour of the second beneficiary. In such an event, the beneficiary requests his Banker to open another L/C in favour of the suppliers on the strength of the L/C received by him. The L/C received by the beneficiary is from the Bank in importers country and is called as foreign L/C. Based on this foreign L/C the beneficiarys Bank issues another L/C in favour of the suppliers and this L/C is called as Inland L/C. Such an ancillary L/C is called as Back to Back L/C or Countervailing, L/C, or L/C and Counter L/C. The supplier i.e. the beneficiary of the Back to Back L/C, sends the goods to the exporter (beneficiary of the original credit), and gets the payment from the exporters Bank i.e. Bank that issued the Back to Back L/C. It is intended that the exporter will substitute his own documents and ship the goods to the importer and present the documents complying presentation, for negotiation to the Nominated Bank. The exporters liability under the Back to back L/C would be adjusted out of the negotiation proceeds. The following points are required to be noted in this context: The terms and conditions of the Back to back L/C should be the same as that of the original L/C except the curtailing in: 1. 2. The amount of L/C. (This would leave the margin of profit for the exporter) The latest shipping dates. ( This would leave sufficient time for the exporter to substitute his document for the suppliers documents) The Back to Back L/C has certain features common with the Transferrable L/C. these are as follows: The benefit under the L/C is transferred to the third party in both the types of L/Cs. The documents are substituted by the first beneficiary in both the types of L/Cs. The possibility of the importer knowing the real supplier or vice a versa is avoided in both the cases. However they differ from each other in the following matters: There is an authority from the Issuing Bank for the transfer of benefit under the L/C in the case of Transferrable L/C. No such authority is there in case of Back to Back L/C.

In case of Transferrable L/C, the transferred L/C is only an extension of the original L/C. But Back to Back L/C is independent of the original L/C. In terms of the Article 38 i of UCP 600, the Transferring Bank has the right to substitute the documents submitted by the second beneficiary to the Issuing Bank in case the beneficiary fails to submit his own documents on first demand by the Nominated Bank. Under Back to Back L/C submission of documents submitted by the second beneficiary is not possible.

4.10.8 Red Clause and Green Clause L/C:


Red Clause Letters of Credit:: In case of Red Clause L/C, the advance is made available to the beneficiary at the instance of the Issuing Bank, for the purpose of manufacturing / processing / packing of the goods. Such an advance is expected to take care of the working capital needs of the exporter in respect of the goods to be exported. Such clause indicating availability of advance to the beneficiary used to be indicated in red ink on the L/C and therefore such L/Cs used to be called as Red Clause L/C. Once the advance is given to the exporter in accordance to the terms and conditions of the L/C in this regard, the responsibility of the Bank extending such advance ends. It is neither required to supervise the advance, nor is it required to make efforts for recovery of the advance. The advance is of self liquidating nature. When the beneficiary submits the documents under the L/C, and they make a complying presentation, the Bank who extended the advance to the beneficiary and now negotiating the documents can recover its advance from the proceeds of the export bill submitted by the beneficiary. In case the beneficiary does not submit the documents, whether making complying presentation or not, the Bank which extended the advance to the exporter can approach the Issuing Bank and ask for the recovery of advance amount and the interest thereon. The Issuing Bank, having authorised to give such advance to the beneficiary under a Red Clause L/C is obliged to pay the outstanding advance to the Bank which extended the advance to the beneficiary. The Issuing Bank may subsequently recover it from the applicant at whose instance this clause was included in the L/C.

Green Clause L/C: It is an extended version of the Red Clause L/C. Besides the finance as given under the Red Clause L/C, and as discussed above, advance for meeting the storage and warehousing needs of the beneficiary is also given. The discussion as above is applicable to this advance also. These types of L/Cs are called as Packing or Anticipatory credits. Though they do not find mention in the UCP 600, by practice they are guided by these provisions.

4.10.9 Standby or Guarantee Letter of Credit:


Standby L/C is a substitute for the Bank Guarantee and is used in countries, such as Japan and USA, where issuing guarantees is not allowed. It does not call for the documents as are required in case of the L/Cs discussed above. And therefore very strictly speaking they do not fall under the category of the Documentary Credits as are envisaged under UCP 600.

Under the Standby L/C the Issuing Bank assures the beneficiary that in the event of nonperformance or non-payment of an obligation by the applicant, the beneficiary may get the payment from the Issuing Bank. This claim is payable on presentation of a Bill of Exchange accompanied by the requisite documentary evidence of non-performance / non-payment as stipulated in the credit. The US Comptroller of Currency defines the Standby Letter of Credit as follows: Standby L/C is any L/C or similar arrangement, however named or described which represents an obligation to the beneficiary on the part of the issuer: i. To repay money borrowed by or advanced to for the account of the party or

ii. To make payment on account of any indebtedness undertaken by the account party or iii. To make payment on account of any default by the account party in performance of an obligation. 4.11 SUMMARY _____________________________________________________ It is difficult to consider the international trade taking place in the absence of the instrument like L/C. In spite of the five Banks, situated in different countries, the L/C mechanism operates in such a harmonious manner that it provides the assurance of payment to the exporter for the goods sold by him to an importer in a far off country. It also simultaneously ensures, though not goods, importer of the title to the goods that he bought from an exporter from a far off country. The mechanism of the L/C truly satisfies the requirements of the buyer as well as seller in the international trade transactions. This mechanism and such an understanding are facilitated by the International Chambers of Commerce, Paris. The immaculately and aptly worded Uniform Customs and Practices for Documentary Credits Publication 600, popularly now called as UCP 600 is at the heart of this L/C mechanism. It describes the roles and responsibilities of the parties to the Letter of Credit very categorically and in an unambiguous manner. It also describes in clear cut manner the plethora of the documents that are required by the importer from the exporter and the various authorities issuing such documents in the exporters country. Taking into account the myriad trade practices followed in different countries, different stages of development of the countries and therefore the different practices of governance, the task of evolving uniform code for L/C is a major achievement of the ICC. Almost all the countries subscribe to the UCP 600.

Almost all international trade transactions are governed by the provisions of UCP600, except where the export is to the subsidiaries, affiliates, close relatives, exporters own offices or factories or of similar nature, where the risk perception of the exporter about not receiving the payment for the goods exported is very very low.

There are various types of L/Cs to suit the requirements of the exporter and the importer. They can very well choose a type of L/C that is most suitable for both of them. In the appendix A38 the entire UCP600 is given, which a reader should refer so as to clearly understanding the points made in this chapter. Reader is also suggested to go through a sample Letter of Credit given in appendix A40. Appendix A41 gives the full set of documents prepared by an exporter in INdia unser a Letter of Credit issued by a Bank in Poland. 14 different documents prepared along with the L/C makes the entire subject of L/C clear and given the idea to the reader or a budding exporter that it is not as complicated to prepare the edxport documents under L/C as was thought by him earlier.

4.12

KEY WORDS

1) Advance remittance, 4) Letter of Credit, 7) Incoterms, 10) Applicant, 13) BIS, 16) Nominated Bank, 19) Open Invitation, 22) Negotiation,

2) Open account, 5) UCP 600,

3) Bills, 6) International Chambers of Commerce,

8) Uniform Rules for Collection, 9) Beneficiary, 11) Issuing Bank, 14) Confirming Bank, 17) Complying Presentation, 20) Reimbursing Bank, 23) SWIFT, 12) FEDAI, 15) Advising Bank, 18) Specified Nominated Bank 21) Acceptance, 24) Expiry date for Shipment, 26) Revocable / Irrevocable, 28) Confirmed / Unconfirmed, 31) Deferred L/C, 34) Fixed / Revolving L/C, 37) Red Clause and Green Clause L/C, 39) Anticipatory or Packing L/C,

25) Expiry date for Negotiation, 27) With Recourse / Without Recourse, 29) Payment L/C, 32) Negotiation L/C, 35) Transferrable L/C, 30) Acceptance L/C, 33) Restricted / Open L/C, 36) Back to Back L/C,

38) Standby or Guarantee L/C, 40) First / second beneficiary.

4.13

DESCRIPTIVE QUESTIONS

Q.1: Explain the different methods of settling debt in respect of international trade. Q.2: Explain the Letter of Credit mechanism. Q.3: Write short notes on: a) International Chambers of Commerce b) Bank of International Settlement. c) SWIFT Q.4: Who are the various parties to the Letter of Credits? What are their duties and responsibilities? Q.5: Differentiate between the following: a) Revocable L/C and Irrevocable L/C b) With Recourse L/C and Without Recourse L/C c) Confirmed L/C and Unconfirmed L/C Q.6: Differentiate between the following: a) Payment L/C, Acceptance L/C and Negotiation L/C b) Restricted L/C and Open L/C c) Fixed L/C and Revolving L/C d) Transferrable L/C and Back to Back L/C Q.7: Explain what Standby Letter of Credit is. Q.8: How are Red or Green Clause Letters of Credit useful to the exporter? Q.9: What are the essential contents of a Letter of Credit? Explain their significance. 4.14 OBJECTIVE QUESTIONS

Q.1: ICC does not stand for: A. C. Indian Chambers of Commerce International Credit Council B. International Cricket Control D. International Chambers of Commerce

Q.2: SWIFT stands for: A. B. C. D. Society for Worldwide InterBank Financial Transactions Society for Worldwide International Financial Transactions Society for Worldwide InterBank Foreign exchange Transactions Society for Worldwide International Foreign exchange Transactions

Q.3: BIS does not stand for: A. C. Bureau of Indian Standards B. Bureau of International Standards

Banka de International of Switzerland D.Bank of International Settlement

Q.4: Due date is calculated in respect of: A. C. Demand Bill of Exchange Both the above B. Usance Bill of Exchange D. None of the above

Q.5: The following is taken into account while calculating due date: A. B. C. D. Credit period given to the buyer Credit period given to the buyer + NTP Credit period given to the buyer + NTP + grace period of 3 days where applicable It is stipulated in the L/C

Q.6: Role of the Advising Bank is to: A. B. C. D. Advise the exporter whether he should export or not Simply mail the L/C as received Inform the exporter when the payment will be received from the importer Attest the genuineness of the L/C and inform the same to the exporter

Q.7: Which one of the following is NOT correct? A. B. C. D. The Bank that pays to the beneficiary on complying presentation is Issuing Bank The Bank that pays to the beneficiary on complying presentation is Nominated Bank The Bank that pays to the beneficiary on complying presentation is Confirming Bank The Bank that pays to the beneficiary on complying presentation is Reimbursing Bank

Q.8: Reimbursing Bank reimburses the: A. C. Importer Nominated Bank B. Exporter D. Issuing Bank

Q.9: Transferrable L/C can be transferred by: A. B. C. D. Issuing Bank to Confirming Bank First beneficiary to second beneficiary Nominated Bank to second beneficiary Issuing Bank to Advising Bank

Q.10: Back to Back L/C is issued by: A. C. Importers Bank Any Bank in Importers country B. Exporters Bank D. Any Bank in Exporters country

Q.11: Standby Letter of Credit is defined in: A. C. UCP 600 Incoterms B. US Comptroller of Currency D. Uniform Rules for Collection

Q.12: The Letter of Credit that provides advance to the exporter at the instance of the Issuing Bank is: A. C. Red Clause L/C Green Clause L/C B. Blue Clause L/C D. Black Clause L/C

Q.13: Restricted L/C is the one which: A. C. D Specifies the amount of L/C B. Specifies the name of the port of loading

Specifies the name of the Nominated Bank Specifies the name of the vessel carrying export cargo

Q.14: Confirming Bank is the one: A. B. C. D. That assures the payment to the beneficiary on his making complying presentation That assures the reimbursement to the Nominated Bank That assures the delivery of the goods to the importer That assures ICC that provisions of UCP 600 shall be followed

Q.15: FEDAI is: A. B. C. D. Foreign Exchange Dealers Association of India Federation of Exporters and Dealers Association of India Federation of Exporters and Dealers Association International Foreign Exchange Dealers Association International

Chapter

Export Finance

5.1 Learning Objectives On reading this chapter the reader will know the financial
facilities that are available to the exporters from the banks who are authorised dealers in foreign He will understand various features of advance (like the exchange. amount of advance, period of advance, interest rate charged, mode of repayment etc.) that is available to the exporter during the period he gets firm export order from the importer till He will also understand the features of the finance that is the time he the goods to the importer. available to ships him after he ships the goods to the importer till the time he actually receives the payment Finance also available to the exporter pending the receipt from the is importer. of the incentives such as Duty Drawback that he is eligible to receive as are envisaged in the FTP 2009-2014 from the Government organisations.

5.2 Various types of financial facilities available to the exporter:


Financial Facilities: The terms finance, loan, credit or advance are used in the same sense in this chapter. Export finance is available as follows: Export is a preferred sector. Exporter is provided with various financial facilities right from the day he receives the confirmed Export Order or a Letter of Credit in his favour. Finance is available before the preshipment of goods is made. It is also available after the shipment of goods and is also available against the incentives receivable from Government under FTP. The loan facilities are available in Indian Rupee or in Foreign currency. Moreover the Reserve Bank of India decides the quantum of loan, Rate of Interest chargeable on loan and other things applicable to each type of export finance available to the exporter. These features of export finance are not left to the vagaries of individual Banks, inspite of the fact that we are in advanced shape of liberalisation. Exporters therefore should not worry about the availability of finance for exports.

1.

Pre-shipment stage: This is called as Pre-shipment finance or Packing Credit. a. Rupee Loans: These loans are granted for a period up to 270 days b. Foreign Currency Loans: Packing Credit in Foreign Currency (PCFC)

2.

Post-shipment stage: a. Rupee Loans: i. On Demand Bills for Transit Period ii. On Usance Bills up to 180 days b. Foreign Currency Loans: Post-shipment Credit in Foreign Currency (PSCFC)

3.

Advance against Incentives receivables under FTP We shall deal with each of these in some detail in paragraphs below.

5.3 Pre-shipment Finance or Packing Credit in Rupees:


Pre-shipment finance or Packing Credit is any loan or advance given to an exporter for financing the purchase, processing, manufacturing or packing of goods meant for exports. This essentially is a working capital finance granted to the exporter. This finance is, at the time of granting, not exactly the export finance, but is given in anticipation of the exports in immediate future. Therefore if the exports do not take place at a later stage the advance is required to be categorized as domestic finance.

5.3.1 Eligibility:
A. Type of Goods: The advance should be for the export of the eligible goods as per the FTP 2009-14. For this purpose the classification of the goods is required to be taken into account.

The ITC (HS) Classification is given below: 1. Free- no restrictions on imports / exports of these items (earlier known as OGL i.e. Open General License items). 2. Prohibited goods. 3. Restricted through authorization or in terms of public notices issued. 4. Importable or Exportable only through State Trading Enterprises (STE). These were earlier known as Canalized items. This classification is given in Chapter 2 paragraph 2.3. It is more elaborately dealt in the Chapter 11 on FTP B. 1. Type of Export: Direct Export:

The exporter could be one who is exporting the goods direct, when such goods fall under the `Free- no restriction category or `Restricted through authorisation category of ITC (HS) Classification. Such exporters are exporting the goods on the strength of the L/C issued by the banks of good standing abroad in favour of the exporter. Therefore the Packing Credit facility can be availed by the exporter against this Letter of Credit. For some reason if the L?C is not received by the exporter, or it is likely to be received at a later stage then the exporter can still avail the Packing Credit on the basis of the firm Export Order. 2. Indirect Export:

Exporter exporting the goods that fall under the STE regime or Canalised items of ITC (HS) classification, are required to export through the canalizing agency, such as STC / MMTC. In such case they do not receive the Letters of Credit or Export Orders in their name. He can still avail the Packing Credit by producing the following documents: a) A letter from the canalizing agency giving the details of Export Order and the portion of it to be executed by the exporter. b) Certificate by the canalizing agency that they have not and will not avail Packing Credit for the portion allotted to the exporter. c) Alternatively Canalizing agency should open Back to Back L/C in favour of the exporter. 3. Sub-suppliers of the exporters:

Sub-suppliers of the exporter can also avail the Packing Credit facility for supplying the raw material or components to be used in the production of the export goods. 4. Deemed Exports:

When the exporter makes supplies to the projects that are financed by multilateral or bilateral agencies / IBRD / ADB / OPEC, such supplies are recognised as Deemed Exports. (FTP 2009-14, Chapter 8, on Deemed Exports) Such suppliers who are deemed exporters are also eligible for availing Packing Credit on

obtaining authenticated copy of the contract between the authorities and the supplier, together with the certificate issued by the concerned central agency to the party to the effect that he has won the particular tender under international competitive bidding for supplies to such aided project in India.

5.3.2 Type of Accounts:


Packing Credit can be availed in both the type of accounts namely, Term Loan or Cash Credit accounts. Term Loan accounts: The exporter avails the loan required to meet his working capital demands in one shot from the banker and then uses it as per his need. This is generally of the nature of one account for one L/C or one Export Contract. The Term Loan availed is repaid as soon as the shipment takes place. Cash Credit account: if the exporter receives Export Orders / L/Cs on a regular basis he can on the strength his past record justify availing Packing Credit through Cash Credit account. In such a case he need not wait for Export Order or L/C. pending its receipt he can avail Packing Credit and submit the Export Order or L/C subsequently. He can start his production early. He can also manage the drawing of the loan from the bank only as per his requirement and thus save on interest cost, unlike the drawing in case of Term Loan, where he has to draw in one lump sum and keep paying interest, irrespective of whether he uses the loan amount in full or not.

5.3.3 Period of Loan and Interest Rate:


The period for which Packing Credit is availed depends upon the circumstances of each case, such as the time required for procuring the raw material, period required for manufacturing or processing the goods and subsequently time required for shipping the goods etc. However as a general rule the period for which Packing Credit is made available is 180 days. This period can be further extended to 270 days. The Interest Rates are subject to the guidelines issued by the RBI in this regard. These detailed guidelines are given in the Appendix A37. The Interest Rate for the First Stage of 180 days, should not be more than (Base Rate 2.5 PP) The Interest Rate for the Second Stage of Beyond 180 days up to 270 days, should not be more than (Base Rate -2.5 PP) [same as above]. This concessional Rate of Interest can be availed only if the bank has agreed to the extension of the period of Packing Credit beyond 180 days and maximum up to 270 days In three cases described below, the banks are free to charge any Rate of Interest on the Packing Credits. They have been deregulated in such case. o where the bank does not grant extension beyond 180 days then from 181st day onwards, and

o if the extension is granted somewhere between 180 days and 270 days, then from day beyond such extension is not granted, o and in any case beyond 270 days The banks are free means banks are free to charge Interest Rates keeping in view the Base Rate and the spread guidelines. The PP above means Percentage Points. The Base Rate means the Rate of Interest below which the bank will not lend. (Refer Appendix A36). In case the exporter is not able to repay Packing Credit he has availed within 360 days then the banks will recover the amount outstanding at a rate applicable to the domestic loans plus 2% as penalty. This interest at such an increased Rate of Interest is charged from the first day of granting the advance.

5.3.4 Quantum of Advance:


The exporter can get Packing Credit to the extent of FOB i.e. Free On Board value of the export goods or the cost of production whichever is less. Sometimes the bankers also stipulate the margin, which depends on the worth of the exporter and the commodity to be exported. Generally such margin ranges between 10% and 15% of the FOB value of the export or the cost of production.

5.2.5 Sources of Repayment:


1. Proceeds of the Bills of Exchange drawn under the Export Contract or in terms of L/C. 2. Export incentives like Duty Drawback receivable by the exporter as are applicable in FTP 2009-14. 3. Substitution of the Contract 4. Substitution of the commodity or fresh exports 5. Rupee payments The following are the sources of repayment of the Packing Credit availed by the exporter: 1. Proceeds of the Bills of Exchange drawn under the Export Contract or in terms of L/C. On availing Packing Credit, the exporter manufactures the goods and makes them ready for export. On shipping these goods he obtains the transport document. He then prepares the other documents along with the Bill of Exchange and submits them to the bank that granted him the Packing Credit. The bank, while paying the proceeds of this export Bill of Exchange, recovers the Packing Credit already granted to him. 2. Export incentives like Duty Drawback receivable by the exporter as are applicable in FTP 2009-14. Exporter, while manufacturing the export goods, has to sometimes use the imported raw material or components etc. He would have also paid customs duty on imports of raw

material or components etc. When the manufactured goods are exported the custom duty paid is refunded back to the exporter. Similarly, excise duty if applicable is paid on the goods when they are manufactured and taken out of factory for exports. This excise duty is also refunded back to the exporter, after the export of the goods. FTP 2009-2014 provides for refund of customs duty and excise duty as described above after the exports are effected. However it takes some time for the exporter to receive this amount of duty as there are formalities to be completed in this regard. This scheme of refunding duties to the exporter is called as Duty Drawback scheme. Amount received under the Duty Drawback can be used for paying Packing Credit loan. 3. Substitution of the Contract: In case the exporter is not able to export against the original contract due to reasons beyond his control, the exporter can substitute the original contract with the other contract, within a reasonable time. The proceeds of the export bill of exchange submitted under the substituted contract can be used for paying the Packing Credit availed for fulfilling original contract. 4. Substitution of the commodity or fresh exports: If exporter is not able to export a particular commodity as it becomes commercially unviable, the exporter can substitute the contract of the export of original commodity, with the contract of export of some other commodity. Alternately he can substitute some other contract or L/C on the basis of which the exporter has not availed Packing Credit so far. 5. Rupee payments: If the exporter is unable to export, the Packing Credit availed by him can be repaid by paying `. in such case the Rate of Interest applied by the bank is the Rate of Interest as applicable to the domestic loan plus 2% from the date of advance.

5.4

Pre-shipment Credit in Foreign Currencies (PCFC):

Exporter can avail pre-shipment credit in any of the convertible foreign currency. This PCFC is useful to the exporter in the following ways: a) It is available at lower Rate of Interest. The Interest Rate charged is maximum 1% above LIBOR / EuroLIBOR / EURIBOR. If the LIBOR is 4% p.a. then the exporter can get the Packing Credit at the Interest Rate of 5% p.a. The minimum Interest Rate that is charged on the Rupee Packing Credit is 7% as of now. So the Rate of Interest on PCFC is 2% lower than the Rate of Interest on Rupee Packing Credit. b) If the exporter needs to import certain raw material or components etc. for manufacture of the goods meant for export or otherwise, then the benefit is twofold: i) The exporter does not have to worry about the fluctuation in exchange rate at the time of receipt of foreign exchange (as proceeds of the export) and at the time of

payment foreign exchange (for the import of raw material, components etc.). This exchange rate may be favourable to the exporter or it could be unfavourable to him. Nevertheless it is a risk for the exporter, which he would like to avoid. ii) When the exporter receives the export proceeds in foreign exchange the bank buys it from the exporter and it applies the buying rate for conversion of foreign exchange in `. Similarly when the exporter wants to import raw material, components etc. and make payment in foreign exchange, bank sells this foreign exchange to him and applies selling rate for converting ` in foreign exchange. Exporter finds that he loses on such conversion of foreign exchange in ` and then ` back into the foreign exchange. This loss is certainly avoidable, and exporter would like to avoid it. c) The Packing Credit is available for a total duration of 360 days. For the purpose of charging Interest Rate this period is divided in two parts of 180 days. For the first 180 days the Rate of Interest that is charged is as given in a) above i.e. LIBOR / EuroLIBOR / EURIBOR plus 1% (5% in the case given above). For the next 180 days the Rate of Interest charged will be 2% more than that is charged for the first period i.e. LIBOR / EuroLIBOR / EUROBOR plus 3% (7% in the case given above) d) Exporter can avail PCFC in any convertible foreign currency, irrespective of the currency of the invoice. e) PCFC can be availed even if the exports are to ACU countries. (ACU countries are those who participate in Asian Clearing Union, which was formed on 1st November 1975. These countries are: 1] Bangla Desh, 2] India, 3] Iran, 4] Myanmar, 5] Nepal, 6] Pakistan and 7] Sri Lanka.) f) PCFC can be availed for a standard period of 1 month, 2 months, 3 months and 6 months. This is because the LIBOR / EuroLIBOR / EURIBOR, the international reference rates are quoted for the same periods, and therefore the Interest Rate can be easily calculated. It can also be availed for non-standard periods up to a period of 360 days. In this case the interest charged should be 1% higher than the reference rate relating to the next higher period. g) Interest is charged on monthly basis h) If the export does not materialize then the Packing Credit is recovered in terms of `. this ` is determined by converting the Packing Credit loan amount at the TT Selling Rate of the bank for the currency in which PCFC was granted. i) Other conditions regarding the amount of advance, eligibility for advance etc. are same as in the case of Packing Credit in Rupees.

5.5

Advance against Duty Drawback:

The import duty paid on raw materials or the components used in the export products or the excise duty paid on items indigenously produced for export are repaid to the exporter on completion of the export. The items on which the Duty Drawback is available is available is decided by the Government policies as envisaged in the FTP 2009-14.

The need for the exporter seeking the advance against the Duty Drawback arises because of the delay involved in verifying the claims of the exporter by the concerned authorities and making payment of the Duty Drawback claim to the exporter. Exporter seeking liquidity, cannot afford to lock up his funds in this manner. He therefore approaches the bank for the financial assistance to him against his claim of Duty Drawback. The advance can be obtained by the exporter either at the Pre-shipment stage or at the Post shipment stage. The exporter is required to authorise the bank to receive the Duty Drawback claim from the authorities concerned direct. The following applies to the Pre-shipment as well as Post-shipment finance against the Duty Drawback granted to the exporter. The period for which this advance can be availed is 90 days. The Rate of Interest applicable is Base Rate 2.5 PP Amount of the loan in this case is the claim amount margin (to be decided on case to case basis) The Packing Credit granted is treated as overdue after 90 days and the banks are free to charge any Rate of Interest keeping in view the Base Rate and the spread guidelines. In the event of export not taking place and the exporter is therefore not found eligible to receive any Duty Drawback, then the exporter pays the Packing Credit amount to the bank in local currency that is `. The Rate of Interest charged in this case is as applicable for the domestic Rate of Interest from the date of advance

5.6

Post-shipment Finance:

The exporter receives the Firm Export Contract or L/C, avails the Packing Credit and makes the goods ready for the export. He then arranges for the shipment of the goods. At this stage it is necessary to repay the Packing Credit that he has availed earlier. He does so by availing another loan which is termed as Post-shipment finance. The Packing Credit availed earlier gets converted into Post-shipment finance. The exporter might not have availed Packing Credit earlier, but on shipping the goods he may decide to avail the Post-shipment Export Finance. He is eligible to avail the finance in this case also. For availing Post-shipment export finance the exporter has to submit the following: 1. On shipping the goods the exporter obtains the relevant transport documents. He should submit the same to the bank. 2. As the exports have been permitted by the customs, he should submit the relevant shipping bill and the export declaration form duly authorised by the customs. In other words he should submit all the necessary regulatory documents in connection with the exports that he has made. 3. He should also submit the commercial documents as are required by the importer to facilitate the latter to get the expeditious clearance of goods from the customs of his country. These forms should also enable the importer to draw benefits of duty remission / concession from the authorities of his country (e.g. GSP certificate)

4. He should also submit the Bill of Exchange drawn in proper form as per the requirement of the importer / as required as per the terms of L/C. this Bill of Exchange should accompany the documents enumerated in the L/C.

5.6.1

Scrutiny of bill drawn under L/C:

If the exporter has received L/C, and he submits the document under the L/C, the bank who receives the documents and intends to pay becomes the Nominated Bank. the Nominated Bank scrutinises the documents thoroughly with terms and conditions mentioned in L/C and with the provisions of UCP 600. The Nominated Bank also verifies the inter se compatibility / conformation of the documents. On satisfying that the exporter is making a complying presentation, the Nominated Bank makes the payment to the exporter, pending the reimbursement from the Issuing Bank in terms of L/C

5.6.2

Dealing with Discrepant Documents:

If the Nominated Bank finds that the exporter is unable to make complying presentation under the L/C, as there are certain discrepancies in the documents, the exporter has the following courses of action open to obtain the payment. (It may be noted that the ICC has found that about 70% of the documents worldwide, are discrepant on first presentation.) a) Request the Nominated Bank to seek the approval of the Issuing Bank to accept the discrepant documents and make the payment. b) The exporter may offer indemnity or guarantee to the bank stating that he will refund the amount back to the bank in case the discrepant documents are not further accepted by the Issuing Bank and the Nominated Bank is not reimbursed. (This is known as negotiation under reserve) c) He may request the bank to take the documents under collection and send them to the Issuing Bank / importer in the manner as if they are not under L/C. The payment in this case is made to the exporter only after it is received from the importer. Therefore this is not the Post-shipment Finance.

5.6.3

Purchase / Negotiation of Export Bill (Not under L/C):

In this case the bank has to satisfy whether the documents tendered by the exporter conform to the export contract entered into between the exporter and the importer (as there is no L/C in this case). The instructions contained in the covering letter given by the exporter, besides the export contract, are required to be adhered to. These instructions could be as follows: Tenor of the Bill of Exchange, either Deman or Usance. Delivery of the documents is against payment or acceptance The details of the bank through whom the documents are to be presented to the importer Commission to be recovered from the importer or from the proceeds. Drawee in case of need if any etc.

The exporters bank may on satisfying as per the foregoing in paragraphs above may make payment to the exporter against the documents submitted by him. Interest Rates charged are as follows: 1. For Demand Bill of Exchange, up to Normal Transit Period as per FEDAI guidelines (Base Rate 2.5PP) 2. For Usance Bill of Exchange: a. Up to 90 days from the date of shipment: (Base Rate 2.5PP) b. Beyond 90 days and up to six months from the date of shipment: (Base Rate 2.5PP) c. Beyond six months up to 365 days (Base Rate 2.5PP) (Subject however that the concessive Rate of Interest is applicable up to due date only). In all the three cases above,the Rate of Interest applicable appears same. However RBI may advise different rates for the periods mentioned in a, b and c above in future.

5.6.4 Post Shipment Credit in Foreign Currencies (PSCFC):


This scheme is available for the exporters who want to discount the Usance Bills for a period up to 180 days from the date of shipment. These 180 days include the period of Usance, Normal Transit Period and Grace Period. The Rate of Interest charged on such PSCFC is 1% over the LIBOR / EuroLIBOR / EURIBOR If the export bill becomes overdue then the Rate of Interest shall be 3% over LIBOR / EuroLIBOR / EURIBOR. This scheme was introduced by RBI w.e.f. 1st January 1992. It was subsequently withdrawn w.e.f. 8th February 1996. The reader may refer to Appendix A35, Master Circular by RBI for more details in this connection.

5.6.5 Advance against Bills under Collection:


The exporter, whose export bill has been taken on collection basis by the bank sometimes earlier, may be in need of money. He may therefore approach the bank with a request to grant him an advance holding the export bill already sent on collection as a security. On the face of it, this appears a case of purchase of the export bill as described in paragraph 5.6.3 above. The only difference being in the case above as per paragraph 5.6.3, the bank grants the finance to the exporter at the time sending the export bill to the importers bank (called as purchase of the export bill), and in this case the bill is sent to the importers bank earlier and the advance is given to the exporter sometimes later as an afterthought (called as Advance against Export Bill under Collection).

But there are following three differences: 1. Advance against Bill under Collection is a Rupee account and the risk of exchange rate fluctuation remains with the exporter. Consider the case that the exporter has given an

export bill for $ 10,000 for collection to his banker on 1st December 2010 and bank sends it for collection on the same day. The exporter needs advance against this bill on 10th December 2010. He approaches the bank, requests for the advance and the bank gives him ` 2,00,000 as an advance to be recovered on the date the export bill is realised. Let us presume that the bill gets realised on 27th December 2010. The exchange rate on 27th December is 1$ = ` 45. Exporter shall get ` 4,50,000 as the proceeds of his export bill. Bank will recover ` 2,00,000 plus the interest and credit the remaining amount to the exporters account. Thus the risk of exchange rate fluctuation remains with the exporter. However in case of the purchase of the export bill, the bank purchases the bill on 1st December 2010 itself at the exchange rate prevailing on this date. If the rate of exchange on this day is 1$ = ` 44, then exporter will get ` 4,40,000 less margin. On 27th December the margin only will be released.

2. In Purchase Transaction the full, value less margin, is paid to the exporter. But in advance against Bill under Collection certain percentage of the bill amount is paid to the exporter. 3. In Bill Purchased transaction the bank becomes the holder in due course whereas in Advance against Bill under Collection the bank remains an agent of the exporter.

5.6.6 Export Factoring and Forfaiting:


Factoring is, in a way, the system of financing book debts of the exporters. The RBI has permitted the banks who are Authorised Dealers to provide factoring services to the exporters on `with recourse basis. Factoring involves assigning book debts, for consideration, by the exporter in favour of the bank who is factor. The factor assumes the functions of collecting, following, maintaining the receivables of the exporter. The bank may for this purpose maintain sales ledger, attend book-keeping entries and perform other ancillary duties. Exporters get a great relief as the factor provides the services of collection and maintenance of exporters receivables. Forfaiting is similar to export factoring with a difference that while export factoring is generally for short term, forfaiting is for medium term to cover exports on deferred credit basis. Forfaiting offers better liquidity and faster turnover of resources, avoidance of credit risks, elimination of exchange risks etc. to the exporter.

5.6.7 Uniform rules for collection of bills:


The export bills are generally drawn under the L/C issued by the importers bank. Dealing with such bills is governed by the provisions of UCP 600 published by ICC, Paris, France. However, if the export documents submitted by the exporter do not make a complying presentation, then documents are required to be sent under collection. In cases where the exporter does not receive the L/C for some reason, but ships the goods to the importer, exporters bank sends the goods under collection. Collection of a foreign bill involves many parties namely the exporter, exporters banker, importer, importers bank, and bank in the importers Country which is correspondent of the exporters bank etc. To have a common code of understanding and standardised procedure and practices for

this purpose, the Uniform Rules for Collection of commercial paper, a publication of the International Chambers of Commerce, France, Paris, was first brought out in1956. It was then revised in 1967, 1978 and was then titled `Uniform Rules for Collection. It was further revised in 1995. It is called as publication no 522 and contains 26 articles. It is adopted with effect from 1st January 1996. The provisions of this publication are binding on the parties involved in the collection of the foreign bills. FEDAI (Foreign Exchange Dealers Association of India) has approved adoption of these rules in India. For details of these Uniform Rules for Collection Publication No. 522 of ICC refer Appendix A39.

5.7

Other important issues:


Interest Rate Subvention: The Government of India introduced a scheme of Interest Rate Subvention of 2 Percentage Points w.e.f. 1st December 2008 till 31st March 2009 and further extended it till 31st March 2010 and again extended till 31st March 2011, on Pre-shipment and Post-shipment Rupee Export Credit, for certain employment oriented export sectors as under: 1. Textiles (including Handloom) 2. Handicrafts 3. Carpets 4. Leather 5. Gems and Jewellary 6. Marine products 7. Small and Medium Enterprises. 8. Leather and leather manufacturing 9. Jute manufacturing 10.Engineering goods

(These are also some of the sectors enumerated in chapter no.2, paragraph 2.4, which exporter needs to consider as the facilities are granted to these sectors under FTP 2009-14.) Under this dispensation, banks are allowed to charge Interest Rate not exceeding Base Rate minus 4.5 PP on Pre-shipment Credits up to 270 days and Post-shipment Credits up to 180 days on the outstanding amount. However the total subvention will be subject to the condition that the Interest Rate, after subvention, will not fall below 7% which is the Rate of Interest applicable to the agriculture under priority sector lending. (Refer Appendix A37). If the bankers find it difficult to lend to the exporters on account of paucity of funds, RBI extends the refinance to the banks and makes the funds available to them so that the exporter does not suffer. Banks are eligible to get refinance from RBI under this scheme.

The ECGC extends the Pre-shipment and Post-shipment Guarantees to the banks which grant these advances to the exporters. The guarantee from the ECGC is to indemnify the bank granting export finance to the exporter. In case the exporter is not able to pay the export loan extended to him, and the financing bank suffers a loss on account of such failure of the exporter, then certain percentage of the loss suffered by the bank is indemnified by the ECGC under their Whole Turnover Packing Credit Guarantee (WTPCG) and Whole Turnover Post-shipment Guarantee (WTPSG) schemes.

5.8

SUMMARY __________________________________________________

Realization of proceeds of export sale takes longer time compared to the domestic sale. It is also fraught with myriad risks. Nevertheless it is a preferred sector. Exporters earn the much needed foreign exchange for the country, which can be used for the import of technology, knowhow, capital goods etc. which in turn give fillip to the employment generation and the development of economy of the country. Therefore the finance is made available to the exporters at concessional Rate of Interest for as long a time as one year. These rates are also not left to the bankers to decide but are decided by the RBI. Various incentive are also offered to the banks to encourage the bankers to offer these loans to the exporters such as refinance facility by RBI and guaranteed recovery of at least a big portion of the export finance under WTPCG/ WTPSG scheme of the ECGC, which is a Government of India undertaking. The period for which the exporter remains out of funds i.e. from the time he exports the goods and the time he finally receives the payment from the importer, is divided in various sub parts. Different concessional Interest Rates are charged for the loan availed by the exporter depending upon the sub part in which he avails the loan. By resorting to this kind of policy of Differential Interest Rate system RBI ensures that the exporter continues to get the financial assistance at concessive Rate of Interest, but at the same time he ensures speedy recovery of the export proceeds. In case where the exporter is having an irrevocable L/C issued by the prime bank in his favour, the banks rely on this L/C and extend the export finance without insisting on any collateral security. However for exports not covered under L/C the regular credit appraisal process is followed. It is suggested that the exporters take the advantage of the concessional finance schemes that are available to him and described in this chapter.

5.9

KEY WORDS 1) Packing Credit, 4) PSCFC, 7) Base Rate, 10) EURIBOR, 2) Pre-shipment Credit, 5) Term Loan Account, 8) LIBOR, 11) ACU, 3) PCFC, 6) Cash Credit Account, 9) EuroLIBOR, 12) TT Selling Rate,

13) Factoring,

4) Forfaiting, 16) Interest Rate subvention, 19) Refinance.

15) Uniform Rules for Collection, 17) WTPCG, 5.10 18) WTPSG,

DESCRIPTIVE QUESTIONS

Q.1. Explain the salient features of the Packing Credit scheme especially with reference to 1) Eligibility of the exporter, 2) Quantum of Loan, 3) Period of Loan and the Rate of Interest, 4) Sources of Repayment. Q.2. When can the Post-shipment Loan be granted to an exporter? What are the different types of loan that can be availed by the exporter? Q.3. How can the exporter cope up with the liquidity problem when there is delay in receiving the incentive, he is eligible under FTP, from the Government Department? Q.4. How are the bankers encouraged to grant the export finance to the exporter? Q.5. Write short notes on the following: a. Interest Rate Subvention c. Factoring and Forfaiting Q.6. Write short notes on the following: a. ACU c. LIBOR 5.11 OBJECTIVE QUESTIONS b. TT Selling Rate d. EuroLIBOR / EURIBOR b. Base Rate d. Uniform Rules for Collection

Q.1. Packing Credit is made available to the exporter for; A. For arranging the special type of packing for the export goods. B. For meeting exporters working capital needs C. For packing and shipping the export goods D. For shipment of export goods in CFR contract Q.2. Post-shipment Credit is granted to the exporter; A. For the payment of freight for transportation of goods B. For meeting exporters working capital needs C. To tide over the liquidity problems of the exporter D. To pay for freight and insurance in CIF contract Q.3. When the exporter is eligible for the incentives under FTP, but there is time for him to actually receive such incentives, he can approach bank and bank will;

A. Extend him Pre-shipment Credit B. Extend him Post-shipment Credit C. Can extend him both pre-shipment or Post-shipment credit D. Bank cannot finance Q.4. Interest Rates on the export credit are decided by the; A. FEDAI C. EXIM Bank B. Bank themselves D. RBI

Q.5. Maximum period for which the Packing Credit against Duty Drawback incentives receivable is; A. 90 days C. 360 days B. 180 days D. It cannot be granted

Q.6. Maximum period for which the Pre-shipment finance can be generally availed is; A. 90 days B. 180 days C. 270 days D.360 days

Q.7. Maximum period for which the Post-shipment credit can be generally availed is; A. 90 days B. 180 days C. 270 days D.360 days

Q.8. PCFC or PSCFC can be granted in; A. Any foreign currency C. Any convertible currency Q.9. Uniform Rules for Collection are prepared by; A. ICC and approved for adoption by FEDAI B. FEDAI and approved for adoption by ICC C. RBI and approved for adoption by FIEO D. FIEO and approved for adoption by Government of India Q10. Factoring and Forfaiting services are related to; A. Making huge foreign currency loan available to the exporters in stages by the banks. B. Rendering the assistance for manufacturing quality export product by the Inspector of Factories, Government of India. C. Collection of short term and medium term receivables of the exporters by the banks authorised by RBI D. Transport services offered by the freight forwarders. B. Only in $ D. Only in the currency in which the invoice is prepared

Chapter

Marine Insurance

6.1 Learning Objectives Exporter perceives great risk of loss of his export cargo
while in transit from the exporters place till it reaches the importers place. He is interested in covering this risk. The general insurance companies offer the insurance in this regard. The reader will know on reading this chapter what principles he need to follow in order to get such insurance from the insurance company. He would also know the various kinds of losses that he is subjected to and the way We also incorporated the Incoterms that are used in theyhave are required to be the export import covered. He will also know the kind of policy that he should transactions all kind over the world, and the specific meaning ask for and the they have in determining of clauses that he should look into so that the purpose for the risk and the responsibility of either the exporter or the which he is obtaining importer. the insurance policy is served.

6.2 Cargo Insurance:


6.2.1 Introduction:
International trade is very risky as the sellers and buyers are situated at a far off place and in order to trade have to send their goods from one country to the other. The goods are required to be transported by different modes of transport such as road, rail, waterways, airways etc. while changing from one mode of transport to the other mode the goods are required to be unloaded from one vehicle and reloaded into the other vehicle. The goods i.e. export cargo has to thus undergo rigors of bouts of trans-shipment and also the hassles of various modes of shipment. Rough handling, hostile environment is likely to cause damage to the goods. The exporters are no wonder a worried lot on this count if it is their responsibility to reach the goods to the importer. Importers are similarly worried if it is their responsibility to buy the goods from the buyers place and carry them to their place.

Where the anxiety for the safety of the goods and the lurking risk of damage to the goods stifles the enthusiasm of the international traders, insurance companies find the prospects for their business. In fact the genesis of the Marine Insurance lies here. The merchants in London use to collect small amounts from the members and pool this money in a big corpus of fund. This corpus was then used to make good the eventual loss of a trader while his goods were in transit. In India the business of non life insurance was started by the Oriental Insurance Company in 1818. Now there are 4 Public Sector Insurance Companies and as many as 16 Private Sector Companies which offer the Marine Insurance. It may be noted that whenever there are exports, by whatever mode of transport, there is a risk associated with it and the cover that is provided by the insurance company in respect of this is called as Marine Insurance.

6.2.2 List of Insurance Companies operating in India:


The following insurance companies operating in India offer Marine Insurance cover: The Public Sector Insurance Companies which cover these risks are 1) National Insurance Company Ltd. 2) New India Assurance Company Ltd. 3) Oriental Insurance Company Ltd. and 4) United India Insurance Company Ltd. There are many Private Insurance Companies that cover the kind of risks associated in the transportation of the export cargo. Some of them are: 1) ICICI Lombard General Insurance Company Ltd. 2) HDFC Chubb General Insurance Company Ltd. 3) Universal Sompo General Insurance Company Ltd. 4) Bajaj Allianz General Insurance Company Ltd.

5) IFFCO- Tokyo General Insurance Company Ltd. 6) Reliance General Insurance Company Ltd. 7) Royal Sundaram Alliance Insurance Company Ltd. 8) Tata AIG General Insurance Company Ltd. 9) Cholamandalam General Insurance Company Ltd. 10) Export Credit Guarantee Corporation 11) Apollo DKV Insurance Company Ltd. 12) Future General India Insurance Company Ltd. 13) Star Health and Alliance Insurance Company Ltd. 14) Shriram General Insurance Company Ltd. 15) Bharti AXA General Insurance Company Ltd. 16) Agriculture Insurance Company of India.

6.2.3 Principles of Marine Cargo Insurance:


6.2.3.1 Insurable Interest: A person is said to be having insurable interest if he is interested in safe arrival of cargo. The test is, if the person is put to loss, if the cargo gets damaged then such person is said to be the person having insurable interest in the cargo. In case the export contract is FOB, then the exporters liability ceases as soon as the goods are loaded on the board of the ship. He is then after not responsible for the damage to the goods or loss of the goods. Thus in FOB contracts the exporter ceases to be the person having insurable interest as soon as he ensures that the goods are safely put on the board of the ship. But from this point onwards the importers responsibility commences and he is the one who suffers loss if the goods get damaged or goods are lost. Thus the importer becomes the person having insurable interest. Considering the above it is open for the exporter or the importer to effect the Marine Insurance of the export cargo. In international trade the title of the goods or ownership of the goods and therefore the insurable interest (and also the risk) keeps shifting from one person to another at various points. International Chambers of Commerce has clearly spelt out these points from where the risk shifts. These are the basis of Incoterms, which we shall discuss in this chapter at a later stage. 6.2.3.2 Utmost Good Faith: A contract of insurance is the contract of uberrimae fidei, i.e. contract of utmost good faith. The meaning of this is that if the exporter has concealed any material fact, the contract can be avoided by the insurance company. Similarly if the exporter misrepresents the facts, the insurance

company can still avoid the contract. It is generally said that the exporter should disclose what he ought to disclose, and should not disclose what he ought not to disclose, about the material facts while insuring. Exporter is thus required to act in good faith. This also similarly applies to the other party namely the insurance company. 6.2.3.3 Indemnity: The contract of insurance is the contract of indemnity. That is the insurance company compensates the exporter only a portion of the loss. The beneficiary or the assured under the Policy is generally not supposed to make profit out of the claim made under the insurance Policy. But in case of Marine Insurance Policy normally the insurance is effected for 110% of the CIF value. This is to allow the exporter to recover the cost, the return transportation expenses, exchange rate fluctuation loss if any and certain amount profit.

