ROLE OF FOREIGN EXCHANGE

DEPARTMENT IN EXPORTS AND

IMPORTS

SUBMITED BY
MANOJ KUMAR.R 3510910409

MANOJ SRINIVAS MANTRI 3510910413

MANOJ.N 3510910415

MANOJ.S 3510910416

MATHY ELANCHEZHIAN.G 3510910418

Introduction

Foreign Exchange Management Act or in short (FEMA) is an act that provides guidelines for
the free flow of foreign exchange in India. It has brought a new management regime of
foreign exchange consistent with the emerging frame work of the World Trade Organisation
(WTO). Foreign Exchange Management Act was earlier known as FERA (Foreign Exchange
Regulation Act), which has been found to be unsuccessful with the proliberalisation policies
of the Government of India.

FEMA is applicable in all over India and even branches, offices and agencies located outside
India, if it belongs to a person who is a resident of India.

Some Highlights of FEMA

 It prohibits foreign exchange dealing undertaken other than an authorised person;

 It also makes it clear that if any person residing in India, received any Forex payment
(without there being a corresponding inward remittance from abroad) the concerned
person shall be deemed to have received they payment from a nonauthorised person.
 There are 7 types of current account transactions, which are totally prohibited, and
therefore no transaction can be undertaken relating to them. These include transaction
relating to lotteries, football pools, banned magazines and a few others.
 FEMA and the related rules give full freedom to Resident of India (ROI) to hold or
own or transfer any foreign security or immovable property situated outside India.
 Similar freedom is also given to a resident who inherits such security or immovable
property from an ROI.
 An ROI is permitted to hold shares, securities and properties acquired by him while
he was a Resident or inherited such properties from a Resident.
 The exchange drawn can also be used for purpose other than for which it is drawn
provided drawl of exchange is otherwise permitted for such purpose.
 Certain prescribed limits have been substantially enhanced. For instance, residence
now going abroad for business purpose or for participating in conferences seminars
will not need the RBI's permission to avail foreign exchange up to US$. 25,000 per
 trip irrespective of the period of stay, basic travel quota has been increased from the
existing US$ 3,000 to US$ 5,000 per calendar year.

Payment Methods in Export Import Trade.

There are 3 standard ways of payment methods in the export import trade international trade
market:

1. Clean Payment
2. Collection of Bills
3. Letters of Credit L/c

1. Clean Payments

In clean payment method, all shipping documents, including title documents are handled
directly between the trading partners. The role of banks is limited to clearing amounts as
required. Clean payment method offers a relatively cheap and uncomplicated method of
payment for both importers and exporters.

There are basically two type of clean payments:

Advance Payment

In advance payment method the exporter is trusted to ship the goods after receiving payment
from the importer.

Open Account

In open account method the importer is trusted to pay the exporter after receipt of goods.
The main drawback of open account method is that exporter assumes all the risks while the
importer get the advantage over the delay use of company's cash resources and is also not
responsible for the risk associated with goods.

2. Payment Collection of Bills in International Trade

The Payment Collection of Bills also called “Uniform Rules for Collections” is published by
International Chamber of Commerce (ICC) under the document number 522 (URC522) and
is followed by more than 90% of the world's banks.

In this method of payment in international trade the exporter entrusts the handling of
commercial and often financial documents to banks and gives the banks necessary
instructions concerning the release of these documents to the Importer. It is considered to be
one of the cost effective methods of evidencing a transaction for buyers, where documents
are manipulated via the banking system.

There are two methods of collections of bill :

Documents Against Payment  D/P

In this case documents are released to the importer only when the payment has been done.

Documents Against Acceptance  D/A

In this case documents are released to the importer only against acceptance of a draft.

3. Letter of Credit  L/c

Letter of Credit also known as Documentary Credit is a written undertaking by the importers
bank known as the issuing bank on behalf of its customer, the importer (applicant), promising
to effect payment in favor of the exporter (beneficiary) up to a stated sum of money, within a
prescribed time limit and against stipulated documents. It is published by the International
Chamber of Commerce under the provision of Uniform Custom and Practices (UCP)
brochure number 500.

Export Finance and Documentation.