6.2.4 Nature of Risks:


6.2.4.1 Types of Losses: Total Loss and Partial Loss: The following four risks are the basic risks those are covered in any insurance Policy. They are: Perils of the sea Fire Jettison Barratry 1. Perils of the sea, which include damage to the vessel or the cargo by forces of waves, storms, stranding of the vessel, sinking of the vessel and collision with other vessel etc. 2. Fire, which includes damage directly due to fire or the damage caused due to efforts made to extinguish the fire. 3. Jettison, which means voluntary throwing overboard some cargo to save the ship and the rest of the cargo. 4. Barratry, which means loss due to fraudulent or wrongful acts of the captain of the vessel or its crew. The losses on account of these risks or otherwise could be of four types as follows: A. Total Loss: i. Actual Total Loss B. Partial Loss: i. General Average Loss ii. Particular Average Loss ii. Constructive Total Loss

We shall discuss these different kinds of losses below.

A. i.

Actual Total Loss:


This definition is with reference to the goods already insured, and there is loss of the goods. This loss will be called as Actual Total Loss when the goods are destroyed or so damaged as to cease to be a thing of insurance. Or alternately the assured to irretrievably deprived of the goods. (For example the goods get completely burnt and reduce into ashes; we consider this as Actual Total Loss)

A. ii. Constructive Total Loss:


The loss is considered as Constructive Total Loss if the expenditure that is required to be incurred in preserving / retrieving these goods is more than the value of the goods themselves. (For example consider items worth `10,000 have fallen into the sea while loading on the ship. When trying to retrieve these items the owner has to spend an amount of `12,000. In such a case it is better not to retrieve these items that have fallen into the sea. This loss is the case of Constructive Total Loss.)

B. i.

General Average Loss:


This is the unique feature of the Marine Insurance. This has been the part of Marine Insurance from very ancient times. The concept of the general average is quite simple and it is incorporated in the Marine Insurance policies. Consider the ship is on the high seas and starts sinking due to excess weight. The Captain and the crew members decide that the ship should be made lighter in order to keep it floating. To this end they decide to throw away some of the cargo out of the ship into the sea. Generally the captain decides which cargo has to be thrown on considering its weight and the value. The cargo with higher weight and lower value is thrown out first. Captains decision, as he being the person on the spot, is final in this regard. This is called jettisoning the cargo. In the process of jettison, as above, by throwing one of the exporters cargo has saved the cargo of all others. It has also saved the ship from sinking. The exporter whose cargo is thrown away has suffered General Average Loss. Where there is General Average Loss, the party on whom it falls is entitled to a ratable contribution from other parties who were benefitted because of this. Therefore the other exporters as well as the ship owner compensate (General Average Loss) the exporter whose cargo was jettisoned. These other exporters as well as the ship owner incur some loss in compensating the exporter whose cargo was jettisoned. This loss to other exporters and to the ship owner is called as contribution to General Average Loss. When the assured has incurred a general average expenditure he may recover it from the insurance company. Some examples of General Average Loss could be on account of the following acts: i. Cargo jettisoned in an effort to refloat the ship ii. Goods damaged by water used to extinguish fire, provided the goods themselves have not been on fire.

iii. Expenses of entering and leaving a port of refuge iv. Expenses of discharging, storing and reloading of the cargo if that is necessary for the common safety It may be noted that the; Above acts are known as General Average Acts The loss caused because of these acts is a General Average Loss Contribution made by other exporters whose cargo is saved and by the ship owner is called as General Average Contribution 6.2.4.2 Particular Average Loss: General Average loss is voluntarily undertaken for the common safety of all the other parties, exporters as well as the ship owner. It can therefore be shifted on the others who are benefitted. Particular Loss on the other hand is fortuitous or accidental. It cannot be therefore shifted to others and has to be borne by the person affected. This type of loss can be broadly classified in the following three categories. 1. Loss or damage caused to both the goods and the carrier of the goods. 2. Loss or damage is only to goods and not to the carrier of the goods. 3. Loss or damage caused during handling of cargo when the goods are trans-shipped. We give below the examples of each category: 1. Loss or damage caused to both the goods and the carrier of the goods: a) b) c) d) e) f) Sinking of the carrier / vessel or ship Grounding of the carrier / vessel or ship Collision of the carrier / vessel or ship with another vessel Derailment of a train Collision or overturning of a truck Aircrafts accidents

2. Loss or damage is only to goods and not to the carrier of the goods. a) Flooding into the carrier b) Wetting by sea water or rain or snow c) Condensation of the cargo d) Sweating of the cargo e) Breakage or damage due to shock

f) g) h) i)

Vibrations resulting in damage in quality or quantity Acceleration or deceleration forces Turbulence or damage by odour through contact with other goods Theft, Pilferage or hijacking etc.

3. Loss or damage caused during handling of cargo when the goods are trans-shipped. a) b) c) d) e) While loading cargo on to the vessel Handling the cargo in the ships hold Discharge of cargo Trans-shipment of cargo during the journey Loading and unloading the cargo in the warehouse etc.

If the loss is incurred due to the above reasons/ acts or activities, it is a Particular Average Loss of the exporter 6.2.5 Features of Marine Insurance Policy: 6.2.5.1 Parties to the contract: The exporter or the importer approaches the insurance company to obtain an insurance cover / insurance Policy for the goods to be transported. The person who approaches the insurance company for the sake of getting insurance is called as `Proposer. The Insurance Company offering Marine Insurance is generally known as `Underwriters. The goods that are being transported from one country to the other are known as `subject matter. The person who is to receive the payment in case of loss or damage to goods is called as `Assured. 6.2.5.2 Premium Charged: Premium charged depends on the following factors: i. Goods: a) Nature of goods: Hazardous, fragile goods attract more premium. b) Size, volume and weight of the goods: Larger size and volume, and more weight attract more premium. c) Packing of the goods: Well packed goods attract less premium ii. Transit routes: The transit routes that are prone to maritime crimes such as piracy, theft, embargo or terrorist activities, attract more premium. iii. Infrastructure at the place of destination: If the infrastructure at the place of destination is sub standard then more premium is charged.

iv. Quality of the Vessel: If smaller and older ships carry the goods, then more premium is charged. v. Extent of cover sought: If the exporter seeks wider coverage of risks more premium is required to be paid by him 6.2.5.3 Sum Assured: Marine Insurance Policy is the Agreed Value Policy, unlike the other insurance Policy. Such insurance contracts are based on the value of the sales contract and allow an element of profit to be included in the sum assured. According to the Marine Insurance Industry practices there is a provision for taking an extra value over and above the CIF invoice value as sum assured. This extra 10% amount generally allowed is for the purpose of i) meeting the transportation expenses to bring the damaged goods back, ii) to cover the loss in the value of the goods due to exchange rate fluctuation and iii) to allow the exporter to earn the remainder as his profit. Therefore the sum assured in Marine Insurance policies is 110% of the CIF Invoice value of the goods. 6.2.5.4 Assignment: Marine Insurance Policy can be transferred by assignment unless it contains specific terms expressly prohibiting the assignment. The assignment can be made either before or after the loss takes place. Since the exporter obtains the payment from his bank he assigns the Policy in his bankers name. His banker sends this Policy to its correspondent in the importers country along with the other documents. At that time once again the exporters bank assigns it in favour of the Correspondent bank or the importers bank. When the importer makes the payment in case of DP term or accepts his liability on the bill of exchange in case of DA term, the importers bank assigns it in favour of the importer. As assignee is the person to who is entitled to receive the payment from the insurance company in case of loss or damage to the goods, each assignee is an `Assured person at that popular time. Since such assignees or the assured persons are more than one during the entire period of insurance, the marine policies are impliedly assignable / transferrable. 6.2.6 Types of Marine Insurance Policy: 6.2.6.1 Specific Voyage and Time Policies: Voyage Policy covers the insurance of the goods from the commencement of the voyage till the completion of the voyage. Time Policy covers the insurance of the goods for the particular time specifically mentioned in the Policy. It can be issued for a maximum period of 12 months.

A contract of both the voyage and the time may be included in the same Policy. Such policies are suitable for the firms that seldom require marine cargo insurance policies in their normal course of business. 6.2.6.2 Open Policy: Exporters having continuous shipments may opt for this type of Open Policy. Under this arrangement a Policy covering the expected shipments for a period of, say, one year is taken. As and when the shipments are made they are declared to the insurer and got the insurance covered. The insurance Policy issued for an overall limit / period is a stamped document issued once when the Policy is taken. Subsequently, as and when the shipments are made, the declarations are made by the exporter and the, unstamped, certificates of insurance are issued by the insurer. A variant of the Open Policy is the Open Cover. It is similar to the Open Policy. But it is not a legal document and not executed on a stamp paper. However, the specific policies or certificates issued under the Open Cover are stamped and they are legal document. Exporter generally takes this Policy for one year for the expected export turnover for that year, so that he does not have to repeatedly obtain the Policy each time he exports the goods. This is cost effective and efficient way of managing the exports. If the exporters total exports for the year fall short of the amount of sum assured of the Open Policy, then the balance amount premium is refunded or adjusted for the premium for the next year. It is necessary that the exporter when he takes an Open Policy declares all his exports, as soon as the shipment takes place, and get them covered. He is not expected to declare the exports only after the goods are lost and the insurer is unaware of this loss of goods. In such a case insurer will pay the claim. But this is against the principles of utmost good faith. 6.2.6.3 Special Declaration Policy: This is the Open Policy for the large exporters. The following are the points of difference between Special Declaration Policy and the Open Policy mentioned above. Special Declaration Policy is available to the exporters having annual export turnover of ` 2 crore and above The exporter has to declare his annual turnover at the commencement of the Policy and pay the premium on the whole turnover in advance to the insurer. He gets the discount on the premium to the extent of 20% to 35% for making such advance payment. Instead of making the declaration as soon as the exports are made as is envisaged in the Open Policy mentioned above, in this Special Declaration Policy the declaration is allowed to be made on monthly or quarterly basis.

6.2.6.4 Duty Insurance Policy: This Policy is beneficial to the importer of the goods / cargo in the importers country. It is necessary when the import duty component in the value of the goods / cargo is substantially high.

Generally the insurance company covers the 110% of the CIF value of the goods / cargo. However this goods / cargo becomes more valuable when the import duties (say for example 25% of the value of the goods / cargo) are paid on them. If we consider the CIF value of the goods / cargo to be $ 100, then the insurance claim is available up to $110. But when the importer receives this goods in his country and the import duty of 25% is paid on it, the value of the goods become $125. In case such a goods / cargo is lost or gets damaged after the payment of import duty but before it reaches the importers warehouse, there is loss / risk which remains uncovered. This very risk is covered under the duty insurance Policy. However the claim under this Policy is admissible only if the claim under the Marine Insurance Policy covering the goods is admissible. This Policy is generally taken by the importer.

6.2.6.5 Sellers Contingency Policy: This Policy covers the risk the exporter is subjected to when the importer refuses to accept the goods due to certain reasons. 6.2.6.6 Contents of the Policy: The Marine Insurance Act provides that the contract of Marine Insurance shall not be admitted in evidence unless the following dwtails are mentioned in the Marine Insurance Policy: i. The name of the assured or of some person who affects the insurance on his behalf ii. The subject matter of insurance and the list of risks against which it is insured iii. The voyage or the period or both, as the case maybe, covered by the insurance. iv. The sum or sums insured v. The name or names of the insurer or insurers. The marine Policy may be signed by or on behalf of two or more insurers Apart from this there are various terms and conditions enumerated.

6.3

Risks Covered under Institute Cargo Clauses:

Coverage against various kinds of losses / damages etc. is provided on the basis of Institute Cargo Clauses. The London Institute of Underwriters, UK, first introduced these clauses. Cargo insurance claims are settled on the basis of Institute Cargo Clauses in India. The different kinds of Institute Cargo Clauses are as follows: 1. Institute Cargo Clause A 2. Institute Cargo Clause B 3. Institute Cargo Clause C Such Clauses are also used to cover the movement / transportation of goods within India, in Inland water transport or through sea or air.

The type of risks covered under various Institute Cargo Clauses is as follows:

6.3.1 ICC clause C:


Institute Cargo Clause C or ICC `C: This is the most restricted coverage and subject to the listed exclusions, covers loss or damage to the subject matter insured, caused by: 1. Fire or explosions to the ship or goods. 2. Sinking of the ship. 3. Stranding of the ship from normal route. 4. Grounding or capsizing of the ship and cargo. 5. Overturning or derailment of truck or rail. 6. Collision of ship or aircraft. 7. Contact of vessel craft with any external object other than water causing damage to cargo. 8. Delivery of goods at port of distress thereby causing damage. 9. General Average losses as discussed above.

10.Jettison as discussed above. Institute Cargo Clause C covers major damages / casualties during land or sea transit and such clauses are used for cargo that does not get easily damaged like, coal, oil in bulk, scrap steel etc. 6.3.2 ICC B: Institute Cargo Clause B or ICC `B: Institute Cargo Clause B is wider in coverage of risks as compared to risks covered under ICC `C. In addition to the damages covered under ICC C Clauses, it covers the following loss or damage: 1. Earthquake, causing damage to goods. 2. Volcano eruption or lightning in sky causing damage to the goods. 3. Damage by water ingress into ship at sea / inland water transport. 4. Total loss of package damaged at board of ship. 5. Total loss of package dropped during loading and unloading of cargo. 6. Institute Cargo Clause B covers more risks in comparison to ICC C. It covers the significant additional coverage against wetting/damping/moisture damage from sea, lake or river water. 7. It also covers accidents while loading and unloading of cargo

1. 2. 3. 4.

But it does not cover the following: Theft, pilferage, shortage and non-delivery. Fresh and / or rain and / or river water damage. Hook, oil, mud, acid and damage by other cargo. Heating and sweating

5. Breakage, denting, clipping, scratching and blending. 6. Leakage. 7. Bursting and tearing. These risks can be covered by paying an extra premium. They will then appear as endorsement to the Policy.

6.3.3 ICC A:
Institute Cargo Clause A or ICC A: The coverage is highest under the Institute Cargo Clause A. This clause is therefore also known as All Risk clause or All Risk Policy, which covers most of the risks of damage and loss to cargo in international trade. The insured has to be vigilant in deciphering all the meanings of the clause, as risk and casualties, which fall under this clause, are of fortuitous nature. This clause does not cover any loss that occurs inevitably. The insured has to be careful while opting for this clause as the premium rate is highest under this clause. The decision of covering the goods under this clause shall be based on nature of goods / perishability of goods etc. Casualties / damages covered under ICC A are in addition to the risk coverage offered in ICC B and ICC C.

The additional risks covered ICCC A are as follows: 1. Breakage of the Cargo goods. 2. Scratching of the Cargo goods. 3. Clipping, denting and bruising of the Cargo goods. 4. Theft or Piracy of Cargo goods. 5. Malacious damage such as untimely delivery or non-delivery of goods. 6. All damages caused due to water including rain water.

6.3.4 Risks not covered in Marine Insurance:


There are certain risks which are not covered by a Marine Insurance Policy under any of the cargo clauses mentioned above. They are: a) Loss, damage or expense caused by delay and inherent vice or nature of the subject-matter; b) Loss, damage or expense attributable to willful misconduct of the insured, c) Ordinary leakage, ordinary loss in weight or volume, or ordinary wear and tear of the subject-matter insured; d) Insufficiency or unsuitability of packing; e) Deliberate damage to or deliberate destruction of the goods; f) Loss, damage or expense arising from insolvency or financial default of the owners, managers, charterers or operators of the vessel; and g) Loss, damage or expense arising from the use of atomic weapons or nuclear fission and/or other like reaction or radioactive force.

6.3.5 Comparison of ICC clauses A, B and C:


Risks 1. Fire or Explosion 2. Vessel or craft stranded, sunk, burnt or capsized 3. Land conveyance overturned or derailed 4. Collision or contact of vessel, craft or conveyance with any yes external object other than water 5. Discharge of cargo at a port of distress 6. Earthquake, lightening or volcanic eruption 7. Malicious damage of goods 8. Theft of goods 9. Delay in delivery of goods 10. Inherent vice or nature of the subject matter 11. Willful misconduct of the assured 12. General Average Sacrifice/Contribution 13. Jettison 14. Washing overboard 15. Entry of sea, river or lake water into vessel, craft, yes conveyance, container or a place of storage 16.Total loss of any package lost overboard or dropped while loading onto, or unloading from, vessel or craft 17. Piracy 18. War 19. Strikes, Riots, Civil Commotion (SRCC) including no terrorists or any person acting from a political motive 20. Use of any atomic or nuclear weapon 21. Ordinary leakage, ordinary loss in weight or volume, or ordinary wear or tear 22. insufficiency or unsuitability of packing 23. The sea unworthiness of vessel, craft, conveyance or container at the time of loading no no no no no no no no no no no no yes no no no no no no no yes yes no yes yes yes yes yes no no yes yes yes yes yes no no no no no yes yes yes yes yes no no no no no no yes yes no no ICC A yes yes yes ICC B yes yes yes yes ICC C yes yes yes yes

6.4

Incoterms:

The existence of difference in interpretation of the transportation terms in different countries has been a cause of friction in the international trade transactions. Misunderstandings, disputes and court cases could all be avoided if all tHe parties to the international trade understands the transportation terms (as well as other terms) in the same way and in the same sense. International Chambers of Commerce, (refer Chapter 4 paragraph 4.4) has therefore evolved International Commercial terms, known as Incoterms, which are commonly used transportation terms, in international trade transactions. It defined clearly the points when the risk and responsibilities of the buyer and seller of the goods and passage of ownership in the goods are assumed by the buyers and sellers. Such attempts were made first in 1936 when the incoterms were formulated. Subsequently they were revised them in 1953, 1967, 1976, 1980, 1990 and in 2000. Keeping in view the changing aspects of the transportation in the recent times once again ICC revised the Incoterms in 2010 and announced that these Incoterms, as given below, shall be used with effect from 1st of January 2011. Appended below is the list of eleven Incoterms, covering all modes of transport. Incoterms 2010: Expanded Summary Note: An Incoterm must be accompanied by a named place for example FOB Sydney, EXW Tahitietc.
T he fo llow i ng a re t he El eve n Inc ot erm s tha t a re in u se w .e .f. 1 st Ja n ua ry 2 0 1 1.
1 ) E X W , 2 ) FC A , 3 ) CP T , 4 ) C IP , 5) D A T , 6 ) D A P , 7 ) D D P , 8 ) F A S , 9) F O B , 1 0 ) C FR , 1 1 ) C IF .

1) EX W (E x W o rks )

Th e bu y er b e ar s a ll cos t s a n d ri s ks inv o lv e d in ta kin g t h e go od s from t h e s e ll er's p rem is e s to the d e s ire d de s ti nat io n . T h e s e ll er's ob l iga ti o n is t o m a k e t h e g oo d s a v ai la b le at hi s p re m i s es (w ork s, fac to ry , w a reh o us e). Th i s te rm rep r es en ts m ini m u m o b li gat io n fo r the s ell er a nd m a x im u m o bli ga tio n for th e b uy e r. T hi s t erm ca n b e us ed ac ro s s al l m o de s of tr an s po rt. Th e s e lle r's o b li gat io n is t o h a n d o ver th e g oo ds , cl ea red for exp o rt, int o t he ch arg e of th e c arr ie r n a m e d b y t h e bu ye r a t th e na m e d pla ce or p o in t. If n o pr eci se p o int is i nd i ca te d by t he b uy e r, t h e sel le r m ay c ho o s e w it h in t h e p la ce o r ran g e s ti p ul ate d w he re t h e ca rri er s hal l ta k e th e g oo ds in t o h is cha rge . W he n the s e lle r's as s is t anc e i s req u ire d in m a kin g t h e co n tra ct w ith the ca rri er t h e sel le r ma y a ct a t t he b uy e rs ris k an d exp en se . Th is t erm c an b e us ed ac ro s s al l m o de s of tr an s po rt. Th e s e ll er p ay s t h e fre ig ht fo r the c arri a g e o f go o ds to the na m e d des t ina ti o n. The ri s k o f lo ss o r da m a ge to t he g oo ds occ urri n g aft er the de li very h as be en m ad e t o th e ca rri er i s tra ns ferre d fro m t h e sel le r to t he bu yer . T h i s t erm re q ui res th e s el le r to c le ar t he go od s for e xp or t a n d c an b e us e d ac ro s s a ll m o d es of tra ns p ort .

2) F C A (F re e C a rr ie r A rra n g ed )

3) C PT (C a rriag e P a id T o)

4)

CIP (Carriage & Insuranc e Paid to)

Th e seller ha s the sam e obligations as u nder CPT but has the resp onsibility of obtai ning insuran ce a gainst the b uyer's risk of loss or dam age o f go ods d uring the carriage. The seller is required to clear th e goods for ex port ho wever he is only r equ ired to obtain insura nce on minim um coverage. This term requires the seller to clear th e goods for ex port and can be used acro ss al l mod es of transport . New Term - May be used for all transp ort modes: Seller delivers th e goods, unloaded from the transpo rt, and place at th em at the d isposal o f th e buyer at a nam ed termin al at the named port o r p lace o f d esti natio n. "Term inal" includes qu ay, wareh ouse, co ntainer yard or road, rail or air terminal. Both p arties should agre e on the part icu lar term inal a nd i f p ossible a point within the term inal at which po int the risks will tran sfer fro m th e seller to the buyer o f th e go ods. (If it is intended that th e seller is to bear all th e costs and responsi biliti es from the term inal to another point, DAP o r DDP may app ly). Responsibilit ies Seller is responsib le for the c osts and risks to bring the good s to th e po int specified in the co ntract Seller sh ould ensur e that their forwarding co ntract m irro rs the c ontr act of sale Seller is respo nsible fo r the export clearan ce procedu res Im por ter is respon sible to clear the go ods fo r impor t, arra nge im por t c usto ms formalities, and pay im port duty If the parties intend the seller to bear the risks and costs of taking th e go ods fro m the term in al to another place then the DAP or DDP term m ay app ly

5) D AT (Delivered At Term inal)

6)

DAP (Delivered At Place)

New Term - May b e u sed for all transp ort modes: Seller delivers th e goods when they are pla ced at the dispo sal of the buyer from the tr anspor t ready fo r unlo ading at the nam ed Place. Parties are ad vised to specify as clearly as possible the po int with in the agreed Pla ce, because risks tran sfer at this point from seller to buyer. (If the seller is respon sible for clearin g th e goods, paying duties etc., co nsiderat io n should be given to u sing the DDP term) . Responsibilit ies Seller bears th e r espon sibility and risks to deliver the good s to the name d p lace. Seller is a dvised to ob tain contracts o f carriage that m atch the c ontr act of sale. Seller is req uired to clear t he go ods for exp ort. If the seller incurs unloading costs at place of d estinatio n, un less previously agreed th ey are not entitled to recover any such costs Im por ter is r espon sible fo r effecting custom s clearance, and paying a ny c usto ms dutie s in his co untry.

7) DDP (Delivered Duty P aid)

Th e seller is respon sible for deli vering th e goo ds to the nam ed p lace in th e cou ntry of imp ortation, includ ing all costs and r isks in bringing the goods to fin al destina tion. This includ es paym ent of duties, ta xes and com pletion of custom s form alities i n exporters country and im porters co untry as well . This term may be used irrespec tive o f th e m ode of t ran sp ort.

The seller is considered to have fulfilled his obligation when goods are8) FAS (Free Alongside placed alongside the vessel at the port of shipment. The buyer is responsible Ship)for all costs and risks of loss or damage to the goods from that moment. The buyer is also required to clear the goods for export. This term should only be used for sea or inland waterway transport. Once the goods have passed over the ship's rail at the port of export the buyer9) FOB (Free On Board) is responsible for all costs and risks of loss or damage to the goods from that point. The seller is required to clear the goods for export. This term should only be used for sea or inland waterway transport. 10) CFR (Cost and Freight) The seller must pay the costs and freight required in bringing the goods to the named port of destination. The risk of loss or damage is transferred from seller to buyer when the goods pass over the ship's rail in the port of shipment. The seller is required to clear the goods for export. This term should only be used for sea or inland waterway transport.

11) CIFThe seller has the same obligations as under CFR. However he is also (Cost, Insurance required to provide insurance against the buyer's risk of loss or damage to the & Freight)goods during transit. The seller is required to clear the goods for export. This term should only be used for sea or inland waterway transport.

6.5 Procedure for lodging Marine Insurance Claim:


When the `assured person comes to know about the damage or loss of the goods, he is expected to take efforts to reduce the damage or loss as much as possible. In his efforts to do so he may incur some expenses. Such expenses incurred on controlling the damage of goods are reimbursable by the insurance company in addition to the payment of the claim. In other words, the insurance company expects the `assured person to do exactly what he would have done to save the goods from such an incident if the shipments were not assured at all. After this is done, the `assured person should notify the insurance company, which shall survey the damage to the cargo. As per provisions of the Marine Insurance Act 1963; all cargo insurance claims; which are more than ` 20,000 are required to be surveyed by the licensed surveyor in order to assess the damages / loss to the goods. The surveyor will ascertain the circumstances underwhich damage or loss to goods has occured, such as nature of goods, proximate cause behind the incident and extent of loss and damage to the goods. The shipper or his agent should also be informed immediately and should be advised to be present at the time and venue of the survey, so that the shipper and exporter can explain the causes that led to the damage of goods. The surveyor is required to inform about the monetary claim in writing to the shipping company, port trust or any other responsible party, under whose custody the consignment was at the time of loss / decay or damage. Such reporting by the surveyor can be in any form, but it must include the full details of the transit of goods. Such description of the loss or damage by the surveyor should state that the shipping company or other party will be held responsible for any

loss or damage with an indication of the estimated amount of loss, if it is proved that loss is due to their negligence. After payment of a claim on the basis of a Subrogation Letter and a Power of Attorney obtained from the importer or exporter, the insurance company can proceed against the carriers or any other responsible party for recovery of the amount as per the laid down rules in this regard. If the rights of recovery against the parties, which are liable to make good the loss or damage, are not protected, by the person assured, then the amount recoverable from the party liable, will be deducted from the claim amount and the balance amount will only be paid to the person assured. However, if the amount of recovery is not ascertainable, the claim will be settled on non standard basis for an amount not exceeding 75% of the assessed loss as per Marine Insurance Act, 1963.

Substantiating the Claim:


The important aspect of cargo claims is to substantiate and prove the losses or damages that have occurred to the cargo during the transit. It is the responsibility of the assured person to prove that casualty / damage that has occurred to the cargo is due to reasons that are beyond his control and these damages or losses have occurred during the period of insurance coverage. The following procedure is adopted to substantiate the claim of insurance with the insurance company.

Scrutinizing the outside condition of packages:


The person assured must be cautious to check the outside and external condition of all packages of cargo at the time of taking delivery of cargo from the shipping company. Only if he is satisfied that cargo packages seem to be in good apparent condition, should he sign the delivery receipt. First hand inspection is expected by the assured person. As, such an inspection / examination on the part of importer or his agent, can delay the unloading of the cargo from the ship / lorry, the shipping company will generally try to avoid such inspection / examination. However, the assured person must thoroughly examine the consignment packages and record any losses / damages on the delivery receipts, so that it can work as an evidence for the insurer to take action against carriers for negligence, if any.

Recording damages / losses on delivery receipt:


The person assured must ensure that he obtains the signature from the person in charge of the steamship, shipping or lorry company, or port authorities on a delivery receipt. It shouldbe noted that all delivery receipts must include a clause, which shall indicate that the cargo received by the person assured is in a good condition. If the condition of the goods is not so, the same fact should be recorded on the delivery note. The person assured, while receiving the goods, cargo and cartons, must check whether the Shipping company has signed a delivery receipt. In case the Shipping company has not done so and the person assured has received the goods, the onus of damage and casualty will be on the person assured himself. If the person assured takes delivery of cargo without noting the damages

on the delivery receipt and signature of person in charge of Shipping company / Lorry Company or railway etc, it would be inferred that he is satisfied with the cargo and has legally acknowledged and received the goods in apparent good condition. It minimizes the chances for the person assured to prove that the damage done to the cargo was by the Shipping company/Lorry company or Railway.

3. Recording the numbers of cartons / packages:


Another important issue that requires attention on the part of consignee / importer / person assured, is to record all case numbers that appear damaged on the delivery receipt. Vague term such as Six Cases Damaged on the receipt are not acceptable in a court of law and therefore the consignee / importer / person assured must record the numbers appearing on each case / cartage / package as the case may be. Cargo Insurance Claim Procedure: 1. In case of loss / damage of the cargo in the transit, the person assured has to lodge a monetary claim against the carrier within the time limit as prescribed in the Marine Insurance Act 1963, to protect the right of recovery of claims. 2. The person assured should proceed for the appointment of surveyor or claim representative as the case may be, in the agreement with the insurer so as to determine the nature, cause and extent of loss / damages to the cargo. 3. The surveyor or claim representative, after a thorough analysis of the cargo makes a report and informs the insurer about the approximate value of loss incurred to the cargo.

4. The claim procedure of insurance can take about a months time. Various documents required for lofging claims are given below.

1.

Document required in ocean transit:


(a) Claim form of insurance, which shall be duly filled in and signed by the Person assured. (b) Original policy / certificate (c) Cargo landed but Missed / Certificate of Damages / Certificate of Short Landing (as applicable) (d) Suppliers invoice (e) Packing list (f) Importers copy of Bill of Entry (in quadruplicate) ((g) Survey report of the shipping company. (h) Copy of all sorts of correspondence / communications, which has taken place with the shipping company

(i) Copies of all sorts of postal correspondence / communications, which have taken place with the shipping company / carrier / port authorities / customs authorities etc. (j) In case of short shipment of cargo, the copies of correspondence with the exporter / consignor. (k) Lost Overboard Certificate, in case of loss of cargo from the port trust, which shall be countersigned by the master of the vessel or steamer agents (l) Copy of Pro forma Invoice for valuation of cargo damaged / lost and original repair bills receipts (m) Copy of application filed by the importer with Customs for refund of duty (if applicable) (n) Photographs of the damaged goods evidencing loss. (o) Letter of Subrogation-cum-Special Power of Attorney.

2.

Documents required in inland transit (rail):


(a) Claim form, which shall be duly filled and signed by the Person ssured. (b) Original policy / certificate (c) A certificate of open delivery or copy of application for open delivery (d) Copy of the letter of protest sent to the railways with the acknowledgement and certified extract of the remarks made in the station delivery or complaints book of the railways (e) Suppliers invoice (f) Packing list (g) Copy of insurance claim notice served on the railways along with postal acknowledgement card (h) Copies of all sorts of correspondence / communications, which have taken place with the railway (i) Copies of correspondence taken place with the consignor / exporter (reply from consignor / exporter is a must) in connection with short packing (if applicable) (j) Original copy of Railway Receipt (k) Copy of Pro forma Invoice for valuation of cargo damaged / lost and original repair bills receipts (l) Photographs of the damaged cargo, evidencing loss. (m) Copy of the Letter of Subrogation along with the Special Power of Attorney.

3. Documents required in inland transit (road):


(a) Claim form, which shall be duly filled in and signed by the claimants (b) Original policy / certificate (c) Original copy of Open Delivery Certificate (d) Copy of notices served to the Lorry company for advising about survey to be done and protests made to them for the damaged / lost cartons / packages (e) Suppliers invoice (f) Packing list (g) Copy of insurance claim notice served on the Lorry company along with postal acknowledgement card (h) Copies of all sorts of correspondence / communications, which have taken place with the carriers (i) Copies of correspondence, which has taken place with the consignor / exporter (reply from consignor / exporter is essential) in connection with short packing (for short receipt claims) (j) Original copy of Non-Delivery Certificate for making claims of non-delivery (k) Copy of Pro forma Invoice for valuation of cargo damaged / lost and original repair bills receipts (1) Photographs of the damaged cargo, evidencing loss. (m) Copy of the Letter of Subrogation along with the Special Power of Attorney.

4. Documents required in air transit:


(a) Claim form, which shall be duly filled in and signed by the Person assured. (b) Original policy / certificate (c) Original airway bill (d) Importers reference copy of Bill of Entry (quadruplicate copy) so as to prove the arrival of cargo (e) Suppliers invoice (f) Packing list (g) Copy of Insurance Claim Notice served on the airlines along with postal acknowledgement card (h) Copies of correspondence, which has taken place with the airlines carrier (i) Copies of correspondence, which has taken place with the consignor / exporter (reply from consignor / exporter is essential) in connection with short packing for estimating short receipt claims.

(j) Original copy of Non-delivery Certificate for making claims of non-delivery (k) Original Certificate of Short Delivery of Cargo for making claims of short delivery (1) Copy of Pro forma Invoice for valuation of cargo damaged / lost and original repair bills receipts (m) Photographs of damaged cargo, evidencing loss. (n) Copy of the Letter of Subrogation along with the Special Power of Attorney. 5. Documents required in postal transit: (a) Claim form of insurance shall be duly filled in and signed by the Person assured. (b) Original policy / certificate (c) Original copy of post parcel receipt (d) Suppliers invoice (e) Copy of the notice served on postal department or authorities for insurance claim along with postal acknowledgement card (f) All reference copies of correspondence that have taken place with the postal authorities (g) Original copy of Non-delivery Certificate for non-delivery claims (h) Original copy of Certificate of Short Delivery for short delivery claims (i) Certificate of Damage (in original) or Certificate of Damage as issued by the postal department (for shortage / damage claims) (j) Copy of the Letter of Subrogation along with the Special Power of Attorney.

6.6

SUMMARY _________________________________________________

The exporter is worried about the safety of the goods while in transport. The various modes of transport give rise to different kinds of risks. These risks are covered by 4 public sector insurance companies and 16 private sector insurance companies. Insurance policy is a contract between the proposer and the insurance company, the beneficiary of which is called as the person assured. The insurance policy should contain the name of the assured, subject matter, details of the risks covered, sum assured and name of the insurer along with the other terms and conditions. There are various types of losses namely the actual total loss, which arises when the goods are lost or destroyed and ceases to be of any use, and constructive total

loss which actually means that to retrieve the lost or damaged goods the person assured needs to incur expenses more than the value of the goods. Similarly General Average Loss is the loss of the exporter in order to save the cargo of all other exporters and also to save the ship. There are general average contributions made by the other exporters to compensate the exporter who had to thus sacrifice his cargo. These contributions are payable by the insurance company. Particular Average Loss is the loss due to the perils of the sea, fire, jettison or barratry. These losses are the direct losses of the exporter and cannot be shifted, unlike the General Average Losses which can be shifted to others.

The open insurance policy is meant for the exporters having frequent exports, while voyage or time policy is for the exporters who do not export so frequently. For large exporters there is a special declaration policy. Insurance companies also offer policies to the importers who have risk when they pay large amount of import duty, which increase the value of the imported goods, but the insurance cover already obtained falls insufficient to cover this increased value of the goods. The insurance companies also cover the exporters risk in case the importer refuses to accept the goods under their sellers contingency policy. We hace also seen the standard clause ICC C, ICC B and ICC A used worlwide by the Insurance Companies. Each of these clauses explain the kinds of risk that are covered under the clause. ICC C covers the least risks of the three and ICC A covers the most. We have also seen what kind of risks Insurance Companies do not cover. We have also seen the different eleven Incoterms which are effective from 1st of January 2011. These terms clearly define the risk and responsibility of the exporter and the importer, which depend upon the point when the ownership passes on to the importer from the exporter. These are framed by the ICC and are accepted word wide. Finally we have also seen the procedure for lodgment of claim should the unfortunate incident happens. This requires expeditiously informing the insurance company and obtaining the claim form from the company. Besides trying to contain the losses / damages the exporter needs to arrange for the surveyor and inspection of the goods to assess the extent of loss. On obtaining the surveyors certificate the claim can be preferred with the insurance company.

6.7

KEY WORDS 2) Insurable interest, 5) perils of sea, 8) Actual Total Loss, 3) uberrimae fedei, 6) Jettison, 9) Constructive Total Loss,

1) Marine Insurance, 4) Indemnity, 7) Barratry,

10) General Average Loss, 11) Particular Average Loss, 12) Proposer, 13) Underwriter, 16) Sum assured, 19) Time Policies, 14) Subject matter, 17) Assignment, 20) Open Policies, 15) Assured, 18) Specific Voyage Policy 21) Special Declaration Policy,

22) Duty Insurance Policy, 23) Sellers Contingency Policy, 24) ICC Clause A, 27) All risk clause, 30) Incoterms, 34) CIP, 37) DDP, 40) CFR, 43) Claim Form. 25) ICC clause B, 28) War and SRCC cover, 31) EXW, 32) FCA, 35) DAT, 38) FAS, 41) CIF, 26) ICC Clause C, 29) TPND, 33) CPT, 36) DAP, 39) FOB, 42) Surveyor,

6.8

DESCRIPTIVE QUESTIONS

Q.1. What is the meaning of `Marine Insurance? Why is it necessary for the exporters? Q.2. Explain the various types of risks that exporter comprehends and looks up to insurance company to cover them. Q.3. Explain the various types of losses with respect to the marine insurance. Q.4. On what principles the contract of insurance is based? Explain them in detail. Q.5. What are the essential contents of the insurance policy? Q.6. Write a short notes on the following with respect to the insurance policy: 1) Proposer, 2) Underwriter, 3) Subject matter, 4) Assured. Q.7. Why are marine insurance policies assignable unlike domestic insurance policies? Q.8. Differentiate between the `Voyage and Time Policy and `Open Policy. Q.9. Write short notes on: 1) Duty Insurance Policy and 2) Sellers Contingency Policy.

Q.10. What are the risks covered under the ICC Clause A? Explain in detail. What are the risks that are not covered under this clause? Q.11. What do you understand by `Incoterms? Effective from 1 st January 2011, how many Incoterms are there? Explain each one of them in brief. Q.12. Explain the procedure for lodgment of claim with the insurance company in case of damage to the export goods.

6.9

OBJECTIVE QUESTIONS

Q.1: Marine Insurance covers the risks in: A. Exporting the goods by sea only B. Exporting the goods by sea, by air and by container only C. Transportation of the goods for the purpose of export D. The foreign countries only. Q.2: A person is said to have `insurable interest if he is: A. An Exporter B. An Importer C. He is put to loss if the goods get damaged or lost D. Banker who granted export finance to the exporter Q.3: Principle of `uberrimae fidei means: A. Principal of Equity B. Principle of good faith and without negligence C. Principle of re- insurance D. Principle of utmost good faith Q.4: Insurance Company indemnifies the person assured in case of marine insurance means the Insurance Company: A. Pays the entire value of the goods B. Pays the a portion of the value of loss of goods C. Pays the entire value of the loss of goods and a small portion of profit D. None of the above Q.5: `Assignment in case of marine insurance policy means: A. The policy is transferrable by endorsement B. Proposer is the person assured and he cannot be changed

C. It is a restrictive term D. The exporter has to complete certain assignment before he can apply for the policy Q.6: `Open Policy in case of marine insurance means: A. The terms of this policy are known to everybody B. The policy is not `closed C. Policy of insurance company regarding payment of claims in such policy are liberal D. Policy is issued for a period of 12 months, and proposer can export the goods and just declare them to the insurance company Q.7: The maximum risks are covered under the: A. ICC clause A C. ICC clause C B. ICC clause B D. None of the above

Q.8: Which one of the following risk is not covered by the Insurance Company under its marine insurance policy: A. Fire and Explosion C. General Average Sacrifice B. Jettison D. Insufficiency or unsuitability of packing

Q.9: Which one of the following risk is covered by the Insurance Company under its marine insurance policy: A. Deliberate damage to or deliberate destruction of the goods B. Loss or damage caused by the delay and the inherent vice or nature of the goods C. Loss or damage caused because of the discharge of the cargo at a port of distress D. Ordinary leakage, ordinary loss in weight or volume or ordinary wear or tear of the goods Q.10: ICC clauses are in respect of marine insurance. ICC stands for: A. International Chambers of Commerce clauses B. Institute Cargo Clauses C. Indian Chambers of Commerce clauses D. Instant Cargo Claims clauses Q.11: Marine Insurance can be offered by: A. Only Public Sector Insurance Companies B. Only Private Sector Insurance Companies C. Only Foreign Insurance Companies D. All the above

Q.12: Which one of the following is not an example of General Average Sacrifice? A. Goods damaged by water used to extinguish fire, provided the goods themselves have not been on fire. B. Expenses of entering and leaving a port of refuge C. Expenses of discharging, storing and reloading of the cargo if that is necessary for the common safety D. Loss of goods due to sinking of ship Q.13: Which one of the following is an example of the General Average Sacrifice? A. Loss due to Jettison C. Loss due to collision of ship B. Loss due to grounding of ship D. TPND

Q.14: ICC has declared new Incoterms recently applicable from 1st January 2011. They are: A. 13 in number C. 11 in number Q.15: The most beneficial clause for the exporter is: A. DDP B. CIF C. FOB D. EXW B. 12 in number D. 10 in number

Q.16: The most beneficial clause for the importer is: A. DDP B. CIF C. FOB D. EXW

Q.17: There are two new Incoterms introduced in the 2010 amendment. They are: A. CPT & CIP C. DAP & DAT B. FCA & FAS D. DDU & DEQ

Chapter

Export Credit Guarantee Corporation


7.1 Learning Objectives On reading this chapter the reader will know about ECGC,
one of the most important organisations that help the exporters to ward off the ever lurking risks in their minds, the political or the country risk in exports. He will also know about the other risks such as the commercial risk and how that is covered by the ECGC. Of late the banks are failing and the guarantee that is given by the L/C The reader will know the salient features of the policies that issuing bank to the the ECGC issues to exporter is of no use in case the issuing bank also fails. The the exporters in this regard reader will also know how the ECGC extends its cover to the banks which are ECGC covers this risk too. financing exports, should the exporter fail to repay the export finance extended to him. He will know the salient features of the two schemes namely the whole turnover packing credit and the whole Reader will also know the ECGC categorisation of the various turnover post-shipment credit under which financing banks cover countries in the their risks. world based on their risk profiles, the different modes of payment. The amount of premium is charged on this basis of risk categorization to the exporters.

7.2 About the THE ECGC: 7.2.1. Introduction: International trade is highly risky and exporter has to face myriad risks. We have deliberated over these risks in chapter 1. We have also seen the ways in which they are covered. One of the most important risk and piquant risk of them is the risk offered by the profile of the country. It is not easy for the exporter to comprehend such kind of risk and mitigate it. If the exporters are continually exposed to this kind of risk then they will stop exporting. This will have consequences that will affect the benefits of international trade as advocated by the world class economists like Adam Smith and David Ricardo. To address to this risk related to the risk profile of the importing country, in India we have established THE ECGC in 1957. It was then known as Export Risk Insurance Corporation or ERIC in brief. It was renamed as Export Credit and Guarantee Corporation in 1964. It covered the risks present due to the risk profile of the importing country. This risk are called as `Political risk or `Country risk. We have explained the country risk or the political risk in chapter 1, paragraph 1.6 (a). This is the risks because of which the exporter is put to loss for one reason or the other. The reasons for exporters loss could be any of the following: 1. War, revolution or civil disturbances in the buyers country. 2. New import licensing restrictions in the buyers country. 3. Cancellation of valid import license of the importer in the importers country. 4. Payment of additional handling, transportation or insurance charges occasioned by interruption or diversion of voyage which cannot be recovered from the buyer. 5. Imposition of restrictions on remittances by the government in the buyers country or any government action which may block or delay payment to the exporter. 6. Apart from the above there could be a possibility that the exporters license to export is cancelled in India and the exporter suffers a loss. 7. There is a new export policy in India and exporter is put to loss 8. Any other cause of loss occurring outside India, and beyond the control of the exporter and/or importer. 7.2.2 Covering the Country risk of the exporter: THE ECGC helps the exporter in covering these risks mentioned above under its various risk insurance policies. It is Government of India Undertaking. It functions under the administrative control of the Ministry of Commerce, GOI. It indemnifies upto 90% of the loss of the exporter. There are some other policies which indemnify the loss of the exporter in varying percentages. 7.2.3 Summary Points about the THE ECGC: The following are the important summary of points about THE ECGC:

The THE ECGC was established on 30th July 1957, with an objective to promote exports. The THE ECGC was incorporated in 1957 as an Insurance Company and was earlier known as Export Risk Insurance Corporation (ERIC) It was then transformed into Export Credit and Guarantee Corporation (EC&GC) in 1964 It is now known as the THE ECGC The THE ECGC is managed by the Board of Directors, Ministry of Commerce, Government Of India. Authorised Capital of THE ECGC is ` 1000 crore and the paid up capital is ` 800 crore. It has Registered Office at Mumbai, 5 Regional Offices and 53 Branch Offices, spread all over the country It is one of the, 53 members from 42 countries, member of BERNE Union, International Union of Credit Investment Insurers. It has an alliance with Co face (France), and D&B. It is a company registered with the insurance regulator IRDA in September 2002. The THE ECGCs branches are ISO 9001:2000 certified. ICRA, Indian Credit Rating Agency, an associate of Moodys Investor service, has awarded `iAAA rating to the THE ECGC for its claims paying ability and the best prospects of meeting the customers obligation. It has the largest database of importers in the different countries. It also maintains a list of importers who have made defaults in the past. The THE ECGC is given the responsibility of operating the National Export Insurance Account, NEIA, with a corpus of ` 2000 crore which is set up by Government of India It has tied up with NSIC, National Small Industries Corporation, to offer its products to SME sector. It has since launched full-fledged Factoring services As other insurance companies are encroaching upon the hitherto monopoly sector of offering political risk coverage to the exporters, the THE ECGC is considering to foray into the Domestic Risk Insurance Sector. 7.2.4 Main Functions of the THE ECGC: In view of the foregoing the following are the main functions of the THE ECGC: 1. The THE ECGC provides a wide range of credit risk insurance covers / policies and products to the exporters to enable them to withstand losses that they are likely to incur in export of goods and services in the ever risky international business. 2. It encourages the financing by the banks and other financers, to the exporters, for their

genuine trade transactions, especially in cases where the exporter has a risky payment option, by offering their guarantee under its WTPCG / WTPSG scheme. 3. It also provides overseas insurance to Indian companies that invest in joint ventures abroad in the form of equity or loan, thereby covering their exposure to risks and enabling them to make foray in the international markets. 7.2.5 Specific Functions of the THE ECGC: Apart from the main functions of extending policies to the exporters, guarantees to the banks and investment insurance covers to Indian companies, the following are the specific functions that the THE ECGC performs which help the exporters immensely. 1. The THE ECGC collects the information in the export related activities, particularly in the areas of potential risks associated with the countries and different modes of payment, in globally changing environment and offer guidance to the exporters to enable them to avoid risks. 2. The THE ECGC, with its network with other credit risk agencies in the world, publishes the information on the risk perception of the various countries. Such exercise is conducted generally once in a period of six months. This data is quite useful to the exporters in deciding the direction of their trade. 3. The THE ECGC assists the exporters in recovering bad debts from the defaulters by its own efforts or by providing exporters legal help and contacts with diplomatic establishments in the importers country. 4. The THE ECGC maintains a database of domestic and international exporters and importers and shares the same with other credit risk insurance agencies and provides the information on the creditworthiness of the overseas and domestic traders. 5. The THE ECGC also offers various products and services to the exporters, including customized products to meet their requirement and the needs of the export credit insurance.