The following is a list of documents often used in international trade:

 Air Waybill
 Bill of Lading
 Certificate of Origin
  Combined Transport Document
 Draft (or Bill of Exchange)
 Insurance Policy (or Certificate)
 Packing List/Specification
 Inspection Certificate

Air Waybills

Air Waybills make sure that goods have been received for shipment by air. A typical air
waybill sample consists of of three originals and nine copies. The first original is for the
carrier and is signed by a export agent; the second original, the consignee's copy, is signed by
an export agent; the third original is signed by the carrier and is handed to the export agent as
a receipt for the goods.

Air Waybills serves as:

      •  Proof of receipt of the goods for shipment.

      •  An invoice for the freight.
      •  A certificate of insurance.
      •  A guide to airline staff for the handling, dispatch and delivery of the consignment.

The principal requirement for an air waybill are :

 The proper shipper and consignee must be mention.

 The airport of departure and destination must be mention.
 The goods description must be consistent with that shown on other documents.
 Any weight, measure or shipping marks must agree with those shown on other
documents.
 It must be signed and dated by the actual carrier or by the named agent of a named
carrier.
 It must mention whether freight has been paid or will be paid at the destination point.

Bill of Lading (B/L)

Bill of Lading is a document given by the shipping agency for the goods shipped for
transportation form one destination to another and is signed by the representatives of the
carrying vessel.

Bill of landing is issued in the set of two, three or more. The number in the set will be
indicated on each bill of lading and all must be accounted for. This is done due to the safety
reasons which ensure that the document never comes into the hands of an unauthorised
person.  Only one original is sufficient to take possession of goods at port of discharge so, a
bank which finances a trade transaction will need to control the complete set. The bill of
lading must be signed by the shipping company or its agent, and must show how many signed
originals were issued.

It will indicate whether cost of freight/ carriage has been paid or not :

"Freight Prepaid" : Paid by shipper

"Freight collect" : To be paid by the buyer at the port of discharge

The bill of lading also forms the contract of carriage.

To be acceptable to the buyer, the B/L should :

 Carry an "On Board" notation to showing the actual date of shipment, (Sometimes
however, the "on board" wording is in small print at the bottom of the B/L, in which
cases there is no need for a dated "on board" notation to be shown separately with
date and signature.)
 Be "clean" have no notation by the shipping company to the effect that goods/
packaging are damaged.

The main parties involve in a bill of lading are:

 Shipper
o The person who send the goods.
 Consignee
o The person who take delivery of the goods.
  Notify Party
o The person, usually the importer, to whom the shipping company or its agent
gives notice of arrival of the goods.
 Carrier
o The person or company who has concluded a contract with the shipper for
conveyance of goods

The bill of lading must meet all the requirements of the credit as well as
complying with UCP 500. These are as follows :

 The correct shipper, consignee and notifying party must be shown.

 The carrying vessel and ports of the loading and discharge must be stated.
 The place of receipt and place of delivery must be stated, if different from port of
loading or port of discharge.
 The goods description must be consistent with that shown on other documents.
 Any weight or measures must agree with those shown on other documents.
 Shipping marks and numbers and /or container number must agree with those shown
on other documents.
 It must state whether freight has been paid or is payable at destination.
 It must be dated on or before the latest date for shipment specified in the credit.
 It must state the actual name of the carrier or be signed as agent for a named carrier.

Certificate of Origin

The Certificate of Origin is required by the custom authority of the importing country for the
purpose of imposing import duty. It is usually issued by the Chamber of Commerce and
contains information like seal of the chamber, details of the good to be transported and so on.

The certificate must provide that the information required by the credit and be consistent with
all other document, It would normally include :

 The name of the company and address as exporter.

 The name of the importer.
  Package numbers, shipping marks and description of goods to agree with that on other
documents.
 Any weight or measurements must agree with those shown on other documents.
 It should be signed and stamped by the Chamber of Commerce.

Combined Transport Document

Combined Transport Document is also known as Multimodal Transport Document, and is

used when goods are transported using more than one mode of transportation. In the case of
multimodal transport document, the contract of carriage is meant for a combined transport
from the place of shipping to the place of delivery. It also evidence receipt of goods but it
does not evidence on board shipment, if it complies with ICC 500, Art. 26(a). The liability of
the combined transport operator starts from the place of shipment and ends at the place of
delivery. This documents need to be signed with appropriate number of originals in the full
set and proper evidence which indicates that transport charges have been paid or will be paid
at destination port.