7.3. Schedule of Premium Charges: The schedule of premium charged by the THE ECGC depends on the various factors. The important among them are: Categorisation of countries Modes of payment Types of risks covered (Risks not covered by the THE ECGC) Various types of covers 7.3.1 Categorization of Countries: We have mentioned under point number 2 of the Specific Functions above that THE ECGC, with its network with other credit risk agencies in the world, publishes the information on risk

perception of the various countries. This exercise is conducted by them every six months. THE ECGC categorises the countries in the world, with whom India is having trading relationship, on a seven point scale. These seven different groups are A+, A, B+, B, C+, C, and D. Countries falling in group A+ are considered as highly trustworthy countries, where Indian exporter can export the goods without much of the risk. These countries do not have the balance of payment problems. They hold reasonably good amount of foreign exchange reserves and can make the payment for the goods imported by them without any problem. These countries also have reasonably good and stable governments, well established and transparent and matured trade policies. The past record of the importers, from countries belonging to this group, is also reasonably good. In short if the exporter sells the goods to countries belonging to this group A+, he runs a very small risk of non payment for the exports that he has made. On the other end of the scale we have countries falling under D group. Countries falling under this group have balance of payment problems. They have very less foreign exchange reserves. They experience difficulty in making payment for the goods they import into their countries. These countries also may not have stable governments. They also do not have well chalked out and transparent trade policies. Exporters who made exports to these countries could have experienced difficulties in the past. Because of such reasons the THE ECGC categorises such countries in D group. Exporter should stay away from exporting to these countries. The other groups fall in between these two extremes. They have varying risk perceptions. Exporters generally export to the A+, A, B+ group countries. They should desist from exporting to bottom three group countries, namely C+, C and D. As the risk of the exporter increases as his exports move from A+ group countries to the D group countries. Therefore the risk of THE ECGC also increases in covering such risk of the exporter. And hence THE ECGC charges higher premium to cover the risk of exports to D group countries than the exports to A+ group countries. List of categorisation of the countries in the world is given in the Appendix A42. List of the THE ECGC offices with thir telephone numbers/Fax numbers and E-mails are given in Appendix A43. 7.3.2 Modes of Payment: We have also made a mention of different modes of payment in globally changing environment. The different modes of payments have also been discussed in chapter 4 on L/C. In the paragraph 4.2 reading Methods of settling debts. We have made a mention about `advance payment received by the exporter before he ships the goods, and `open accounts where he ships the goods to the importer and importer keeps settling the account by making periodical payments. There are few more methods of exporter receiving the payment from the importer. The general principle of measuring risk for the exporter in this regard, as anybody would readily agree, is related to the time span between the two events, one of the events being exporter shipping the goods to the importer and the other is exporter receiving the payment from the importer. The longer is the span between these two events, larger is the risk. Shorter is the span between these two events, lesser is the risk.

The following are the general terms that are used to denote the payment terms in increasing order of risk for the exporter. 1. Advance payment: The exporter receives the payment in advance before he ships the goods and therefore there is no risk of non receipt of the payment. But this situation does not arise always. This is the case when it is a sellers market or the exporter has the monopoly in selling the goods or the demand for the product is very high and the sellers are very few. In such case the insurance from THE ECGC is not necessary as there is no risk perceived in payments. 2. Letter of Credit: Generally international trade transactions are under the Letter of Credit issued by the importers bank, wherein assurance of payment is given to the exporter by the issuing bank. As the issuing banks are the banks having international presence, they are considered more trustworthy than the individual importer. The risk in respect of non- payment by the importer or the issuing bank in this case is considered as very low. The exporter either does not cover this risk of non-payment by the importer or the issuing bank, for the goods or if he still is skeptical about the payment for the goods he insures this risk with THE ECGC. Since the risk is low the premium charged by THE ECGC is also very low. In the recent era the banks which were considered as big and creditworthy and of long standing have also failed. Therefore it would be wiser for the exporter to cover this risk also under the THE ECGCs cover for insuring the risk for the failure of issuing bank.

3. DP term: DP stands for Documents against Payment. When the exporter sends the documents including the transport document he instructs the importers bank that the documents, including the transport documents are to be delivered to the importer only on his making payment and not before that. The transport document is the most crucial and important document of all, for it generally passes the title of the goods from the exporter to the importer. Importer on receiving the transport document becomes the constructive or symbolic owner of the goods. He generally gets the right to take the delivery of the goods from the transport company. In case the importer gets the delivery of the goods before making payment for the goods, the trade transaction becomes riskier. And therefore if the exporter does not want to take the risk he stipulates that the documents, including the transport document should be delivered to the importer only on his making the payment. This is DP term. This term if used in context with the transaction under L/C then the L/C is called as DP L/C. This term can also be for the transactions that are not under the L/C.

4. DA term: DA stands for Documents against Acceptance. The implication of this term is that the importer gets the documents, including the transport document, merely on accepting the liability to make payment at certain future date. The importer in such a case comes in possession of the transport documents and impliedly the goods merely on giving his acceptance and not the payment. The payment is required to be made on some future date. This type of arrangement made between the exporter and the importer poses comparatively greater risk for the exporter. The time given to the importer to make payment may vary from 15 days to 360 days. This time is calculated from the various

starting dates which could be the date of the Bill of Exchange, date of the Invoice, date of Shipment, date of importer getting the documents in his possession (called as date of presentation) etc. The exporter should bear in mind that longer is the time given by him to the importer to make the payment after the date of his getting the documents, including the transport document, larger is the risk that he is assuming. In such case the larger will be the risk THE ECGC is taking in covering this risk and therefore THE ECGC will charge more premium. The L/C which allows this type of payment term is called as DA L/C 7.3.3 Types of Risk Covered: Broadly the THE ECGC covers three types of risks. These are: 1. Commercial Risk 2. Political Risk 3. L/C Opening Bank Risk 1. Commercial Risk: The important commercial risks covered are: i. Insolvency of the buyer / importer ii. Importers protracted default to pay for the goods accepted by him iii. Buyers failure to accept the goods. 2. Political Risk: These are also known as country risks and are given 7.2 (a) they are once again reproduced here: 1. War, revolution or civil disturbances in the buyers country. 2. New import licensing restrictions in the buyers country. 3. Cancellation of valid import license of the importer in the importers country. 4. Payment of additional handling, transportation or insurance charges occasioned by interruption or diversion of voyage which cannot be recovered from the buyer. 5. Imposition of restrictions on remittances by the government in the buyers country or any government action which may block or delay payment to the exporter. 6. Apart from the above there could be a possibility that the exporters license to export is cancelled in India and the exporter suffers a loss. 7. There is a new export policy in India and exporter is put to loss 8. Any other cause of loss occurring outside India, and beyond the control of the exporter and/or importer.

3. L/C Opening Bank Risk: Though this was not the predominant risk in the past, now a days the risk of big and reputed banks failure lurks occasionally in the mind of the exporter. It is true that the importers inability to pay is covered by the L/C issuing bank. Issuing bank is said to be substituting the creditworthiness of the importer. But the question that is to be asked is how creditworthy these banks themselves are? Since the banks have failed in the recent past, the ECGC also covers the risk of the Issuing Bank failing and thereby the exporter though a beneficiary of the L/C not getting his payment. 7.3.4 Risks not covered by the ECGC: The following risks are not covered by the ECGC. 1. Commercial disputes raised by the buyer, unless the exporter obtains the decree from a competent court of law in the buyers country in his favour. 2. Causes inherent in the nature of goods 3. Buyers failure to obtain necessary import or exchange authorisation from the authorities in his country 4. Insolvency or default of an agent of the exporter or of the collecting bank 5. Loss or damage to goods which can be covered by the commercial insurers 6. Loss due to exchange rate fluctuation 7.3.5 Various types of covers: The policy issued may cover the risks from the date of shipment or from the date of contract. In either case the policy may cover all the three Political, Commercial and L/C Opening Bank risk or any two of the three risks or any one of the risks. It is for the exporter to choose the risk against which he wants to cover himself. However it should be borne in mind that if the cover is obtained from the date of contract it will attract more premium than the cover obtained from the date of shipment. It may also be borne in mind that if the exporter wants to cover all the three risks he has to pay more premium than for getting the cover for two types of risks, which in turn is more than the cover availed for any one risk. Latest rate of premium charged by the ECGC are shown in the following table. These rates are shown for the reader to get an approximate idea of rates and exact rates of premium should be ascertained from the ECGC at the time of taking cover under the policy. Country Classification A1 A1 A1 D Terms of Payment LC DP DP DA Premium `0.12/`100 `0.29/`100 `0.58/`100 `3.00/`100

7.4 Standard Policies: Standard Policy, also known as Shipment Comprehensive Risk (SCR) Policy is one of the most popular policies as it offers the most coverage with the least premium. It is ideally suitable for the exporters to cover their risks associated with respect to the goods exported on short term credit, i.e. credit not exceeding 180 days. SCR covers all the three risks, namely the Commercial risk, Political risk and L/C Opening Bank risk. It is issued to the exporters whose anticipated annual turnover is more than ` 50 Lakhs. Risks Covered Under the Standard Policy: The following risks are covered from the date of shipment of cargo under the Standard Policy of THE ECGC. Commercial risks: 1. Cases of insolvency of the importer. 2. Cases of failure of the importer to make or ensure the payment to exporter within a specified period, which is usually less than six months, from the date of shipment. 3. Cases where the importer has failed to accept the cargo. Such cases are subject to certain conditions as specified by the ECGC. Political risks 1. The circumstances under which the Government of the importers country, may restrict the import of certain cargo. Or any other action by the Government of the importers country, resulting in blockage of payment to the exporter or delay the transfer of payment made by the importer. Such actions may relate to the restrictions placed on foreign exchange transactions in view of lower foreign exchange reserves of the importing country. 2. There could be cases of war, rebellion, civil war, revolution or civil disturbances in the importers country. Because of this importers country may impose restrictions or may cancel the valid import license of the importer. 3. Cases under which there is an interruption or diversion of voyage outside India, which compels the exporter to bear additional burden of freight and / or insurance charges and such charges or expenses cannot be recovered from the importer. 4. The cases under which any other loss has occurred outside India and such loss is usually not insurable by General Insurance Companies, where such losses are beyond the control of both the exporter and the importer. 3. LC Opening Bank Risk: a) Cases of insolvency of the L/C Opening Bank in trade transaction; b) Cases in which the LC Opening Bank has failed to make payment to the exporter within a specified period.

Risks Not Covered Under the Standard Policy: The following types of risks or losses are not covered under the SCR or Standard Policy of THE ECGC: 1. Any disputes of commercial nature such as disputes related to quality of product or services except the cases under which the exporter has obtained the decree in his favour from a competent court of law in the importers country. 2. Losses due to any reasons or causes, which are inherent in the nature of the cargo such as fungal infection to food products during voyage, evaporation loss in camphor, etc. 3. The cases under which the importer has failed to obtain necessary import or exchange authorization from authorities in his country. 4. The cases relating to insolvency or default of any agent of the exporter or of the collecting bank involved in trade transaction. 5. Any losses or damages, usually insurable by General Iinsurance Companies. 6. Losses related to exchange rate fluctuation as the invoiced foreign currency may appreciate during the period the payment is received by the exporter. As we have already seen that when the foreign currency appreciates the exporter suffers loss. 7. The circumstances under which the exporter has failed or has shown negligence in fulfilling the terms and conditions of the export sales contract. Salient features of the Standard Policies:

Features Eligibility

Period of the Policy Exclusions permitted

Risks Covered

Percentage of cover Minimum Premium Important obligations of the Exporter

Description An exporter whose annual export turnover is more than `50 lakh is eligible for this policy. 24 months Export to Associates Letters of Credit Consignment Exports Commercial Risks Political Risks L/C Opening Bank Risks 90% `10,000/- adjustable - Obtaining valid credit limit on buyers and banks - Premium payable in advance on the basis of projected turnover - Cash discounts at 1% and 5% on the premium projected exports on quarterly and annual exports respectively - Monthly declaration of Shipments - Declaration of payment overdue by more than 30 days - Filing of claim within 24 months from due date - Sharing of recovery

Highlilghts

- Lowest premium rate - NCB of 5% every year - Discrepancy cover for L/C - Automatic approval for resale/reshipment up to 25% of GIV - Increased discretionary limit

7.5 Small Exporters Policy: The Small Exporters Policy is just a replica of the Standard Policy whereby certain improvements as per the requirement of small exporters have been incorporated. As the turnover of small exporters is supposed to be lower, this policy is issued to exporters whose anticipated export turnover for the period of one year does not exceed ` 50 Lakhs. The coverage of risks under this policy is higher as the ECGC desires to encourage small exporters to venture into the export business. Risks Covered Under the Small Exporters Policy: The following risks are covered from the date of shipment of cargo under the Small Exporters Policy of THE ECGC. Commercial risks: 1) Cases of insolvency of the importer. 2) Cases of failure of the importer to make or ensure the payment to exporter within a specified period, which is usually less than six months from the date of shipment. 3) Cases under which the importer has failed to accept the cargo. Such cases are subject to certain conditions as specified by the ECGC. Political risks: 1) The circumstances under which the Government of the importers country may restrict the import of certain cargo Or any other action by the Government of the importers country, resulting in blockage of payment to the exporter or delay the transfer of payment made by the importer. Such actions may relate to the restrictions placed on foreign exchange transactions in view of lower foreign exchange reserves of the importing country. 2) There could be cases of war, rebellion, civil war, revolution or civil disturbances in the importers country. Because of this importers country may impose restrictions or may cancel the valid import license of the importer. 3) Cases under which there is an interruption or diversion of voyage outside India, which compels the exporter to bear additional burden of freight and / or insurance charges and such charges or expenses cannot be recovered from the importer. 4) The cases under which any other loss has occurred outside India and such loss is usually not insurable by General Insurance Companies, where such losses are beyond the control of both the exporter and the importer.

LC Opening Bank Risk: a) Cases of insolvency of the L/C Opening Bank in trade transaction; b) Cases in which the LC Opening Bank has failed to make payment to the exporter within a specified period. Risks Not Covered Under the Small Exporters Policy: The following types of risks or losses are not covered under the Small Exporters Policy of the ECGC: 1. Any dispute of commercial nature, such as dispute related to quality of product or services except the cases under which the exporter has obtained the decree in his favour from a competent court of law in the importers country. 2. Losses due to any reason or cause that is inherent in the nature of the cargo, such as loss of weight in the product like camphor or kerosene or petrol during voyage. 3. The cases under which the importer has failed to obtain necessary import or exchange authorization from authorities in his country. 4. The cases relating to insolvency or default of any agent of the exporter or of the collecting bank involved in trade transaction. 5. Any losses or damages usually insurable by General Insurance Companies. 6. Losses related to exchange rate fluctuations as the invoiced foreign currency may appreciate during the period till the exporter receives the payment. 7. The circumstances under which the exporter has failed or has shown negligence in fulfilling the terms and conditions of the export sales contract. Salient Features of the Small Exporters Policy
Features Eligibility Period of the Policy Exclusions permitted Description Export turnoverupto `50 lakh. 12 months -Export to Associates -Letters of Credit -Consignment Exports -Commercial Risks -Political Risks -L/C Opening Bank Risks - 95% for Commercial Risks - 100% for Political Risks `2,000/- adjustable

Risks Covered

Percentage of cover Minimum Premium

Important obligations of the Exporter

Highlilghts

- Obtaining valid credit limit on buyers and banks - Premium payable in advance on the basis of projected turnover - Cash discounts at 1% and 5% on the premium projected exports on quarterly and annual exports respectively - Quarterly declaration of Shipments - Declaration of payment overdue by more than 30 days - Filing of claim within 12 months from due date - Sharing of recovery - Highest coverage/compensation - Lowest premium rate - NCB of 5% every year - Discrepancy cover for L/C - Automatic approval for resale/reshipment up to 25% of GIV

- Increased discretionary limit

7.6 Other Policies: 7.6.1 Exports Turnover policy: Exports Turnover policy is a variant of the Standard Policy. It is suitable for large-scale exporters who pay premium not less than `10 Lakhs per annum. If an exporter is making a payment of premium of `10 Lakhs or more a year, he will be entitled to avail of this policy. Under this policy, the exporter is supposed to make payment of premium on the basis of projection of the expected export turnover for that year and such premium is adjustable based on actual exports during the financial year. Such policy also ensures additional discount in the premium payable if the exporter has succeeded in achieving more export turnover than the turnover that actually was projected by him in the beginning while availing of the policy. Hence this policy provides an added advantage to exporters for their sincere efforts to increase the exports. Under this policy, the procedure of payment of premium is very simple. The exporter pays the premium along with the details of the exports to be made by him. This policy also provides for higher discretionary credit limits on importers, based on the total premium paid by the exporter. The Exports Turnover Policy is issued with a validity period of one year and usually has the same set of provisions regarding risk covered and not covered, as has been laid down under the Standard Policy. Salient Features of the Exports Turnover Policy
Features Eligibility Description Turnover Policy is for the benefit of large exporters who contribute not les than `10 lakh per annum towards premium. The policy envisages projection of the export turnover of the policyholder for a year and the initial determination of the premium payable on that basis, subject to adjustment at the end of the year based on actual.

Period of the Policy Risks Covered

Percentage of cover Important obligations of the Exporter

12 months -Commercial Risks -Political Risks -L/C Opening Bank Risks - 90% - Premium will be payable in four equal quarterly installments in advance - Submission of quarterly statement of shipments - Declaration of overdue payments - Filing of claim within 24 months - Sharing of recovery - Simplified procedure for payment of Premium - 10% of projected premium is waived when exports increase beyond projection

Highlilghts

- Increased discretionary limit

7.6.2 Specific Shipment Policy (Short Term): These policies can be availed of by the exporters: 1. who do not hold Standard Policy of the ECGC mentioned above, and 2. who have obtained Standard Policy, but intend to make the shipment which is not allowed under the provisions of the Standard Policy so obtained. The exporter, in order to be cost effective, may exclude some of his consignments from the Standard Policies, Shipment Comprehensive Risk, SCR policy. He may then choose such policy, which is tailored to cover the nature of risk that the exporter assumes while exporting. There are three variants to match the exporters requirements, which are described below. Specific Shipment Policies Short-Term (SSP-ST), offer cover to Indian exporters against commercial and political risks that are involved in the export of goods on short-term credit not exceeding 180 days in international trade. Exporters can take cover under these policies for either a shipment or a few shipments to a buyer under a contract. Varients of SSP (ST): Such policy can be availed of in the following variants, depending on the requirements. 1. Specific Shipments (Commercial and Political Risks) Policy Short-Term. 2. Specific Shipments (Political Risks) Policy Short-Term. 3. Specific Shipments (Insolvency and Default of L/C Opening Bank and Political Risks) Policy Short-Term.

Different Risks Covered Under SSP (ST): 1. Commercial risks: a) Cases of insolvency of the importer. b) Cases of failure of the importer to make or ensure the payment to exporter within a specified period, which is usually within six months from the date of shipment. c) Cases under which importer has failed to accept the cargo. Such cases are subject to certain conditions as specified by ECGC. 2. Political risks: a) The circumstances under which the Government of the importers country may restrict the import of certain cargo Or any other action by the Government of the importers country, resulting in blockage of payment to the exporter or delay the transfer of payment made by the importer. Such actions may relate to the restrictions placed on foreign exchange transactions in view of lower foreign exchange reserves of the importing country. b) There could be cases of war, rebellion, civil war, revolution or civil disturbances in the importers country. Because of this importers country may impose restrictions or may cancel the valid import license of the importer. c) Cases under which there is an interruption or diversion of voyage outside India, which compels the exporter to bear additional burden of freight and / or insurance charges and such charges or expenses cannot be recovered from the importer. d) The cases under which any other loss has occurred outside India and such loss is usually not insurable by General Insurance Companies, where such losses are beyond the control of both the exporter and the importer. 3. LC Opening Bank Risk: e) Cases of insolvency of the L/C Opening Bank in trade transaction; f) Cases in which the LC Opening Bank has failed to make payment to the exporter within a specified period. Risks Not Covered Under SSP (ST): 1. Any dispute of a commercial nature, such as dispute related to quality of product or service except the cases under which the exporter has obtained the decree in his favour from a competent court of law in the Importers country. 2. Losses due to any reason or cause that are inherent in the nature of the cargo, such as loss of weight in the product like camphor or kerosene or petrol during voyage. 3. The cases in which the importer has failed to obtain necessary import or exchange authorization from authorities in his country. 4. The cases relating to insolvency or default of any agent of the exporter or of the collecting bank involved in trade transaction.

5. Any loss or damage, which are usually insurable by General Insurance Companies. 6. Losses related to exchange rate fluctuation, as the invoiced foreign currency may appreciate during the period till the payment is received by the exporter. 7. The circumstances under which an exporter has failed or has shown negligence in fulfilling the terms and conditions of the export sales contract. 8. The cases of non-payment due to any discrepancy in the letter of credit, as have been pointed out by the L/C Opening Bank.

7.6.3 Exports (Specific Buyers) Policy: Salient features of the Specific Shipment Policy
Features Eligibility Description These policies can be availed of by exporters who do not hold our Standard Policy or by exporter having a policy, in respect of shipments premitted to be excluded from the purview of the Standard Policy. Exporter can pick and choose the contract/shipment to be covered and indicate the type of cover required. The policy would be valid for shipment(s) made from the date of issue of the policy up to last date allowed under the relevant contract for shipment. -Commercial Risks -Political Risks -L/C Opening Bank Risks - 80% - Upfront premium payment - Statement of shipments made - Payment Advice Slip - Statement of Overdue - Filing of claim within 12 months from due date - Sharing of recovery - Selection for Insurance cover - Other exports not to be declared - Add-on Marine Insurance Cover - Premium rate reduced proportionately on higher share of loss to exporter

Period of the Policy

Risks Covered

Percentage of cover Important obligations of the Exporter

Highlilghts

In certain cases, exporters need to take credit insurance cover against importers of dubious standing. Such importers creditworthiness may be under doubt. Hence the ECGC provides Buyerwise Policies Short-Term (BP-ST) cover to Indian exporters, against commercial and political risks involved in this regard. Under this policy, all shipments to the particular importer are supposed to be under the credit insurance cover of this policy with a provision to allow exclusion of shipments, which are under the letter of credit. These policies can be availed of by:

1. Those exporters who do not hold Standard Policy and 2. By exporters having Standard Policy but for shipments excluded from the purview of the Standard Policy and such importers credit rating is under doubt. Different Types of BP (ST) This policy is available, in the following variants: 1. Buyer-Wise (Commercial And Political Risks) Policy Short-Term 2. Buyer-Wise (Political Risks) Policy Short-Term. 3. Buyer-Wise (Insolvency and Default of L/C Opening Bank and Political Risks) Policy Short-Term. Different Risks Covered Under BP (ST) 1. Commercial risks: a. Cases of insolvency of the importer. b. Cases of failure of the importer to make or ensure the payment to exporter within a specified period, which is usually less than six months from the date of shipment. c. Cases under which importer has failed to accept the cargo. Such cases are subject to certain conditions as specified by ECGC. 2. Political risks: a) The circumstances under which the Government of the importers country may restrict the import of certain cargo or any other action by the Government of the importers country, resulting in blockage of payment to the exporter or delay the transfer of payment made by the importer. Such actions may relate to the restrictions placed on foreign exchange transactions in view of lower foreign exchange reserves of the importing country. b) There could be cases of war, rebellion, civil war, revolution or civil disturbances in the importers country. Because of this importers country may impose restrictions or may cancel the valid import license of the importer. c) Cases under which there is an interruption or diversion of voyage outside India, which compels the exporter to bear additional burden of freight and / or insurance charges and such charges or expenses cannot be recovered from the importer.

d) Cases under which any other loss has occurred outside India and such loss is usually not insurable by General Insurance Companies, where such losses are beyond the control of both the exporter and the importer. 3. LC Opening Bank Risk: a) Cases of insolvency of the L/C Opening Bank in trade transaction; b) Cases in which the LC Opening Bank has failed to make payment to the exporter within a specified period.

Risks Not Covered Under BP (ST) 1. Commercial disputes including quality disputes raised by the buyer, unless the exporter obtains a decree from a competent court of law in the buyers country in his favour; 2. Causes inherent in the nature of goods; 3. Buyers failure to obtain necessary import or exchange authorization from authorities in his country; 4. Loss or damage to goods; 5. Exchange rate fluctuation; 6. Failure of the exporter to fulfill the terms of the export contract or negligence on his part. Salient Features of Export (Specific Buyers) Policy:
Features Eligibility Description The Spedific Buyers Policy provides cover for shipments made to a particular buyer or set of buyers. Exporters not holding the Standard Policy can avail of this to cover their shipments to one or more buyers. Exporters holding Standard Policy can also avail of this policy for covering shipments to individual buyers, if all shipments to such buyers have been permitted to be excluded from the purview of the Standard Policy. 12 months. -Commercial Risks -Political Risks -L/C Opening Bank Risks - 80% - Deposit premium on quarterly basis, in advance - Submission of shipment declarations quarterly - Declaration of payment overdue for more than 30 days - Filing of claim within 12 months from due date - Sharing of recovery - Selective buyer can be insured - Option to exclude L/C exports

Period of the Policy Risks Covered

Percentage of cover Important obligations

Highlilghts

- Premium rate can be reduced proportionately

7.6.4 Buyer Exposure Policy: While the policies offered by ECGC require the exporters to pay premium on the export turnover, exposure to each buyer is controlled by ECGC through a system of approval of credit limits. The large exporters felt that this is unreasonable.

THE ECGC, on the request of exporters has tailored a policy for such exporters, known as Buyers Exposure Policy, whereby the premium to be charged is calculated on the basis of the expected level of exposure to risks when exports are made. There are two variant of this policy: 1. Exposure (Single Buyer) Policy, which is for covering the risks on a specified buyer and 2. Exposure (Multi Buyer) Policy, which is for covering the risks on all buyers. They are explained as under. 7.6.4.1 Exposure (Single Buyer) Policy: An exporter has the option to have a policy based on the exposure on a selected buyer / importer against various commercial and political risks. Such cover under this policy is available for both commercial as well as political risks attached to the importer in case of non-LC and LC transactions. Such a policy can be issued separately for each buyer and covers all the exports to be made to the buyer during a period of twelve months. In case the exporter has opted for commercial as well as for political risks cover, he will also be having coverage against default or insolvency of LC Opening Bank, if the trade transaction is covered through LC, provided, such banks rank is within 25,000 under the World first Ranking, as per the latest Bankers Almanac. (Bankers Almanac has updated data of about 5,60,000 financial institutions mostly compiled from the information supplied by the financial institutions and regulators in their respective countries). In case, the L/C Opening Banks rank is above 25,000 and the exporter desires to cover LC Opening Banks default or insolvency, then he should contact the ECGC for approval of the same before shipment is effected.

Features Eligibility

Description

The Buyer EXposure Policy is to insure exporters having a large number of shipments with simpplified procedure and rationalized premium. An exporter can choose to obtain exposure based cover on a selected buyer. The cover would be against commercial and political risks. The option to exclude L/C shipment is available. If the exporter has opted for commercial and political risks cover, failure of L/C opening bank with World Rank ipto 25000 as per latest Bankers Almanac is available. Period of the Policy The policy would be valid for shipment(s) made from the date of issue of the policy up to last date allowed under the relevant contract for shipment. Risks Covered-Commercial Risks -Political Risks -L/C Opening Bank Risks Percentage of cover - 90% for Standard Policyholders and 80% for others. Important obligations - Premium payable in advance of the Exporter- Option to pay premium quarterly in advance is available

Highlilghts

- Premium non-refundable - Obtaining approval for extension in due date beyond 180 days - Declaration of overdue payments - Filing of claim within 12 months from due date - Sharing of recovery - 5% discount in premium, if paid in advance - Declaration procedure waived - Exporter to approach only for default and claim

- one policy for one buyer

7.6.4.2 Multi Buyer Exposure Policy: This policy is suitable for those exporters who export to a large number of buyers around the world. The number of shipments made by such exporters is also expected to be quite high and it is convenient for such exporters to apply for multi buyer exposure policy, so as to cover their all risks against all the buyers. It makes their job simple and convenient as they would have deposited their premium, and submitted the information on the buyers etc. once at the time of approval of exposure limit by the ECGC. Such policy reflects the needs of changing times and requirements of Indian exporters in an era marked with high export growth rate and large-scale market diversification. Special Features of this policy is that the exporters can take cover for an Aggregate Loss Limit (ALL), on all their buyers, to whom they propose to sell on credit terms, in open cover countries. While accepting the proposal, the ECGC would expect the ALL sought to be not less than 10% of the past 12 month turnover applicable for the categories/countries for which cover is sought. Salient Features of Multi-Buyer Exposure Policy
Features Eligibility Description Some exporters export to large number of buyers. The number of shipments made by them is also quite high. In order to meet the needs of such exporters, Multi-Buyer Exposure Policy is introduced. Cover would be available for exports to 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 website www.the ECGC.in. If the transaction is on L/C opening World Rank ip to 25000 as per latest Bankers Almanac is

bankwith available. If exporter opts for only political risks for L/C exports, premium at lesser rate is offered. 12 months - Buyer Risks - Political Risks - L/C Opening Bank Risks

Period of the Policy Risks Covered

Percentage of cover - 80% Important obligations - Upfront premium payment of the Exporter- Statement of shipments made - Payment Advice Slip - Statement of Overdue - Filing of claim within 12 months from due date - Sharing of recovery Highlilghts- Selection for Insurance cover - Other exports not to be declared - Add-on Marine Insurance Cover - Premium rate reduced proportionately on higher share of loss to exporter

7.6.5 Consignment Exports Policy (Stockholding Agent and Global Entity): Indian exporters are increasingly using all possible channels to increase their exports, which include consignment exports. In consignment exports, goods are shipped to target markets and kept in stock over there. These goods are then sold as and when the right opportunity exists. In order to protect Indian exporters from the losses those may arise during the process of consignment export, ECGC has offered them this policy. Indian exporters may therefore feel encouraged to tap every possible opportunity to increase their exports. The Consignment Exports Policy is offered in the following two variants: 1. Consignment Exports Policy (Stockholding Agent) 2. Consignment Exports Policy (Global Entity) 7.6.5.1 Consignment Exports (Stockholding Agent): A Consignment Exports (Stockholding Agent) is suitable for the individual or small exporter whose business operations are limited to one or two countries. This policy can be availed by the exporters who fulfill the following criteria as stipulated by the ECGC. (a) The cargo is transported / shipped to the foreign firm or importer or agent as agreed in the export sales contract between both the parties. (b) The foreign firm or agents is an independent and separate legal entity as per provisions of that country. The promoters, owners or proprietors of such firm or agency do not have any kind of relationship with the exporter or his firm. (c) The foreign agents or firm has responsibilities that may include receiving the shipment of cargo sent by exporter, holding such cargo in the stock, locating and selecting the ultimate buyers for such goods and selling such goods as per the directions, suggestions of the principal exporter. (d) The sales so made by the foreign agents/firm are at risk and on behalf of the principal exporter who is based in India. Agents or Firms take care of all these responsibilities, receiving commission or similar reward or compensation on the sales executed by them.

The various combinations of risks may be involved at different stages of trade deal in case of consignment exports and accordingly, the ECGC has designed the Consignment Export Policy (Stockholding Agent), offering the following options to the exporters: (a) Commercial risks on both stock-holding agent and ultimate buyers with political risks for the entire period; (b) Commercial risks on the ultimate buyers only with political risks for the entire period; (c) Commercial risks on the stockholding agent only with political risks for the entire period; and (d) Only political risks for the entire period. Salient Features of Consignment Exports Policy (Stockholding Agent):
Features Eligibility Description

Economic liberalization and gradual removal of international barriers for trade and commerce are opening up various new avenues of export opportunities to Indian exporters of quality goods. A method increasingly adopted by Indian exporters isconsignment exports where goods are shipped and held in stock overseas; ready for sale to overseas buyers, as and when orders are received. Thus, a separate credit insurance policy is introduced to cover exclusively shipments on consignment basis, taking into account their special features, providing adequate incentives and simplifying the procedures considerably. Period of the Policy 12 months Risks Covered- Commercial Risks on Stockholding Agent and/or ultimate buyer - Political Risks Percentage of cover- 90% for Standard Policyholder and 80% for others Important obligations - Advance deposit of premium in advance on quarterly or monthly basis. - Obtaining credit limit on ultimate buyers beyond the discretionary limit - Quarterly/monthly statement of actual exports - Filing of claim. - Sharing of recovery Highlilghts- Covers only the consignment exports - Other exports not to be declared - Rationalized premium for 360 days - Automatic cover for ultimate buyers up to discretionary limit - Commercial risks on agents covered

- Extended period for realization upto 360 days

7.6.5.2 Consignment Export Policy (Global Entity): Indian companies as well as foreign companies, which are making India their production base, are largely expanding and diversifying their business in international markets. Accordingly, they can cover their risk on consignment exports by fulfilling the following criteria as stipulated by the ECGC. (a) The cargo is transported / shipped to the stockholding entity as agreed, usually without a written agreement as the sales are generally to sister firms / associate firms. (b) The foreign entity is usually exporters own branch office / authorized representative/ warehousing agent / associate or sister concern / subsidiary company. (c) The foreign partys responsibilities may include receiving the shipment of cargo as sent by the exporter, holding such cargo in the stock, locating and selecting the ultimate buyers for such goods and selling such goods as per the directions or suggestions of the principal exporter. (d) The sales so made by the sister entity / associate firm in the foreign market are essentially not at the risk. Risk may vary at different stages of consignment export through global entity model. Accordingly, the ECGC has designed the Consignment Export Policy (Global Entity) offering following options to the exporters: 1. Commercial risks on the ultimate buyers only with political risks for the entire period; 2. Only political risks for the entire period. However, in those cases where the intermediary is an associate of the exporter and both the exporter and the associate are joint stock companies with the exporters share in the capital of the associate is not exceeding 49%, the following combinations of risks can also be covered: 1. Insolvency of the global entity and commercial risks on ultimate buyers with political risks for the entire period. 2. Insolvency of the global entity with political risks for the entire period. Features of Consignment Exports Policy (Global Entity)
Features Eligibility Description A method adopted by Indian exporters is consignment exports, where goods are shipped to their own branch office overseas; ready for sale to overseas buyers, as and when orders are received. Thus, a separate credit insurance policy is introduced to cover exclusively, shipments by the exporters to their branches overseas on consignment basis, taking into account their special features, providing adequate incentives and simplifying the procedures considerably. 12 months - Commercial Risks on ultimate buyers

Period of the Policy Risks Covered

- Political Risks - Insolvency Risk on the overseas branch on conditions Percentage of cover - 90% for Standard Policyholder and 80% for others Important obligations - Advance deposit of premium in advance on quarterly or monthly basis. - Obtaining credit limit on ultimate buyers beyond the discretionary limit - Quarterly/monthly statement of actual export - overdue declaration. - Filing of claim. - Sharing of recovery Highlilghts- Covers only the consignment exports - Rationalized premium for 360 days - Automatic cover for ultimate buyers up to discretionary limit - Commercial risks on agents covered

- Extended period for realization upto 360 days

7.7 Services Policies: In the era of liberalisation, India has taken a giant leap in the area of exporting services. The ECGC offers these policies where Indian companies enter into export sales contracts with foreign companies for providing them practical, technical or professional services. Such payments are under risk, as the service contract is much similar to the cargo supply contracts. Hence ECGC offers this policy so as to provide protection to Indian exporters of services. This enables them to do business free of worries about delay in payments or non receipt of payments for the service exports made by them. Different types of services policies and protection: For the benefit of exporters, this policy is offered in the following variants. 1. Specific Services Contract (Comprehensive Risks) Policy; 2. Specific Services Contract (Political Risks) Policy; 3. Whole-Turnover Services (Comprehensive Risks) Policy; and 4. Whole-Turnover Services (Political Risks) Policy.

Specific Services Policies are issued to cover the single specified contract as has been entered into between the services provider and services recipient. These policies are issued in order to provide cover for export sales contracts having a large value and where such contracts are extended over a relatively long period of time. Whole-turnover services policies, on the other hand, provide the credit insurance cover where the period of each contract is relatively short in time. Whole Turnover Services Policy is suitable for exporters who provide services to the same recipient and on a repetitive basis. Services Export Policies are issued to cover the credit risk of all services that are provided in contracts supposed to be concluded in the next 24 months.

Services policies are designed in order to provide coverage to exports sales contracts under which only services, as notified under WTO Agreemend, are to be rendered. In case the value of services to be rendered forms only a small part of the export sales contract, such contract shall be covered under the appropriate specific policy for supply contracts. Salient features of Services Policies
Features Eligibility Description

Services Policies offer protection to Indian firms against payment risks involved in rendering services to foreign parties. A wide range of services like technical 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 depending on the nature of service provided. The premium rates applicable to Standard Policy will be applied for Whole Turnover Policy and Specific Shipment Policy (SSP-ST), premium rates will be applied for Specific Services Policy. Period of the Policy 12/24 months as per the requirement. Risks Covered- Commercial Risks on ultimate buyers - Political Risks - LC Opening Bank Risks Percentage of cover - 90% or 80% Important obligations - Advance deposit of premium to cover premium. - Obtaining credit limit on services receiver. - Monthly statement of actual services provided. - Overdue declaration. - Filing of claim. - Sharing of recovery.

Highlilghts

- Option to select the type of cover.

7.8 Software Projects Policies: India, in the recent past, has emerged as a leading country offering quality software services. Many Indian companies are engaged in international business operations in North America, Europe, Australia and Asia. The ECGC has designed a policy offering protection to the exporters of services, including software and related services. As the Standard Polices, issued by the ECGC do not offer the benefits in tune with the exact requirements of software exporters, the ECGC has introduced a new credit insurance cover to meet the needs of the software exporters, through Software Projects Policy, in the cases where the payments are received in foreign exchange. The Software Projects Policy can be offered for software project services, either on one-time / turnkey basis or progressive / milestone basis. The following is the list of services that are eligible for credit insurance cover under the Software Projects Policy:

1.Development of software at the exporters location in India to be delivered and implemented in the buyers (client) location; or 2.Development of software on-site of the client and supply and implementation; or 3.Both the cases mentioned above. Important features of Software Projects Policy: Software projects exports have special characteristics and are quite different from cargo exports. Understanding the exporters problem while working on such projects, the ECGC has taken care of those special features of services project and has accordingly introduced the following features in the Software Project Policy: 1. The exporter is allowed to submit a progress report indicating the level of completion in the project on milestone basis, instead of a mandatory monthly or quarterly report, as in the case of other polices. He is also required to submit the details of payment sought and payment received and deviations in these areas to the ECGC. 2. The exporter has to specify in advance the manner in which the work in progress would be estimated (namely, the reports that would be available on the volume of work done and the rate to be applied on the defined unit to arrive at the work done it could be a document giving the man-hours spent and rate per man-hour or it could be a simple number of days worked and rate per day). 3. Liability of the ECGC would be only for the work reported in the progress report. 4. The ECGC will have the right to examine the books of accounts and other documents of the exporter either on its own or through an authorized agency prior to admission of claim. Certification by banks may be dispensed with in cases where it is felt that it is not possible. 5. The contract should provide for a clear acceptance mechanism in respect of services rendered and if possible, a procedure for arbitration. It should also provide for rectification of mistakes, errors and omissions. The ECGC would not cover any loss due to errors or omissions.

6. Loss coverage will be restricted to 80% as there is no salvage possibility. 7. Apart from stipulating the loss limit on the buyer, the policy document would also specify the limit upto which the losses are covered under other risks. Salient Features of Software Projects Policy:
Features Eligibility Description The Software Projects policy will provide protection to exporters of software and related services where the payments will be received in foreign exchange. - Supply of software products and packages, or - Staffing and programming services, or - Both off-shore and on-site development

Software Services Exports covered under Software Projects Policy

Risks Covered Commercial Risks Political Risks

Percentage of cover Distinct Characteristics

- Default, insolvency and wrongful repudiation after commencement of services 1. Transfer Delay variation of eschange rate. 2. War risk. 3. Restrictions arise due to Political situation in India or buyers country. 4. Refusal of visa for employees of exporter. 5. Unjustified restraining of personnel of the exporter. 6. Increase in any tax or introduction of a new tax payable by the exporter. 7. Variation in exchange (Losses mentioned at 4 to 7 above will be covered maximum upto 25% of value of export). - 80% - Billing mostly on milestones progress report. - Exact duedates not possible. - Losses may be for the work done for which invoice is not raised. - No physical documentation possible. - Specific deficiencies and corrective measures. - No salvage in almost all the cases. - Authorized agency shall inspect books of account. - Accept the documents without Banks certification. - Contract for a defined period. - Billing predetermined interval. - Loss including services rendered. - No physical documents for transfer.

Highlilghts

- Provision for correction in case of omission or deletion.

7.9 IT Enabled Services Policies: There are two variants of this policy as under: 7.9.1 7.9.2 IT-Enabled Services (Specific Customer) Policy IT Enabled Services Policies (Multi Customer):

7.9.1 IT-Enabled Services (Specific Customer) Policy For meeting the requirement of exporters in the areas of Business Process Outsourcing, Knowledge Process Outsourcing Engineering Process Outsourcing and Legal Process Outsourcing, the THE ECGC has designed the IT-enabled Services (Specific Customer) Policy, which is issued to cover the following commercial and political risks involved in rendering IT-enabled services to a particular customer: Commercial risks: 1. Cases of insolvency of the importer.

2. Cases of failure of the importer to make or ensure the payment to exporter within a specified period, which is usually less than six months from the due date of payment. 3. Cases under which the importer has failed to accept the services. Such cases are subject to certain conditions as specified by the ECGC. Bank risks: 1. The cases of Insolvency of the L/C Opening Bank in trade transaction; 2. The cases under which the LC Opening Bank has failed to make the payment to the exporter within a specified period, which is usually less than six months from the due date. Political risks: 1. Circumstances under which the Government of the importers country may restrict the import of certain services or ban certain service contracts. Or any other government action resulting in blockage or delays the transfer of payment made by the importer, such as restrictions imposed on foreign exchange remittances due to paucity of foreign exchange reserves. 2. Cases of war, rebellion, civil war, revolution or civil disturbances in the importers country. The importer country may also impose restrictions or may cancel the valid import license of the importer. 3. Cases of new restrictions on imports of that services or cancellation of a valid import license by authorities in the importers country. 4. Cases where the Government of India has cancelled the legally valid and binding sales contract between the exporter and the importer or user. Salient Features of IT-Enabled Services Policy:
Features Eligibility Description IT-enabled Services (Specific Customer) Policy would be given in respect of contracts for rendering service during a defined period with billing on the basis of service rendered during a period day, a week, a month or a quarter. IT-enabled Services (Specific Customer) Policy

Policies to be offered Risks Covered Commercial Risks - Insolvency of the customer - Failure of the customer to make the payment - Buyers failure to accept the services rendered (Subject to certain conditions) - Bankruptcy of L/C Opening Bank - Failure of L/C Opening Bank to make the payment - Imposition of restrictions by the Government of the Customers country

Bank Risks Political Risks

Percentage of cover Distinct Characteristics

Highlilghts

- Transfer delay - War, Civil war, revolution or civil disturbances in the customers country - New import restrictions or cancellation of a valid import license - Cancellation by the Govt. of India a legally valid and binding contract between the exporter and the customer - 80% - Contract for a defined period. - Billing pre-determined interval - Loss including services rendered - No physical documents for transfer - Provision for correction in case of omission or deletion - The policy will be offered for contracts, which contain standard terms and condions as per the norms and practices of the IT-enabled Services expot industry. - Right to verify documents by autgorized agency - Monthly declaration indicatng the services rendered,, invioces raised and ibvoices paid to be submitted by the exporter

- No separate overdue report.

7.9.2 IT Enabled Services Policies (Multi Customer): The policy is same as above. However this policy can be taken on the multiple importers of services instead of a specific importer as in the above case. Salient features of IT-Enabled Services Policy:
Features Eligibility Description IT-enabled Services (Multi Customer) Policy would be given in respect of contracts for rendering service during a defined period with billing on the basis of service rendered during a period day, a week, a month or a quarter. IT-enabled Services (Multi Customer) Policy

Policies to be offered Risks Covered Commercial Risks - Insolvency of the customer - Failure of the customer to make the payment - Buyers failure to accept the services rendered (Subject to certain conditions) - Bankruptcy of L/C Opening Bank - Failure of L/C Opening Bank to make the payment - Imposition of restrictions by the Government of the Customers country - Transfer delay

Bank Risks Political Risks

Percentage of cover Distinct Characteristics

Highlilghts

- War, Civil war, revolution or civil disturbances in the customers country - New import restrictions or cancellation of a valid import license - Cancellation by the Govt. of India a legally valid and binding contract between the exporter and the customer - 80% - Contract for a defined period. - Billing pre-determined interval - Loss including services rendered - No physical documents for transfer - Provision for correction in case of omission or deletion - The policy will be offered for contracts, which contain standard terms and condions as per the norms and practices of the IT-enabled Services expot industry. - Right to verify documents by autgorized agency - Monthly declaration indicatng the services rendered,, invioces raised and ibvoices paid to be submitted by the exporter

- No separate overdue report.

Types of ITES contracts that will be eligible for cover: ITES policy cover can be availed of by the exporters with regard to the sales contracts for rendering IT-enabled service to the user during a defined period. The billing for the same has to be on the basis of service rendered during a period say, a week, a month or a quarter, where the payments due for the services rendered will be received in foreign exchange. 7.10 Construction Works Policy: Construction Works Policy is designed to provide cover to an Indian contractor who executes a civil construction job abroad. The distinguishing features of construction contract are that: (a) the contractor keeps raising bills periodically throughout the contract period for the value of work done between one billing period and another; (b) to be eligible for payment, the bills have to be certified by a consultant or supervisor engaged by the employer for the purpose and (c) that, unlike bills of exchange raised by suppliers of goods, the bills raised by the contractor do not represent conclusive evidence of debt, but are subject to payment in terms of the contract that may provide, among other things, for penalties or adjustments on various counts.

The scope for disputes is very large. Besides, the contract value itself may only be an estimate of the work to be done, since the contract may provide for cost escalation, variation in contracts, additional contracts, etc. It is therefore, important that the contractor ensures that the

contract is well-drafted to provide clarity of the obligations of the two parties and for resolution of disputes that may arise in the course of execution of the contract. Contractors should use the Standard Conditions of Contract (International) prepared by the Federation International Des Ingenieurs Conseils (FIDIC) jointly with the Federation International du Batiment et des Travaux Publics (FIBTP). Risks covered under Construction Works Policy: The Construction Works Policy of the ECGC is designed to protect contractor from 85% of the loss that may be sustained by him due to the following risks: 1. Failure of the employer to pay the amounts that become payable to the contractor in terms of the contract, including any amount payable under an arbitration award. 2. Insolvency of the employer (when he is a non-government entity). 3. Restrictions on transfer of payments from the employers country to India after the employer has made the payments in local currency. 4. Failure of the contractor to receive any sum due and payable under the contract by reason of war, civil war, rebellion, etc. 5. The failure of the contractor to receive any sum that is payable to him on termination or frustration of the contract, if such failure is due to its having become impossible to ascertain the amount or its due date because of war, civil war, rebellion etc. 6. Imposition of restrictions on import of goods or materials (not being the contractors plant or equipment) or cancellation of the authority to import such goods or cancellation of export license in India, for reasons beyond his control; and 7. Interruption or diversion of voyage outside India, resulting in his incurring in respect of goods or materials exported from India, of additional handling, transport or insurance charges, which cannot be recovered from the employer.

Risks not covered by Construction Works Policy: The Construction Works Policy excludes from its purview losses, which may be sustained due to the following causes: 1. Failure of the contractor and / or the employer (where the employer is not a government) to obtain, issue or deliver any authority necessary under the law of India or the employers country for execution of the project and to make payment thereof. 2. Risks that can normally be insured with commercial insurers. 3. Insolvency, default or negligence of any agent, seller or sub-contractor. 4. Execution of any work or incurring of any expense by the contractor after the employer has been in default in making any payment for a period of 120 days unless, on an application made by the contractor within 90 days of such default, the ECGC has agreed to his continuing execution of the contract despite the employers default. 5. Execution of any work or incurring of any expense by the contractor after the estimated

date for completion of the contract unless, at the request of the contractor, the ECGC has agreed to a change in such date. 7.11 Specific Policy for Supply Contract: The Standard Policy is a whole turnover policy designed to provide a continuing insurance for the regular flow of an exporters shipments, for which credit period does not exceed 180 days. Contracts for export of capital goods or turnkey projects or construction works or rendering services abroad are not of a repetitive nature and they involve medium / long-term credits. Such transactions are, therefore, insured by the ECGC on a case-to-case basis under specific policies. 1. Procedure for Specific Policy for Supply Contract: All contracts for export on deferred payment terms and contracts for turnkey projects and construction works abroad require prior clearance of Authorized Dealers, EXIM Bank or the Working Group in terms of powers delegated to them as per Exchange Control Regulations. Applications for the purpose are to be submitted to the Aauthorized Dealer (the financing bank), which will forward applications beyond its delegated powers to the EXIM Bank. Proposals for specific policy are to be made to the ECGC after the contract has been cleared by the Authorized Dealer, EXIM Bank or the Working Group, as the case may be. Types of Policies: (a) Specific Shipment (Comprehensive Risks) Policy; (b) Specific Shipments (Political Risks) Policy; (c) Specific Contract (Comprehensive Risks) Policy; and (d) Specific Contract (Political Risks) Policy. Risk Coverage: Specific Shipments (Comprehensive Risks) Policy provides cover against all the risks covered under the Standard Policy for shipments to be made under the contract in question. It is, therefore, the appropriate policy for an exporter if the payments are open to both commercial and political risks. Where commercial risks are absent, e.g., where the payments are guaranteed by a bank, or by the government of the overseas country, the exporter may opt for the Specific Shipments (Political Risks) Policy for which the premium rate will be lower than that for the Comprehensive Risks Policy. Specific Contract Policy (which also can be for comprehensive or political risks) differs from Shipments Policy. The former provides the exporter not only with the post-shipment cover like the latter, but also with some pre-shipment cover from the date of contract. In case shipments cannot be made due to any of the risks covered or due to restriction on export of the goods from India, the loss in respect of unshipped goods will also be covered under Contract Policies. Premium rates for Contract Policies will be higher than that for Shipment Policies.

7.12 Policies for SME sector: The ECGC introduced a Policy exclusively for the SME sector units with effect from 4th July, 2008. The Policy is particularly meant for the SME Sector. The features of the SME Policy are, as under: Features of Small and Medium Exporters Policy at a glance 1. Policy period: 12 months 2. Processing Fees: ` 1000 3. Credit limit fees: Not applicable 4. Discretionary Limit: Not applicable 5. Declarations: Not required 6. Premium: ` 5000 7. Maximum Loss covered: Limit ` 10 lacs 8. Single Loss Limit: ` 3 lacs 9. Report of overdue: should be submitted by the exporter to the ECGC within 60 days from the due date 10. Waiting period for categorisation of overdue: Two months from the due date or extended due date 11. Percentage of cover 90% of the loss. This Policy is meant for exporters engaged in manufacturing activities having invested in plant and machinery or engaged in export of services having invested in equipment as per MSMED Act, 2006. This Policy can be issued to an exporter qualifying as per the MSMED Act, 2006. The exporter desirous of obtaining the Policy should furnish the certificate issued by the designated authority. (District Industries Centers) This Policy is not meant for the exporters carrying out trade activities only. 7.13 Guarantees to the Banks: 7.13.1 Packing Credit Guarantee: The ECGC also offers guarantees to the banks so that exporter can avail easy finance for their export consignments. The various schemes for offering guarantees are as follows: Packing Credit Guarantee: Sometimes, the exporter may face problems and hurdles in getting the pre-shipment credit from the bank on time due to factors such as unsafe mode of payment, doubtful L/C, poor credit ranking of importer or his country in making payment, the exporter being relatively new to the export business, and the extent of facilities needed by him being out of proportion to the equity of the firms. Under such circumstances; The ECGC can help the exporter in availing pre-shipment credit by offering a guarantee on behalf of exporter to the bank.

The Packing Credit Guarantee of the ECGC helps an exporter getting prompt; better and adequate credit facilities from their bankers for meeting pre-shipment credit needs for carrying out international trade transactions. The ECGC assures the banks on behalf of exporter that if he fails to pay back the loaned amount to the bank, the ECGC will compensate the bank for the major portion of the loss so occurred and the rest will be taken care of by the credit-giving bank. Whole Turnover Packing Credit Guarantee (WTPCG): This kind of guarantee is available to the bankers, where they can cover all their export finances at pre-shipment stage, without any exception, whether risky or not, with the ECGC. This is called as the principle of whole turnover. The benefit that the bankers derive under this scheme are that: They can avoid getting individual advance guaranteed. They need to send a statement of advance granted during a particular period to the ECGC. The bank gets higher percentage of the cover The rate of premium is lesser. 7.13.2 Export Production Finance Guarantee: Export Production Finance Guarantee: Sometimes, the exporter quotes prices just at the cost of production foregoing their profit margin. This could be due to heavy competition in the international market. The Government, through export incentives schemes, supplements some benefits to these exporters. For example, Tata and Birla in 1991 kept exporting iron and paper just at the manufacturing cost so that India could meet its foreign exchange needs. The Government of India in return, has given some benefits to Tata and Birla domestically so that they can profit out of it. In the era of liberalization, such instances are common when a country has to sell just at the cost so that other allied industries, jobs and overall economic environment may not be disturbed.

Keeping these circumstances in mind, the ECGC has devised this scheme for the purpose enabling finances to exporters from banks by offering Export Production Finance Guarantees to the banks. Banks sanction such advances to the exporters at the pre-shipment stage to the full extent of the cost of production, even if it exceeds the F.O.B. value of the contract / order, including the differences representing Incentive / Duty Drawback receivable by the exporter. The ECGC offers the same kind of cover and the premium rate as in case of Packing Credit Guarantee under this scheme also. Exporters can avail of such facility through banks that have opted for WTPCG and shall be eligible for concessionary premium rate as well. 7.13.3 Post-Shipment Export Credit Guarantee: Post-Shipment Export Credit Guarantee. Pre-shipment credit that is sanctioned to exporter is treated to be as repaid once the exporter completes the process of sending goods to the importer and submits the trade documents to the bank for further action such as purchase / discounting / negotiation. In case the exporter wishes to continue the finance facilities till he receives the value of shipment from the foreign buyer, he can avail of post-shipment credit from the Authorised

Dealer Banks. The Post-Shipment Credit Guarantee scheme of the ECGC ensures protection to banks against non-realization of export proceeds and the resultant failure of the exporter to repay the finances back to banks. Post-Shipment finance is usually given to the exporters by banks through purchase, negotiation or discounting of export bills. It can also be through the advances against bills which the exporter has sent for collection through his bank and the collection bills will also qualify for this guarantee scheme of the ECGC. However, it is essential for an exporter to avail of a suitable policy of the ECGC in order to cover the overseas credit risks. Whole Turnover Post-Shipment Guarantee (WTPSG): This kind of guarantee is available to the bankers, where they can cover all their export finances at post-shipment stage, without any exception, whether risky or not, with the ECGC. This is called as the principle of whole turnover. The benefit that the bankers derive under this scheme is that: They can avoid getting individual advance guaranteed. They need to send a statement of advance granted during a particular period to the ECGC. The bank gets higher percentage of the cover The rate of premium is lesser. 7.13.4 Export Finance Guarantee: Under this scheme, the ECGC provides guarantees to the bank if an exporter wishes to avail the finances from the bank against the export incentives / duty drawback to be given by the Government of India. This guarantee scheme covers the risks of the banks on the post-shipment finances, against the export incentives receivable in the form of cash assistance, duty drawback, etc. 7.13.5 Export Performance Guarantee: Exporters are sometimes required to execute bonds or furnish bank guarantees, at various stages of export business. An exporter who desires to quote for a foreign tender may have to furnish a bank guarantee in the form of a bid bond. If he wins the contract, he may have to furnish bank guarantee to foreign buyers to ensure due performance. He may be required to furnish such guarantees when he receives advance payment, or in lieu of retention money. He may be required to furnish such gaurantees to the foreign bank, in case he has to raise overseas finance for his contract. Further, for obtaining import licenses for raw materials or capital goods, exporters may have to execute an undertaking to export goods of a specified value within a stipulated time, duly supported by bank guarantees. Bank guarantees are also furnished by exporters to the Customs, Central Excise, or Sales Tax authorities for the purpose of clearing goods without payment of duty or for exemption from tax for goods procured for export. Exporters may also be required to furnish guarantees in support of export obligations to Export Promotion Councils, Commodity Boards, and the State Trading Corporation of India, the Minerals and Metals and Metals Trading Corporation of India etc.

An export proposal may be frustrated if the exporters bank is unwilling to issue a guarantee, which the exporter may be required to furnish. The Export Performance Guarantee provided by the ECGC is aimed at helping the exporter in such cases. The guarantee, which is in the nature of a counter-guarantee to the bank, is issued to protect the bank against loss that it may suffer on account of guarantees given by it on behalf of the exporters. This protection is intended to encourage banks to give guarantees on a liberal basis for export purposes. 7.13.6 Export Finance (Overseas Lending) Guarantee: Presently, Indian companies are largely foraying in international contracts in overseas markets and are exposed to risk of non-payments. In order to meet such requirements, the ECGC has devised the Export Finance (Overseas Lending) Guarantee Scheme by covering the risks of a bank financing the overseas project to an Indian project exporter. 7.13.7 Transfer Guarantee: Transfer guarantee is a mechanism through which a bank in India can add its confirmation to a Letter of Credit. Under such circumstances, the onus of payment for Letter of Credit falls on the confirming bank and it has to honour the drafts which are drawn in favour of the beneficiary i.e., exporter. Exporters usually get their Letter of Credit confirmed if they are doubtful of the solvency of issuing bank or of the importer country and wish to avoid unforeseen circumstances such as payment restrictions by importer country. Exporters become assured of the payments of export proceeds when the Letter of Credit is confirmed and it becomes an effective payment mode. The Export Credit Guarantee Corporation of India offers transfer guarantees to such confirming bank so that the bank may not be exposed to any kind of risk. Some reasons that prompt the confirming banks to avail transfer guarantees are as follows:

a) In case of any discrepancy in L/C b) In case of bankruptcy of the L/C Opening Bank, c) Adverse political conditions in the importers country, which may prompt the authorities to ban light of capital. d) Cases of war, rebellion, civil war resulting in delay in payments. e) Transfer delays or imposition of moratorium on payment by the importer country. All such conditions as mentioned above can delay or prevent the transfer of export proceeds from the importers bank to the exporters confirming bank. The confirming banks in this case, are exposed to risks that are beyond their control and hence wish to avoid any kind of risk by getting it insured from the ECGC through its Transfer Guarantee scheme. The Transfer Guarantee scheme of the ECGC covers the confirming bank from such kind of risks the resultant loss that may crop up. Transfer Guarantees have the following features: 1. It covers Political as well as Commercial Risk. 2. Political Risk coverage is 90% and Commercial Risk coverage is 75% 3. Premium rates vary depending upon the country and the risk perceptions.

7.14 Overseas Investment Guarantee: In recent times, Indian enterprises are largely looking up for tapping the overseas business opportunities and accordingly, the ECGC has designed a scheme to provide protection to such entrepreneurs and companies intending to make investments in foreign markets. Indian entrepreneurs or companies making investment in overseas markets by way of equity capital or untied loan for the sake of setting up a business project, planning an expansion or diversification of existing operations and getting into overseas projects will be eligible for investment insurance cover from the ECGC. Such investment by Indian entrepreneurs can either be in cash or in the form of export of Indian capital goods and services to an overseas destination. The ECGC extends the cover for such investment not only for the original investment but also for the annual dividends or interest receivable from such investment made abroad. The guarantees so offered by the ECGC cover the risks of war, expropriation and restriction on remittances under the Overseas Investment Guarantee Scheme. Such policy covers the political risk involved in the investment overseas and not the commercial risks as the investor will keep control of the management of the joint venture or subsidiary with himself. For availing this scheme of the ECGC, the qualifying criteria is that the Indian Government should have a bilateral agreement with the other country where the investment has been planned for protecting the investment of one country in another. The ECGC may also extend such guarantees to entrepreneurs making investment in countries where the Indian Government does not have investment guarantee agreement, but it is sufficiently satisfied that the general laws of the destination country have adequate legislation in place for protecting Indian investments. Such a guarantee can be usually for the period of 15 years but can be extended up to 20 years. Investment limit under insurance will automatically get reduced each five years. 7.15 Exchange Fluctuation Risk Cover: In the recent past, the rupee has been open to fluctuations, as the policy-makers have decided to let it float in the foreign exchange market and decide its own value based on demand and supply. Exporters are prone to such risk if the rupee appreciates against invoiced foreign currency. The Exchange Fluctuation Risk Cover, as provided by the ECGC; protects exporters from such risk. The exporters of capital goods, civil engineering contractors and consultants who have often to receive payments over a period of years for their exports, construction works or services can avail of this cover to protect themselves from exchange rate fluctuation risks involved in international trade. The salient features of these guarantees of the ECGC are mentioned below. 1. Eligibility: Payments in foreign currency shall be received after a period of 12 months or more, up to a maximum period of 15 years.

2. The Exchange Fluctuation Cover can be obtained from the date of bidding in the international projects. 3. There are two variants of the scheme, namely the Exchange Fluctuation Risk (Bid) Cover, and Exchange Fluctuation Risk (Contract) Cover. 4. Refund of premium up to 75%, if the bid is successful. 7.16 Factoring Services: Factoring refers to the purchase of accounts receivables / invoices of the exporter by the ECGC. The exporter; in order to obtain finances against the sales made;, assigns his accounts receivables in favour of the ECGC and informs the importer about the same. Factoring provides following benefits to an exporter: 1. Easy and prompt export financing by way of pre-payment of the receivables; 2. Maintenance of sales ledger. 3. Collection of bills receivables / recovery of bad debts by the ECGC (factor) and 4. Credit protection against bad debts. The terms and conditions of factoring are subject to the agreement between exporter and the ECGC (factor). Factoring services as provided by the ECGC may include, Factoring with recourse Factoring without recourse and Maturity factoring. When pre-financing is provided to the exporter but no credit protection is guaranteed by the ECGC; it will be known as Recourse Factoring. When credit guarantee is also assured by the ECGC; it will be known as factoring without recourse. Contrary to this, when no pre-financing of the receivables is provided, but the ECGC ensures to pay the amount due only on maturity of the credit period, it is known as Maturity Factoring. Salient features of the ECGC Services in Factoring: 1. Assuring 100% credit guarantee against bad debts. 2. Sales register maintenance in respect of factored transactions. 3. Regular monitoring of outstanding credits, facilitating collection of receivables on due date, recovery, at its own cost, of all recoverable bad debts. Exporter Finance under Maturity Factoring: The ECGC is an agency instituted by the Government of India to provide services to exporters in managing their credit risks and inter alia, ensures easier availability of bank finance to its factoring clients. The ECGC provides

such services through the banks and takes responsibility for any risk so occurring. Specific benefits of the scheme to an exporter and banks are as follows: Benefits to the Exporters: Opportunity to offer easier credit terms to the importer. Factoring ensures better protection than an irrevocable L/C. Enables the exporter to offer more friendly terms to the importer such as DP / DA Reduces the transactional cost of the business through lower costs in handling the documents. Offers substantial time and cost savings related to the follow up and monitoring the payment / recovery.

Benefits to the Banks: It offers 100% protection to the banks as the ECGC guarantee is available. The ECGC ensure the payment to the banks within 3 days of the crystallization of the dues. Savings on guarantee premiums No pre disbursal assessment risk or post disbursal monitoring is required as full risk is assumed by the ECGC. Procedure for Availing the ECGC Factoring Services: 1. The exporter should request for factoring services facility by forwarding a formal application to the nearest office of the ECGC, through his bank. 2. The exporter should provide full information with regard to business, including information on importers for whom the bills are to be factored. 3. The exporter should get pre-approval from the ECGC for this purpose and have a Permitted Limit (PL) established on each one of the importers whose bills are factored. 4. The exporter should enter into a Factoring Agreement with the ECGC and offer to the ECGC for factoring (with payment of factoring charges) all future export transactions on DA/ OD terms with those buyers on whom a PL has been established. 5. The exporter should approach his bank for arranging advances on such factored receivables, and notify the name of the bank to the ECGC to enable the ECGC to communicate to the bank, the limit established on each importer. 6. The exporter should ensure due performance of obligations to the buyer under export contract/ purchase order.

Summary _________________________________________________________ The risks that the exporter is exposed to in the international trade are many. There is possibility that the importer may not pay. This is known as credit risk. Even if the importer pays there is a possibility that the country may not pay. The reasons could be many. The exporter therefore would feel discouraged to export, if such risks are not taken care of. Government of India has therefore set up THE ECGC in 1957. It offers protection to the exporters in the form of indemnifying their loss to about 90%, by offering them a large number of insurance policies to suit their various needs related to the international trade transactions of goods and services. It does not stop there. THE ECGC also encourages the banks by giving them the guarantee for the benefit of the exporter. If the exporter is not able to pay the export loan he has taken and the financing bank suffers a loss because of the exporters failure, then the THE ECGC makes good the portion of the loss. THE ECGC also offers various other services apart from these such as factoring, providing very useful and relevant information to the exporter on the credibility of the importer and the importing country. It also assists in recovering bad debts of the exporters and so on. As the risk coverage comes to the exporter at a very low cost and thus helps the exporters immensely.

7.18 KEY WORDS 1) Political risk, 4) L/C Opening Bank risk, 7) Moody, 10) Co face, 13) NSIC, 16) WTPCG, 19) DA, 22) Guarantees to the bankers 2) country risk, 5) ICRA, 8) IRDA, 11) ISO 9001-2000, 14) SME, 17) WTPSG, 20) Small Exporter. 3) Commercial risk, 6) iAAA rating, 9) D & B, 12) NEIA, 15) Factoring, 18) DP, 21) Policies to the exporters,

7.20 DESCRIPTIVE QUESTIONS Q.1. What is the role and what are the functions of the ECGC? Q.2. What are the various types of risks that are covered by the ECGC? Q.3. What are the factors on which the premium chargeable on the policies issued by the ECGC depends? Q.4: Explain the salient features of the Standard Policy, also known as Shipment Comprehensive Risk Policy. Q.5. Explain the salient features of the Small Exporters Policy. Q.6. Explain the principle of whole turnover. How are WTPCG and WTPSG directly useful to the banks and indirectly to the exporters? Q.7. What do you understand by Factoring? Explain the factoring services offered by the the ECGC. How are they useful to the exporters? Q.8. Enumerate all the policies that are available to the exporters and the eligibility of the exporter to avail of these policies. Q.9. Enumerate all the guarantees that are available to the bankers and the purpose of each of them. 7.21 OBJECTIVE QUESTIONS Q.1: The ECGC is: A. In Banking sector B. In Insurance sector C. In the business of Exporting Services D. NBFC Q.2: The ECGC functions under: A. The ministry of Finance B. The Ministry of External Affairs C. The Ministry of Commerce D. The RBI Q.3: The ECGC was established in: A. 1954 B. 1955 C. 1956 D. 1957

Q.4: While calculating premium the ECGC uses the term DP. DP stands for: A. Drawing Power B. Documents against Payment C. Duty Paid D. Du-Pont Q.5: Principle of `Whole Turnover means: A. Only Whole sale export credits are covered B. All export credits are covered, irrespective of whether they are risky or not risky C. Only risky export credits are covered and non risky export credits are not covered D. Export as well as import risks are covered Q.6: Small Exporters Policy covers: A. 95% of commercial risk and 100% of political risk B. 100 % of commercial risk and 95% of political risk C. 95% of commercial risk and 95% of political risk D. 100% of commercial risk and 100% of political risk Q.7: `Small Exporter means whose annual export turnover doe not exceed the limit of A. ` 100 lakhs B. ` 75 lakhs C. ` 50 lakhs D. ` 25 lakhs Q.8: Small Exporters policy is issued for a period of: A. 36 months B. 30 months C. 24 months D. 12 months Q.9: The minimum premium payable on Small Exporters Policy is: A. ` 1,000 B. ` 2,000 C. ` 5,000 D. ` 10,000

Q.10: Standard Policies are issued for a period of: A. 12 months B. 18 months C. 24 months D. 30 months Q.11: The ECGC covers the following risks A. Commercial risks B. Political risks C. Both A and B above D. C and L/C Opening Bank risk Q.12: The ECGC does the following: A. Issues the guarantees to the exporters and policies to the bankers B. Issues policies to the exporters and guarantees to the bankers C. Issues the policies to the bankers and the exporters both D. Issues guarantees to the bankers and the exporters both Q.13: THE ECGC has categorised the countries in the world in: A. 4 groups B. 5 groups C. 6 groups D. 7 groups Q.14: While calculating the premium, the ECGC uses DA term. It stands for: A. Documents against Acceptance B. Dearness Allowance C. Discrepancies Allowed D. None of the above Q.15: Exporter need not obtain the policy from the the ECGC in case he: A. Is the beneficiary of the L/C issued by the Prime Bank B. He draws the invoice in Indian Rupee C. Has already taken Marine Insurance cover under ICC-A covering All Risks D. Has received full advance payment.

Chapter

Quality Control and Preshipment Inspection

8.1 Learning Objectives On reading this chapter the


reader will know why, when and how the quality control and Preshipment inspection is required to be done. He will also know the authorities which can conduct such inspection and the products notified for compulsory inspection.

8.2

Necessity of Quality Control and Preshipment Inspection:

The exporters need to export quality products to other countries as this will enhance Indias image in the international market. It will also serve the other purpose of stimulating the demand for the quality products in the international market and thus help boost the exports. This in turn increases the much needed foreign exchange reserve, besides generating the domestic employment. Keeping all this in view all exporters must strive to supply only quality products. Towards this end they should subject their export cargo to quality check and inspection by the designated authorities. These designated authorities ensure thet the export cargo is a per the international standards set in this regard and issues the certificate to that effect. There are three designated inspecting authorities in this connection. They are as follows: 1. As designated or approved by the Government of India under Exports (Quality Control & Inspection) Act, 1963. This is known as compulsory inspection. 2. As are designated by the buyer of the goods, the importer, in foreign country, to make sure about the quality of the goods. This is known as inspection by buyers agency 3. As requested by the exporter himself, in order to be eligible for concession in import duties in the foreign countries. This is known as voluntary inspection. We shall discuss these in the following paragraphs.

8.2.1 Exports (Quality Control & Inspection) Act, 1963:


The Government of India launched a programme for quality control and inspection of the export cargo by enacting The Export (Quality Control and Inspection) Act, 1963 as amended in 1984, along with The Export (Quality Control and Inspection) Rules, 1964 and corrected up to 30th September 1986. (Refer Appendix A51). The salient features of this act are as under: 1. The act empowers the Government to: a. Notify the commodities which shall be subject to Quality Control or Inspection or both, prior to export, b. Specify the Quality Control or Inspection, which will be applied to a notified commodity c. Establish, adopt or recognise one or more standard specifications to a notified commodity d. Prohibit the export in the course of international trade of notified commodity, unless it is accompanied by a certificate under Section 7, that the commodity satisfies the condition related to Quality Control or Inspection. e. The goods can be exported only when they are affixed or applied to it a mark or seal accepted by the Central Government that these goods conform to the standard specifications.

2. For carrying out pre-shipment inspection of various goods a number of existing agencies, both Government and private, have been recognised. (Refer Appendix A50). 3. To supplement the work of these agencies, the Government also established five Export Inspection Agencies in 1966, exclusively for Export Inspection, under the administrative and technical control of Export Inspection Council. They are situated at: i. ii. iii. iv. v. Mumbai, Kolkata, Cochin, Chennai and Delhi

4. Compulsory Pre-shipment Inspection, in as much as 90% of exports from India has been covered under one or the other system of Quality Control. 5. Exporters can refer this list or contact Export Inspection Agencies to find out if the goods he wants to export fall under the list of compulsory Quality Control and Preshipment Inspection. (Refer Appendix A50) 8.2.2 Inspection by Buyers Agency: Sometimes, the importers lay down their own standards / specifications which may or may not be equivalent to the Indian standards including stipulations under the Exports (Quality Control and Inspection) Act, 1963. Importer would like to make sure about the quality of the goods that he is buying. Therefore the importers / Foreign Buyers nominate their own inspection agencies / persons to supervise the production of the goods and / or carry out the inspection before shipment. Such certificate is generally obtained by the exporter and sent to the importer along with the other export documents as we discussed in chapter 3 under paragraph 3.4.5. 8.2.3 Voluntary Inspection: In addition to the compulsory inspection certificate, required to be obtained by the exporter, under the Exports (Quality Control and Inspection) Act, 1963, the exporters may have to obtain additional certificates with regard to quality of the goods. Such inspection certificates are required to be obtained particularly in respect of hand woven goods of cotton yarn / mixed yarn for exports to the EEC countries and the USA. Such certificates are also required for India items covering both the handicrafts and handlooms (textile) groups. We give below the following specific types of certificates, which importers require, in order for them to claim concession in import duty in their country: i. Five language certificate is required for hand-woven knotted cotton fabrics and madeups for exports to EEC countries

ii. Handloom certificates and certificates of origin for Handloom Goods for exports to EEC countries. iii. Certification of India items For obtaining certificate at point number (i), (ii) and (iii) above the exporter has to apply in the prescribed form with two copies of invoice to the Textile Committee. iv. GSP certificate for items entitled to tariff concessions under Generalised System of Preferences adopted and operated by almost all the developed countries. For obtaining GSP certificates the exporter needs to apply to the concerned Export Inspection Agency / Agency authorised to issue the same. v. Endorsement of US special customs invoice otherwise known as Visa Certificate. Visa Certificate is the endorsement of US Special Customs Invoice. The exporter has to send the application for such an endorsement duly certified by the Inspection Agency along with the Invoice and Transport Document quoting GR form number

8.3

Types of Preshipment Inspection:


The following are the various types of Pre-shipment Inspection: Consignment wise Inspection, In-Process Quality Control (IPQC), Self Certification Scheme and Fumigation of Consignment. These are discussed below:

8.3.1 Consignment wise Inspection: Under this type of inspection each individual consignment is inspected by the Export Inspection Agency, prior to its export. Only those consignments which conform to the recognised specifications are allowed for exports and the certificate is issued in this regard. The goods which do not conform to the recognised specifications are not allowed for exports. 8.3.2 In-Process Quality Control (IPQC): There are various product wise Inspection Agencies. For example there are Export Inspection Agencies which are approved for conducting inspection for the products as detailed below: Engineering Products Footwear Products Eggs Products Chemicals Products Black pepper

Milk Products Basmati rice Honey Products Poultry meat Products Other Products These agencies conduct the inspection of the products from the time the manufacturing activity starts. Each stage of the manufacturing activity is inspected. Generally following are the stages in production which are under the scanner of the Inspection Agency: Procurement of Raw Material Procurement of components Process of manufacturing Product control Packing control The Export Inspection Agency inspects the goods at every stage and only those goods conforming to the specified norms are granted certificates and are allowed to be exported. Exportworthy Units: Engineering goods manufacturing units and Footwear and Footwear components manufacturing units, which are authorised to issue, their own certificates of inspection themselves only for those products for which they have been granted IPQC facility are called as Exportworthy units. These units should get themselves registered as Exportworthy units with the concerned Export Inspection Agency. The inspection under this system is done by the Export Inspection Agency from time to time and certificate of inspection is issued on the end products without any in depth study at the pre-shipment stage. Where the goods, for export are offered, by the merchant exporter, for inspection i.e. not by the manufacturer directly, complete inspection is carried out by the Export Inspection Agency. 8.3.3 Self Certification Scheme: Large manufacturers / exporters are allowed the facility of Self Certification, as it is considered that they themselves are the best judge of the quality of their products and will not allow their reputation to be spoiled in the international market by compromising on quality. The industrial units having proven reputation and adequate testing facilities have to apply to the Director (Inspection and Quality Control), Export Inspection Council of India, 11th floor, Pragati towers, 26 Rajendra Place, New Delhi.110008. They are granted a certificate valid for one year, allowing them the facility of Self Certification.

In case of Engineering Products, Chemical and Allied Products, Marine Products and Footwear Products, this facility is available. The certificate indicates the number of and date of EIAs reference for registration under Self-Certification scheme. The Self-Certificate has to be issued in the aligned format as per the new standardised pre-shipment documents. The approval of the industrial unit is notified in the Gazette of India. The exporter has to pay fees for getting this facility based on his export turnover. Minimum quality norms as prescribed by the Export Inspection Council are required to be maintained by such units. 8.3.4 Fumigation of Consignment: Export of commodities such as de-oiled rice bran, crushed bones, hooves and horns, which are susceptible to insect infestation while in storage and in transit are subjected to compulsory fumigation to ensure that the product reaches the destination in good condition.

8.4

Procedure for Preshipment Inspection:

The procedure for obtaining Preshipment Inspection Certificate is different for Exportworthy units and those units which are not registered as Exportworthy units. The procedure is described as follows: For Exportworthy units: These units, which are exercising adequate in-process quality control and approved as Exportworthy, have to submit only their application in the prescribed form, called as Intimation for Inspection form, to the concerned Export Inspection Agency. The Export Inspection Certificate is issued by the Agency on the basis of the performance report of the unit submitted by the officials of the Export Inspection Agency, during the checks at all levels of production carried out by them according to the specification laid down for each level of production. Whenever required or if EIA feels that spot checks are necessary, such checks are also carried out. For units not registered as Exportworthy: These units are required to apply in the prescribed form to EIA well in advance generally about seven days before the date of shipment. They should also submit the following documents with the application: a) Copy of export contract b) Copy of Letter of Credit c) Details of packing specification d) Commercial invoice giving evidence of FOB value of export consignment e) Crossed cheque for the inspection fees f) Declaration regarding importers technical specifications, if any. After getting the intimation for inspection, EIA deputes their inspector to conduct the inspection at the exporters factory or warehouse. He submits his report to the EIA. If the report

submitted by him is satisfactory EIA issues the Inspection Certificate in triplicate. These three copies are meant for, 1. Original Inspection Certificate is required to be submitted to the Export Department of the Customs 2. The Duplicate is to be sent to the importer 3. The triplicate is kept by the exporter for his record. 8.4.1 Rejection and Appeal against Rejection If the consignment is not passed for the export the EIA issues the Rejection Note. If the exporter is not satisfied with the decision of the EIA, he may file an appeal within 10 days from the date of receipt of the Rejection Note. On receipt of the appeal from the exporter, EIA will convene a meeting of the appellate panel. The panel will review the inspection report of the EIA, and if necessary examine the concerned consignment. The decision of the appellate panel is binding on both the exporter and the EIA.

8.5

Powers granted to EIC under the Act:

The following are some of the powers vested with the EIC under the Export (Quality Control and Preshipment Inspection) Act 1963. We are not elaborating these powers here. They are only mentioned here to emphasize the point that EIA has very vast powers and therefore the formalities in this regard should be taken seriously by the exporters. Power to obtain information from exporters etc. Power to enter and inspect Power to search Power to seize commodities etc. Power to stop and seize conveyances Search and seizure to be made in accordance with the code of Criminal Procedure 1973 Confiscation of conveyance Confiscation of goods

8.6

SUMMARY __________________________________________________

It is important to get the pre-shipment inspection done by the exporter which is either compulsory under the Act, as requested by the importer or voluntary. The inspection is carried out on consignment basis for the goods which can be inspected or tested after their production process is completely over. There are however goods which cannot be inspected after their production is over, as the raw material used or the techniques involved, or the methods of processing impact the quality of the product which may not be detectable easily once the production is over. For such products the inspection is conducted while they are being processed. This is called as Inprocess Quality Control inspection.

The Exportworthy units, registered as such with EIA can issue their own certificates, based on which the EIA issues its inspection certificate without much of rigorous checks. The units not registered as Exportworthy units are subjected to rigorous checks before the inspection certificate is issued to them. The large exporters of repute who have testing facilities are authorised to issue their own certificates and no further certificate from the EIA is necessary.

8.7

KEY WORDS

1) Exports (Quality Control & Inspection) Act, 1963. 2) Compulsory Inspection, 4) Inspection by Buyers Agency, 6) Standard Specifications, 8) Export Inspection Council, 10) India items, 12) US Special Customs Invoice, 14) Self Certification Scheme, 16) Fumigation, 3) Voluntary Inspection, 5) Notified commodity, 7) Export Inspection Agencies, 9) EEC countries, 11) GSP Certificate, 13) Consignment wise Inspection, 15) Exportworthy units, 17) IPQC.

8.8

DESCRIPTIVE QUESTIONS

Q.1. Explain the importance and the need of the Preshipment Quality Control and inspection. Q.2. What are the various types of inspections that are carried out? Q.3. Explain the Self Certification Scheme of EIC. Is it the same as the scheme of Exportworthy unit?

Q.4. Write short notes on: 1) Notified Commodity, 2) India items, 3) Powers of EIC, 4) US Special Customs Invoice 8.9 OBJECTIVE QUESTIONS

Q.1: Inspection Certificate issued by the EIA is submitted to: A. Excise B. Customs C. RBI D. EPC

Q.2: Which of the following statements is not true? A. Compulsory inspection covers about 90% of the commodities B. Compulsory Inspection is carried out by the Customs C. Compulsory Inspection is applicable to the Exportworthy units D. Compulsory Inspection is related to only notified commodities Q.3: There are five EIAs. Four of them are at four metros namely, Mumbai, Delhi, Kolkata and Chennai. The fifth one is at: A. Ahmedabad B. Panaji C. Tuticorin D. Cochin

Q.4: Self Certification Scheme can be availed by: A. Exportworthy units B. Large and reputed exporters C. Exporters who do not use imported raw material D. Merchant Exporters Q.5: EIA issues the Inspection Certificates without much check in respect of: A. Status exporters C. Exportworthy units Q.6: IPQC means: A. Indian Products of Quality Control C. In-Process Quality Control Q.7: Fumigation Certificate is taken in respect of: A. Engineering products B. Sports goods C. Marine products D. Export of commodities such as de-oiled rice bran, crushed bones, hooves and horns. B. International Products of Quality Control D. In Process Quantity Control B. Star exporters D. Manufacturer exporters

Q.8: Voluntary Inspection is sought by the: A. Exporter B. Importer C. EIA D. Customs

Q.9: Voluntary Inspection is undertaken: A. To enhance Indias image abroad B. In respect of hand woven goods of cotton yarn / mixed yarn for exports to the EEC countries and the USA. C. In respect of food products exports to Japan D. Whenever anybody feels he can voluntarily conduct this kind of inspection Q.10: If the EIA does not issue the inspection certificate because the goods are not up to the mark, then the exporter can: A. make an appeal to EIA and appellate panel is set up B. still export the same goods but to a buyer from the North African Country C. sell the goods in the domestic market only D. do all the above.

Chapter

9
9.1 Learning Objectives

Foreign Exchange Rates


On reading this chapter the reader will be able to understand the reasons why the exchange rate between the two currencies keeps fluctuating. He will also know what different factors bank takes into account while calculating the currency In the beginning exchange rate quoted by exchange rates and quoting them to the the bank for customers mostly converting i.e. $ into ` for buying and selling of $ the importers and exporters. by the bank is explained. The next is the exchange rate quoted by the bank for converting the other currencies (except and ) into ` is explained when the bank is buying or Exporter selling these as well as importer will get a fair idea about currencies. And lastly the rate quoted by the how rates quoted by their banks are bankthese for converting related to the and into ` is explained. interbank market in India and international market.

9.2 Reasons for Exchange Rates Fluctuations: There are two values for a currency. One is internal and the other is external. In this chapter we are mainly talking about the external value of `, which is used for deciding the exchange rates of other currencies in terms of `. This rate of exchange is the combined effect of as many factors that affect the countrys economy. These factors are enumerated below: 1. 2. 3. 4. 5. 6. 7. 8. 9. Balance of Payment Inflation Interest Rates Money Supply GDP growth Discoveries leading to the growth of National Wealth Capital inflows and outflows Political Stability Speculations

10. Market Factors The currency of the country becomes stronger and appreciates vis a vis other currencies if it has a very favourable balance of payment, low inflation rate and interest rate prevailing in the economy. Similarly the lower money supply and higher GDP helps the currency to appreciate. Larger national wealth and capital inflows coupled with the political stability helps in contributing appreciation of the currency of the country. Speculations and market forces or psychology of the investors cannot be foretold. The currency of the country appreciates if these two factors favours the currency. The converse is true in all the cases. 9.3 Exchange Rate Quotations: While we discuss the exchange rate quotations in this chapter we shall bear in mind that the banks are the one who are authorised to deal in all types of foreign exchange transactions and are thus authorised by the RBI, the authority which implements FEMA, the Foreign Exchange Management Act, 1999. Therefore we shall always make the discussion from the point of view of a banker and that the foreign exchange will be treated as a commodity and dealt with as such and shall be therefore priced in terms of `. The discussions are from the point of view of a banker: Any trading has two aspects i.e. Buying and Selling. A trader has to buy the goods from his suppliers, which he sells to his customers. Likewise, the banks (which are authorised to deal in foreign exchange) buy as well as sell their commodity i.e. the Foreign Currency. The transaction is always talked of from the banks point of view. This in effect means that when the bank is buying and selling Foreign Currency it must make profit in these transactions.

Their exchange rate quotations for buying and selling should be formulated keeping this aspect in view. The Foreign Currency is presumed as commodity that is being either bought or sold: Therefore, when we say a buying (or purchase), we imply that the bank has bought the Foreign Currency by paying in terms of `. Similarly, when we say a sale, we imply that, the bank has sold the Foreign Currency and received `. 9.3.1 Buying Rate and Selling Rate:

In order for the bank to make profit the bank should buy the Foreign Currency at a lower rate and sell it at a higher rate. This difference in the two exchange rates of a currency represents the banks profit and is called as spread. Therefore in a buying transaction the bank acquires Foreign Currency and parts with home currency. And in a sale transaction the bank parts with Foreign Currency and acquires home currency. 9.3.2 Direct Quotation and Indirect Quotation: Methods of Quotation A grocery merchant can express the price of commodity in either of the following two methods: Method 1: One Kilo sugar costs `32 One Kilo sunflower oil costs ` 80 One kilo rice costs ` 40 Method 2: For ` 8, 250 grams of sugar For ` 8, 100 grams of sunflower oil For ` 8, 200 grams of rice Price under both the methods is the same though expressed differently. In Method 1, the price is quoted in `. In method 2, the unit of ` is kept constant at 8, and the quantity of commodity is varied to reflect their prices. In foreign exchange also the rate of exchange can be quoted in two ways: Method 1: (Called as Direct Quote) $ 1 = ` 45.10 1 = `65.80 1 = ` 74.75

Method 2: (Called as Indirect Quote) ` 100 = $ 2.2173 `100 = 1.5198 `100 = 1.3378 The quotation under Method 1, in which exchange rate is expressed as the price per unit of Foreign Currency in terms of the home currency is known as `Home Currency Quotation or Direct Quotation. It may be noted that under direct quotation the number of units of Foreign Currency is kept constant and any change in the exchange rate will be made by changing the value in terms of rupees. The quotation under Method 2, in which the unit of home currency is kept constant and the exchange rate is expressed as so many units of Foreign Currency is known as Foreign Currency Quotation or `Indirect Quotation or simply `Currency Quotation. Under indirect quotation, any change in exchange rate will be effected by changing the number of units of Foreign Currency. The terms `direct and `indirect quotations are in common use and shall be used in this chapter hereafter. The indirect quotation is used in London foreign exchange market. Whereas, in New York, and other foreign exchange markets mostly the direct method is used. In India, Direct quotation was prevalent till 1966. After devaluation of rupee in 1966, following the practice in London exchange market, indirect quotation was adopted. Effective from 2nd August 1993, India has switched over to direct quotation again. Direct Quotation The Maxim to make profit is `Buy Low, Sell High The prime motive of any trader is to make profit. He earns profit by purchasing the commodity at a lower price and selling it at a higher price. In foreign exchange dealings also, the banker buys the Foreign Currency at a lesser price and sells it at a higher price. For instance, the bank may buy one $ at ` 45.10 and sell at ` 45.20. Thus, in direct quotation as above, the principle adopted by the bank is to buy at a lower price and sell at a higher price. This principle is stated in the form of a maxim: `Buy Low; Sell High. Indirect Quotation: The maxim to make profit is `Buy High; Sell Low Suppose a trader wants to make profit for a fixed amount of investment. He would acquire more units of the commodity when he buys and would part with lesser units of the commodity when he sells. Taking an example of a grocery merchant, if for ` 100 he gets 2.5 kilo of rice from his supplier and for the same amount of ` 100 he sells only 2.25 kilo of rice he would make profit. The same principle can be applied to a foreign exchange quotation. In indirect quotation, it is the commodity of the trade, viz., the Foreign Currency, which is varying in accordance with the change in exchange rates. For a fixed unit of home currency the bank would like to acquire more units of Foreign Currency while buying and part with lesser units of Foreign Currency, while selling.