Multimodal transport document would normally show :

 That the consignee and notify parties are as the credit.

 The place goods are received, or taken in charges, and place of final destination.
 Whether freight is prepaid or to be collected.
 The date of dispatch or taking in charge, and the "On Board" notation, if any must be
dated and signed.
 Total number of originals.
 Signature of the carrier, multimodal transport operator or their agents.

Commercial Invoice

Commercial Invoice document is provided by the seller to the buyer. Also known as export
invoice or import invoice, commercial invoice is finally used by the custom authorities of the
importer's country to evaluate the good for the purpose of taxation.
The invoice must :

 Be issued by the beneficiary named in the credit (the seller).

 Be address to the applicant of the credit (the buyer).
 Be signed by the beneficiary (if required).
 Include the description of the goods exactly as detailed in the credit.
 Be issued in the stated number of originals (which must be marked "Original) and
copies.
 Include the price and unit prices if appropriate.
 State the price amount payable which must not exceed that stated in the credit
 include the shipping terms.

Bill of Exchange

A Bill of Exchange is a special type of written document under which an exporter ask
importer a certain amount of money in future and the importer also agrees to pay the importer
that amount of money on or before the future date. This document has special importance in
wholesale trade where large amount of money involved.

Following persons are involved in a bill of exchange:

      Drawer: The person who writes or prepares the bill.
      Drawee: The person who pays the bill.
      Payee: The person to whom the payment is to be made.
      Holder of the Bill: The person who is in possession of the bill.

On the basis of the due date there are two types of bill of exchange:

 Bill of Exchange after Date: In this case the due date is counted from the date of
drawing and is also called bill after date.
 Bill of Exchange after Sight: In this case the due date is counted from the date of
acceptance of the bill and is also called bill of exchange after sight.
Insurance Certificate

Also known as Insurance Policy, it certifies that goods transported have been insured under
an open policy and is not actionable with little details about the risk covered.

It is necessary that the date on which the insurance becomes effective is same or earlier than
the date of issuance of the transport documents.

Also, if submitted under a LC, the insured amount must be in the same currency as the credit
and usually for the bill amount plus 10 per cent.

The requirements for completion of an insurance policy are as follow :

 The name of the party in the favor which the documents has been issued.
 The name of the vessel or flight details.
 The place from where insurance is to commerce typically the sellers warehouse or the
port of loading and the place where insurance cases usually the buyer's warehouse or
the port of destination.
 Insurance value that specified in the credit.
 Marks and numbers to agree with those on other documents.
 The description of the goods, which must be consistent with that in the credit and on
the invoice.
 The name and address of the claims settling agent together with the place where
claims are payable.
 Countersigned where necessary.
 Date of issue to be no later than the date of transport documents unless cover is shown
to be effective prior to that date.

Packing List  

Also known as packing specification, it contain details about the packing materials used in
the shipping of goods. It also include details like measurement and weight of goods.

The packing List must :

  Have a description of the goods ("A") consistent with the other documents.
 Have details of shipping marks ("B") and numbers consistent with other documents

Inspection Certificate

Certificate of Inspection is a document prepared on the request of seller when he wants the
consignment to be checked by a third party at the port of shipment before the goods are
sealed for final transportation.

In this process seller submit a valid Inspection Certificate along with the other trade
documents like invoice, packing list, shipping bill, bill of lading etc to the bank for
negotiation.

On demand,  inspection can be done by various world renowned  inspection agencies on

nominal charges.

Export Bank Guarantees.

A bank guarantee is a written contract given by a bank on the behalf of a customer. By

issuing this guarantee, a bank takes responsibility for payment of a sum of money in case, if it
is not paid by the customer on whose behalf the guarantee has been issued. In return, a bank
gets some commission for issuing the guarantee.

Any one can apply for a bank guarantee, if his or her company has obligations towards a third
party for which funds need to be blocked in order to guarantee that his or her company fulfils
its obligations (for example carrying out certain works, payment of a debt, etc.).

In case of any changes or cancellation during the transaction process, a bank guarantee
remains valid until the customer dully releases the bank from its liability.