For example, for ` 100, the bank may quote a selling rate of $ 2.2153 and buying rate of $2.2173 The difference between these two rates is the banks margin of profit, Therefore the maxim to make profit is `Buy High; Sell Low. 9.3.3 Two way Quotations: Interpretation in case of Direct Quotation: The foreign exchange quotation between banks will have two rates one at which the quoting bank is willing to buy and the other at which it is willing to sell the Foreign Currency. In the case of direct quotation, the maxim `Buy Low; Sell High applies. The lower of the two rates is the buying rate and the higher is the selling rate. For example, if the exchange rate between Indian Rupee and US Dollar is quoted as: $1 = ` 45.10 / 45.20 The buying rate is `45.10 (i.e. the bank will buy 1 $ for `45.10) and the selling rate is ` 45.20 (i.e. the bank will sell 1$ for `45.20. This is analogous to an everyday example of a scrap dealer. The scrap dealer buys the scrap from us at a lower rate and sells it to the wholesale dealer at higher rate. (He may buy old newspapers from us at ` 4.50 a kilo and sell them at ` 4.75 to the wholesale dealer. Therefore two way quote will be 1 kilo old newspaper = ` 4.50 / ` 4.75) Interpretation in case of Indirect Quotation: In the case of indirect quotation, the maxim Is `Buy High ; Sell Low. The higher of the two rates is the buying rate and the lower rate is the selling rate. For example, the exchange rate between Indian rupees and US Dollars may be quoted as: `100 = $ 2.2153 / 2.2173. This means the quoting bank agrees to sell $ 2.2153 per `100 and buy $ 2.2173 per `100. This is analogous to an example of a grocer who buys 2.5 kilo rice for `100 but sells only 2.25 kilo for `100 and thus makes a profit of 0.25 kilo of rice. The buying rate is also known as the `bid rate and the selling rate as the `offer or `ask rate. The difference between these rates is the gross profit for the bank and is known as the spread as mentioned above. 9.3.4 Cash or value Today, Spot and Forward Rates: Consider there are two banks operating in the foreign exchange market. Dena Bank agrees to buy $ 1,00,000 from SBI. The actual exchange of currencies, i.e., payment of ` and receipt of $, under the contract may take place: 1. 2. 3. On the same day, or Two days later; or Some day later; say after a month.

Depending upon this date of delivery of the currencies, the three kinds of rates prevail in the foreign exchange market. They are discussed below: Case 1: Cash Transaction or `Value Today and `Cash rate: Where the agreement to buy and sell is agreed upon today and exchange of currencies between the Dena Bank and SBI also takes place today, the transaction is known as `Cash Transaction. It is also known as `Value Today transaction. The rate of exchange of currencies agreed between the two banks is the `Cash Rate. Case 2: Spot Transaction and `Spot rate: Generally the delivery of the currencies viz ` to be given by Dena Bank to SBI and $ to be given by SBI to Dena Bank takes place as follows. The ` equivalent of the transaction will be paid by Dena Bank by issuing its cheque on RBI in favour of SBI. Foreign Currency payment is effected at New York, where SBI maintains an account in $ with, say Citibank. Also consider that Dena Bank maintains a similar account with, say, Midland Bank in New York. SBI would telegraphically advise its bank, the Citibank, New York, to pay to Midland bank, $ 1,00,000 for credit to the account of Dena Bank with them. This process involves some time. Moreover, some allowance for the administrative delay is to be made. Therefore, two days are allowed to SBI to ensure that foreign exchange is delivered by it by credit to Nostro account of Dena Bank. For instance, if the contract is made on Monday, the delivery of $ would take place on Wednesday. If Wednesday happens to be a holiday, the delivery will take place on the next day, i.e. on Thursday. Rupee payment is also therefore made on the day the Foreign Currency is received. The transaction where the exchange of currencies takes place two days after the date of the contact is known as the `Spot Transaction and the rate agreed to between the two banks is `Spot Rate. Case 3: Forward Transactions and Forward Rate: Where the delivery of Foreign Currency and payment in rupees takes place second day onwards, the transaction is known as a `Forward Transaction. The forward transaction can be for delivery one month or two months or three months, etc. A forward contract for delivery one month means the exchange of currencies will take place after one month from the date of contract. A forward contract for delivery two months means the exchange of currencies will take place after two months & and so on. The rate that is agreed upon today for the delivery anytime after second day onwards is called as Forward Rate. 9.3.5 Forward Margin / Swap Points: It is possible that the Forward Rate that we discussed above is the same as the Spot Rate for the currency. Then it is said that the Forward Rate is at par with the Spot Rate. But this rarely happens. More often the Forward Rate for a currency may be either costlier or cheaper than its Spot Rate. The difference between the Forward Rate and the Spot Rate is known as the Forward Margin or Swap Points.

The Forward Margin may be either at `premium or at `discount. If the Forward Margin is at premium, the Foreign Currency will be costlier under Forward Rate than under the Spot Rate. If the Forward Margin is at discount, the Foreign Currency will be cheaper for forward delivery than for spot delivery. Under direct quotation, premium is added to Spot Rate to arrive at the Forward Rate. This is done both purchase and sale transactions. Discount is deducted from the Spot Rate to arrive at the Forward Rate. 9.3.6 Factors affecting Forward Margin / Swap Points: Forward Margin is the difference between the Spot Rate and Forward Rate of a currency, which makes the Forward Currency either cheaper or costlier compared to the Spot Currency. The following four factors are the dominant factors that affect the Forward Margin: 1. The difference in the Rates of Interest prevailing in two countries whose currencies are in consideration. 2. Demand and Supply of the two currencies in the international market 3. Speculation about the Spot rates 4. Foreign Exchange regulation in both the countries whose currencies are in consideration We shall discuss these factors in brief below. 1. Rates of Interest: The difference in the Rates of Interest prevailing at the home centre and the concerned foreign centre determines the Forward Margin. If the Rate of Interest at the foreign centre is higher than that prevailing at the home centre, the Forward Margin would be at discount. Conversely, if the Rate of Interest at the foreign centre is lower than that at the home centre, then the Forward Margin would be at premium. This can be explained by taking an example as follows. Suppose the bank enters into a forward sale contract with the customer, it arranges for delivery of the Foreign Currency on the due date by keeping the funds in deposit at the foreign centre concerned. If the interest rate is higher at the foreign center the net gain to the bank on account of interest received is passed on to the customer by offering the Foreign Currency at discount. On the other hand if the rate of interest is lower at the foreign center the bank suffers a net -loss and the loss is passed on to the customer by quoting the forward rate at a premium. Example: The spot rate for $ is ` 45. The rate of interest at Mumbai is 12 % p.a. and at New York it is 4% p.a. The bank has to quote 3 months selling rate to a customer. Assuming that the operation is for $10,000 and the entire interest loss / gain is passed on to the customer, the forward rate can be calculated as under:

To meet the needs of the customer, the bank may buy spot $ and deposit them in New York for 3 months so that it can deliver on due date the required Dollars. The operations involved are in two parts. The first part being of depositing $ in USA and getting them back with interest after 3 months and the second part is borrowing in India and paying back the amount after three months with interest. And then setting the equivalence between these two amounts to get the forward rate and forward margin. The calculations are shown below: One part: Purchase Dollar and invest for 3 months in New York Interest earned for 3 months at 4 % p.a. Receive after 3 months Second Part: Borrow in Mumbai to pay for Dollar at ` 45 per $ Payment of interest for 3 months at 12 % Pay after 3 months ` 4,50,,000 ` 13,500 $ 10,000 $ 100

$ 10,100

` 4,63,500

The bank should be able to get ` 4,63,500 against $ 10,100. Therefore, the rate quoted is ` 4,63,500 / $10100 = ` 45.89 Therefore the forward premium is (Forward Rate 1$ = ` 45.89 minus Spot rate 1$ = `45.00) ` 0.89. If suitable conditions prevail in the market, the rate of interest would exert a greater influence than any other factor and the forward margin would tend to settle at a rate where the gain / loss in the interest rate differential is fully compensated by the forward margin. But, in practice, it is hard to find this and the forward margin at any particular time is determined by other factors listed below. We may in sum say that if the interest rate in the foreign center is higher than the interest rate in the home center then the Foreign Currency is at discount. On the other hand if the interest rate in the foreign center is lower than the interest rate in the home center then the Foreign Currency is at discount. 2. Demand and supply: Forward margin is also determined by the demand for and the supply of Foreign Currency. If the demand for Foreign Currency is more than its supply, forward rate would be at premium. If the supply exceeds the demand, the forward rate would be at discount. Some of the investors who want to gain out of the interest rate differential may try to borrow from low interest rate centre and invest in high interest rate centre. For example, the investor may borrow at New York (at 4%) and invest at Mumbai (at 12%). In order to secure his position he may try to cover the transaction in the forward market. Then, he will sell spot $ and buy forward $. When many investors undertake such transactions, the supply of spot Dollar increases bringing down its price in terms of `. At the same time the demand for forward Dollar increases pushing up the forward $ price in terms of `.

Thus the difference between spot and forward rates widens. The force of demand and supply may take the premium on forward even beyond the limit set by interest rate differential. Incidentally it may also be stated that the loss on account of this premium may exceed the gain on account of interest rate differential on the investment. At this juncture the activity as mentioned above stops. 3. Speculation about spot rates: Since the forward rates are based on spot rates any speculation about the movement of spot rates would influence forward rates also. If the exchange dealers anticipate the spot rate to appreciate, the forward rate would be quoted at premium. If they expect the spot rate to depreciate, the forward rates would be quoted at a discount. 4. Exchange regulations: Exchange control regulations of the countries concerned may put certain restrictions on the forward dealings and may obstruct the influence of the above factors on the forward margin. Such restrictions may be with respect to keeping Foreign Currency balances abroad, borrowing overseas, etc. Intervention in the forward market by the central banks may also be resorted to, to influence the forward margin. 9.3.7 Interpretation of Interbank Quotation: The market quotation for a currency consists of the Spot Rate and the Forward Margin. The outright forward rate has to be calculated by loading the Forward Margin into the Spot Rate. For instance, US Dollar is quoted in the interbank market on 5th of December as under: Spot $1 = `45.4000/4200 2000/2100 3500/3600

Spot/January Spot/February

The following points should be noted in interpreting the above quotation: 1. These rates (Two way quotes) are given by some bank and that bank is called as Quoting bank. 2. The first statement is the Spot Rate for $ prevailing on 5 th of December for which the delivery of the currencies shall be made on 7 th of December. 3. As this is the `Direct Quotation the maxim adopted by the Quoting bank to make profit is `Buy Low and Sell High. Accordingly, the Quoting banks buying rate is lower of the two way quote i.e. ` 45.4000 and selling rate is ` 45.4200. 4. The second and third statements are Forward Margins for forward delivery during the months of January and February respectively. 5. Spot/January rate is valid for delivery anytime till the end January. Similarly the Spot/February rate is valid for delivery anytime till the end February. 6. The Forward Margin is expressed in points, i.e., 0.0001 of the currency. Therefore, the forward margin for January is 20 paisa and 21 paisa for the Quoting banks buying rate and selling rates respectively.

7. Where the forward margin for a month is given in ascending order as in the quotation above, it indicates that the forward currency is at premium. 8. The outright forward rates are arrived at by adding the forward margin to the spot rates. 9. The outright forward rates for $ can be derived from the above quotation as follows:

Buying rate January ` Spot rate (5th Dec). Add: Premium Outright Forward rates 45.4000 0.2000 45.6000 February ` 45.4000 0.3500 45.7500

Selling rate January ` 45.4200 0.2100 45.6300 February ` 45.4200 0.3600 45.7800

From the above calculations we arrive at the following outright forward rates: Buying Spot delivery (5th Dec). Forward delivery January Forward delivery February $1=` 45.4000 45.6000 45.7500 Selling 45.4200 45.6300 45.7800

If the forward currency is at discount, it would be indicated by quoting the forward margin in the descending order. Suppose that on 5th December the quotation for Pound-Sterling (i.e. GBP or ) in the interbank market is as follows: Spot Spot/January Spot/February 1 = ` 65.4000/4300 3800/3600 5700/5400

Since the forward margin is in descending order (3800/3600), forward pound-sterling is at discount. The outright Forward Rates are calculated by deducting the related discount from the Spot Rate. This is shown below: Buying rate January ` Spot rate (5th Dec). Less: Discount Outright Forward rates 65.4000 0.3800 65.0200 February ` 65.4000 0.5700 64.8300, Selling rate January ` 65.4300 0.3600 65.0700 February ` 65.4300 0.5400 64.8900

From the above calculations the outright forward rates for pound sterling can be restated as follows: Buying Spot (5th Dec.) Forward delivery January Forward delivery February Important Points to remember: If the Forward Margin is in ascending order then the Foreign Currency is at premium; and the Forward Margin is required to be added to the Spot Rate. If the Forward Margin is in descending order then the Foreign Currency is at discount; and the Forward margin is required to be deducted from Spot Rate. Alternative Method of Quotation: In the international markets the Forward Margin is quoted in number of months from the date of quotation. Earlier, in India too, the same method of quotation was adopted. Under this method, the exchange rate for US Dollar may be quoted on 5th December, as follows: Spot 1 month 2 months $1 = ` 4525/4750 2200/2300 4500/4600 1 = ` 65.4000 65.0200 64.8300 Selling 65.4300 65.0700 64.8900

In this case the due date of the forward contract is calculated from the spot date. Thus 1 month forward contract will fall due on 5th of January. If 5th January is a holiday, the contract will be due on the next working day. As an exception to this rule, if the next day of such due date runs into the next month, the due date is advanced to the preceding day and not on the succeeding day. 9.4 9.4.1 Merchant Rates: Merchant Rates for converting $ in ` (Part 1) This section on Merchant Rates we shall study in these parts: Part 1 : Calculation of Merchant Rates for converting $ in `. Part 2 : Calculation of Merchant Rates for converting any currency other than $, and in `, and Part 3 : Calculation of Merchant Rates for converting and in `.

Merchant Rates are those quoted by the bank to its customers and the `Base Rates are those on which the merchant rates depend. When the bank buys foreign exchange from the customer, it sells the same in the interbank market at a better rate and thus makes a profit out of the deal. In the interbank market, the bank will

accept the rate as dictated by the market. It can therefore sell foreign exchange in the market at the market buying rate for the currency concerned. Thus the interbank buying rate forms the basis for quotation of buying rate by the bank to its customer. Similarly, when the bank sells foreign exchange to the customer, it meets the commitment by purchasing the required foreign exchange from the interbank market. It can acquire foreign exchange from the market at the market selling rate. Therefore, the interbank selling rate forms the basis for quotation of selling rate to the customer by the bank. The interbank rate on the basis of which the bank quotes its `Merchant Rate (to its customer) is known as `Base Rate. Exchange Margin If the bank quotes the Base Rate to the customer, it makes no profit. On the other hand, there are administrative costs involved. Further, the deal with the customer takes place first. Only after acquiring or selling the foreign exchange from / to the customer, the bank goes to the interbank market to sell or acquire the foreign exchange required to cover the deal with the customer. An hour or two might have lapsed by this time. The exchange rates are fluctuating constantly and by the time the deal with the market is concluded, the exchange rate might have turned adverse to the bank. Therefore, sufficient margin should be built into the rate to cover the administrative cost, cover the exchange fluctuation and provide some profit on the transaction to the bank. This is done by loading exchange margin to the base rate. The quantum of margin that is built into the rate is determined by the bank concerned, keeping with the market trend.

(Up to 1995, the exchange margin included in the merchant rates were prescribed by FEDAL For the sake of information, the FEDAI prescribed margins are given below. TT Purchase rate Bills Purchase rate TT Selling rate Bills selling rate 9.4.1.1 Buying Rate: As already noted, in a purchase transaction the bank acquires foreign exchange from the customer and pays him in ` Some of the purchase transactions result in the bank acquiring foreign exchange immediately, while some involve delay in the acquisition of foreign exchange. For instance, if the bank pays a demand draft drawn on it by its correspondent bank, there is no delay because the foreign correspondent bank would already have credited the Nostro account of the paying bank while issuing the demand draft. On the other hand, if the bank purchases an `On demand export bill from the customer, it has first to be sent to the Drawees place for collection. The export bill will be sent to the correspondent bank for collection. The correspondent bank will present the bill export to the Drawee. The Nostro account of the bank with its correspondent bank will be credited only when the Drawee makes payment against the export bill. Suppose this takes 20 days. The bank will acquire foreign exchange only after 20 days. 0.025% to 0.080% 0.125% to 0.150% 0.125% to 0.150% 0.175% to 0.200% (over TT selling rate)

Depending upon the time of realisation of foreign exchange by the bank, two types of buying rates are quoted in India. They are: (i) TT Buying Rate, and (ii) Bill Buying Rate. 9.4.1.1.1 TT Buying Rate:

TT Buying Rate (TT stands for Telegraphic Transfer): This is the rate applied by the bank when the transaction does not involve any delay in realisation of the foreign exchange by the bank. In other words, the Nostro account of the bank would already have been credited. The rate is calculated by deducting from the interbank buying rate the exchange margin as determined by the bank, from the interbank buying rate. Though the name implies telegraphic transfer, it is not necessary that proceeds of the transaction are received by telegram. Any transaction where no delay is involved in the bank acquiring the foreign exchange will be done at the TT rate. Transactions where TT rate is applied are: (i) Payment of demand drafts, mail transfers, telegraphic transfers, etc drawn on the bank where banks Nostro account is already credited; (ii) Foreign bills collected. When a foreign bill is taken for collection, the bank pays to the exporter only when the importer pays for the bill and the banks Nostro account abroad is credited; (iii) Cancellation of foreign exchange sold earlier. For instance, the purchaser of a bank draft drawn on New York may later request the bank to cancel the draft and refund the money to him. In such case, the bank will apply the TT buying rate to determine the rupee amount payable to the customer.

The method of calculating TT buying rate is shown below: TT Buying Rate: Dollar / Rupee (1$/`)market spot buying rate (in Interbank Market in India) Less: Exchange margin 1$ = ` `

TT Buying rate*`......... Rounded off to nearest multiple of 0.0025.1$= ----- (TT Buying rate) Note: We will use the term $/` rate to indicate so many rupees per Dollar. Dollar is the currency being bought or sold. 9.4.1.1.2 Bills Buying Rate: This is the rate to be applied when a foreign export bill is purchased. When the bill is purchased, the proceeds will be realised by the bank after the bill is presented to, the Drawee at the overseas centre. In the case of a Usance bill the proceeds will be realised on the due date of the bill

which includes the transit period, the Usance period and the period of grace if any of the bill. If a sight (demand) export bill on London is purchased, the realisation will be after a period of about 20 days (transit period). The bank would be able to dispose of the foreign exchange only after this period. Therefore, the rate quoted to the customer would be based not on the Spot Rate in the interbank market, but on the interbank rate for 20 days forward. Likewise, if the bill purchased is 45 days Usance bill, then the bill will realise after about 65 days (20 days transit plus 45 days Usanceand period of grace if any period). Therefore, the bank would be able to dispose of foreign exchange only after 65 days; the rate to the customer would be based on the interbank rate for 65 days forward. Two points need noting in loading the bills buying rate with forward margin. First, forward margin is normally available for periods of a calendar month and not for 20 days etc. Secondly, forward margin may be at a premium or discount. Premium is to be added to the spot rate and discount should be deducted from it. While making calculations, the bank will see that the period for which forward margin is loaded is beneficial to the bank. Let us suppose that on 13th January interbank quotation for US Dollar was as under: Spot Spot / January / February / March $1 = ` 43.5000 / 5500 2000 / 2100 5000 / 5100 7500 / 7600

The bank wants to calculate bill buying rate for a sight bill. The transit period is, say 20 days. The bill will fall due on 2nd February. Apparently, the forward rate relevant is spot / February rate as this is valid for the entire month of February. If the currency is at premium, round off the Forward Rate to lower month: However, it should be noted that forward Dollar is at premium. The customer will be getting more rupees per Dollar under the forward rate than under the spot rate. As we have already seen, the forward premium represents the interest differential. The Spot/February forward premium includes interest differential up to the last day of February. As this benefit does not fully accrue on 2nd February, when the bill is expected to mature, the bank will not concede premium up to this month. It will concede premium only up to the last completed month and base its bills buying rate for Dollar on the Spot / January forward rate. (If the bank takes Spot / February forward premium, the base rate will be `44.0000 (i.e. spot rate `43.5000 + forward margin for February `0.5000). By taking only Spot / January premium, the bank offers only ` 43.7000 (i.e. spot rate `43.5000 + forward margin for January `0.2000) per Dollar, which is beneficial to the bank.) In case of a 45 days Usance bill submitted on the same date, the expected due date (called the

notional due date) is 19th March. The bank will concede premium only up to February. Thus, where the Foreign Currency is at premium, while calculating the bill buying rate, the bank will round off the transit and Usance periods to lower month. If the currency is at discount, round off the Forward Rate to higher month: Let us assume that on 18th April, the Dollar is at discount and the quotation in the interbank market is as under: Spot Spot/April /May /June $1=` 42.7500 / 8000 1300 / 1200 3000 / 2900 5500 / 5400

The bank is required to quote a rate for purchasing a sight (Demand) Export bill on New York. Transit period is 20 days. The bill will fall, due on 8th May. Since Dollar is at discount, forward Dollar fetches lesser rupees than spot Dollars. In other words, longer the forward period involved, the bank is able to get Dollar from the customer at cheaper rate. Therefore, the bank will deduct discount up to May end while quoting for this bill. In case of Usance for 45 days, the due date falls on 22nd June. The bank will base its rate to the customer on Spot / June forward rate. Here, the due date of the bill is rounded off to the higher month, i.e., end of the month in which it falls. Thus, where the Foreign Currency is at discount, while calculating the bill buying rate, the bank will round off the transit and Usance periods to higher month. We recapitulate the above rule for loading forward margin. while calculating bill buying rate, if the forward margin is at premium, round off the forward margin to be added to spot rate to lower month; & if the forward margin is at discount round off the forward margin to be duducted from the spot rate to the higher month. As noted under TT buying rate, the bank would include exchange margin in the rate quoted to the customer while quoting for purchase of bills also. The margin may be slightly higher than that for TT buying rate. In view of the discussions above the banks will quote more than one bill rate, each for a different period of Usance of the bill. The method of calculating bills buying rate is given below. Bill Buying Rate Dollar/Rupee market spot buying rate (in Interbank Market in India) Add: Forward premium (For transit, Usance and grace period if any; rounded off to lower month) OR Forward discount (For transit, Usance and grace period if any; rounded off to higher month) $1= ` ---------

Less:

` ---------

Less:

Exchange margin Bill buying rate *Rounded off to the nearest multiple of 0.0025

` --------` --------` --------Bill Buying Rate

9.4.1.1.2.1 Normal transit Period: Table I. Statement of Normal Transit Period for purposes of foreign currencies for Direct and Indirect Bill Transit periodNo. of days For Indirect Bills drawn on For Currencies of Countries Direct U.K. Bills Continent of Europe North America Africa Australia,Central Asia New Zealand, & South PacificAmerica Islands & West Indies

UK, Europe, America Africa, Asia Australia, New Zealand, Pacific Islands & West Indies Central and South America

20 20

25 30

30 25

30 35

35 35

20 25

30 35

35 35

25 35

35 30

Table II. Statement of Normal Transit Period for purposes of bills Drawn in rupees Transaction 1. 2. 3. 4. Notes: 1. Table II is not relevant for this topic of exchange rate calculation Bills drawn under letters of credit where reimbursement is provided at the centre of negotiation Bills drawn under letter of credit where reimbursement is provided at a centre in India other than the centre of negotiation Bills drawn under letter of credit where reimbursement is provided by banks situated outside India Bills not drawn under letter of credit No. of days 3 7 20 20

2. Direct bills are those bills which are drawn in a currency of the country and made payable in that country (or reimbursable in that country). For example, a bill for 10,000 drawn on London is a direct bill.

Indirect bills are those bill which are drawn in a currency of one country, but made payable in another country. For example, a bill for 10,000 drawn on Tokyo is an indirect bill. For an indirect bill the transit period provided is longer because an additional time for transit of information from the place where the bill is drawn on, to the place where settlement is made is involved. For instance, in our illustration, the bill should reach Tokyo and the Tokyo bank should intimate a bank in London to make payment. But, in the above case, if the bill is to be sent to Tokyo and the bank in India is allowed to make a claim direct with a bank in London for payment under the bill, it will be a direct bill. The normal transit period will be taken as if the bill is drawn on London. 9.4.1.1.2.2 Grace period: Countries where Grace Period is Applicable: Aden (See Southern Yemen) Anguilla (West Indies) Antigua (West Indies) Australia Bahamas (West Indies) Barbados Bermuda Borneo Burma British Honduras British Solomon Islands Cameroon (Formerly British South Cameroon Area only) Canada Carriacou Cayman Islands (West Indies) Sabah Sierra Leone Seychelles Singapore Somali Ethiopia Southern Yemen (Aden) Sri Lanka Falkland Island Fiji Island St. Helena St. Kitts (West Indies) Malawi Nalaysia Malta Montesserrat (W Indies) Mauritius New Zealand Neviz (West Indies) Nigeria Norfolk Island Pakistan Papua & New Guinea Portuguese Timor

St. Lucia (West Indies) Gambia Ghana Gibraltar Grenada Grenada (W Indies) Guyana Hong Kong Mirk & Caicos Islands India Ireland Jamaica Jordan Kenya 9.4.1.2 Selling Rates: When a bank sells foreign exchange it receives Indian Rupees from the customer and parts with Foreign Currency. The sale is effected by issuing a payment instrument on the correspondent bank with whom it maintains the Nostro account. Immediately on sale, the bank buys the requisite foreign exchange from the market and gets its Nostro account credited with the amount so that when the payment instrument issued by it is presented to the correspondent bank it can be honoured by debiting to the Nostro account. Therefore, for all sales on ready/spot basis to the customer, the bank resorts to the interbank market immediately and the base rate is the interbank spot selling rate. However, depending upon the work involved, viz., whether the sale involves handling of documents by the bank or not, two types of selling rates are quoted in India. They are: Western Samoa Zambia Korea Uganda Virgin Islands (British) St. Vincent (West Indies) Sudan Swaziland Tanzania Thailand Trinidad & Tobago

(i) (ii) 9.4.1.2.1

TT Selling rate; and Bills Selling rate. TT Selling Rate:

This rate is used for all transactions which do not involve handling of documents by the bank. Transactions for which this rate is quoted are: i) Issue of demand drafts, mail transfers, telegraphic transfers, etc., other than for retirement of an import bill; and

ii) Cancellation of foreign exchange purchased earlier. For instance, when an export bill purchased-earlier is returned unpaid before its due date, the bank will apply the TT selling rate for the transaction.

The TT selling rate is calculated on the basis of interbank selling rate. The rate to the customer is calculated by adding exchange margin to the interbank rate. 9.4.1.2.2 Bills Selling Rate:

This rate is used for all transactions which involve handling of documents by the bank: for example, payment against import bills. The bills selling rate is calculated by adding exchange margin to the TT selling rate. That means the exchange margin enters into the bills selling rate twice, once on the interbank rate and again on the TT selling rate. The method of calculating the two selling rate is shown below. TT Selling rate and Bills Selling Rate: Dollar/Rupee market spot selling rate (in interbank market in India) Exchange margin for TT selling rate TT Selling Rate* Exchange margin for Bills selling rate Bills Selling Rate* ` + = + = `.... ` `...... `......

Add: Add:

*Rounded off to nearest multiple of 0.0025 and quoted to customer. 9.4.2 Merchant Rates for converting any other currency other than (found or Sterling Pound or Great British Pound) and Euro: Merchant Rates Based on Cross Rates: So far the calculations were restricted to the Dollar / rupee exchange rate. That was so because the calculation of exchange rates for foreign currencies other than US Dollar (`other currencies in brief except and ) involves all the steps explained previously and something more. The exchange rates for other currencies are quoted to customers based on the rates for the currency concerned prevailing in international foreign exchange markets like London, Singapore and Hongkong. These rates are available in terms of US Dollar. They have to be converted into Rupee terms before quoting to the customers. We shall first examine how exchange rates are quoted in international markets and then we shall see how these rates are used for quoting rates for currencies other than US Dollar in India. Exchange Rate Quotations in International Markets: In international markets, barring few exceptions, all rates are quoted in terms of US Dollar. For instance, at Singapore Swiss Franc (CHF) may be quoted at 0.9720 / 0.9740 and Japanese Yen (JPY) at 83.44/64. This should be understood as: 1$ = CHF 0.9720/0.9740 1$ = JPY 83.44/60

In interpreting an international market quotation, we may approach from either the variable currency (Viz: CHF or JPY in the above quotation) or the standard currency (viz., the Dollar). For instance, we may take a transaction in which Swiss Francs are received in exchange for Dollars as: (a) Purchase of Swiss Francs against Dollar or (b) Sale of Dollar against Swiss Francs. For the sake of uniformity we will assume the standard currency as the currency being bought or sold. The interbank quotations are to be looked from the point of view of quoting bank: 9.4.2.1 Dollar / Foreign Currency Quotation: The quotation for Swiss Franc is CHF 0.9720 and CHF 0.9740 per Dollar. While buying Dollar the quoting bank would part with fewer francs per Dollar and while selling Dollars would require as many francs as possible. Thus CHF 0.9720 is the Dollar buying rate and CHF 0.9740 is the Dollar selling rate. It may be observed that when viewed from Dollar the exchange quotation partakes the character of a direct quotation and the maxim `Buy low and Sell high is applicable. We will denote such rates as Dollar / Foreign Currency Rates implying that the Dollar is being bought or sold against Foreign Currency. 9.4.2.2 Foreign Currency / Dollar Quotation Few currencies such as pound sterling ( or GBP) and Euro are quoted in variable units of USD (US Dollar or $). They are quoted as so many US Dollars per unit of Foreign Currency concerned. Examples are GBP 1 = USD 1.6326 / 6348 EUR 1 = USD 1.3325 / 3335 The standard currency here is the Foreign Currency i.e. GBP and Euro. Taking Euro as example, the quoting bank will buy Euro at USD 1.3325 and sell Euro at USD 1.3335. We will indicate such quotation as Foreign Currency / Dollar Rate. Quotation being for purchase or sale of Foreign Currency against Dollars. Forward Margin / Swap Points: Dollar / Foreign Currency Quotation: At Singapore market, Dollar may be quoted against Swiss Frank and Japanese Yen as follows: Swiss Franc (CHF) Spot 1 month forward 2 months forward 0.9720/40 50/60 70/80 Japanese Yen (JPY) 83.44/64 17/16 30/29

The forward margin (also called swap margin or swap points) is quoted in terms of points. A point is the last decimal place in the exchange quotation. Thus, in a four digit quotation, a point is 0.0001. In a two decimal quotation, it is 0.01. As against Swiss Franc, the forward margin for Dollar is CHF 0.0050/0.0060. Since the order in which the forward margin is quoted is ascending, forward Dollar is at premium. Premium is added to the spot rate to arrive at the forward rates, both in respect of purchase and sale transactions. Based on the data given above, the forward rates for Dollar against Swiss Franc are arrived at as follows: Dollar Buying 1 month forward 2 months forward CHF 0.9770 CHF 0.9790 Dollar Selling 0.9800 0.9820

As against Japanese Yen, the forward Dollar is at a discount. (Note that the forward margin is in descending order.) Discount is deducted from the spot rate to arrive at the forward rate, both for buying and selling. The forward rates for Dollar against Japanese Yen, based on the data given above are as follows: Dollar Buying 1 month forward 2 months forward Forward Margin / Swap Points: Foreign Currency / Dollar Quotation: Let us assume the following exchange rates are prevailing: Pound Sterling Spot USD 1.6326/48 50/53 90/93 Euro 1.3325/35 65/62 84/82 JPY 83.27 JPY 83.14 Dollar Selling 83.48 83.35

1 month forward 2 months forward

Against Dollar, the forward Pound Sterling is at premium. Premium should be added to the spot rate to arrive at the forward rate. Thus the forward rates for Pound Sterling in terms of Dollar are as follows:

Pound Sterling Buying 1 month forward 2 months forward USD 1.6376 USD 1.6416

Pound Sterling Selling 1.6401 1.6441

Forward Euro is at discount, since the forward margin is quoted in the descending order. Discount should be deducted from the spot rate to arrive at the forward rate. Based on the data given, forward rates for Euroin terms of Dollar can be arrived at as follows: Euro Buying 1 month forward 2 months forward USD 1.3260 USD 1.3241 Euro Selling 1.6273 1.6253

9.4.2.3 Cross Rate and Chain Rule: Let us now see how exchange rates are calculated in India based on quotations in international markets. Assumptions: In India, buying rates are calculated on the assumption that the Foreign Currency acquired is disposed off abroad in the international market and the proceeds realised in US Dollars. The US Dollars thus acquired would be sold in the local interbank market to realise Rupee. For example, if the bank purchased a CHF 10,000 export bill it is, assumed that it will sell the CHF at the Singapore market and acquire US Dollars there. The US Dollars are then sold in the interbank market against Indian Rupee. The bank would get the rate for US Dollars in terms of Indian Rupees in India. This would be the interbank rate for US Dollars. It would also get the rate for US Dollars in terms of Swiss Franc at the Singapore market. From the above two quotes the bank has to quote the rate to the customer for Swiss Franc in terms of Indian Rupees. The fixing of rate of exchange between the Foreign Currency and Indian Rupee through the medium of some other currency is done by what it is known as Chain Rule. The rate thus obtained is the Cross Rate between these currencies. For example, let us assume that in the interbank market Dollar is quoted at ` 45.50 and at Singapore market the Dollar is quoted at CHF 0.9700. With this information, the rate of exchange of Swiss Franc in terms of Indian Rupees may be calculated as follows: If and CHF 0.9700 = $ 1 $ 1 = ` 45.50

Then it follows that or

CHF 0.9700 = ` 45.50 1 CHF = ` (45.50 / 0.9700) = `46.91

It would be immediately seen that the above calculation involves simply dividing the RupeeDollar rate by the Dollar-CHF rate. In respect of currencies quoted indirectly against US Dollar, e.g., Euro and Sterling, the Foreign Currency/ Rupee rate is calculated by multiplying the Dollar/ Rupee rate and Foreign Currency/ Dollar rate. This is illustrated numerically below. Dollar / Rupee is 45.50 and Euro / Dollar is 1.3400. Rupee Euro rate can be calculated thus: If And 1 1$ = $ 1.3400 = `453.50

Then it follows that, $ 1.3400 And hence 9.4.2.4 Buying Rates: Calculation of Merchant Rates: Calculations of ready rates for Euro and Pound Sterling are studied in the next section. Here we discuss calculation of ready rates for other currencies. Buying Rates Let us call the currency (other than US Dollar) for which the exchange rate is to be calculated as the Foreign Currency. Suppose a customer tenders a Foreign Currency export bill for purchase by the bank. We have seen that when the customer tenders a Dollar bill, the bank disposes of the Dollar acquired from the customer in the interbank market at the market buying rate and therefore the interbank buying rate for Dollar forms the basis for quoting Dollar buying rate to the customer. In the case of a Foreign Currency bill tendered by the customer, the bank should first get Foreign Currency converted to US Dollar in the international market. In other words it has to buy Dollars in the International market against the Foreign Currency. The bank can do so at the market selling rate for Dollar. Therefore the merchant rate for the Foreign Currency would be calculated by crossing the Dollar selling rate against the Foreign Currency in the international market. The method of calculating ready rates thus is given below. 9.4.2.4.1 TT Buying Rate Dollar / Rupee market spot buying rate (in Interbank Market in India) Less: Exchange Margin ` ` 1 = ` (45.50 * 1.3400) = 1 = `60.97

TT buying rate for Dollar Dollar / Foreign Currency market spot selling rate (in International Market say at Singapore) TT buying rate for Foreign Currency = (1) divided by (2) *Rounded off to nearest multiple of 0.0025, 9.4.2.4.2 Bill Buying Rate Dollar / Rupee market spot buying rate (in Interbank Market in India) Add: Forward premium (for transit and Usance periods; rounded off to lower month) OR Less: Less: Forward discount (for transit and Usance periods; rounded off to higher month) Exchange margin Bill buying rate for Dollar Dollar / Foreign Currency market spot selling rate (in International Market say at Singapore) Add: Forward premium (for transit a Usance periods rounded off to higher month) OR Less: Forward discount (for transit and Usance periods; rounded off to lower month) Bill buying rate for Foreign Currency (1) Divided by (2) * Rounded off to nearest multiple of 0.0025. 9.4.2.5 Selling rate: 9.4.2.5.1 TT Selling Rate: 9.4.2.5.2 Bills Selling Rate: Dollar / Rupee market spot selling rate (in Interbank Market in India) Add: Exchange margin for TT selling TT Selling rate for Dollar Add: Exchange margin for bills selling Bills selling rate for Dollar Dollar/Foreign Currency market buying rate (in International market say at Singapore) =

` ------ (1) FC ------ (2) `

` `

` ` ` ------ (1) FC FC.

FC ------ (2) `

` +` ` ------ (1) +` = ` --------- (2) = FC ------ (3)

TT selling rate for Foreign Currency = (1) divided by (3)*

=`

Bills selling rate for Foreign Currency = (2) divided by (3)*= ` *Rounded off to nearest multiple of 0.0025 and quoted to the customer. 9.4.3 Merchant Rates for converting (GBP) and (Euro) in ` (Part 3): 9.4.3.1 Buying Rate: It has been noted earlier that in respect of and , the exchange rate is quoted in terms of $ per unit of the currency concerned. Thus it is a Foreign Currency / Dollar rate. We also interpreted the rates from the standpoint of buying or selling . Thus when a local bank buys from its customer, it would sell the in the international market at the market buying rate. The $ obtained from the deal is sold in the interbank market at the market buying rate for Dollar to obtain `. Thus the relevant rates to be crossed for quoting to the customer are buying rate for in the international market and buying rate for $ in the interbank market. Similarly for quoting selling rate to the customer, the bank crosses the selling rate in the international market and $ selling rate in the interbank market. The calculations are shown below. 9.4.3.1.1 TT Buying Rate: Dollar / Rupee market spot buying rate (in Interbank Rate in India) Less:Exchange Margin TT buying rate for Dollar Foreign Currency / Dollar market Spot Buying Rate (in International Market say in Singapore) TT buying rate for Foreign Currency = (1) multiplied by (2)* * Rounded off to nearest multiple of 0.0025

` ` ` $

...(I) ...(2)

`. 9.4.3.1.2 Bill Buying Rate: Dollar / Rupee market spot buying rate (in Interbank Rate in India) Add: Forward premium (for transit and Usance periods; rounded off to lower month) OR Less: Less: Forward discount (for transit and Usance periods; rounded off to higher month) Exchange margin Bill buying rate for Dollar Foreign Currency / Dollar market spot buying rate (in International Market say in Singapore) ` ` ` $ (1) `

Add:

Forward premium (for transit and Usance periods: rounded off to lower month) OR

Less:

Forward discount (for transit and Usance periods; rounded off to higher month) Bill buying rate for Foreign Currency = (1) multiplied by (2)* *Rounded off to nearest multiple of 0.0025.

$ `

(2)

9.4.3.2 Selling Rates: 9.4.3.2.1 TT Selling Rate: 9.4.3.2.2 Bills Selling Rate: Selling Rates: Dollar / Rupee market spot selling rate (in Interbank Market in India) Add: (1) Add: Exchange margin for bill Selling Bills selling rate for Dollar Foreign Currency/Dollar market selling rate (in International Market say in Singapore) TT Selling rate for Foreign Currency (1) multiplied by (3)* +` =` =$ = `. (2) (3 Exchange margin for TT Selling TT Selling rate for Dollar ` +` = `

Bills Selling rate for Foreign Currency (2) multiplied by (3)*= ` *Rounded off to nearest multiple of 0.0025 and quoted to the customer. 9.5 Some Important Aspects of Exchange Rates: 9.5.1 Fineness of Quotation: The exchange rate is quoted up to 4 decimals in multiples of 0.0025. The quotation is for one unit of Foreign Currency except in the case of Japanese Yen, Belgian Franc, Italian Lira, Indonesian Rupiah, Kenyan Shilling, Spanish Peseta and currencies of Asian Clearing Union countries (Bangladesh Taka, Myanmar Kyat, Iranian Riyal, Pakistani Rupee and Sri Lankan Rupee etc.) where the quotation is per 100 units of the Foreign Currency concerned. Examples of valid quotations are: $1 1 1 100 = ` 43.2350 = ` 63.3525 = ` 43.5000 = ` 35.6075

While computing the merchant rates, the calculations can be made up to five places of decimal and finally rounded off to the nearest multiple of 0.0025. For example, if rate for $ works out. to ` 43.12446 per $ then it can be rounded off to ` 43.1250. The Rupee amount paid to or received from a customer on account of exchange transaction should be rounded off to the nearest Rupee, i.e., up to 49 paisa should be ignored and 50 to 99 paisa should be rounded off to higher Rupee (Rule 7 of FEDAI). 9.5.2 Spread Between TT Rates: It was stated that banks have the discretion to include the exchange margin at rates determined by them. This is, however, subject to the condition that the maximum spread between TT buying and TT Selling rates quoted to the customers shall be as under: Name of currency Current maximum spread between customer rates for TT buying and TT selling from the mean TT rate (taking both sides together) 1%

A. US Dollar B. Pound sterling, Deutsche mark, Japanese Yen, French franc, Swiss Franc, Dutch Guilder and Australian Dollar C. Other currencies

2% No limit at present, but banks shall keep the rate spread to the minimum

The banks are, however, free to quote the rates to customers, which are better than those warranted by the spread limits. Explanation of calculation of the Spread: The TT Buying and TT Selling rates quoted by a bank for US Dollar are: ` 45.00 ` 45.30. Let us see if this quotation fulfils the above condition: The mean rate is `(45.00+45.30) / 2 or `45.15. 0.5% of the mean rate is `0.226 The TT buying rate cannot be lower than (` 45.15 - `0.226) `44.924. The TT selling rate cannot be higher than (`45.15 + `0.226) `45.376. The rates quoted by the bank are within this range and therefore fulfill the stipulation. 9.5.3 Quoting Better / Best Rate In the case of valued customers having large foreign exchange dealings with the bank or of importance to the bank, the bank may endeavour to quote a better rate than is normally quoted to the

customers. Any one or a combination of the following methods may be adopted to quote a better rate: (i) Rounding off the rate to the advantage of the customer instead of to the banker or to the nearest paisa. That is, the rate may be rounded off to higher paisa for buying and lower paisa for selling. (ii) The exchange margin may be reduced to the minimum. (iii) The rate maybe based on the cheapest market rate. Moreover, the current. prevailing market rates may be verified to see if any favourable shift is there and the rate may be based on on-going market rates. (iv) Instead of rounding off the premium / discount to the whole month, proportionate Forward Margin up to the exact due date of the bill may be conceded in favour of the customer. (v) The rate may be quoted in multiples of 0.0025 instead of in multiples of 0.01. 9.5.4 Rounding off for Card Rates: For transactions of smaller value, say less than the equivalent of $ 1,000, banks do not calculate the rates for each transaction separately. The rates calculated at the beginning of the day are applied to all transactions taking place during the day, unless the movement in the exchange rates in the market warrants otherwise. These rates are known as Card Rates. FEDAI Rule specifies that for Card Rates, the exchange rate can be quoted rounded off to two decimals. Therefore, the Card Rates can be quoted to the nearest paisa.

9.6

SUMMARY__________________________________________________

The foreign exchange market is one of the biggest markets having turnover of more than $ 2 Trillion per day. There are three categories of the participants in this market. One of them is very large banks and the customers dealing in huge amounts at the international level. They deal at the market driven currency exchange rates known as international (currency) exchange rates. The second category is the category of the banks in India dealing among themselves. They also deal at the market driven rates known as interbank exchange rates in India. The third category is the customers of the bank viz. the exporters and importers and others who need to buy and sell Foreign Currency from the Bank. Majority of these deal involve Dollar as currency on one side of the transaction. As all the Foreign Currency transactions are required to be routed through the banking channels, the importers, exporters and others who come in possession of or need foreign exchange need to transact through the banks. These customers put through their transactions at the rates quoted by their banks, which are called as merchant rates.

As every trader has his buying rate and selling rate for the commodity, the banker also has the buying rate and the selling rate for the foreign currency. The difference in these rates represents the spread and it is a measure of profit for the banks. There are two methods of quoting rates the direct quotation and the indirect quotation. The rates are quoted as cash, spot or forward depending upon whether the currencies are exchanged on the same day, two days later or some other day after two days respectively. There are various ways in which the banks calculate these rates for their customers depending upon, in which market, whether the interbank market in India or the international market or both, the bank has to go to either for getting the foreign exchange for their customer or dispose off the foreign exchange given by him. The bank would always ensure making the profit in the process of quoting the merchant rates, by loading the margin on the interbank or international market rates. We have discussed the calculations for arriving at the four different rate rates, namely the TT Buying, Bill Buying, TT Selling and the Bills Selling rates. Their methods differ slightly for the different currencies viz. the 1. Dollar 2. Sterling Pound and 3. Euro, and rest of the currencies. While calculating the bills buying rate we have seen how and why the forward rate is to be taken into account, how swap points are determined and what are the factors that affect the forward rates. We have also seen from the base rates are taken in each of the 3 cases and how the exchange rates are calculated.

9.7

KEY WORDS 1) Direct Quotation, 3) Foreign Currency Quotation, 6) Bills Buying Rate, 9) Buy Low, Sell High; 11) Two Way Quotation, 13) Value Today, 16) Forward Margin, 18) Interbank Quotation, 20) Currency at Discount, 23) Exchange Margin, 26) Due Date, 2) Indirect Quotation, 4) Home Currency Quotation, 7) TT Selling rate, 10) Buy High, Sell Low; 12) Cash Rate, 14) Spot Rate, 17) Swap Points, 19) Quoting Bank, 21) Currency at Premium, 24) NTP, 27) International Market, 22) Merchant Rates, 25) Grace Period, 15) Forward Rate, 5) TT Buying rate, 8) Bills Selling rate,

28) Dollar / Foreign Currency Quotation, 29) Foreign Currency / Dollar Quotation, 30) Cross Rate, 31) Chain Rule, 32) Spread, 33) Card Rate.

9.8 Q1.

DESCRIPTIVE QUESTIONS What do you understand by the `Spot Rate, `Forward Rate and `Swap Points? Explain the factors that determine the `Swap Points.

Q.2. Explain the base rates used for calculating the TT Buying Rate for 1) US Dollar, 2) GB Pound and Euro and 3) Currencies other than $, , . Why there is difference between the base rates used in the three different cases? Q.3. What factors are taken into account for calculating the bill buying rate for converting $ in `? Explain these factors. Q.4. What are the various types of Selling Rates? Explain their method of calculation.

9.9

OBJECTIVE QUESTIONS

Q.1: When we say Buying transaction, in respect of exchange rate calculations, we interpret this as: A. The bank buys the Foreign Currency B. The bank buys Indian Rupees

C. The bank sells the Indian Rupees D. The bank sells the Foreign Currency Q.2: When we say `Selling transaction, in respect of exchange rate calculations, we interpret this as: A. B. C. D. The bank buys the Foreign Currency The bank buys Indian Rupees The bank sells the Indian Rupees The bank sells the Foreign Currency

Q.3: Direct Quotation means: A. Where variable units of Foreign Currency are quoted for fixed amount of Indian Rupees B. Where variable units of Indian Rupees are quoted for fixed amount of Foreign Currency. C. Where no intermediary currency is involved. D. The rate quoted by the IMF to the Governments direct.

Q.4: Indirect Quotation means: A. Where variable units of Foreign Currency are quoted for fixed amount of Indian Rupees B. Where variable units of Indian Rupees are quoted for fixed amount of Foreign Currency. C. Where an intermediary currency is involved in calculating the exchange rate D. The rate quoted by the IBRD to the Governments indirectly

Q.5: Direct Quotation is also called as: A. B. C. D. Foreign Currency Quotation Home Currency Quotation Quotation by IMF Quotation by IBRD

Q.6: Indirect Quotation is also called as: A. B. C. D. Foreign Currency Quotation Home Currency Quotation Quotation by IMF Quotation by IBRD

Q.7: TT Buying rate is used by the banks: A. When the Foreign Currency shall be acquired by Telegraphic Transfer. B. When the exporter submits the export bill and bank shall receive the Foreign Currency on due date.

C. When the banks Nostro account is already credited D. Only in case of buying of USD. Q.8: Bill Buying Rate is applied by the bankers, A. B. C. D. While converting any Foreign Currency Notes or Travelers Cheques into Indian Rupee. While paying against the export bill, tendered by the exporter. Only in case the Foreign Currency is at Discount. Only in case the Foreign Currency is at Premium

Q.9: TT Selling rate is used by the bank: A. B. C. D. In case of selling Foreign Currency against imports. In case of clean sale without handling any documents In case of sale effected by Telegraphic Transfer. Only in case of sale of USD

Q.10: Bills Selling rate is applied by the banks when, A. B. C. D. It issues the Foreign Currency Notes or Travelers Cheques to its customers. It handles the documents and does the additional work. In case the Foreign Currency is at Discount. In case the Foreign Currency is at Premium.

Q.11: In case of Indirect Quote of the bank, the maxim to make profit is: A. B. C. D. Buy High, Sell Low Buy High, Sell High Buy Low, Sell Low Buy Low, Sell High

Q.12: In case of Direct Quote of the bank, the maxim to make profit is: A. B. C. D. Buy High, Sell Low Buy High, Sell High Buy Low, Sell Low Buy Low, Sell High

Q.13: In Two Way Quote, when the bank quotes: A. B. C. D. In Direct Quote Method, the lower one of the two is the buying rate. In Direct Quote Method, the higher one of the two one is the buying rate. Both the buying and selling rates are same. For buying any two currencies of international standard i.e. USD, Euro, GBP or JY.

Q.14: In Two Way Quote when the bank quotes: A. B. C. D. In Indirect Quote Method, the lower one of the two is the buying rate. In Indirect Quote Method, the higher one of the two is the buying rate. Both the buying and selling rates are same. For selling any two currencies of international standard i.e. USD, Euro, GBP or JY.

Q.15: When the currencies are exchanged on the day the exchange rate is agreed, the agreed rate of exchange is called as: A. B. C. D. Spot Rate Cash Rate Forward Rate TOM Rate

Q.16: When the currencies are exchanged before the close of the second working from the day the exchange rate is agreed, the agreed rate of exchange is called as: A. B. C. D. Forward Rate Value Today Rate Spot Rate TOM Rate

Q.17: When the currencies are exchanged any day after the second working day from the day the exchange rate is agreed, the agreed rate is called as: A. B. C. D. TOM Rate Option Rate Future Rate Forward Rate

Q.18: If the Interbank quote on 22nd December is Spot Spot/January Spot/February $1 = `45.4000/4200 2000/2100 3500/3600 then:

A. Forward $ is available at Discount B. Forward $ is available at Premium C. It cannot be told with certainty, whether the $ is at discount or at premium in forward market. D. Forward $ is available at par.

Q.19: If the Swap points are quoted in ascending order, as in the quotation given below, then to arrive at the outright forward rate, the swap points are:

Spot$1 = `45.4000/4200 Spot/January 2000/2100 Spot/February 3500/3600 A. B. C. D. To be added to the Spot Rate To be subtracted from the spot rate To be added in the buying rate and subtracted from the selling rate To be added to the selling rate and subtracted from the buying rate.

Q.20: If the Interbank Quotation appears as shown below, Spot 1 = ` 65.4000/4300 Spot/January3800/3600 Spot/February5700/5400 then to arrive at the outright forward rate the swap points are: A. Added to the Spot Rate B. Subtracted from the Spot Rate C. To be added in the buying rate and subtracted from the selling rate D. To be added to the selling rate and subtracted from the buying rate.

Q.21: In the context of Foreign Exchange business, NTP stands for: A. B. C. D. Q.22: A. B. C. D. Normal Temperature and Pressure Normal Transportation Process Normal Transit Period Normal Transnational Product Which of the following is true about the `Grace Period : It is either applicable or not applicable in the particular country. It is always three days. It is extra time given to the Drawee of the Usance draft to make payment. All the above.

Q.23: Spread is calculated between the: A. B. C. D. TT Buying and Bills Selling Rates TT Selling and Bills Buying Rates TT Buying and Bill Selling Rate Bills Buying and TT Selling Rates

Q.24: Card Rates are: A. Calculated up to two decimals only B. They are meant for small transactions only

C. They are valid only for a short period. D. All the above. Q.25: The most dominant factor that affects Forward Margin is: A. B. C. D. Positions of Foreign Exchange Reserves of the two countries concerned. Inflation Rates prevailing in the Economies of the two countries concerned. Interest Rates prevailing in the two countries concerned. Foreign Exchange rules and regulations in the respective countries.

Q.26: While calculating the Bill Buying rate, the bankers generally round off the month in which the due date of the bill falls to: A. B. C. D. If the currency is at discount, round off the Forward Rate to Lower Month. If the currency is at premium, round it off the Forward Rate to Higher Month If the currency is at premium, round off the Forward Rate to Lower Month: None of the above.

Chapter

10

Hedging Tools for Foreign Exchange Transactions

Exporter earns the foreign currency when he sells the goods and needs to surrender it to the authorised dealer and get ` in lieu of 10.1 Learning that. Similarly the Objectives importer when he buys the goods needs to make the payment in foreign currency, which he has to obtain from the authorised dealer by giving `. In both the cases the conversion of foreign currency into ` takes place. We have already seen in the previous chapters the reasons as to why this conversion rate of one currency into the other keeps changing frequently. This poses the risk of loss to the importer or exporter. The mechanism by which this risk is taken care of is called as hedging. The rate of exchange between the foreign currency and the Indian rupees is determined much in advance before the currencies are actually delivered by the exporter or the importer on one hand and the authorised dealer on the other hand. The reader of this chapter will understand the three such basic instruments viz the forwards, futures and options, those are used in hedging the exchange rate fluctuation risk and the way they operate.

10.2 Different Hedging Tools: From amongst the various hedging tools available to the exporter and the importer we shall study the most basic three hedging tools in this chapter. They are 1. Forward Contracts 2. Currency Futures 3. Currency Options 10.2.1 Forward Contracts: The Forward Contracts, (Forward Exchange Contract, Forward Currency Contract or simply Forwards) means the rate of exchange is fixed today for the deliveries of currencies of any amount, that will be effected any time after the second working day. These contracts are between exporter or importer on one hand and the Authorised Dealer on the other hand. 10.2.2 Currency Futures: The Currency Futures (or merely Futures) means the rate of exchange is fixed today for the deliveries of the currencies in the specific quantities (not any amount as is the case in Forwards) will be effected on the specific predetermined days (not on any day as is the case in Forwards). These contracts are between the exporters or importers on one hand and the recognised foreign Currency Exchanges (and generally not with the Authorised Dealer as is the case in Forwards). 10.2.3 Currency Options: The Currency Options (or merely Options) are similar to Currency Futures with one difference, that these kinds of contracts do not require specific performance from one of the parties. As such the party who enjoys the benefits of either performance or of non-performance is called as the `Buyer of the Options Contract. The other party which offers such benefits is called as the `Writer of the contract. We shall see the functional details of the Forwards, Futures and Options in the following paragraphs. 10.3 Forward Exchange Contracts: Let us take an example of the exporter in India, who contracts to sell to a firm in London, machinery at a price of 20,000. Before agreeing to this price, the exporter calculates his total cost of production, adds a reasonable margin of profit and, satisfies that the proceeds of 20,000 would cover this amount. He bases his calculations on the exchange rate prevailing as on the date of his quotation. For example, if the exchange rate on the date is ` 70 per , he expects to receive ` 14,00,000 on execution of the contract. As the exchange rate keeps fluctuating there is a possibility that by the time the exporter executes the contract and receives , which may be after a lapse of say three months the rate of exchange might have turned adverse for him.

Consider the rate prevailing on the date he receives , is ` 65 per he would receive only `13,00,000 as against his estimate of ` 14,00,000. Thus he may have to bear a loss of ` 1,00,000. It is also possible that the rate may turn favourable to him and bring him unexpected profits. But the fact remains that the amount that he would receive on execution of the contract is uncertain. This uncertainty about the rate that would prevail on a future date is known as the `exchange risk or `currency risk, as we discussed in chapter 1 at paragraph 1.7.3. The reader is requested to read the example and the discussions about the Forward Contract from chapter 1 for more clarity. For the exporter the exchange risk is that the foreign currency in which the transaction is designated may depreciate in future and may bring less than the expected realisation in local currency terms. The importer too faces exchange risk when the transaction is designated in a foreign currency. The risk is that the foreign currency may appreciate in value and he may be compelled to pay in local currency an amount higher than that was originally contemplated. 10.3.1 Features of Forward Exchange Contract: Forward Exchange Contract is a tool that offers adequate protection to an importer or an exporter against exchange risk. Under a forward exchange contract an Authorised Dealer and a customer exporter or importer enter into a contract to buy or sell a fixed amount of foreign currency (as is mutually agreed) on a specified future date (as is mutually agreed) at a predetermined rate of exchange. The exporter, for instance, instead of groping in the dark or making a wild guess about what the future rate of exchange would be, enters into a contract with the Authorised Dealer immediately on securing a firm export contract. The exporter agrees to sell foreign exchange of the export contract amount and currency at a specified future date which is the likely date of receipt of the export proceeds. The Authorised Dealer on his part agrees to buy this at a specified rate of exchange. The exporter is thus assured of his price of the export goods in the local currency. In our example, the exporter may enter into a Forward Contract with the bank for 3 months delivery at ` 68 per . This rate, as on the date of contract, is known as 3 months forward rate. When, the exporter submits his bill under the contract, the Authorised Dealer would purchase it at the rate of ` 68 per , irrespective of the spot rate then prevailing. 10.3.2 Date of Delivery: According to Rule 7 of FEDAI, a Forward Contract is deliverable at a future date, duration of the contract being computed from the spot value date of the transaction. Thus, if a 3 months Forward Contract is booked on 22nd December 2010, the period of three months should commence from 24th December 2010 and the Forward Contract will fall due on 24th March 2011. 10.3.3 Fixed and Option Forward Contract: The Forward Contract under which the delivery of foreign exchange should take place on a

specified future date is known as Fixed Forward Contract. For instance, if on 22nd December 2010, an exporter enters into a three months Forward Contract with his bank to sell 100,000, it means the exporter would be presenting an export bill on 24th March 2011 to the bank for 100,000. He cannot deliver foreign exchange prior to or later than the determined date. I We saw that forward exchange contract is a tool by which the customer tries to cover the exchange risk. The purpose will be defeated if he is unable to deliver foreign exchange exactly on the due date. In real situations, it is not ,possible for any exporter to determine in advance the precise date on which he will be tendering the export documents. Besides internal factors relating to production, many other external factors also decide the date on which he is able to complete shipment and present the export documents to the bank. At the most the exporter can only estimate the probable date around which he would be able to complete his commitment. With a view to eliminating the difficulty in fixing the exact date for delivery of foreign exchange, the exporter or importer may be given a choice of delivering the foreign exchange during a given period of days. An arrangement whereby the exporter or importer can respectively sell to or buy from the bank foreign exchange on any day during a given period of time at a predetermined rate of exchange is known as Option Forward Contract. The rate at which the deal takes place is the option forward rate. For example, on 22nd December 2010 an exporter enters into three months forward sale contract with the bank with option over March 2011. It means the customer can sell foreign exchange to the bank on any day between 1st March 2011 and 31st March 2011. The period from 1st to 31st March 2011 is known as the `Option Period. 10.3.4 Rules regarding Option Forward Contract: 1. The Option Period of delivery should not exceed one month. In any case it should not extend beyond one calendar month, i.e., from first to last working day of the month. 2. As between a bank and exporter or importer, the option is that of the exporter or importer. As such the bank cannot force the customer to deliver foreign exchange on any specific date. It is up to the customer to choose any date within the Option Period. 10.3.5 Exchange Control Regulations: Foreign Exchange Management Act 1999 provides that, a person resident in India may enter into a Forward Contract with an Authorised Dealer in India to hedge an exposure to exchange risk in respect of a transaction for which sale and / or purchase of foreign exchange is permitted under the Act, or rules or regulations or directions or orders made or issued there under, subject to following terms and conditions: (a) The Authorised Dealer through verification of documentary evidence is satisfied about the genuineness of the underlying exposure, (b) The maturity of the hedge does not exceed the maturity of the underlying transaction, (c) The currency of hedge and tenor are left to the choice of the customer, (d) Where the exact amount of the underlying transaction is not ascertainable, the contract is booked on the basis of a reasonable estimate.

(e) Foreign currency loans / bonds will be eligible for hedge only after final approval is accorded by the Reserve Bank of India, where such approval is necessary. (g) Balances in the Exchange Earners Foreign Currency (EEFC) accounts sold forward by the account holders shall remain earmarked for delivery and such contracts shall not be cancelled. They may, however, be rolled-over. (h) Contracts involving ` as one of the currencies, once cancelled shall not be re-booked although they can be rolled over at ongoing rates on or before maturity. This restriction shall apply to contracts covering export transactions which may be cancelled, rebooked or rolled over at on-going rates. (i) Substitution of contracts for hedging trade transactions may be permitted by an Authorised Dealer on being satisfied with the circumstances under which such substitution has become necessary.

10.3.6 Execution of Forward Exchange Contract: By definition, the time and amount of foreign exchange to be delivered are predetermined under a Forward Contract and the exporter or importer is bound by this agreement. So, theoretically, there should not be any variation and on the due date of the Forward Contract the exporter or importer will either deliver or take delivery of the fixed sum of foreign exchange agreed upon. But, in practice, quite often the delivery under a Forward Contract may take place before or after the due date, or delivery of foreign exchange may not take place at all. The bank generally agrees to these variations provided the customer agrees to bear the loss, if any, that the Authorised Dealer / bank may have to sustain on account of the variation. Let us analyse the various possibilities regarding the delivery of the currencies under the Forward Contract. The foreign exchange may be: Delivered on the due date as per the terms of Forward Contract. Delivered earlier than the due date. Delivered after the due date. Alternatively, the customer may request cancellation of the contract. This request for cancellation may be made. Cancellation on the due date. Cancellation before the due date. Cancellation later than the due date. Yet another alternative is that the customer may request postponement of the date of delivery of currency under the Forward Contract. This request for postponement may be made, Postponement on the due date. Postponement earlier than the due date.

Postponement after the due date. These nine various possibilities described above are summarised below: 1. Delivery on the due date. 2. Early delivery. 3. Late delivery. 4. Cancellation on the due date. 5. Early cancellation. 6. Late cancellation. 7. Extension on the due date. 8. Early extension. 9. Late extension. Each of these possibilities are dealt with in the terms and conditions on which the Forward Contract is entered into between the

10.3.7 Rollover of Forward Contracts: In respect of transactions like deferred payment imports / exports, repayment of installment and interest on foreign currency loans, the importer or exporter may require long term forward cover, i.e., for periods beyond six months. If suitable cover is available in the market, the bank may book Forward Contract for long terms. More often, the cover is made available on roll-over basis. That is, the initial contract may be made for a period of six months, and, thereafter, as each deferred installment is delivered, outstanding balance of Forward Contract may be extended for further periods of six months each. 10.4 Currency Futures: A Futures Contract is a form of Forward Contract, in that it conveys the right to sell or purchase a specified quantity of a foreign currency at a fixed exchange rate on a specified future date. Whereas in a Forward Contract the quantum of foreign currency and the due date are determined by the exporter or importer, in a Futures Contract these are standardised. While Forward Contract can be entered into by a person with any Bank at any place, the Futures Contract can be entered into only with the Financial Futures Exchanges. Thus, a Futures Contract may be defined as an agreement entered into with the specified Futures Exchange to buy or sell a standard (specified) amount of foreign currency at a specified price for delivery on a specified future date. The salient features of a Futures Contract, which also distinguish it from Forward Contract, are as follows: 10.4.1 Futures Exchanges: A Forward Contract can be entered into with any Authorised Dealer or a bank, and hence termed

as Over-The-Counter (OTC) product. A Futures Contact can be traded only on recognised Futures Exchanges. There are over 50 Futures Exchanges spread over the world. The important among them are: International Monetary Market (IMM) it is a part of Chicago Mercantile Exchange, which is in since 1972. London International Financial Futures Exchange (LIFFE) There are other Future Exchanges such as LME (London Metal Exchange), SIMEX (Singapore International Monetary Exchange), CBOT (Chicago Board of Trade) etc. 10.4.2 Size of Contract: The size of the transaction is standardised. For instance, at LIFFE, the standard size of a Future is: 62,500 Similarly, at Chicago Mercantile Exchange, the standard size of a Future is 62,500 CAD 1,00,000 12,50,00,000 In all the Futures Contracts, the stated currency is the foreign currency that is being bought or sold against $. 10.4.3 Delivery dates: The due dates of the Future Contracts fall on a specified day in specified months in a year, generally on quarterly basis. For instance at Chicago Mercantile Exchange, the specified day is Third Wednesday of the following months: March, June, September and December The month during which a contract expires is referred to as the `spot month. All trading stops two business days prior to the delivery date to enable the participants deliver the currencies, as in the case of spot market. 10.4.4 Price Movements: The price for the Futures is quoted as so many units of $ per unit of foreign currency. The value of the Futures will be the price per unit of foreign currency multiplied by the size of the contract.

For instance, the CAD Futures may be bought at a price of $ 0.998 per CAD. Since the standard size of one Futures is CAD 1,00,000, its value in terms of $ is $ 0.998 x 1,00,000 = $ 99,800. So we say that one Canadian Dollar Futures is available for $99,800. The exchange may fix the minimum size of price movements, called `tick. For instance, the tick may be $ 0.0001 for CAD, which amounts to a tick value of $ 10.00 per Futures Contract of CAD 1,00,000. The exchange may also fix the maximum intra-day movements of the price. If the price varies beyond the limit prescribed, compared to the closing price of the previous day, the trading may be suspended to assess the situation. The exchange may permit further trading after the margin accounts are properly adjusted. 10.4.5 Trading by Members: Buyers or sellers of Futures Contracts place orders with the exchange brokers or exchange members. These orders are communicated to the floor of the Futures Exchange. The price for a given number of Futures Contracts is negotiated and the deal is struck when someone is willing to buy and some other is willing to sell at the agreed price. The price keeps changing depending upon the demand and supply. For each Futures Contract, there is one person who buys the Futures (or takes a long position) and another who sells (or takes a short position). The number of outstanding two-sided contracts at any given time is called as the Open Interest. 10.4.6 Dealing with Clearing House: Although two members conclude a deal between themselves, one buying and the other selling, the Clearing House of the Futures Exchange is interposed between the deals and both the deals are with the Clearing House only. Thus the member who buys the Futures has to accept delivery from the Clearing House and the member who sells has to deliver the foreign exchange to the Clearing House. This arrangement safeguards the interests of the members against the failure of the counterparty. 10.4.7 Margins: As stated above, the clearing house assumes the counterparty risk in the Futures Contract. In order to ensure their liquidity and thereby safety for the Clearing House, the members are required to keep with the Clearing House margin ranging from 2.5% to 10% of the Futures Contracts outstanding in their names, in the form of cash, treasury bills or Letters of Credit. There are two types of margins. Initial Margin and Maintenance Margin. The margin that is required to be deposited at the time of entering into the contract is the Initial Margin. Another level of margin, lesser than the Initial Margin, is also prescribed which is known as the Maintenance Margin. The margin money will be adjusted (i.e., balance reduced or increased) with the change in the current value of Futures. If the margin money is reduced below the maintenance level the member is expected to bring in additional amount and restore the margin at least to the initial level. 10.4.8 Marking to Market: As noted above, although the contracts are to be delivered on the due date, the value of each outstanding Futures Contract is determined every day by reference to the closing quotation and any

excess or shortage is adjusted in the margin account of the concerned member. This process of revaluing the Futures Contract based on the ruling price for Futures is known as Marking to Market. By Marking the Futures Contract to Market and adjusting the margin money accounts, the Clearing House ensures the continued liquidity of the members and minimise for itself, the counterparty risk. The buyer of Futures Contract gains by an increase in the value of the Futures Contract. His margin account is increased by this value. Correspondingly, the seller loses and his margin account is reduced by the value. This is only a notional gain / loss because the Futures Contract has to be settled at the ruling price for the contract. The gain / loss on the margin account will be compensated by the loss / gain in the value of the Future Contract. 10.4.9 Liquidity: One salient feature of Futures, that makes it an effective tool as hedging instrument, is its liquidity. The buyer of the Futures need not hold it till maturity. On any intermediary date he can sell it to another and wind up his position with the exchange. Similarly a seller can enter into a purchase deal before the due date and square his position. In fact it is for this reason that Futures is sometimes described as a bet on the future price of the currency, rather than an obligation to buy the currency. Most of the Futures Contracts are not delivered on the due date, but extinguished by counter deals. As the delivery date approaches, the Open Interest (i.e. number of outstanding two-sided contracts) falls steeply. 10.4.10 Delivery: If the contract is held up to the due date, it will be settled by exchange of currencies. 10.5 Currency Options: An Options contract confers on the buyer the eligibility or a right to buy or sell a sum of foreign currency at a pre-determined rate on a future date, without any corresponding obligation to do so. On the due date the buyer of the Options may choose to buy / sell as per his entitlement or he may choose to let it go unused. Either of the decisions is binding on the seller, who has no such discretion. The seller of the Option has only obligation. Essentially, an Options Contract serves the similar purpose as a Forward Exchange Contract or the Future Contract viz., to firm up the future payment / receipt in a foreign currency with regard to exchange rate in terms of the local currency. The difference between the Forward Contract or Futures Contract and the Options Contract is that, under the Forward Contract or Futures Contract, the customer is expected to deliver / receive the foreign exchange on the due date at the forward rate irrespective of the spot rate prevailing. Under an Options Contract, on the due date, the customer can make a reassessment of the situation and seek either execution of the contract or its non-execution as may be advantageous to him. The following are the features of the Options Contract: 10.5.1 Parties to the Options: There are two parties to an Options Contract, the option buyer and the option seller. Option buyer is the holder of the right under the contract either to buy or sell one specific currency against

another specific currency. Normally it would be the exporter or importer or the corporate treasurer who would be buying the option from the option seller. Options seller, also known as the writer of the option, is the one who makes the right available to the buyer. He should deliver or accept delivery of the currency concerned if and when the right is exercised by the Options buyer. Normally the writer of the Options will be the bank which provides this instrument to its customers. The seller of the Options is always at a disadvantageous position because the buyer will exercise his right only if the prevailing exchange rate is favourable to him, which also means that the rate is unfavourable to the seller. 10.5.2 Call and Put Options: A contract under which the Option buyer has the right to purchase the specified currency is known as the `Call Option. On the other hand a contract conferring the right to the buyer to sell the specified currency is the `Put Option. Generally $ is the base currency and the other currency of the contract is the foreign currency that is being bought or sold. For instance, in a $ / Call Option, the buyer acquirers, the right to buy against $. Similarly, in a $ / Put Option, the buyer acquires the right to sell against $. 10.5.3 Premium: The consideration for the seller to offer the right to the buyer is the Premium. Thus Premium is the fee payable by the buyer of the Option to the seller at the time of entering into the Options Contract. The premium paid is not refundable whether the buyer ultimately exercises his right or not. 10.5.4 Strike Price: The exchange rate at which the currencies are agreed to be exchanged under the Options Contract is the `Strike Price. The market price for Option is not a single price. Varying prices maybe quoted, each at a different Premium. The Premium charged would vary according to the market perceptions about the future exchange rate for the currency. For instance, the quotation and Premium for Call Option in the market for for delivery in March may be quoted as follows: Strike Price (Quotation) in Cents (1/100 th of a $) 1.34 1.35 1.36 1.37 1.38 1.39 Premium in Cents CallPut 0.10 0.15 0.20 0.23 0.24 0.25 0.30 0.25 0.22 0.20 0.19 0.18

A buyer of Call Option may buy at $ 1.34 by paying a premium of $ 0.001 per . Or, he may opt for $ 1.37 at a premium of $ 0.0023, and so on. The Strike Price and Premium agreed between the buyer and seller will be applicable for the Options Contract. 10.5.5 Maturity: The date on which the contract expires is the maturity date. 10.5.6 Execution: Based on the period when the buyer can exercise his right under the Options Contract, Options are classified, into two types, viz., American Option and European Option. Under an American Option, the Option buyer can exercise his right on any date during the currency of the contract, i.e., any date on or before the maturity date. Under an European Option, the buyer can exercise his right only on its maturity date. Since offering American Option means assuming higher risk for the seller, the Premium charged would also be higher. 10.5.7 Types of Option Instruments: Three types of Options are available. They are: (i) OTC Options (ii) Exchange Traded Options (iii) Options on Futures 10.5.7.1 Over-The-Counter (OTC) Options: These Options tools are available with individual banks. They are tailor-made to the requirements of the buyer with regard to the maturity, price and size of the Options Contract. The buyer of the Option bears the counterparty risk, i.e., the risk that the seller of the Option, the bank may fail to fulfill its obligation under the Options Contract. Normally this type of Options is confined to contract of large volumes and between big players. Since this is non-standard variety the premium charged may also be higher. 10.5.7.2 Exchange Traded Options: These are physical Currency Options traded at an organised / recognised Currency Exchanges. The buyer acquires the right to buy or sell the foreign currency similar to the OTC Options described above, but for standard maturities and in standard amounts. The contract is with the Clearing House of the exchange and hence the counterparty risk is minimised. 10.5.7.3 Options on Futures: Options on Futures give the buyer of the Options, the right to buy / sell specific number of Futures on specified exchange. Depending upon the, Strike Price prevailing the buyer may exercise his option or forgo it. If the buyer of Call Options exercises his option, he will receive a long Future Contract in the currency. That is he will become the buyer of the Futures Contract in the exchange.

Then the Futures Contract will be subject to other regulations like Margin, Marking to Market etc. 10.6 Execution of Contracts: Whether the buyer will exercise his right under the Options Contract depends upon the spot price for the currency prevailing on the due date of the Options Contract. Based on the prevailing spot price, the Options Contract may be considered as: (a) In-The-Money, (b) Out-of-The-Money, or (c) At-The-Money. . 10.6.1 In-The-Money Options: An Options is said to be In-The-Money when it would be advantageous for the buyer of the Option to exercise his right. Thus, a Call Option is In-The-Money if on the maturity date the spot price for the currency being bought is higher than the Strike Price under the Options Contract. Consider that the Strike Price under the Call Options Contract is $ 0.988 .per CAD (i.e. he has a right to obtain / buy one CAD against $ 0.988) and in the market spot price for CAD is $ 0.998. It would be advantageous for the buyer of the Call Option to exercise his Option and obtain / buy one CAD at $ 0.988 and thereby save $ 0.010 per CAD. A Put Option, on the other hand, is In-The-Money, if at maturity the spot price for the underlying currency is lesser than the Strike Price under the Options Contract. The difference between the Options Strike Price and the spot price at maturity, which is in favour of the buyer is known as the Intrinsic Value of the Option. 10.6.2 Out-of-The Money: An Option is Out-of-The- Money, if it is not advantageous for the buyer to exercise his right. A Call Option is Out-of-The- Money if the spot price for the currency bought under Option is lower than the Strike Price agreed under the contract. A Put Option is Out-of-The-Money on the maturity date, where the spot price for the currency sold is higher than the Strike Price under the Options Contract. When the Option is Out-of-The- Money, the buyer does not exercise his right and the seller stands to gain by the premium he received under the Options Contract. 10.6.3 At-The-Money: An Options Contract is At-The-Money when the Strike Price is equal to the spot rate for the currency concerned on the due date of the contract. It makes no difference to either of the parties whether the buyer exercises his Option or not. 10.7 Futures and Options in India: 10.7.1 Exchange traded derivatives: In India the currency derivatives were banned until 1995. Subsequent to the L.C.Gupta committee recommendations the trading in the currency derivatives was considered by the RBI

and SEBI. While RBI looks after the product development, SEBI provides the trading platform for such products. Since August 2008 the Futures was introduced as a hedging tool for the residents of India. Only $ / ` Futures was allowed to be traded. One Futures was equivalent of $1000. The trading hours were from 9.00AM to 5PM and the recognised exchanges were NSE, BSE, MCX-SX Subsequently during March 2010, the Futures of three more currencies were permitted. These currencies were , and each of which is paired with `. To sum up there are as of now Futures of four pairs of currencies that are traded on three Futures Currency Exchanges: The four pairs of currencies are: 1. $ / ` 2. / ` 3. / ` 4. / ` And the three Currencies Futures Exchanges are: 1. NSE 2. BSE 3. MCX-S Currency Options in only one pair i.e. $ / ` is being traded on two options exchanges namely NSE and USE (sponsored by BSE). United Stock Exchange of India is an unique public provate partnership with equity participation by both the public sector and the private sector. USE has 16 of the most respected names in the Indian business as Constortium members 1. Allahabad Bank 2. Andhra Bank 3. Bank of Baroda 4. Bank of India 5. Canara Bank 6. Federal Bank 7. HDFC Bank 8. Indian Overseas Bank 9. Indian Potash 10. Jaypee Capital 11. MMTC 12. Oriental Bank of Commerce 13. Punjab National Bank 14. Tata Consultancy Services 15. Union Bank of India 16. United Bank of India. The following are the details applicable to both the Futures and Options and to all the currency derivatives exchanges: 1. All derivatives are cash settled. 2. They are offered for the period ranging from one month to twelve months. 3. Settlement day is two working days before the last business day of the month. 4. The size of the one futures contract or one Options Contract is 1000 units of the foreign currency ($, , ). Only in case of Japanese Yen the size of the contract is of 1,00,000 . 5. Trading hours are from 9 AM to 5 PM from Monday through Friday. 6. Options are European type.

10.7.2 OTC derivatives with the Authorised Dealers: In India banks are allowed to write Cross-Currency Options, after obtaining general permission from Reserve Bank of India and subject to the following conditions: (a) Options should be sold to customers only to cover their genuine exposures. (b) Options should be written on a fully covered basis, i.e., the bank should buy from the overseas branch / bank / internationally recognised / approved Options Exchanges, an identical Option for the same amount, Strike Price and Maturity Date as the one sold to its customer. Option positions should not be left open. (c) Options Premiums may be paid to the overseas sellers for Options bought by the bank who, in turn, may charge the Premium to the customer by keeping a spread. Premiums may be paid and received in foreign currency. (d) Options written and Options purchased should be Marked to Market at suitable periods, so as to coincide with the dates on which evaluation of foreign exchange positions is done. It may be noted that only cross-currency are permitted. That is, both the currencies involved are foreign currencies, e.g., $ against . Options in a foreign currency against ` is not permitted. Options Contracts have not been used widely in India for the following reasons: 1. Most of the exposures of the importers and exporters are in $, and non-availability of $/ ` Option until as recently as October 2010, had been a great drawback. The Cross-Currency Options provided only partial cover against exchange risk. 2. Banks can write Options only by covering themselves fully in the international markets. The premium charged by the international banks, is added to the charges of the Option providing bank. This makes the Cross-Currency Options instrument very costly for the importers or the exporters. 10.8 Uses of Options: An exporter who expects to execute the contract and receive foreign exchange after a period of say, six months may enter into a Put Options for six months which entitles him to sell the foreign currency on maturity at an agreed predetermined price (Strike Price). If on maturity, the spot price for the currency is more favourable to the exporter he may choose not to exercise his right of selling under the contract. He can instead sell the foreign currency earned on account of exports, in the market at the spot rate. Similarly, an importer may enter into a Call Options entitling him to buy the foreign currency on a future date. Options Contract is useful especially in covering exchange risk under contingent conditions, like when the company enters into a bid. The exchange risk will arise only if the contract is awarded and foreign currency exposure arises. Other methods of hedging, such as Forward Contracts, will prove costly if the contract is not awarded and the Forward Contract booked already has to be cancelled.

10.9 Summary ________________________________________________________ We discussed only three tools that hedge the currency fluctuation risk faced by the exporter as well as importer. These can also be used by anyone who comes in possession of the foreign currency and needs to dispose it off, or anyone who needs the foreign currency that, he would like to spend abroad. All these activities need the rate of conversion of the foreign currency into the `. The rate of conversion keeps fluctuating and therefore the activity is fraught with risk of loss. Under such circumstances one can resort to Forwards, Futures or Options tool and eliminate or reduce the uncertainty in exchange rate fluctuations. In all the three tools the rate of exchange is fixed in advance and the currencies are delivered later (or cash settled). Forwards are tailor-made contracts with the terms as are agreed between the two contracting parties. These Forwards are most commonly used in the Indian context though they are fraught with the counterparty risk. The Futures on the other hand specifies a date of settlement and is for standard amounts. They are not tailor made. The contracts are with the recognised Futures Exchanges and therefore much less risky as far as the counterparty risk is concerned. However both the parties need to perform their part of the obligation as is envisaged in the Future Contract as both the parties to the contract have rights under the contract. Options Contract is a step ahead of the Futures Contract. It is just like the Future Contract with a difference that one of the parties surrenders its right and assumes only the obligation of performance if asked for by the opposite party. This party, which assumes the obligation, is known as seller or writer of the contract. The other party acquires the right, to ensure performance if he so wishes from the opposite party, without having any obligations. Such party is called as buyer of the Options Contract. Buyer of the Options Contract pays certain amount to the seller of the contract, upfront, for acquiring this privilege, which is known as Premium. Put Option gives the buyer of the Option a right to sell the currency at the agreed price to the writer of the Options Contract. The Call Option, on the other hand gives the buyer of the Option a right to buy the currency at an agreed price from the writer of the Options Contract. European Options requires a specific date of settlement on which the performance by the writer is asked for, unlike the American Options where the buyer of the Options can ask the performance by the writer of the Options Contract on the date of settlement or on any day before the date of settlement. If exercising the contract is beneficial to the buyer of the Options, i.e. the Options is In -The- Money, the buyer of the Options seeks the performance from the writer of the Options. In this event the buyer gets benefited and the writer incurs the loss. However, if exercising contract is not beneficial to the buyer of the Option, i.e. the Options is Out-of- The-Money, he allows the Options to lapse without seeking performance from the writer of the Options. In such an event the writer of the Options gets benefitted by an amount of Premium he received from the buyer of the Options Contract. The buyer of the Options Contract looses the Premium he has paid up front, to

the writer of the contract In India Currency Forwards are being used as hedging tool since a very long time. Generally these types of contracts are made by the exporter or importer with the Authorised Dealers. The Futures in four currencies ($, , and ), paired with ` are being traded on NSE, BSE and MCX-SX. The option in $ paired with ` is traded on NSE and USE (promoted by BSE). There is a long way ahead, as far as the introduction of the various derivative products in India is concerned. We are yet to introduce cross currency derivatives on the recognised exchanges, and also to introduce some more varieties apart from Plain Vanilla Option, the Options like Barrier Options, Digital or Binary Options, Forward Start Options, Leveraged Options, Compound Options and those involving combinations of the ones mentioned here.

10.10KEY WORDS

1. Forwards, 5. Option Forward Contract, 9. Delivery date, 11. Futures Exchanges, 14. Tick, 17. Counterparty Risk, 19. Maintenance Margin, 22. Seller of Option, 25. Put Option, 28. Option on Futures, 30.Out-of-The-Money, 33. American Option,

2. Futures,3. Options,4. Exchange risk, 6. EEFC,7. Rollover,8. Settlement Date, 10. Size of Futures, 12. OTC,13. Exchange traded, 15. Open Interest,16. Clearing House, 18. Initial Margin, 20. Marking to Market,21. Writer of Option, 23. Buyer of Option,24. Call Option, 26. Premium on Option,27. Strike Price, 29.In-The-Money, 31. At-The-Money,32.European Option, 34. Intrinsic value of the Option.

10.11 DESCRIPTIVE QUESTIONS Q.1: Differentiate between the Forwards, Futures and Options as hedging tools. Q.2: Explain the various features of the Futures. Q.3: Write short notes on the following in respect of Options: 1. European Options and American Options 2. Put and Call Options

3. In-The-Money, Out-of-The-Money and At-The-Money 4. Writer and Buyer of the Option Q.4: How can Options be used by the Exporter and Importer? Q.5: Write a detailed note on Forward Currency Contract. Q.6: Describe the present position of introduction of derivatives in India. 10.12 OBJECTIVE QUESTIONS Q.1: The basic purpose of Forwards, Futures and Options is: A. B. C. D. To look ahead in the time horizon for better business opportunities To have choice from variety of the business To reduce the risk of probable loss To calculate the attendant risk in the business

Q.2: Which one of the following is a tailor made contract? A. Forwards B. Futures C. Options D. None of the above

Q.3: Which of the following has the least counterparty risk? A. Forwards and Futures C. Options and Forwards B. Futures and Options D. All the above

Q.4: In Option Forward, the delivery of the currencies can be made: A. Only on the due dateB. On the settlement date only C. Any day during the period of delivery as agreed between the contracting parties D. As decided by the Authorised Dealer bank Q.5: If a Fixed Forward Contract of three months entered into on 22nd December 2010, it will fall due for delivery on: A. 22nd March 2011 C. 24th March 2011 B. 23rd March 2011 D. 25th March 2011

Q.6: If an Option over March Forward Contract of three months is entered into on 22nd December 2010, then it falls due for delivery on: A. B. C. D. Any day between 1st day of March and the 10th day of March 2011. Any day between 11th day of March and the 20th day of March 2011. Any day between 21st day of March and the Last day of March 2011. Any day during the month of March 2011.

Q.7: Forward Contracts are permitted in which of the following Currencies? A. Only in $ C. Only in Convertible Currencies B. Only in $, , and D. All the currencies

Q.7: Currency Futures are permitted in which of the following currencies?

A. Only in $ C. Only in Convertible Currencies

B. Only in $, , and D. All the currencies

Q.8: Currency Options are permitted in which of the following Currencies? A. Only in $ C. Only in Convertible Currencies Q.9: In Put Option: A. B. C. D. The buyer of the option has a right to buy the currency at a stipulated rate The buyer of the option has a right to sell the currency at a stipulated rate The seller of the option has a right to buy the currency at a stipulated rate The seller of the option has a right to sell the currency at a stipulated rate B. Only in $, , and D. All the currencies

Q.9: In Call Option: A. B. C. D. The buyer of the options has a right to buy the currency at a stipulated rate The buyer of the options has a right to sell the currency at a stipulated rate The seller of the options has a right to buy the currency at a stipulated rate The seller of the options has a right to sell the currency at a stipulated rate

Q.10: The Buyer of the Options allows the Option to lapse if it is A. In-The-Money C. Off -The-Money B. Out-of-The-Money D. On-The-Money

Q.11: The Buyer of the Options exercises the Option if it is A. In-The-Money C. At-The-Money B. Out-of-The-Money D. On-The-Money

Q.12: European Options means where the delivery of the currency takes place: A. Only in any country in EuropeB. Only on the date of settlement C. Any time before the date of settlement. D. In any country other than Europe Q.13: American Options means where the delivery of the currency takes place: A. Only in AmericaB. Only on the date of settlement C. Any time before the date of settlementD. In any country other than America Q. 14: Seller of the Options is also called as: A. Author B. Trader C. Writer D. Asker

Q.15: Open Interest means: A. B. C. D. Where the buyer offers to buy the currency but seller is not ready to sell Where the seller offers to sell the currency but the buyer is not ready to buy Where there are no buyers and sellers and the market is wide open Two side concluded contracts those are awaiting performance

Chapter

11

Salient features of Foreign Trade On reading this chapter the reader will broadly understand the objectives and contents of Policy (2009-14) FTP 2009-14. He will understand the classification of the goods
and the formalities that he is expected to do in exporting the Learning goods. Exporter is also 11.1 given benefits in the Objectives form of importing the inputs and capital goods without payment of customs duty or paying reduced amount of customs duty. He will understand the schemes granting such benefits to him. Certain entitlements accrue to the exporter when he makes the export of the notified products and exports it to the notified destinations. The schemes relating to this are also explained in this chapter. Exporter is not expected to export duties and taxes while exporting the goods and services. He is either exempted from paying customs duty and excise duty on the inputs he uses in the manufacture of the export product or if he has paid such levies those are refunded to him. Schemes related to this are also explained. He will also know the sectors, the exports from which are incentivized, that are encouraged by the Government. (Some portion of the contents here is repeated from Chapter 2 of the book. The repetition is to ensure the continuity in writing. Moreover the detail FTP is given in the Appendix at the end of the book for further reading).

11.2 Introduction: India had a long history of adverse Balance of Payment. To cope up with this problem the following measures were taken: 1. Import Trade Control was first introduced in early stages of World War two, by notification under Defense of India Rules (DIR). 2. Imports and Exports (Control) Act was passed in 1947, during which period foreign exchange rate was artificially controlled by RBI. 3. Foreign Exchange Regulation Act was introduced in 1947. 4. Later this act was amended in 1973. Amended FERA came into effect from 1st of January 1974. 5. Now, with effect from 1st of June 2000, more liberal Foreign Exchange Management Act (FEMA) is in force. However it was observed that the Import Trade Control Act (1947) was not adequately furthering the cause of foreign trade under the changed circumstances and therefore it was replaced in August 1992, by Foreign Trade (Development and Regulation) Act. The Act is designed to authorize the Government to formulate the Export Import Policy and to carry out the amendments to it as per changing situations. The authority is also granted to the Government to implement the Export Import policy. The Government therefore appoints the Director General of Foreign Trade (DGFT) and the policy is supervised and controlled by the DGFT. The Hand Book of Procedures (HBP) empowers the DGFT to specify the procedures to be followed by the importer, exporter and the Licensing Authorities. Under these powers Standard Input Output Norms (SION), Schedule of Duty Entitlement Pass Book (DEPB) rates and Indian Trade Control (Harmonized System) ITC (HS) are notified by means of the public notices by DGFT.

Ministry of Commerce issues policy for Imports and Exports for five years, which is amended from time to time depending upon the changing circumstances. The policy was earlier termed as EXIM Policy. It was named as Foreign Trade Policy for 2004-09. The same name continues for the policy for the next five years period 2009-14. The policy announced on 27.08.2009, is contained in 9 Chapters. It contains the following: 1. Handbook of Procedures for Volume 1, which gives the procedural aspects of the policy. 2. SION in Volume 2, for various products for Duty Exemption Scheme. 3. ITC (HS) Classification of Imports and Exports items and 4. Handbook of DEPB Rates. 11.2.1. Authority: Foreign Trade (Development and Regulation) Act 1992 Section 3: Empowers the Central Government to make provisions for development and regulation of foreign trade by facilitating imports and increasing exports, by an order

published in Official Gazette. Section 5: Central Government reserves the right to make amendments by notification to this policy. 11.2.2. Contents: 1. Basic Policy contains 9 Chapters 2. Handbook of Procedures Volume 1 contains 9 Chapters 3. Handbook of Procedures Volume 2 gives SION (Standard Input Output Norms) for various products for the purpose of duty exemption 4. ITC (HS) Classification of Export and Import Items 5. Handbook of DEPB rates 11.2.3. Matters covered by FTP: 1. Policy for regulating import and export of goods and services 2. Export Promotional measures 3. Duty Remission and Duty Exemption schemes for promotion of exports 4. Export Promotion Capital Goods Scheme (EPCG) 5. EOU (Export Oriented Unit) / EHTP (Electronic and Hardware Technology Park) / STP (Software Technology Park) / BTP (Biotechnology Park). 6. SEZ (Special Economic Zone). 7. Deemed Exports 11.2.4. Period of FTP: With effect from 27th August 2009 till 31st March 2014. 11.2.5. Objectives of FTP 2009-14: 1. The immediate objective of the policy is to arrest and reverse the declining trend of exports 2. To provide additional support to the sectors, which have been hit badly due to recession in the developed world. 3. To achieve the export target of $200 billion by March 2011, i.e. about 15% growth over the exports as of March 2010. 4. The country should be able to come back on high export growth path of around 25% for the remaining three years of policy. This would translate into the following approximate year end export targets: a. For the year ending March 2012 - $250 billion b. For the year ending March 2013 - $ 312.5 billion c. For the year ending March 2014 - $ 390.63 billion

5.