In the situations, where a customer fails to pay the money, the bank must pay the amount
within three working days. This payment can also be refused by the bank, if the claim is
found to be unlawful.
Benefits of Bank Guarantees

For Governments
1. Increases the rate of private financing for key sectors such as infrastructure.
2. Provides access to capital markets as well as commercial banks.
3. Reduces cost of private financing to affordable levels.
4. Facilitates privatizations and public private partnerships.
5. Reduces government risk exposure by passing commercial risk to the private sector.
For Private Sector
1. Reduces risk of private transactions in emerging countries.
2. Mitigates risks that the private sector does not control.
3. Opens new markets.
4. Improves project sustainability.

Export Pre Shipment and Post Shipment Finance.

Pre Shipment Finance is issued by a financial institution when the seller want the payment of
the goods before shipment. The main objectives behind preshipment finance or pre export
finance is to enable exporter to:

 Procure raw materials.

 Carry out manufacturing process.
 Provide a secure warehouse for goods and raw materials.
 Process and pack the goods.
 Ship the goods to the buyers.
 Meet other financial cost of the business.

Types of Pre Shipment Finance

 Packing Credit
 Advance against Cheques/Draft etc. representing Advance Payments.

Preshipment finance is extended in the following forms :

  Packing Credit in Indian Rupee
 Packing Credit in Foreign Currency (PCFC)

Export Post Shipment Finance.

Post Shipment Finance is a kind of loan provided by a financial institution to an exporter or

seller against a shipment that has already been made. This type of export finance is granted
from the date of extending the credit after shipment of the goods to the realization date of the
exporter proceeds. Exporters don’t wait for the importer to deposit the funds.

Basic Features

The features of postshipment finance are:

 Purpose of Finance
Postshipment finance is meant to finance export sales receivable after the date of
shipment of goods to the date of realization of exports proceeds. In cases of deemed
exports, it is extended to finance receivable against supplies made to designated
agencies.
 Basis of Finance
Postshipment finances is provided against evidence of shipment of goods or supplies
made to the importer or seller or any other designated agency.
 Types of Finance

Postshipment finance can be secured or unsecured. Since the finance is extended

against evidence of export shipment and bank obtains the documents of title of goods,
the finance is normally self liquidating. In that case it involves advance against
undrawn balance, and is usually unsecured in nature.
Further, the finance is mostly a funded advance. In few cases, such as financing of
project exports, the issue of guarantee (retention money guarantees) is involved and
the financing is not funded in nature.

 Quantum of Finance
As a quantum of finance, postshipment finance can be extended up to 100% of the
invoice value of goods. In special cases, where the domestic value of the goods
 increases the value of the exporter order, finance for a price difference can also be
extended and the price difference is covered by the government. This type of finance
is not extended in case of preshipment stage.
Banks can also finance undrawn balance. In such cases banks are free to stipulate
margin requirements as per their usual lending norm.
 Period of Finance
Postshipment finance can be off short terms or long term, depending on the payment
terms offered by the exporter to the overseas importer. In case of cash exports, the
maximum period allowed for realization of exports proceeds is six months from the
date of shipment. Concessive rate of interest is available for a highest period of 180
days, opening from the date of surrender of documents. Usually, the documents need
to be submitted within 21days from the date of shipment.

Financing For Various Types of Export Buyer's Credit

Postshipment finance can be provided for three types of export :

 Physical exports: Finance is provided to the actual exporter or to the exporter in

whose name the trade documents are transferred.
 Deemed export: Finance is provided to the supplier of the goods which are supplied to
the designated agencies.
 Capital goods and project exports: Finance is sometimes extended in the name of
overseas buyer. The disbursal of money is directly made to the domestic exporter.

Supplier's Credit

Buyer's Credit is a special type of loan that a bank offers to the buyers for large scale
purchasing under a contract. Once the bank approved loans to the buyer, the seller shoulders
all or part of the interests incurred.

Types of Post Shipment Finance

The post shipment finance can be classified as :

1. Export Bills purchased/discounted.

2. Export Bills negotiated
 3. Advance against export bills sent on collection basis.
4. Advance against export on consignment basis
5. Advance against undrawn balance on exports
6. Advance against claims of Duty Drawback.

BIBLOGRAPHY

www.google.co.in

www.wikipedia.com

www.rbi.org.in

www.infodriveindia.com