The above achievement is equivalent to approximately doubling the existing export performance in goods and services by March 2014.

6. The long term objective of the policy is to double the Indias present share of 1.38% of the global trade by March 2020. 11.3. ITC (HS) Classification of Import and Export Items: There are four categories of the items as follows: 11.3.1. Free unless regulated. Exports and Imports of these items shall be free, except where regulated by FTP or any other law in force. The item wise export and import policy shall be, as specified in ITC (HS) notified by DGFT, as amended from time to time 11.3.2. Restricted Goods. Any goods, export or import of which is restricted under ITC (HS) may be exported or imported only in accordance with an Authorisation or in terms of public notice issued in this regard. Examples of items restricted for imports: Live Animals, Opium, Cactus, Potato and Potato Seeds, Ginger, Marble, Granite, Explosives, DDT, Sandal Wood, News Print, Bond Paper, Ivory and Ivory Products etc Examples of Restricted items for exports: Cattle, Horses, Camel, Jawa Sparrow, Fresh and Frozen Silver Pomfrets, Dried Vegetables, Bone and Bone Products, De-oiled Groundnut Cakes, Fodder, Rice Bran, Sand and Soil, Sandal Wood Products, Urea, Silk Worms, Vintage Motor Cars and Motor Cycles, Whole Human Blood Plasma, Viscose Staple Fibre, Chemicals for Weapons etc. 11.3.3. Exports/ Imports through State Trading Enterprises: Any goods, import or export of which is governed through exclusive or special privileges granted to STEs, may be imported or exported by the STEs as per conditions specified in the ITC (HS). DGFT may, however, grant an authorisation to any person to import or export any goods. Such STEs shall make any such purchases or sales involving imports or exports solely in accordance with the commercial considerations, including price, quality, availability, marketability, transportation and other conditions of purchase or sales in a non discretionary manner and shall afford enterprises of other countries adequate opportunity, in accordance with customary business practices, to compete for participation in such purchases or sales. Examples of Import of items through STE: Petroleum products can be imported through Indian Oil Corporation, Urea can be imported through STC, MMTC and Indian Potash Ltd. Wheat, Maize, Rice can be imported through Food Corporation of India, Copra and Crude Oil can be imported through STC. Examples of Export of items through STE: Crude Ooil through IOC, Gum Karaya through TRIFED, MICA waste through MMTC, Minerals Ores of rare Earths, Iron Ore, Bauxite,

Manganese Ore etc. through Indian Rare Earths Ltd., and MMTC, seeds of Maize through NAFED, TRIFED, NDDB, Onion through NAFED and specified state agencies. 11.3.4. Prohibited goods: The export or import of these items is not permitted. Examples of items prohibited for imports: Wild Animals, Fats or Oil of Animal Origin, Pig Fats, Margarine of Animal Origin, Mmutton Tallow, Chicory Plants etc. Examples of items prohibited for exports: Wild Life, Exotic Birds, Endangered Plants, Beef, Pig Fat, Milk, Skimmed milk, Milk Food for Babies, Peacock Feathers, Handicrafts of Peacock Feathers, Dried Leguminous Vegetables, Guar Seeds, Lentils, Sugar, Ivory, Potato Seeds, Seeds, Margarine of Animal Origin, Human Skeletons, Wood and Wood Products, Wood Pulp, Sandalwood etc. (items mainly related to the conservation of our natural resources are prohibited) 11.4. Ten Sectors that enjoy specific benefits under the FTP (Chapter 1B of FTP 2009-14): (Special Focus Initiatives) Government of India makes concerted efforts to promote the exports in the sectors listed below by announcing and implementing specific sectoral strategies. This special focus is with a view to increase our market share of global trade, besides providing employment opportunities. Benefits available to the exporters in exporting the products covered by each of the following ten sectors under FTP 2009-14 are given below. (These sectors were also mentioned in chapter 2 of the book.) 11.4.1. Agriculture and Village Industry. Benefits under Vishesh Krishi and Gram Udyog Yojana: i. The objective of the scheme is to promote agricultural and forest based value added products and the products coming from Gram Udyog.

ii. Duty Credit Scrip benefit of 5% of FOB value of exports in free foreign exchange is granted with an aim at compensating the high transport cost w.e.f. 27.08.2009. These Duty Credit Scrips can be used for importing inputs and capital goods which are freely importable and can be used for payment of customs duty. The Duty Credit Scrips are valid for a period of 24 months. iii. The Status Exporters shall be eligible for Duty Credit Scrip equal to 10% of FOB value of agriculture exports, for import of Capital Goods / Equipment such as Cold Storage units, Pack Houses (including facilities for handling, grading, sorting and packaging etc.) or Reefer Van/ Containers. iv. Capital Goods imported under EPCG will be permitted to be installed anywhere in the AEZ (Agriculture Economic Zone). v. Imports of restricted items are allowed under various export promotion schemes. Imports of inputs such as pesticides are permitted under Advance Authorization Scheme for agro exports.

vi. New Towns of Export Excellence with a threshold of `150 crore shall be notified. vii. Certain specified flowers, fruits and vegetables are entitled to Special Duty Credit Scrip, in addition to the normal benefit under VKGUY. 11.4.2. Handlooms. i. Specific funds are earmarked under MAI (Market Access Initiative) / MDA (Market Development Assistance) scheme for promoting handloom exports.

ii. Duty Free Import Entitlement of specified trimmings and embellishments is 5% of FOB value of Exports during the previous financial year. iii. Duty Free Import Entitlement of a hand knotted carpet samples is 1% of FOB value of exports during previous financial year. iv. Duty Free Import of Old pieces of Hand Knotted Carpets on consignment basis for reexport after repairs is permitted. v. New Towns of Export Excellence with a threshold of ` 150 crore shall be notified vi. Machinery and Equipment for effluent treatment plants is exempt from Customs Duty. 11.4.3. Handicrafts. i. Duty Free Import Entitlement of tools, trimmings and embellishment is 5% of FOB value of exports during previous financial year. Entitlement is broad banded and shall also extend to merchant exporters tied up with supporting manufacturers.

ii. Handicraft EPC is authorized to import trimmings, embellishments and consumables on behalf of those exporters for whom directly importing may not be viable. iii. Specific funds are earmarked under MAI & MDA schemes for promoting handicraft exports. iv. CVD (Countervailing Duty) is exempted on Duty Free Import of trimmings, embellishment and consumables. v. New Towns of Export Excellence with a reduced threshold limit of ` 150 crore shall be notified. vi. Machinery and Equipment for effluent treatment plants are exempt from Customs Duty. vii. All handicrafts exports would be treated as Special Focus Products and are entitled to higher incentives. 11.4.4. Gems & Jewellery. i. Import of Gold of 8k and above is allowed under replenishment scheme subject to import being accompanied by an Assay Certificate specifying purity, weight and alloy content.

ii. Duty Free Import Entitlement, based on FOB value of exports during the previous financial year, of consumables and tools, for:

1. Jewellery made out of: a. Precious metals (other than Gold and platinum) 2% b. Gold and Platinum 1% c. Rhodium finished Silver 3% 2. Cut and polished Diamonds 1% is available. iii. Duty free import entitlement of commercial samples shall be ` 3,00,000. iv. Duty free re-import entitlement for rejected jewellery shall be 2% of FOB value of exports. v. Import of diamonds on consignment basis for certification / grading & re-export by the authorized offices / agencies of Gemological Institute of America (GIA) in India or other approved agencies will be permitted. vi. Personal carriage of gems and jewellery products in case of holding / participating in overseas exhibitions increased to $ 5 million and to $ 1 million in case of export promotion tours. vii. Extension in number of days for re-import of unsold items in case of participation in an exhibition in USA increased to 90 days. viii.In an endeavour to make India a diamond international hub, it is planned to establish Diamond Bourse(s). 11.4.5. Leather and Footwear: i. Duty Free Import Entitlement of specified items is 3% of FOB value of exports of leather garment in the preceding financial year.

ii. Duty Free Entitlement for Import of trimmings, embellishment and footwear components for footwear (leather as well as synthetic), gloves, travel bags, and handbags is 3% of FOB value of exports of previous financial year. Such entitlements shall also cover packing material, such as printed and non printed shoe boxes, small cartons made of wood, tin or plastic materials for packing footwear. iii. Machinery and Equipment for Effluent Treatment Plants shall be exempt from Basic Import Duty. iv. Re-export of unsuitable imported materials such as raw hides and skins and wet blue leathers is permitted. v. CVD is exempted on lining and interlining material notified at S.No.168 of customs notification no. 21/2002 dated 01.03.2002. vi. CVD is exempted on raw, tanned and dressed fur skins falling under chapter 43 of ITC (HS). vii. Re-export of unsold hides, skins, and semi finished leather shall be allowed from public bonded warehouse at 50% of the applicable export duty.

11.4.6. Marine Sector: i. Imports of technological upgradation under EPCG in fisheries sector (except fishing trawlers, ships, boats and other similar items) exempted from maintaining average Export Obligation.

ii. Duty Free Import of specified specialized inputs / chemicals and flavouring oils is allowed to the extent of 1% of FOB value of preceding financial years export. iii. To allow import of monofilament long line system of tuna fishing at a concessional rate of duty and Bait Fish for tuna fishing at nil duty. iv. A self removal procedure for clearance of seafood waste is applicable subject to prescribed wastage norms. v. Marine products are considered for VKGUY scheme. 11.4.7. Electronics and IT Hardware Manufacturing Industries: i. Expeditious clearance of approvals required from DGFT shall be ensured.

ii. Exporters and Associations would be entitled to utilize MAI and MDA schemes for promoting Electronics and IT Hardware Manufacturing Industry exports. 11.4.8. Sports Goods and Toys: i. Duty Free Imports of specified specialized inputs allowed to the extent of 3% of FOB value of preceding financial years exports.

ii. Sport Goods and Toys shall be treated as a priority sector under MDA / MAI scheme. Specified funds would be earmarked under MAI / MDA scheme for promoting exports from this sector. iii. Application relating to Sports Goods and Toys shall be considered for fast track clearance by DGFT. iv. Sports Goods and Toys are considered as Special Focus Products and are entitled to higher incentives. 11.4.9. Green Products and Technologies: i. India aims to become a hub for production and exports of green products and technologies.

ii. To achieve this objective, special initiative will be taken to promote development and manufacture of such products and technologies for exports. iii. To begin with, the focus would be on items relating to Transportation, Solar and Wind Power generation and the other products as may be notified which will be incentivized under the Reward Scheme of Chapter 3 of FTP. 11.4.10. Exports from the North Eastern Region: In order to give a fillip to exports of products from the North-Eastern states, notified

products of this region would be incentivized under the Reward Schemes of Chapter 3 of FTP. 11.4.11. Other measures: Apart from this the Government of India also encourages the following efforts of the exporters to achieve: i. Market diversification ii.Technological upgradation iii. `Status by the exporters 11.4. 11.1. Market Diversification: Analysis of direction of Indias foreign trade in the past showed its over dependence on a few western countries. As a matter of policy in general, market diversification is desirable. More particularly the weaker demand in developed economies, triggered by falling asset prices and increased economic uncertainties has pulled down the growth of Indias exports to developed countries. There are no clear signals as to when the markets in the developed countries would revive. To insulate the Indian exports from the decline in demand from developed countries, FTP focuses on diversification of Indian exports to other markets, especially those located in (1) Latin America, (2) Africa, (3) Parts of Asia and (4) Ocenia. These are apart from the countries located in the (1) CIS region, (2) ASEAN countries, (3) Australia and New Zealand.

To induce the exporters to export to these markets the following initiatives are taken under the policy: 1. 26 new countries have been included. 2. The incentives provided have been increased from 2.5% to 3% 3. Significant increase in the outlay of funds ensures support for the exporter to all countries in Africa and Latin America 11.4.11.2. Technological Upgradation: To usher in the next phase of export growth, India needs to move up in the value chain of the export goods. This objective is sought to be achieved by encouraging technological upgradation of export sector. To encourage the initiative taken are as follows: i. More exporter friendly implementation of the EPCG scheme. ii. Easier value addition norms for export of goods over the imported value of the imported inputs. iii. Inclusion of more products for incentives if they are exported to the diverse markets. iv. Encouraging project exports. 11.4.11.3. Support to Status Exporters: Status holder exporters contribute to the extent of 60% of the Indias total exports. In

recognition of this achievement additional Duty Credit Scrip @ 1% of the FOB value of past exports shall be granted to the Status Exporters, for exports in the specified products. 11.5. Direct incentives offered to the Exporters: (Promotional Measures in DGFT as per Chapter 3 of FTP 2009-14) 11.5.1. Status Category of Exporters: 1. Exporters of the following types are eligible to get the Status Category: 1. Manufacturer Exporter 2. Merchant Exporter 3. Service Providers 4. Export Oriented Units (EOUs) 5. Units located in, a. Special Economic Zones (SEZs) b. Agri. Export Zones (AEZs) c. Electronic Hardware Technology Parks (EHTPs) d. Software Technology Parks (STPs) e. Bio-Technology Parks (BTPs) 2. Eligibility criteria on the basis of export performance: Status in column (2) can be granted to the exporter on achieving the export performance in column (3).
S.No. Status Category Export Performance on FOB/FOR Basis in ` in Crores during current plus previous three years taken together (3) 20 100 500 2,500 7,500

(1) 1. 2. 3. 4. 5.

(2) Export House (EH) Star Export House (SEH) Trading House (TH) Star Trading House (STH) Premier Trading House (PTH)

3. If the Export Unit, either Merchant or manufacturer, falls under any one or more categories given below, then the eligibility criteria for export performance is half of the export performance given above. a. Exporters in Small Scale Industries / Tiny Sector / Cottage sector b. Units registered with KVIC / KVIB c. Units located in North Eastern States / Sikkim / Jammu and Kashmir d. Units Exporting Handlooms / Handicrafts / Hand knotted or Silk Carpets e. Exporters exporting to countries in Latin America, CIS, Sub-Saharan Africa f. Units having ISO 9000 (series) / ISO 14000 (series) /WHOGMP / HACCP / SEI CMM level II and above status granted by agencies approved by DGFT in service sector and for agro products

Status in column (2) can be granted to the above mentioned exporters on achieving the performance in column (3).
S.No. Status Category Export Performance on FOB/FOR Basis in ` in C rores during current plus previous three years taken together (3) 10

(1) 1. 2. 3. 4. 5.

(2) Export House (EH) Star Export House (SEH) Trading House (TH) Star Trading House (STH) Premier Trading House (PTH)

50 250 1,250 3,750

Privileges granted to Export and Trading House Status Holders: The Status Holders as per the above eligibility are entitled to the following privileges: 1. Authorisation and customs clearance for both imports and exports on self declaration basis. 2. Fixation of Input-Output Norms on priority within 60 days. 3. Exemption from compulsory negotiation through banks. Remittances / Receipts, however, would be received through banking channels. 4. 100% retention of foreign exchange in EEFC account.

5. Exemption from furnishing of Bank Guarantee in schemes under FTP. 6. SEH and above shall be permitted to establish Export Warehouses, as per DOR (Department of Revenue) guidelines. 7. For Status Holders, a decision on conferring of ACP Status (Accredited Client under Risk Management System of Customs Clearnace) shall be communicated by customs within 30 days from receipt of application with Customs.

8. As an option, for Premier Trading House (PTH), the average level of exports under EPCG scheme shall be the arithmetic mean of export performance in last 5 years, instead of three years. 9. Status Holders of specified sectors shall be eligible for Status Holder Incentive Scrip (under Para 3.16 of FTP). 10. Status Holders of Agriculture Sector shall be eligible for Agriculture Infrastructure Incentive Scrip under VKGUY (under Para 3.13.4 of FTP). Direct incentives are given to the exporters in the form of grant of Duty Credit Scrip The utility of Duty Credit Scrip is explained below. (This is the repetition of Para 2.6.2.2 from Chapter 2 on How to Export?) 11.5.2. Duty Credit Scrip: Duty Credit Scrip benefits are granted with an aim to compensate high transport costs, and to offset other disadvantages that the exporter has to bear. Duty Credit Scrip is an instrument that grants benefit to the exporter in the form of payment of customs duty on the items that he imports. An Exporter need not pay the customs duty to the extent of balance that is available to him under Duty Credit Scrip. This balance that is available to him is to the extent of certain percentage of the FOB exports made by him during the previous financial year. The percentage depends on the various schemes explained in the FTP. For example under VKGUY scheme it is 7%, 5% or 3% of the FOB value of the exports depending upon the product that is exported. Duty Credit Scrip and the items imported against it would be freely transferable. However this benefit of transferability is not available to the Duty Credit Scrip issued under SFIS and Status Holders Incentive Scrip. Import of inputs, goods including capital goods are permitted provided the same are freely importable or restricted items under ITC (HS). Duty Credit Scrips can also be used for EPCG imports, as well as for meeting Export Obligation default. They are valid for 24 months. 11.5.3. Reward / Incentive Schemes in DGFT: The following five schemes offer direct incentives, in the form of granting of Duty Credit Scrip, to the exporters and encourage them to make exports of the notified products or export them to the notified countries.

The schemes are: 1. Focus Product Scheme (FPS) 2. Focus Market Scheme (FMS) 3. Market Linked Focus Product Scrip (MLFPS) 4. Served From India Scheme (SFIS) 5. Vishesh Krishi and Gram Udyog Yojana (VKGUY) 11.5.3.1. Focus Product Scheme: Objective: Objective is to give incentives to the export of such products, which have high export intensity and employment potential, so as to offset infrastructure inefficiencies and other associated costs involved in marketing of these products. Entitlement: Exports of notified products to all countries shall be entitled for Duty Credit Scrip equivalent to 2% ( in certain cases 5%) of the FOB value of the exports made from 27.08.2009 onwards. 11.5.3.2. Focus Market Scheme: Objective: Objective is to offset high freight cost and other externalities to select international market, with a view to enhance Indias export competitiveness in these countries. Entitlement: Exporters of all products to notified countries shall be entitled for Duty Credit Scrip equivalent to 3% of FOB value of exports for exports made from 27.08.2009 onwards. 11.5.3.3. Market Linked Focus Product Scrip (MLFPS): The scheme is meant for export of the products or sectors which offer high export intensity and provide employment opportunity but such products are not covered under the FPS and the markets are not covered under FMS. Such exports are incentivized at 2% of FOB value of exports, for exports made from 27.08.2009 onwards. 11.5.3.4. Served From India Scheme (SFIS): Objective: Objective is to accelerate the growth in export of services so as to create a powerful and unique `Served From India brand, instantly recognised world over. Eligibility: All India service providers of services listed in HBP, who have free foreign exchange

earnings of at least of `10 lakhs in preceding financial year / current financial year shall qualify for Duty Credit Scrip For Individual service providers, minimum free foreign exchange earnings would be `5 lakhs Entitlement: All service providers shall be entitled to Duty Credit Scrip equivalent to 10% of free foreign exchange earned during the current financial year. Imports Allowed: Duty Credit Scrip may be used for import of: 1. any capital goods, including spares, 2. office equipment 3. professional equipment 4. office furniture 5. consumables (The above imports should be freely importable or restricted under ITC(HS) and the imported goods also relate to the service sector business of the applicant) Utilization of Duty Credit Scrip earned shall not be permitted for payment of duty in case of import of vehicles, even if such vehicles are freely importable under ITC (HS). In case of hotels, clubs having residential facility of minimum 30 rooms, golf resorts and stand alone restaurants having catering facilities, Duty Credit Scrip may also be used for import of consumables including food items and alcoholic beverages. Non Transferability: Entitlement / goods (imported / procured) shall be non transferable and be subject to Actual User condition. Procurement from Domestic sources: Utilization of Duty Credit Scrip shall be permitted for payment of Excise Duty. 11.5.3.5. Vishesh Krishi and Gram Udyog Yojana (VKGUY): (Special Agriculture and Village Industry Scheme) Objective: Objective of this scheme is to promote export of: i. Agricultural produce and their value added products.

ii. Minor Forest Produce and their value added variants. iii. Gram Udyog Products iv. Forest Based Products

v. Other Products as notified from time to time. Entitlement: Duty Credit Scrip benefits are granted to compensate for high transport costs and to offset other disadvantages. 5% Duty Credit Scrip is granted for exports of products as notified in Appendix 37A of HBPv1 7% Duty Credit Scrip is granted for export of products as listed in Table 2 of Appendix 37A (these products are Fruits, Flowers, Vegetables etc.) 3% Duty Credit Scrip is granted where the exporter has also availed the benefits of o o o Drawback at rates higher than 1%, and / or Specific DEPB rate, and / or Advance Authorisation or Duty Free Import Authorisation imports of inputs for the exported product for which Duty Credit Scrip under VKGUY is being claimed.

(5%, 7% or 3% are calculated on the FOB value of the exports made from 27.08.2009 onwards) Agri. Infrastructure Incentive Scrip: Status holder of Agriculture sector shall be eligible for Agri. Infrastructure Incentive Scrip under VKGUY. These status exporters are granted a Duty Credit Scrip equivalent to 10% of the FOB value of agriculture exports provided that the total benefit for all status holders put together does not exceed ` 50 crore for each half year. The following capital goods / equipments shall be permitted for imports against the Agri. Infrastructure Incentive Scrip. i. Cold Storage Units (including controlled atmosphere and modified atmosphere stores); Pre-cooling units and Mother Storage Units for Onions.

ii. Pack Houses (including facilities for handling, grading, sorting and packaging etc). iii. Reefer Van / Containers iv. Other Capital Goods / Equipments as may be notified. Imported Capital Goods / Equipments shall be utilized for storage, packing and transportation of Agricultural products This Duty Credit Scrip is subject to `Actual User condition and hence not transferrable. However, for import of Cold Chain Equipment, this incentive scrip shall be freely transferrable amongst Status Holders.

11.6.

Indirect Incentives offered to the Exporters: (Promotional Measures in Department of Commerce Chapter 3 of FTP2009-14)

The Government of India provides various facilities to the exporters in order to encourage them to export and provides such utilities and infrastructure which facilitates export. The schemes are as follows: 1) ASIDE 2) MAI 3) MDA 4) TEE

5) Brand Promotion And Quality 6) Test Houses 11.6.1. ASIDE (Assistance to States for Infrastructure Development of Exports): This scheme has been planned and devised with the objective of coordinating in the efforts of Central as well as State Governments for optimizing the utilization of resources of the country. The scheme basically targets infrastructural improvements in critical areas to achieve the objective of export growth through coordinated efforts of the Central and State Governments. The objective of the scheme is also to involve the State Governments in promotion of exports, by providing assistance to State Governments for creating the appropriate infrastructure for the development and growth of exports. The State Governments can use the funds thus provided by the Central Government for the following purposes: For developing roads connecting production centers to the ports. Setting up inland container depots and container freight stations. Creation of new state levels export promotion industrial parks / zones. Augmenting common facilities in the existing zones. Equity participation in infrastructure projects Development of minor ports and jetties. Assistance in setting up of common effluent treatment facilities. Stabilizing power supply. Any other activity as may be notified by the Department of Commerce from time to time. 11.6.2. MAI: The Market Access Initiative (MAI) scheme is intended to provide financial assistance for medium term export promotion efforts with a sharp focus on a particular country and product. Financial assistance is available for EPC, Industry and Trade Association, Agencies of State Government, Indian Commercial Missions abroad and other eligible entities as may be notified from time to time. Assistance under this scheme shall also be available to Export Promotion Organization / Trade Promotion Organization / National level Institutions / Research Institutions / Universities / Laboratories / Exporters etc. for enhancing exports

through accessing new markets or through increasing the share in the existing markets. A whole range of activities can be funded under the MAI scheme, such as: Market studies. Setting up of show rooms / warehouses / Display in international departmental stores. Sales promotion campaigns / publicity campaigns. Participation in international trade fairs. Brand promotion. Registration charges for pharmaceutical companies. Testing charges for engineering products. Etc. Each of these export promotional activities can receive financial assistance from the Government ranging from 25% to 100% of the total cost depending upon the activity and the implementing agency. 11.6.3. MDA: The Market Development Assistance (MDA) scheme is intended to provide financial assistance for a range of export promotion activities implemented by Export Promotion Councils, Industry and Trade Association on a regular basis every year. As per revised guidelines, assistance under MDA is available to the exporters with annual turnover up to ` 15 crore and for activities mentioned below: For participation in trade fairs. For attending buyer seller meet in India or abroad. For attending Export Promotion seminars. For exploring new market for their specific products and commodities from India in the initial phase. Assistance would be available on air travel on economy class. Charges of the built up furnished stall. Assistance for participation in trade fairs abroad and travel grant is available to exporters if they travel to countries in one of the four focus areas, such as, Latin America, Africa, CIS region or ASEAN countries, Australia and New Zealand. For participation in trade fares in other areas, financial assistance without travel grant is available. 11.6.4. Towns of Export Excellence (TEE): A number of towns in specific geographical regions have emerged as dynamic industrial clusters, contributing handsomely to Indias exports. It is necessary to grant recognition to these industrial clusters with a view to maximizing their potential and enabling them to move higher in

the value chain and tap new markets. Selected towns producing goods of ` 1,000 crore or more will be notified as Towns of Export Excellence on the basis of potential for growth in exports. However for the Handloom, Handicrafts and Agriculture sector this threshold limit stands at reduced export performance at ` 150 crore. The assistance extended to these areas comprises of the following facilities: Common Service Providers in these areas shall be entitled for the facility of the EPCG scheme. The recognized association of units in these areas will be able to access the funds under MAI scheme for creating focused technological services. Such areas will receive priority for assistance for rectifying critical infrastructure gaps from the ASIDE scheme. 11.6.5. Brand Promotion and Quality: IBEF (India Brand Equity Foundation) was set up by the ministry of commerce, with primary objective to promote and create international awareness of the `Made in India label in markets overseas. IBEF aims to promote India as a business opportunity by creating positive economic perceptions of India globally as well as effectively present the India business perspective and leverage business partnership in a globalised market place. DoC Department of Commerce provides funds for capacity building for up-gradation of quality to national level institutions and EPCs to organise training programmes for the skill improvement of the exporters for quality up-gradation, reduction in rejection, product improvement etc. As provided under the MAI scheme of DoC. 11.6.6. Test Houses: Central Government assists in modernization and up-gradation of test houses and laboratories to bring them at par with international standards. 11.7. Duty Exemption & Remission Schemes: (Chapter 4 of FTP 2009-14) Keeping in view that we, as a nation, should export the goods and the services and not the duties and taxes, the schemes of duty exemption & duty remission are evolved. The exporter generally uses and pays the import duty / customs duty on the imported raw material, components or parts or excise duty on the indigenously manufactured raw material, components or parts, in the manufacture of the exported goods. Both these duties i.e. customs duty and excise duty, paid by the exporter while manufacturing the goods for export are components of his cost of production, based on which the final export sale price is determined. If the exporter pays these duties his export price will be higher. But if the exporter does not pay these duties it helps the exporter in reducing the sale price of his export goods and achieve larger volume of exports. Depending upon whether the import duties are waived before the raw material, components and parts are imported without paying import duty / customs duty or the exporter pays the import duty / customs duty and it is subsequently reimbursed to him the following two schemes are formulated.

1. Duty Exemption scheme: (Where the import of the raw material, components and parts, to be used in manufacture of export goods, is allowed without paying the import duty befor the exports are made) a. b. Advance Authorisation scheme (AA) Duty Free Import Authorisation (DFIA)

2. Duty Remission scheme: (Where the import of raw material, components and parts, to be used in manufacture of export goods, is made by making payment of import duty / excise duty and these duties are subsequently reimbursed to the exporter after the exports are made) a. b. Duty Entitlement Pass Book (DEPB) Duty Drawback (DBK)

We shall discuss the salient features of the above schemes in brief here. 11.7.1: Advance Authorisation (AA) scheme: The salient features of the scheme are as follows: a) This is a license to import without paying import duty, the inputs that are required for manufacture of the export goods. b) These inputs include raw material, components, parts, fuel, oil, energy, catalysts etc. c) Duty free import of mandatory spares up to 10% of CIF value of Authorisation, which are required to be exported with the resultant product are also allowed. d) AA can be issued to Manufacturer exporter or Merchant exporter tied to supporting manufacturer. e) AA is available to sub-contractor of the projects if his name appears in the main contract. f) AA can be issued for supplies to be made to UNO or other multilateral agencies. g) AA can be issued for import of raw sugar. h) The following components of import / customs duty are exempted from payment: a. Basic Customs Duty b. Additional Customs Duty c. Education Cess d. Anti-dumping Duty e. Safeguard Duty i) AA is issued with `Actual User condition. It is not transferrable even after completion of Export Obligation. However the product manufactured out of duty free inputs can be disposed off, after the export obligation is fulfilled. Further the manufacturing

wastes/scraps can be disposed off with the payment of applicable duty before fulfillment of the export obligation j) AA, in general, necessitates FOB value of exports with minimum value addition of 15% over the CIF value of the imported inputs. k) In case of AA for import of Tea, minimum value addition shall be 50%. l) AA can also be issued for annual requirement. In such case the entitlement of CIF value of imports, shall be 300% of FOB value of exports in the preceding licensing year or one crore, whichever is higher. m) The exporter may obtain supplies from EOU, EHTP, BTP, STP or SEZ units against AA. n) The export may get his AA converted into `Advance Release Order (ARO) or `Invalidation Letter, if he intends to procure the supplies/ inputs from the indigenous source or from State Trading Enterprises, in lieu of direct imports. He may instead of converting the AA into ARO avail the facility of `Back- to- Back Letter of Credit. o) In case of AA, drawback shall be available for any duty paid material, whether imported or indigenous used in goods exported, as per drawback rate fixed by DoR, Ministry of Finance. 11.7.2: Duty Free Import Authorisation (DFIA): The provisions of Advance Authorisation are applicable to DFIA also, with the following difference: a) AA is not transferrable, however the DFIA is transferrable after fulfillment of the export obligation. b) Input material imported under AA is not transferrable, while input material imported under DFIA is transferrable after fulfillment of export obligation. c) In case of AA 15% of value addition is sufficient, while in case of DFIA, 20% value addition is required. d) DFIA can be issued only for products for which SION have been notified. 11.7.3: Duty Entitlement Pass Book Scheme (DEPB): The salient features of the scheme are as follows: a) DEPB is post export scheme unlike AA scheme.

b) The scheme is available to manufacturer exporters as well as merchant exporters c) The objective of the scheme is to neutralize the incidence of customs duty on import content of the export product. Component of customs duty on fuel shall also be factored in the DEPB rate.

d) The exporter first utilizes customs duty paid inputs in the manufacture of export products, and after the exports gets the duty credit at the notified DEPB rates.

e) f)

The exporter instead of getting refund of customs duty paid on imported inputs in cash, gets a scrip in the form of DEPB credit as duty remission. Exporter can import the goods, including capital goods, within the credit allowed in DEPB. The credit thus can be used to pay basic customs duty as well as CVD and special CVD on import of any goods which are freely importable and / or restricted items. DEPB credit can be utilized for payment of customs duty if goods are imported under EPCG scheme.

g) If the exporter does not want to use it the way allowed in f) above, then he can sell it to another exporter, as the DEPB entitlement is transferrable. Such transfers are however valid for imports within the same port from where the exports are made. Imports from other ports will be available under TRA (Telegraphic Release Advice) facility. h) The exporter can also use DEPB credit towards payment of customs duty in case of export obligation defaults for authorisation. i) j) Exports under DEPB are allowed only when the DEPB rate for the concerned export product is finalized. These rates are finalized by the DGFT on taking into account the following: i) It is certain percentage of FOB value of the exports made in free foreign currency ii) The entitlement rate is fixed on the basis of deemed import content based on SION. iii) Value Addition achieved in export product shall also be taken into account. iv) Component of Customs Duty on fuel shall be considered for DEPB rate. v) SAD will also be considered in case of non availment of Cenvat k) Supplies made to SEZ or SEZ developer are also eligible for DEPB. l) DEPB is valid for 24 months for imports. 11.7.4: Duty Drawback (DBK): EOUs and units in SEZ can import the inputs without payment of the import duty. Similarly we have seen above that under Advance Authorisation scheme or Duty Free Import Authorisation scheme also the inputs can be imported without payment of import duty. In case of central excise, manufacturer can avail Cenvat credit for duty paid on inputs and service tax paid on input services. He can utilise the same for payment of duty on other goods sold in India or service tax on services provided in India or can obtain refund. Schemes like manufacture under bond are also available. Manufacturer or processors who are unable to avail any of these schemes can avail `Duty Drawback. In this scheme the following is given back to the exporter of finished product by way of duty drawback.

i.

Customs Duty paid on the import of the inputs

ii. Excise Duty paid on the inputs iii. Service tax paid on input services If inputs are obtained without payment of customs duty, excise duty and the services are obtained without payment of service tax, no drawback will be paid. If customs duty / excise duty / service tax is paid on part of inputs / input services or refund is obtained, only that part on which duty / service tax is paid and on which rebate or refund is not obtained, will be eligible for draw back. No drawback is available on other taxes like Sales Tax and Octroi Duty. Types of Duty Drawback Rates: There are following three types of rates: 1) All Industry Rate 2) Brand Rate 3) Special Brand rate 1) All Industry Rate: All Industry Drawback Rates are fixed by the Directorate of Drawback, DoR, Ministry of Finance. The rates are periodically revised normally on 1st June every year. The following data are collected for broad categories of products, for this purpose. Average quantity and value of each class of inputs imported or manufactured in India. Average amount of excise / import duty and service tax paid Cost of packing material Cost of HSD / furnace oil Prevailing prices of inputs SION published by DGFT Share of imports in total consumption of inputs and applicable rates of duty FOB value of the exports The rates are expressed as one of the following ways: Percentage of FOB value of the exports Rate per unit Rate per unit quantity of export goods 2) Brand Rate: It is possible to fix All Industry rates for some standard products. It cannot, however, be fixed for special type of products. In such cases, `Brand Rate is fixed

3) Special Brand Rate: All Industry rate is fixed on an average basis. It is possible that some exporter may find that actual excise / customs duty paid on the inputs or input services is higher than the All Industry Rate fixed for his product. In such case he can apply and get the `Special Brand Rate fixed for his product. 11.8. EPCG Scheme: (Chapter 5 of FTP 2009-14) (Will be in operation till 31.03.2011) In the era of global competitiveness, there is an imperative need for Indian exporters to upgrade their technology and reduce their costs. Accordingly, an important element of the Foreign Trade policy is to help exporters for technological upgradation, which is sought to be achieved by promoting imports of capital goods for certain sectors under EPCG at zero percent duty and 3% duty schemes. 11.8.1. Eligible Exporters: 1. 2. Status Holders (through Duty Credit Scrips equivalent to 1% of their export in the previous year) The scheme is also available to products in following sectors: a. Engineering and Electronic b. Basic Chemicals and Pharmaceuticals c. Apparels and Textiles d. Plastics e. Handicrafts f. Chemicals and allied products g. Leather and Leather products 3. EPCG scheme covers manufacturer exporters, merchant exporters, service providers, Common Service Providers in Towns of Export Excellence. 11.8.2. EPCG Schemes based on percentage of Duty exempted: There are two EPCG schemes and its variant in operation: a. Zero duty i.e. no import duty is payable on the imports of the machinery etc. b. 3% duty is payable. c. Variant of the schemes a. Zero duty EPCG scheme: For imports of capital goods for pre-production, production and post production stages in manufacturing.

No import duty is payable on imports of such machinery The importer has to export the product equivalent to 6 times of the duty saved on capital goods imported, called as `Export Obligation. The above export obligation has to be achieved in a period of 6 years from the date of Authorisation. b. 3% duty EPCG scheme: For imports of capital goods for pre-production, production and post production stages in manufacturing. 3% import duty is payable on imports of machinery. The importer has the export obligation of 8 times the duty saved on capital goods imported. This export obligation has to be fulfilled in a period of 8 years from the date of Authorisation. c. Variants of the schemes: i). For Agro units and units in cottage or tiny sector: Duty payable is 3% on imports of capital goods Export Obligation is 6 times of duty saved on capital goods imported Fulfillment of export obligation in 12 years from the date of Authorisation ii). For SSI Units: Duty payable is 3% on imports of goods Export Obligation is 6 times of duty saved on capital goods Fulfillment of export obligation in 8 years from the date of Authorisation. iii). For projects imports notified by Central Board of Excise and Customs: Duty payable is 3% on imports Export Obligation is 8 times of duty saved As these projects have long gestation periods the period of fulfillment is decided by CBEC. Or Duty payable is zero percent on imports Export Obligation is 6 times of the duty saved As these projects have long gestation periods the period of fulfillment is decided by CBEC.

iv). For Retail sector having minimum area of 1000 square meters Duty payable is 3% on imports Export Obligation is 8 times of duty saved Fulfillment of Export Obligation is in 8 years from the date of Authorisation. Note (1) Capital Goods here shall include spares, refurbished or reconditioned spares, tools, jigs, fixtures, dies and moulds. It also includes second hand capital goods, without restriction on age. Note (2) Import of motor cars, sports utility vehicles shall be allowed to hotels, travel agents, tour operators or tour transport operators and companies owning/ operating golf resorts subject to various conditions. Note (3) Export Obligation under the scheme shall be over and above, the average level of exports achieved by him in the preceding three licensing years for the same and similar products within the overall export obligation period. 11.9. SEZ / EOU / EHTP / STP / BTP: (Chapter 6 and 7 of FTP 2009-14) The manufacturing units or service providing units, set up in SEZ, EHTP, STP, BTP and the units set up as EOU enjoy the similar benefits under the FTP and therefore are discussed together. We shall understand in brief what these different kinds of units are and then see the almost common benefits they enjoy. 11.9.1. Special Economic Zone (SEZ): SEZ or Special Economic Zones are specifically developed geographical areas. These are approved by the Board of Approval, constituted by GOI under section8(1) of SEZ act of 2005. It functions under the chair person ship of Additional Secretary in Ministry of Commerce and Industry. Such approval, so far is granted to 577 SEZ and additionally 325 SEZs are notified. We derived this concept from the experience of China, where the SEZs have become the growth engines for the development of Chinese economy. The basic idea is that this contiguous, geographical, notified area is considered as free trade area where inputs and capital goods can be imported free from customs duty or procured indigenously duty free and the final, entire manufactured product is exported duty free and hassle free. This is based on the premise that the goods and services are exported, taxes are not to be exported. The earlier FTZ / EPZ schemes have been scrapped on formulating the SEZ scheme. The SEZ is thus free from all the Indian Laws except the Labour Law and the Banking Law. Though the concept is derived from China, there exists some difference in the Chinese model and the Indian model. The differences are as follows: 1. SEZ s in China are free from Labour Laws, where as in SEZs in India Labour Law applies. 2. In China the SEZs are of very huge size of about 1,000 Hectares, whereas in India the

size can be as less as 10 Hectares. The maximum size in India is 5,000 Hectares. 3. Infrastructure in China is much better than that is available in India. 4. In India there is no compulsory Land Acquisition is resorted to for setting up SEZ, unlike in China. The SEZs are like a separate island within the country. These are treated as if they are outside India for Customs purposes. The goods can be brought in SEZ without payment of Customs Duty or Excise Duty. Supplies to SEZ from other parts of India are treated as exports and are entitled to all benefits available to the exporters. On the other hand the supplies from SEZ to any other person outside SEZ is treated as import by that person and normal customs duty is payable. SEZs have full freedom of operations within SEZ and all facilities of import and export are available within the SEZ itself. There is separate SEZ act formulated in 2005 and the rules regarding SEZ are framed thereunder. Any unit which is a manufacturing unit or unit that provides services set up in the geographic area is called as SEZ unit. Trading units are not permitted under SEZs. 11.9.2. Electronics and Hardware Technology Parks (EHTP)/Software Technology Parks (STP): Electronics and Hardware Technology Parks (EHTPs) and Software Technology Parks (STPs) can be set up on approval / permission granted by the officer designated by Ministry of Communication and Information Technology, instead of Devlopment Commission (DC), and InterMinisterial Standing Committee (IMSC) instead of BoA. 11.9.3. Bio Technology Parks (BTPs): Bio Technology Parks (BTPs) can be notified by DGFT on recommendations of designated officer in the Department of Biotechnology. 11.9.4. Export Oriented Units (EOUs): Export Oriented Units (EOUs) can import inputs and capital goods without payment of import / customs duty. They can procure indigenous inputs and capital goods without payment of excise duty. Their final product should be normally exported, but they are allowed to sell part of their production within India, which is termed as `DTA sale i.e. sale in `Domestic Tariff Area. EOU schemes are under control of Ministry of Commerce, Government of India. EOU units are closely connected with Customs Law and Excise Law. They have to follow the prescribed procedures and statutory exemptions are given as applicable in FTP and subsequent notifications under these laws. SEZ units are located in notified zones. EOU can be set up at various places in India declared as `Warehousing Stations. There are over 350 such places. Thus flexibility in locating EOU is quite wide. A EHTP / STP / BTP can be set up either as a specified zone like SEZ or various locations where EOU can be set up. There is separate Export Promotion Council for SEZ and EOU (refer chapter 2).

11.9.5. Provisions for EOU / SEZ / EHTP/ STP / BTP units: The following provisions as envisaged under FTP apply to the EOUs and units set up in SEZ, EHTP, STP and BTP: 1. These units may export all kinds of goods and services except items prohibited in ITC (HS). Export of Special Chemicals, Organisms, Materials, Equipment and Technology (SCOMET) shall be subject to fulfillment of conditions indicated in ITC (HS). Procurement and supply of export promotional material like brochures / literature / pamphlets, hoardings, catalogues, posters etc up to a maximum value of 1.5% of FOB value of exports of previous year shall also be allowed. 2. These units may import or procure from DTA or bonded warehouses in DTA / international exhibitions held in India, without payment of duty, all types of goods, including capital goods, required for its activity, provided these are not prohibited items of imports under ITC (HS). Goods thus imported are on actual user condition and shall be utilised for export production. 3. State Trading regime shall not apply to the EOU manufacturing units. However, in respect of Chrome Ore / Chrome Concentrate, State Trading Regime as stipulated will be applicable to EOUs. 4. These units may import / procure from DTA, without payment of duty certain specified goods for creating a central facility. Software EOU / DTA units may use such facility for export of software. 5. EOU engaged in agriculture, animal husbandry, aquaculture, floriculture, horticulture, pisciculture, viticulture, poultry or sericulture may be permitted to remove specified goods in connection with its activities for use outside bonded area. 6. Gems and Jewellery EOUs may source gold / silver / platinum through nominated agencies on loan / outright purchase basis provided they export it within a period of 90 days from the date of release. 7. These units, other than service units, may export to Russian federation in Indian Rupees against repayment of State Credit / Escrow Rupee Account of buyer, subject to RBI clearance, if any. 8. These units should be positive Net Foreign Exchange (NEF) Earner. NFE earnings shall be calculated cumulatively in the block of five years, starting from the commencement of production 9. Procurement and export of spares / components, up to 5% of FOB value of exports, may be allowed to same consignee / buyer of the export article, subject to the condition that it shall not count for NFE and direct Tax benefits. 10. Second hand capital goods, without age limit, may also be imported duty free.

11. Other entitlements of these units are as follows: a. Exemption from Income Tax as per sections 10A and 10B of Income Tax Act. b. Exemption from industrial licensing for manufacture of items reserved for SSI sector. c. Export proceeds can be realised within a period of 12 months. d. They are allowed to retain 100% of their export earnings in the EEFC account. e. Units will not be required to furnish Bank Guarantee at the time of import or going for job work in DTA, where the unit has: i. Achieved a turnover of ` 5 Crores or above ii. Unit is in existence for atleast 3 years iii. Unit has achieved positive NEF / Export obligation wherever applicable iv. Unit has not been issued show cause notice or a confirmed demand, during preceding 3 years, under penal provisions of Customs Act, Central Excise Act, Foreign Trade (Development and Regulation) Act, Foreign Exchange Management Act, Finance Act 1994, covering Service Tax or any allied Acts or the rules made there under on account of fraud, collusion, willful misstatement, suppression of facts or contravention of any provision thereof. f. 100% FDI investment permitted through automatic route. g. Units shall pay duty on goods produced or manufactured and cleared into DTA on monthly basis in the manner prescribed in the Central Excise Rules. 11.10. Deemed Exports: (Chapter 8 of FTP 2009-14) Deemed Exports refer to those transactions in which goods supplied do not leave the country and payment for such supplies is received either in ` or in free foreign exchange. Following supplies are considered as Deemed Exports: 1. Supply of goods against Advance Authorisation (AA) / Duty Free Import Authorisation (DFIA). 2. Supply of goods to EOU / STP / EHTP / BTP. 3. Supply of goods to EPCG Authorisation holders. 4. Supply of goods to projects financed by multilateral or bilateral Agencies / funds as notified by Department of Economic Affairs, Ministry of Finance, under International Competitive Bidding (ICB) in accordance with procedures of those Agencies / Funds, where legal agreement provide for tender evaluation without including customs duty. Supply and installation of goods and equipments to projects financed by multilateral or bilateral agencies / funds as notified by DEA, MoF under ICB, in accordance with

procedures of those agencies / funds, which bids may have been invited and evaluated on the basis of Delivered Duty Paid (DDP) prices for goods manufactured abroad. 5. Supply of capital goods, including in unassembled / disassembled condition as well as plants, machineries, accessories, tools, dies, and such goods which are used for installation purposes till stage of commercial production, and spares to the extent of 10% of FOR value to Fertilizer Plants. 6. Supply of goods to any project or purpose in respect of which the MoF, by a notification, permits import of such goods at zero customs duty. 7. Supply of goods to power projects and refineries not covered in 6 above. 8. Supply of marine freight containers by 100% EOU (Domestic freight containersmanufacturers) provided said containers are exported out of India within six months or such further period as permitted by customs. 9. Supply to projects funded by UN Agencies. 10. Supply of goods to nuclear power projects through competitive bidding as opposed to ICB The supplier of goods, which is deemed as exports, is entitled for benefits under FTP such as: 1. Advance Authorisation / Advance Authorisation for annual requirement /Duty Free Import Authorisation. 2. Deemed Export Drawback 3. Exemption from terminal Excise Duty.

SUMMARY ________________________________________________________ Every student and the prospective exporter is expected to understand the Foreign Trade Policy thoroughly. We have seen earlier in Chapter 1 that when an individual makes an export or inport, the country gets affected. Therefore each country decides as to what are the products her citizens should export or import, to what extent should these products be exported or imported and to which country these products are to be exported and from where they should be imported. In other words, determining the Composition, Volume and Direction of the trade is the prerogative of any country. More over in this era of globalization and WTO regime the country has to keep into account a lot of constraints / eligibilities.

Keeping this in view we have attempted here to understand the FTP 2009-14. We have seen the broad perspective in which the FTP is issued by the Ministry of Commerce. The policy is issued along with the Handbook of procedures in two volumes, one of which gives the information about SION and the other explains the procedural aspects of the policy. We have also seen the ITC (HS) classification of the items to be imported and exported. This classification envisages four types of items the first of which is called as `Free unless regulated type. Earlier this was known as Open General License or OGL. The second one is restricted type, the export or import of which requires obtaining `authorisation. Authorisation was earlier known as License. The third category is the items which can be imported or exported only through State Trading Enterprises. These items were earlier known as `Canalised items. And the fourth category is of prohibited items.

We have also seen ten sectors that enjoy the governments patronage in the form of direct incentives of various types under the schemes formulated by the DGFT. In order to develop various markets government encourages exports to notified countries under its Focus Market Scheme. Similarly the government also encourages export of notified products, manufacture of which generates employment in the country, under its Focus Product Scheme. Two schemes are formulated, VKGUY, for encouraging exports from agriculture and village sector and SFIS, for encouraging export of services. Department of Commerce also have formulated the schemes, which generally create the facilities for the exporters, such as ASIDE, MAI, MDA.TEE, Brand Promotion and Test Houses. Keeping in view the principle that taxes are not to be exported along with the goods and services, the provision is made in the FTP to either not charge the customs and excise duty and service tax to the exporter or if charged it should be refunded back to him. We have seen four schemes, Advance Authorisation(AA), Duty Free Import Authorisation(DFIA), Duty Entitlement Pass Book (DEPB) and Duty Draw back (DBK) in this connection.

In order to ensure technological upgradation of the manufacturing Export Units, they are encouraged to import Capital Goods, either without the payment of import duty or with payment of 3% import duty, under Export Promotion Capital Goods Scheme. Customs duty free imports are also permitted along with few other benefits to the units set up as Export Oriented Units (EOUs) or units located in SEZ, EHTP, STP or BTP. The benefits as are applicable to the exporters are also granted to the deemed exporters, even if the payments are received in ` and the goods do not leave the geographical boundary of the country, subject however to certain conditions.

11.12 KEY WORDS 1. DIR, 6. HBP, 11. EOU, 2. FERA, 7. SION, 12. EHTP, 3.FEMA, 8. DEPB, 13. STP, 4. FT (D&R) Act, 5. DGFT, 9. ITC(HS), 14. BTP, 10. EPCG, 15. SEZ, 18. Restricted,

16. Deemed Exports, 19. STE,

17. Free unless Regulated, 21. VKGUY, 24. SEH,

20. Special Focus Initiative, 23. EH,

22. Status Exporters, 26. STH, 30. FMS, 27. PTH, 31. MLFPS,

25. TH, 29. FTP,

28. Duty Credit Scrip, 32. SFIS,

33. Agri.Infrastructure Incentive Scrip, 34. ASIDE, 39. DFIA, 35. MAI, 40. DBK, 36. MDA, 37. TEE, 38. AA, 42. Brand Rate, 46. NEF

41. All Industry Rate, 44. EO, 45. DTA,

43. Special Brand Rate,

11.13

DESCRIPTIVE QUESTIONS

Q.1: What are the objectives of the FTP 2009-14? Enumerate and explain in brief the schemes formulated under the FTP to achieve these objective. Q.2: Explain the EPCG Scheme for the exporters. Q.3: What benefits the exporter is entitled to when he uses the inputs, either imported or indigenous, under the duty exemption and remission schemes given in FTP?

Q.4: Which ten sectors are encouraged by incentivizing them under `Special Focus Initiative scheme in the FTP? What are the eligibilities and the incentives that are available to each one of them? Q.5: What is an EOU? What are the benefits of setting up an EOU? Q.6: Explain in detail the following two schemes in FTP: i) Vishesh Krishi Gram Udyog Yojana (VKGUY) ii) Served from India Scheme (SFIS) Q.7: What do you understand by `Status Exporter? What benefits they enjoy under FTP? Q.8: What is `Deemed Export? Does FTP consider it equivalent to actual export? How? Q.9: Explain the reward schemes for exporters formulated by the DGFT in promoting exports? Q.10: Explain the promotional measures taken by the Department of Commerce that offer the incentives to the exporters in general? Q.11: What is ITC (HS) Classification? How are the goods classified under this system? Explain by giving some examples. 11.14 OBJECTIVE QUESTIONS

Q.1: FTP, the foreign Trade Policy is formulated by: A. Ministry of External Affairs C. Ministry of Commerce and Industry Q.2: FTP, now a days, is formulated for a period of: A. One year B. Three years C. Five years D. Seven years B. Ministry of Finance D. RBI

Q.3: While formulating FTP the concerned authority derives its power from: A. FERA B. FEMA C. FT (D&R) Act D. Customs Act

Q.4: FTP is implemented by: A. DGFT B. RBI C. Customs D. Excise

Q.5: FTP is formulated with an objective of: A. Generating employment in the country and increasing Indias market share in global trade B. Following the guidelines given by IMF and IBRD C. To comply with the provisions of WTO D. None of the above Q.6: ASIDE, MAI, MDA, TEE etc. are the export promotional schemes formulated by: A. DGFT B. Department of Commerce

C. Customs and Excise

D. RBI

Q.7: FMS, FPS, MLFPS, SFIS, VKGUY etc. are the schemes formulated by: A. DGFT C. Customs and Excise Q.8: Status Exporter means, A. An exporter who does his business ethically B. An exporter who has certain political status C. An exporter who achieves certain export turnover in a stipulated period D. An exporter who is not in the negative list of either RBI or department of Customs & Excise Q.9: SFIS is the scheme meant for granting certain benefit to the export industries in: A. Service sector C. Sports and Toys sector B. Software sector D. None of the above B. Department of Commerce D. RBI

Q.10: VKGUY is the scheme meant to grant certain benefits to exporter of: A. Agriculture, minor forest and village products B. Village and cottage industries products C. Any type of `Vishesh product D. Products manufactured after taking loan from KVIC / KVIB Q.11: ITC (HS) Classification stands for, A. Indian Trade Classification (Harmonized System) classification B. Indian Trade Classification (Harmonized System) classification C. International Trade Classification (Harmonized System) classification D. Import- Export Trade Classification (Harmonized System) classification Q.12: Number of Categories given under ITC (HS) are: A. Three B. Four C. Five D. Six

Q.13: Advance Authorisation permits: A. Export of any goods to any country as authorised B. Import of any goods from any country as authorised C. Duty free import of inputs to be used for manufacturing export goods. D. Payment of advance for import of goods

Q.14: Minimum Value Addition required in case of Duty Exemption and Remission Scheme is: A. 5% B. 10% C. 15% D. 20%

Q.15: While calculating Value Addition in case of Duty Exemption and Remission scheme Value Addition means: A. CIF value of Exports should be stipulated % above the FOB value of Imports B. FOB value of Exports should be stipulated % above the FOB value of Imports C. CIF value of Exports should be stipulated % above the CIF value of Imports D. FOB value of Exports should be stipulated % above the CIF value of Imports Q.16: Advance Release Orders facilitates procurement of inputs for the purposes of manufacturing export goods, from: A. DTA B. STE C. Both the above D. None of the above

Q.17: DFIA scheme envisages minimum value addition of: A. 10% B. 15% C. 20% D. 25%

Q.18: Entitlements under DEPB: A. Are not transferrable but the goods imported under it are transferrable B. Are not transferrable and the goods imported under it are also not transferrable C. Are transferrable but the goods imported under it are not transferrable D. Are transferrable and the goods imported under it are also transferrable. Q.19: EPCG stands for: A. Export Promotion Councils Guarantee B. Export Price and Credit Guaranteed C. Export Promotion Capital Goods D. Export Promotion Consumable Goods Q.20: Export Obligation means: A. Country is obliged to export to meet its necessary imports. B. Importer is obliged to export certain times of duty saved on the import of capital goods C. Obligation attached by the Export Prices Controller General D. Obligation exporter has to fulfill towards the Export Promotion Council

Q.21: Under EPCG the duty payable is: A. Zero % or as applicable C. Zero % or 3% Q.22: Under EPCG: A. Export of old Consumable goods is allowed at reduced prices B. Import of old Consumable goods is allowed at reduced prices C. Export of old Capital Goods is allowed at reduced prices D. Import of old Capital Goods is allowed at reduced prices Q.23: SEZ stands for: A. Special Export Zone C. Special Economic Zone B. Special Effective Zone D. Special Exclusive Zone B. 3% or as applicable D. As applicable under the customs act.

Q.24: Units in SEZ / EHTP / STP / BTP and EOUs should be: A. Positive NFE earner C. Neutral to NFE B. Negative NFE earner D. Ignore NFE criterion

Q.25: Which of the following is considered as `Deemed Export? A. Supply to EOU / EHTP / STP / BTP units B. Supply of goods to projects financed by recognised bilateral agencies or funds C. Supply of goods to power projects D. All the above.

Chapter

12

Import Procedures

12.1 Learning On reading this chapter the reader will Objectives understand the meaning of imports, what kinds of goods he can import and how can these be used. He will also understand the way the payment is required to be made for the goods imported and the customs duty that is payable on the goods imported by him. He will also know the customs formalities that are needed to be completed by the importer while clearing the goods imported.

12.2

Imports Preliminaries: The import policy of any country depends on three most important parameters that are:

1. The concerned countrys Foreign Exchange Reserve Position (Balance of Trade, Balance of Payment included). 2. The need to protect the domestic industries, and 3. The International Environment (e.g. IMF, IBRD, WTO compliance.) 12.2.1. Foreign Exchange Reserve Position of the Importing Country Foreign Exchange Reserve Position of India has been traditionally weak and was at its lowest ebb during the early years after independence and just before the herald of era of Liberalisation, Privatisation and Globalisation in 1991. The Foreign Exchange Reserves position between these two periods was not very promising. Therefore we resorted to building up the Foreign Exchange Reserves by adopting a cautious policy of imports, and allowed imports under a regulated regime only when they were necessary. Import Substitution was the theme. At the same time to augur the Foreign Exchange we promoted the exports by upholding a slogan Export or Perish. Our countrys credibility in the international markets improved quite positively, due to these policies and that has helped increasing our Foreign Exchange Reserve Position mainly due to FDI and FII inflows. We can afford to spend this Foreign Exchange, though with care and reasonable controls. The extant FTP therefore carries many schemes which allow imports into the country. For the information of the reader we are producing below the Foreign Exchange Reserves of a few countries in the world. It is interesting to know that India ranks 6th in the world, much ahead of USA at 16th and UK at 21st. Japan, a tiny country geographically, has the Foreign Exchange Reserves to the order of $1050 bn. and ranks second in order. No wonder Japan thinks of mooting the policies which promote imports. The data is obtained from the Wikipedia website and relates to the later part of the year 2010.

Rank of the country based on Name of the country Foreign Exchange Reserves position 1 2 China Japan

Foreign Exchange Reserves the in Billions of $ 2648 1050 770 501 410 381 300 293 289 269 250 226 206 187 155 137 97

16 countries that adopted Euro Europe 3 4 5 6 7 8 9 10 11 12 13 14 15 16 Russia Saudi Arabia Taiwan India Korea Brazil Hongkong and others Switzerland Singapore Germany Thailand France United States of America United Kingdom

12.2.2. The Need to Protect the Domestic Industries: Generally the economies of the third world countries or the under developed countries depend basically on the primary products like agriculture produce, mining etc. They lack in the development of modern industries and service sector. If such countries allow unbridled imports into the country then their industrial sector and the service sector finds it difficult to compete with the imported goods and services and consequently will not grow. Under such circumstances the employment opportunities will also not generate in these countries. Therefore such countries impose various restrictions on the imports into the country. India after independence was passing through such stage and therefore had to resort to various restrictions on the imports. However, India now could boast of modern industries and more than mediocre development in the service sector. India could afford to compete with the imported goods in many sectors now. The

policymakers have taken this into account while formulating the policy on imports under the FTP. We shall discuss this policy in short in the subsequent paragraphs. 12.2.3. The International Environment (e.g. IMF, IBRD, WTO compliance.): The countries in the world need assistance from IMF to meet their temporary, short term Foreign Exchange commitments, which arise as a result of adverse Balance of Trade or adverse Balance of Payment positions. They may also need assistance from IBRD, popularly known as World Bank, to undertake development projects in their country in order to achieve infrastructural improvements or to ensure faster growth of the economy etc. The organisations that provide such aid / grants or assistance impose certain terms and conditions because of which the import policy may get affected. Earlier GATT and now WTO (w.e.f. 1.1.95) is one such organisation which affects the member countries export or import policy in more than one way. It is difficult for any country to survive in seclusion and needs to develop positive trade relationship with other countries in order to achieve growth and development. Therefore as a necessary cost for this, each country has to make some compromise on its export and import policies and be compliant to the international environment.

India also functions under these circumstances and formulates its policy on imports and exports. We shall hereunder define certain important terms that we shall be using in this chapter. 12.2.4. Imports: Imports means bringing goods into India from outside India. The definition is not restricted to only commercial goods. The import is considered as complete when the goods mingle with the land mass of India. 12.2.5. Imported Goods: Imported goods means any goods brought into India from a place outside India but does not include goods, which have been cleared for home consumption. The goods also include: 1. Vessels, aircrafts and vehicles 2. Stores (means goods used in vessel or aircraft and includes fuel and spare parts and other articles of equipment etc.) 3. Baggage ( It includes unaccompanied baggage but does not include motor vehicles) 4. Currency and Negotiable Instruments 5. Any other kind of movable property. 12.2.6. India: The definition of India is an inclusive definition and includes not only the land mass of India but also the territorial waters of India. The territorial waters extend to 12 nautical miles into the sea from the appropriate base line. (1 Nautical Mile = 1852 Meters or 2025 Yards or 6075 Feet).

12.3.

Types of Importers: Before we resort to importing a particular type of the goods we should be able to decide the category of importer we belong to. The following are the categories of the Importers:

1. Actual User (Industrial) 2. Actual User (Non-industrial) 12.3.1. Actual User (Industrial): Actual User (Industrial) means a person who utilises the imported goods for manufacturing in his own industrial unit or manufacturing for his own use in another unit including a jobbing unit. 12.3.2. Actual User (Non Industrial): Actual user (Non-industrial) means a person utilises the imported goods for his own use in: i. Any Commercial Establishment carrying on any Business, Trade or Profession; or

ii. Any Laboratory, Scientific or Research and Development (R&D) Institution, University or other Educational Institution or Hospital; or iii. Any Service Industry. 12.4. Classification of Import Goods:

12.4.1. ITC (HS) Classification: This is the same classification as has been discussed earlier in Chapter no.2 on How to Export and also in Chapter no. 11 on Salient Features of Foreign Trade Policy 200914. Braving duplication we once again give below the details in short for the sake of continuity. 12.4.2. Prohibited: The import of these items is not permitted. Examples of items prohibited for imports: Wild animals, fats or oil of animal origin, pig fats, margarine of animal origin, mutton tallow, chicory plants etc. 12.4.3. Restricted: Any goods, import of which is restricted under ITC (HS) may be imported only in accordance with an Authorisation or in terms of public notice issued in this regard. Examples of items restricted for imports: Live animals, opium, cactus, potato and potato seeds, ginger, marble, granite, explosives, DDT, sandal wood, news print, bond paper, ivory and ivory products etc

12.4.4. Imports through STEs: Any goods, import of which is governed through exclusive or special privileges granted to STEs, may be imported by the STEs as per conditions specified in the ITC (HS). DGFT may, however, grant an authorisation to any person to import any goods. Such STEs shall make any such purchases involving imports solely in accordance with the commercial considerations, including price, quality, availability, marketability, transportation and other conditions of purchase or sales in a non discretionary manner and shall afford enterprises of other countries adequate opportunity, in accordance with customary business practices, to compete for participation in such sales. Examples of Import of items through STEs: Petroleum products can be imported through Indian Oil Corporation, Urea can be imported through STC, MMTC and Indian Potash Ltd. Wheat, Maize, Rice can be imported through Food Corporation of India, copra and crude oil can be imported through STC. 12.4.5. Free unless Regulated: Imports of these items shall be free, except where regulated by FTP or any other law in force. The item wise import policy shall be, as specified in ITC (HS) notified by DGFT, as amended from time to time. 12.5. Modes of Payment: The opening paragraph of Chapter 4 explains the various methods of payment the buyer may resort to. This paragraph is reproduced below. 12.5.1 Advance remittance: When the exporter (seller) exports the goods to the importer (buyer), either of them have anxiety. For the seller sending the goods first without receiving the advance payment, the anxiety is, Will the buyer pay for my goods? For the seller who makes the advance payment for the goods, the anxiety is, Will the seller send the goods? Depending upon whether it is a sellers market or buyers market the method of settling the debt is decided. The exporter may demand advance payment if it is sellers market. This is known as advance remittance system of settling the debt on account of trade. However, even if the importer is ready to pay for the goods in advance, his country may impose exchange control restrictions and he may not be able to make advance payments in such a case. 12.5.2 Open Account: On the other hand if it is a buyers market then the importer may demand delivery of the goods and may take some time for making payment for the goods already received. This is known as settling the debt on open account. However, even though the exporter is ready for sending the goods before receiving the payment, his country may impose restrictions on such kind of trade, and the exporter may

not be able to export the goods. 12.5.3 Bills: Both the methods namely the advance remittance method as well as open account method put the buyer and the seller respectively under financial and psychological stress. Besides, the trade should be in conformity with the exchange control and trade control regulations of both the buyers and sellers countries. These trade conditions dampen the enthusiasm of the exporter and the importer to go for international trade. The Bills methods is therefore evolved as an alternative to the above two methods namely the advance remittance and the open account. The banks come to the immense help to the exporter and the importer in the Bills method. The exporter exports the goods to the importers country, but prepares the transport document in the name of the importers bank instead of preparing it in the name of the importer. Thus the exporter gives constructive possession of the goods to the importers bank. Exporter also sends the transport document along with the other documents to the importers bank with the instruction to hand over the transport document to the importer on receipt of payment for the goods. He (exporter) also instructs the bank to send the payment thus received to him (exporter), deducting the importers bank charges for this service. This process greatly reduces the stress of the exporter as the exporter is sure that the importers bank will obey his instruction and will not part with the goods before receiving the payment for the goods. It also reduces the stress of the importer, as the importer makes the payment only after he receives the constructive possession of the goods.

Though this looks a good arrangement, there is a possibility that the exporter is put to loss if the importer refuses to take delivery of the goods and also to make the payment. The exporter will have to arrange for transportation of the goods back from the country of the importer and the insurance. He has to incur this additional expenditure. He has already incurred the transportation and insurance expenditure while sending the goods at the first instance from his country to the importers country. Though we have, in this Bills process, reduced the anxiety of the importer altogether, the anxiety of the exporter, though to a lesser extent, remains. This anxiety of the exporter can also be eliminated if the payment is assured to him. The instrument which eliminates this anxiety of the exporter is called as Letter of Credit (L/C).

12.5.4 Payment through Letter of Credit: Continuing with the above discussions, if the payment is assured to the exporter irrespective of the fact whether the importer accepts the goods or rejects them, the anxiety of the exporter can also be taken care of. In such a case the importer and the exporter come on the same footing and will be similarly enthusiastic to carry on the international trade transactions. Therefore the Letter of Credit should assure the payment of the exported goods to the exporter, without any reference to the goods or its acceptance by the buyer. Such assurance is given by the bank, the importers bank to be more precise. The article

5 of UCP 600 states Banks deal with documents and not with goods, services or performance to which the documents may relate. Article 4 of UCP 600 states that, a credit by its nature is a separate transaction from the sale or other contract on which it may be based. Banks are in no way concerned with or bound by such contract, even if any reference whatsoever to it is included in the credit. Consequently, the undertaking of the bank to honour, to negotiate or to fulfill any other obligation under the credit is not subject to claims or defences by the applicant resulting from its relationships with the issuing bank or the beneficiary. A beneficiary (i.e. exporter) can in no case avail itself of the contractual relationships existing between banks or between the applicant (i.e. importer) and the issuing bank. Issuing bank should discourage any attempt by the applicant to include, as an integral part of the credit, copies of the underlying contract, pro forma invoice and the like. With such clauses the Letters of Credit have become now the integral part of the international business. The importer can therefore choose to make payment through the Letter of Credit mechanism. Importer will have to apply to his banker for opening a letter of credit. He will also have to undertake to make payment to the L /C issuing bank once the document stipulated by him are received by the issuing bank. This process is called as retiring of Bill under Letter of Credit. 12.5.5 Application for Making Payment: Form A1 As discussed above, irrespective of the mode of payment selected by the importer, whether it is advance payment or payment on retiring the import bill or settling an open account or making payment as per the terms of L / C opened at the instance of the importer by the importers bank, the beneficiary of which is the seller of the goods, the payment is required to be made to the seller of the goods by the importer on complying the terms of import contract. Every importer is required to submit form A1 (Application for Remittance in Foreign Currency) to his bank for making payments towards imports into India. Variants of this form have been devised in different colours to be used depending upon the way payment is made, as follows: i. Remittance in Foreign Currency printed on White Coloured Paper

ii. Transfer of ` to the Vostro account of the bank printed on Light Blue Coloured Paper iii. Remittance through Asian Clearing Union printed on Light Yellow Paper There are three other forms A2, A3 and A4 which are required to be filled up by the remitter of for making remittances abroad. These are required in cases as described below: A2: is required in case the remittance is to be made for purpose other than imports A3: is used if the remittance is to be made by transfer of ` to and from the account of Non- resident bank, and

A4: is used if the remittance is to be made by transfer of ` to and from the accounts other than the Non- resident banks. Generally a Questionnaire is attached to these forms, which is necessary for the Authorised Dealer to understand the reasons for such remittances abroad. If the Authorised Dealer is satisfied that the remittances requested by the remitter fall under their powers, granted to them under FEMA act, which is incorporated in the Exchange Control Manual, published by RBI, the remittances are made by them, without any reference to RBI. If the remittances do not fall under the ambit of powers granted by RBI, then the form A1, A2, A3 or A4 as the case may be, is sent to RBI and permission to make remittance is obtained by the Authorised Dealer and then the remittance is made. 12.5.6 Payment through Asian Clearing Union (ACU): Asian Clearing Union was established at the initiative of Economic and Social Commission for Asia and Pacific (ESCAP) in December 1974. It came into operation from November 1975. Initially five countries, namely, India, Iran, Nepal, Pakistan and Sri Lanka became the members of ACU. Bangla Desh and Myanmar joined later. With Bhutan joining in 1999 and Maldives in 2009, the membership of ACU is nine countries. Instead of making payment in foreign currency for each and every transaction of receipt and payment between these nine countries, these countries have decided to settle the accounts of receipts and payments regularly after a period of every two months. This will facilitate the development of trade amongst the member countries, which otherwise remain repressed due to paucity of foreign exchange. The accounting unit is Asian Monetary Unit (AMU), which is also called as ACU Dollar or ACU Euro (w.e.f. 01.01.2009). Asian Clearing Union is only a mechanism for settlement of payments, between the participating countries. Until 31st December 1995, the settlement of transaction was being made in ` or in the currency of other participating country or in AMU. Effective from 1st January 1996, payments are required to be made or received through ACU Dollar accounts maintained with Authorised Dealers in India in the names of their correspondent banks in ACU countries or ACU Dollar accounts maintained by the Authorised Dealers with their branches / correspondents abroad. 12.6 Customs Clearance: Import is an act of bringing anything into India from a place outside India and it gets completed once the goods culminate with the land mass of India. Import goods are subject to duty of customs. Customs Act casts the obligation on the person in charge of the vessel to land only at the approved customs port or airport. Such person also is not allowed to unload goods without permission of customs and should not allow any passengers or crew to leave the vicinity of the vessel. Further duty is cast upon the person in charge of the vessel to deliver the Import Manifest within 24 hours of the entry of the vessel at the customs station (sea port) or within 12 hours in the case of aircraft arriving at airport. This import manifest is also called as Import Report or Import General Manifest (IGM).

12.6.1 IGM: 12.6.1.1 Different forms of IGM: Different forms of IGM have been prescribed for the aircrafts, vessels and vehicles. These forms are prescribed by a) The Import Manifest (Vessels) Regulations 1971 in case of vessels; b) The Import Manifest (Aircraft) Regulations 1976 in case of aircrafts; c) The Import Report (Form) Regulations 1976 in the case of vehicles. 12.6.1.2 Regulations relating to IGM: All the three regulations are substantially similar and provide for the following: i. The manifest / report should be delivered in duplicate and should cover all the goods carried in the aircraft / vessel / vehicle.

ii. The Manifest / report has to be in four parts as under: a. General Declaration b. Cargo Declaration c. Vessels Stores list d. A list of private property in the possession of the Master, Officers and Crew e. Passenger manifest in case of aircraft iii. The cargo list is categorised in the manifest / report into the following categories and shall be delivered in separate sheet: a. Cargo to be landed b. Unaccompanied baggage c. Goods to be trans-shipped d. Same bottom or retention cargo iv. In the cargo declaration there should be separate mention about: a. Arms, ammunition and explosives b. Narcotics and dangerous drugs c. Gold and silver v. The person delivering the import manifest or report should subscribe in the declaration as to the truth of the contents. 12.6.1.3 Particulars of General declaration: The general declaration will give particulars about the name of the vessel, nationality, tonnage, name of the shipping line, last port of call, port arrival and date and time of arrival, name

of the master, nationality of the master, name and address of the local steamer / shipping agent, ports called during the present voyage, number of crew, number of passengers. The following documents are to be enclosed with the general declaration: a) Cargo declaration b) Store list c) Private property list d) Crew list e) Passenger list f) Maritime declaration of health. Customs act provides that the master of a vessel shall not permit the unloading of any goods until an order has been given by the proper officer granting Entry Inwards to such vessels. This is specified only for the vessels and not for aircrafts or vehicles. Such unloading (as well as loading) should be done in the presence of supervision of the customs officer. The imported goods remain in the custody of custodian after they are unloaded and remain with him till they are cleared for home consumption by the importer. It is the duty of the importer of any goods to make an application to the proper officer for clearance of the goods. 12.6.2 Bill of Entry: The goods may be cleared for home consumption or for deposit in a warehouse or for transit or transshipment. Therefore there are three types of Bills of Entry prescribed for these three different purposes. 12.6.2.1 Types of Bills of Entry: These three Bills of Entry are as follows: Form I (white) for home consumption Form II (yellow) for warehousing (into bond) Form III (green) clearance from warehouse for home consumption (ex-bond) The Bill of Entry can also be filed electronically in Customs houses providing this facility. The form of Bill of Entry is governed by Bill of Entry (Forms Regulations, 1976) 12.6.2.2 Four copies of Bill of Entry: Normally the Bill of Entry is prepared in four copies, as follows: 1. Original, meant for customs authorities for assessment and collection of duty. 2. Duplicate, intended to be an authority to the custodian of the cargo to release cargo to the importer from his custody. 3. Triplicate, as a copy of record for the importer. 4. Quadruplicate, as a copy to be presented to the bank for the purpose of making remittance for the imported goods.

12.6.2.3 Declarations in Bill of Entry: The importer is required to declare in the Bill of Entry among other things, the particular of packages, the description of goods, in terms of description given in the Customs Tariff to enable proper classification of goods and the correct value of the goods for determining the amount of duty. Since the assessment is based on the declaration of the importer, the onus is cast upon him to make a declaration and solemn affirmation about the truth of the contents in the Bill of Entry. The Bill of Entry is to be normally filed after the delivery of the IGM, but before 30 days from unloading as the goods are required to be cleared from the wharf within 30 days. 12.6.2.4 Assessment of value of goods: After the bill of entry is filed, it is assessed by the appraisers of the customs department. In this process they check the supporting documents like invoices, packing lists, payment particulars, catalogues, brokers note, insurance policy etc. which would enable them to arrive at correct decision regarding the classification and valuation of the goods. The physical inspection of the cargo can also be undertaken by the customs officers to check the declaration in the Bill of Entry. 12.6.2.5 Clearance of Goods: Once the customs check is complete and the customs duty is paid the customs allow clearance of goods for home consumption. If the importer is unable to pay the customs duty or does not need the entire goods immediately he can avail the facility of storing the goods in warehouse. These warehouses are public warehouses appointed by the customs or private warehouses licensed by the customs. When the goods are deposited in the warehouse the collection of customs duty is deferred till such goods are cleared for home consumption. The revenue for the government is safeguarded by the importer by executing a bond and binding himself in a sum equal to twice the amount of duty assessed on the goods at the time of import. The importer is also liable to pay interest, rent and charges for storage of goods in warehouse. The process of keeping the goods in warehouse is called as into-bond. Form II (yellow) Bill of Entry is required to be filled and submitted by the importer to the customs. As and when the importer needs the imported goods at a later date, he can pay the customs duty and get the goods released from the warehouse. At this time he fills and submits the Form III (green) Bill of Entry. This is called as Ex-bond.

12.7

Customs Duty: The tax is any contribution imposed by the government on individuals for the use of its services. Taxes serve the purpose of generating revenue for the state, regulate the economy, encourage or discourage a situation, to achieve the social objective of the state. They are of two types, Direct and Indirect. Direct taxes are required to be borne by the person on whom they are levied, whereas Indirect taxes can be passed on to the buyer. One of the forms of the tax is referred to as Duty. A subtle difference can be made in tax and duty. Duty is paid before the act permitted under the law is performed; whereas tax is levied subsequent to the taxable event has taken place. Thus the income tax, gift tax, sales tax etc are levied after the income is earned or gift is made or the sale is affected. Customs Duty or Excise Duty on the goods is levied even before the goods are cleared for

home consumption and are sent out for selling, respectively. All taxes and duties are imposed in three stages namely the levy, assessment and collection. Levy is the stage where the declaration of liability is made and the person or properties in respect of which the tax or duty is to be levied is identified and charged. The next stage is that of assessment. Assessment is the process of quantifying the amount of liability. And the last stage is that of collection of the tax or duty. Liability towards customs duty is broadly based upon the following three factors: 1. The goods, the point and the circumstances under which the customs duty becomes leviable. 2. The procedure, the mechanism and the organisation for determining the amount of customs duty and collection thereof. 3. The exemption to the levy either on the grounds of morality or equity or as result of the discretionary powers vested in the Government as a tool of planning tax structure and control of economic growth of the country. The customs duty is considered to be levied on the goods and not on the persons importing the goods or paying the duty. Being such it is passed on to the buyer. 12.7.1 Duty liability in Certain Special Circumstances: 1. Re-importation of goods produced or manufactured in India shall be liable to duty and be subject to all the condition and restrictions 2. The goods derelict, jetsam, floatsam and wreck brought or coming to India shall be dealt with as if they were imported into India. (For this purpose the derelict goods means any cargo, vessel etc. abandoned in the sea with no hope of recovery. Jetsam means goods jettisoned from the vessel to save her from sinking. Floatsam means the jettisoned goods floating in the sea. And the wreck means cargo or vessel or any property which are cast ashore by tides after ship wreck.) 12.7.2 Components of Customs Duty: There are eight components of Customs Duty. Some or all of them are taken into account as are applicable in computation of the Customs Duty. These components are as follows: Basic Customs Duty Additional Duty of Customs Special Additional Duty of Customs Protective Duty Emergency Power to Impose or Enhance Import Duty Safeguard Duty Countervailing Duty on Subsidised Articles Antidumping Duty

12.7.2.1 Basic Customs Duty: Section 2 of the Customs Tariff Act provides for levy of customs duty at the Standard Rate (which is roughly about 35%) and Preferential Rate (which is roughly about 25%) of the valuation of the imported goods 12.7.2.2 Additional Duty of Customs: Section 3 of the Customs Tariff Act provides that any article which is imported into India shall, in addition, be liable to a duty equal to the excise duty for the time being leviable on the like article if produced or manufactured in India (which is roughly about 16% ). 12.7.2.3 Special Additional Duty of Customs: The Special Additional Duty is levied under section 3A of the Customs Tariff Act. The said section provides the imported goods shall in addition to the Basic Customs Duty and Additional Duty shall also be liable to Special Additional Duty, which shall be levied at a rate to be specified by the Central Government, by notification in Official Gazette. Such rate shall be notified by the Central Government having regard to the Maximum Sales Tax, Local Tax or any other charges for the time being leviable on a like article on its sale or purchase in India. Until the rate is notified by the Central Government as aforesaid, the Special Additional Duty shall be levied at a rate of 4%. 12.7.2.4 Protective Duty: Section 7 of the Customs Tariff Act provides for two types of duties namely Revenue Duties and Protective Duties. Revenue Duties are those which are levied for the purpose of raising customs revenue, whereas the Protective Duties are intended to give protection to the indigenous industries. 12.7.2.5 Emergency Power to Impose or Enhance Import Duty: The Central Government may impose or enhance the import duty as per section 8A of the Customs Tariff Act, subject to the following two conditions: The goods should be specified in the First Schedule. The Central Government is satisfied that the circumstances exist, which render it necessary for the imposition or enhancement of import duty. 12.7.2.6 Safeguard Duty: Section 8B of the Customs Tariff Act provides for imposition of Safeguard Duty. It is imposed for the purpose of protecting the interest of any domestic industry in India. It is product specific i.e. the Safeguard Duty is applicable only for certain articles in respect of which it is imposed. The duty imposed under this section is in addition to any other duty in respect of such goods levied under this act or any other law for the time being in force. The duty can be imposed for a maximum period of 10 years from the date of first imposition, subject to:

1. Central Government is satisfied that any article is imported into India in increased quantities; 2. Such increased importation is causing or threatening to cause serious injury to domestic industry. Exemptions from Safeguard Duty: a) Articles originating from developing country so long as the share of imports of that article from that country does not exceed 3% of the total imports of that article into India. b) Articles originating from more than one developing country so long as the aggregate of imports from all such developing countries taken together does not exceed 9% of the total imports of that article into India. c) Unless specifically made applicable in the notification the articles imported by a 100% EOU or the units in SEZ shall not be liable for Safeguard Duty. 12.7.2.7 Countervailing Duty on Subsidised Articles: Section 9 of the Customs Act provides for imposition of Countervailing Duty, provided the following conditions are followed: a) Any country or territory, directly or indirectly, pays or bestows subsidy upon the manufacture or production or exportation of any article. Such subsidy includes subsidy on transportation of such article. b) Such articles are imported into India. c) The importation may or may not be directly from the country of manufacture or production. d) The article, if not imported from the country of manufacture or production, may be in the same condition as when exported from the country of manufacture or production. The amount of countervailing duty shall not exceed the amount of subsidy paid or bestowed as aforesaid. This duty is in addition to any other duty chargeable. Unless revoked earlier, the duty imposed under this section shall cease to have effect on the expiry of five years from the date of such imposition. Subsidy, as envisaged in this section, shall be deemed to exist if: a) There is financial contribution by the Government or any public body within the territory of the exporting or producing country. Such contribution may include direct transfer of funds like grants, loans etc., waiver of revenue due to the Government etc. b) There is any form of income or price support granted or maintained by the Government, which results in increased export of such article or reduced import of any article into that country. Countervailing duty shall not be levied unless it is determined that: a) The subsidy relates to the export performance;

b) The subsidy relates to the use of domestic goods over imported goods in the export article; or c) The subsidy has been conferred on a limited number of persons engaged in manufacturing, producing or exporting the article unless such a subsidy is for: i. Research activities conducted by or on behalf of such persons

ii. Assistance to disadvantaged regions within the territory of the exporting country iii. Assistance to promote adaption of existing facilities to new environmental requirements. 12.7.2.8 Antidumping Duty: The dumping is defined as an act of selling in a large quantity at a very low price or practically regardless of the price. Further it also includes selling goods abroad at less than the market price at home. The anti-dumping is a country specific, i.e. it is imposed on imports from a particular country. Section 9A of the Customs Tariff Act provides that where any article is exported from any country or territory to India at less than its normal value, then, upon the importation of such article into India, the Central Government may impose an Antidumping Duty not exceeding the margin of dumping (i.e. the difference between the export price and the normal price of the article) in relation to such article. The Antidumping Duty is not leviable on articles imported by a 100% EOU or units in SEZ. This duty is in addition to any other duty chargeable under this act or any other law for the time being in force. Unless revoked earlier, the duty imposed under this section shall cease to have effect on the expiry of 5 years from the date of such imposition. 12.7.3 Remission, Abatement and Exemptions: The Customs Act provides for remission, abatement and exemptions from the Customs Duty in certain circumstances. These provisions are given below: 1. No duty is payable on pilfered goods. 2. Abatement of duty on damaged or deteriorated goods: The duty chargeable on damaged or deteriorated goods shall be abated to the extent of proportion of damage or deterioration from the duty chargeable on such goods before such damage or deterioration. 3. Remission of duty on goods lost, destroyed or abandoned: In all these cases, the goods having been imported, the liability to customs duty is imposed and therefore the importer has to relinquish his title to the goods unconditionally and abandon them. Relinquishing is done by endorsing the document to title in favour of Commissioner of Customs along with the invoice. If the importer does so, he will not be required to pay the duty amount. 12.7.4 Customs Clearance Procedure in Nutshell:

1. The master of the vessel carrying the goods calls on the port, files the arrival report and

the Import General manifest (IGM) with the Customs Authorities. 2. Customs Authorities check the documents, grant entry inwards to the vessel, assign an IGM number and permit the master of the vessel to land and unload the cargo. 3. The vessel discharges the cargo into the custody of the Port Ttrust Authorities. 4. The importer of the goods delivers the negotiable bill of lading received from the supplier of the goods to the master of the vessel and obtains the delivery order. 5. It is the right and responsibility of the importer to file an application for clearance of the goods and this application is called as Bill of Entry. 6. The Customs Authorities check the Bill of Entry with the IGM and note the Bill of Entry in the IGM. 7. The Bill of Entry is then processed by the appraising department to decide upon the tariff classification and valuation of the goods. 8. The Customs Authorities may physically examine the goods for the above purpose of classification and valuation. 9. If the Bill of Entry for Home Consumption is presented, then the Customs Duty is collected and pass out of customs charge is issued. 10. If the Bill of Entry for warehousing is presented, then the importer executes a warehousing bond equal to twice the amount of duty assessed and then the goods are deposited into the warehouse. 11. The importer on showing the pass out of customs charge to the port trust authorities takes the delivery of the goods. 12. In case goods are warehoused, the importer files a Bill of Entry for ex-bond clearance for home consumption at the time of clearance of goods from such warehouse. 13. The Customs Duty is then collected and the goods are allowed to be taken from the port.

12.8

Summary ___________________________________________________

We have seen how the basic factors, viz. the Foreign Exchange Reserves, extent of Protection given to the domestic industry and the international environment, affect the import policy of the country. For the purpose of better understanding the subject we have also seen the definition of Imports, Imported Goods and India, as given by the Customs department. Depending upon the use of the imported items the importers are categorised as Actual User Industrial and Non-Industrial. We have also seen the same classification of goods under ITC (HS), namely the Prohibited, Restricted, imports through STE and the remaining items of import which are free to be imported without asking for any permission from any authority. They are called as Free unless regulated category of items of import.

We have seen how the importer makes the payment for the goods he imports. He can either resort to making payment by making advance remittance or make payment through an open account system. Both these systems of making payment are biased in favour of the seller and buyer respectively. The payment can also be made by seller raising a bill on the buyer, but the best method of settling the international debt between the buyer and seller is through a Letter of Credit Mechanism. For the nine countries, in the Asia, which have formed an Asian Clearing Union the accounts are settled are the periodicity of two months and in terms of the ACU Dollar or ACU Euro. This greatly reduces the requirement of costly Foreign Exchange and its stifling effect on the trade. In case of payment for imports the importer needs to fill in the Application for remittance, form A1. The customs clearance formalities are required to be completed by the importer. These involve filing Bill of Entry with the customs, which gives the details of the goods imported. Customs on satisfying about the importability of the goods (according to ITC (HS) Classification), its tallying with the description in the Import General Manifest (IGM) and payment of import duty, clears the goods for Home Consumption. Importer also has a choice to clear the goods later and avail the facility of warehousing. He may subsequently clear the goods from the warehouse for Home Consumption. He can defer the payment of import duty till he clears the goods for Home Consumption.

We have also seen the various components of the Customs Duty and the rationale behind charging these duties. We have also seen the cases where the Customs Duty can be remitted, abated or exempted.

12.9

KEY WORDS

1. Actual User (Industrial), 4. Bill of Entry, 7. Ex Bond, 10. Additional Duty of Customs, 12. Protective Duty, 15. Antidumping Duty,

2. Actual User (Non-Industrial) 3. IGM, 5. Home Consumption, 8. Warehousing, 6. Into Bond, 9. Basic Customs Duty,

11. Special Additional Duty of Customs, 13. Safeguard duty, 16. Form A1, 14. Countervailing Duty, 17. ACU, 18. AMU

12.10 1. 2. 3. 4. 5.

DESCRIPTIVE QUESTIONS Explain the ITC (HS) Classification of items to be imported by giving a few examples of each of the four categories. Explain in detail the purpose of eight components of the Customs Duty. Write a detail note on the system of settling payments through Asian Clearing Union Explain point wise the procedure of clearing imported goods from the Customs Authorities. Write short notes on: a. Home consumption and Warehousing b. Bill of Entry and Import General Manifest c. Form A1, A2, A3 and A4 d. AMU

6.

What factors are taken into account by the Policymakers while formulating the Import Policy of the Country?

12.11

OBJECTIVE QUESTIONS

Q.1: IGM stands for: A. Indian Government Manual C. International Grand Manual Q.2: Bill of Entry is a document which A. Is prepared by the ship captain requesting entry into the port. B. Is prepared by the exporter seeking permission from the importers country to export the goods. B. Import General Manifest D. International Governmental Manual

C. Is prepared by the importer seeking clearance of goods from Customs D. Is the entry of the import bill documents in the bills register of Authorised Dealer Q.3: For the purpose of Customs, India extends up to certain distance into the sea from the appropriate land mass. This distance is: A. 10 nautical miles C. 16 nautical miles B. 12 nautical miles D. 20 nautical miles

Q.4: Countervailing Duty is imposed by Customs to: A. Compensate for losing the opportunity to receive Excise Duty B. Compensate for losing the opportunity to receive Sales Tax C. Protect the Domestic Industry from the ill effects of subsidy granted in the exporters country D. To deter dumping of goods in India Q.5: Form A1 is filled up by the importer for A. Clearing the imported goods from the customs B. Clearing the goods from the warehouse C. For making the payment for the imported goods through Authorised Dealer D. For getting import authorisation from DGFT in case of restricted goods Q.6: In case the importer clears the goods for warehousing, A. He has to pay the entire customs duty at the time of such clearance B. He has to pay only 50% of the duty at the time of such clearance and remaining 50% while clearing the goods for home consumption C. He does not have to pay any duty at the time of such clearance, but has to pay entire customs duty while clearing the goods for home consumption D. No such facility is provided by the customs. Q.7: The obligation of the importer towards Customs is A. Personal and he has to pay the Customs duty even if he does not clear the imported goods B. Personal and he has to pay the customs duty only if he wants to clear the goods C. Not personal but in any case he has to pay the Customs Duty D. Importer is personally not liable to pay any duty however the imported goods are liable Q.8: The Derelict Goods means

A. Any cargo, vessel etc. abandoned in the sea with no hope of recovery. B. Goods jettisoned from the vessel to save her from sinking. C. The jettisoned goods floating in the sea. D. Cargo or vessel or any property which are cast ashore by tides after ship wreck. Q.9: The amount of Customs Duty payable on Derelict Goods, Jetsam, Floatsam or Wreck is A. Nil B. 50% of the applicable duty for such goods C. At par with the duty as applicable to the import of similar goods D. The percentage of duty is levied at the discretion of the Customs Authorities Q.10: In case of pilfered goods, damaged goods or deteriorated goods, the Customs Duty is A. As applicable for the normal goods as it is not the fault of the customs and the duty is recovered from the importer. B. As applicable for the normal goods but it is recovered from the persons responsible for such pilferage, damage or deterioration C. The duty is reduced to the extent of pilferage, damage or deterioration D. No duty is chargeable on such goods as this happens before the importer takes the delivery of the goods and they are with customs until then.