IIBF & NISM Adda

Certificate Examination in

International Trade Finance

(IIBF & Other Exams)

2020-2021

Compiled by

Srinivas Kante B.Tech, CAIIB

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CERTIFICATE EXAMINATION IN INTERNATIONAL TRADE FINANCE

Rules & Syllabus 2020

OBJECTIVE
Trade Finance is one of the traditional forms of bank finance in India. In view of reforms and liberalisation,
this has gained a new significance. Many of the practices in trade finance have evolved over a period of
time and some are guided by Ministry of Commerce and Reserve Bank of India, besides WTO and
International Chamber of Commerce through UCPDC 600.
With the increase in the volume of trade both domestically and internationally, there is a need for trade
finance professionals from banks as well as corporates.
This comprehensive course aims :
(i) To provide candidates with competencies required to function as trade finance practitioners.
(ii) To enable candidates to possess the needed skill and knowledge to understand clients' needs.
(iii) To enable candidates to handle trade bills of individual clients.

(iv) To enable candidates to attain high ethical and professional standards.

ELIGIBILITY
1. Members and Non-Members of the Institute
2. Candidates must have passed the 12th standard examination in any discipline or its equivalent.

SUBJECT OF EXAMINATION
INTERNATIONAL TRADE FINANCE
PASSING CRITERIA :
Minimum marks for pass in the subject is 60 out of 100.
EXAMINATION For Members For Non-
FEES* : Members
Particulars
First attempt Rs.1,000/- * Rs.1,500/- *
Subsequent each Rs.1,000/- * Rs.1,500/- *
attempt
MEDIUM OF EXAMINATION :
Examination will be conducted in English only.
PATTERN OF EXAMINATION :
(i) Question Paper will contain 120 objective type multiple choice questions for 100 marks.
(ii) The examination will be held in Online Mode only
(iii) There will NOT be negative marking for wrong answers.
DURATION OF EXAMINATION :
The duration of the examination will be of 2 hours.
PERIODICITY AND EXAMINATION CENTRES :
a) Examination will be conducted on pre-announced dates published on IIBF Web Site. Institute conducts
examination on half yearly basis, however periodicity of the examination may be changed depending
upon the requirement of banking industry.

b) List of Examination centers will be available on the website. (Institute will conduct examination in those
centers where there are 20 or more candidates.)
PROCEDURE FOR APPLYING FOR EXAMINATION
Application for examination should be registered online from the Institute’s website www.iibf.org.in. The
schedule of examination and dates for registration will be published on IIBF website.
PROOF OF IDENTITY
Non-members applying for Institute’s examinations / courses are required to attach / submit a copy of any
one of the following documents containing Name, Photo and Signature at the time of registration of
Examination Application. Application without the same shall be liable to be rejected.
1) Photo I / Card issued by Employer or 2) PAN Card or 3) Driving Licencse or 4) Election Voter’s I/Card
or 5) Passport 6) Aadhaar Card

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STUDY MATERIAL / COURSEWARE
The Institute has developed a courseware to cover the syllabus. The courseware (book) for the subject/s
will be available at outlets of publisher/s. Please visit
IIBF website www.iibf.org.in under the menu “Exam Related” for details of book/s and address of
publisher/s outlets. Candidates are advised to make full use of the courseware. However, as banking and
finance fields are dynamic, rules and regulations witness rapid changes. Therefore, the courseware
should not be considered as the only source of information while preparing for the examinations.
Candidates are advised to go through the updates put on the IIBF website from time to time and go
through Master Circulars / Master Directions issued by RBI and publications of IIBF like IIBF Vision, Bank
Quest, etc. All these sources are important from the examination point of view. Candidates are also to
visit the websites of organizations like RBI, SEBI, BIS, IRDAI, FEDAI etc. besides going through other
books & publications covering the subject / exam concerned etc. Questions based on current
developments relating to the subject / exam may also be asked.
Cut-off Date of Guidelines / Important Developments for Examinations
The Institute has a practice of asking questions in each exam about the recent
developments / guidelines issued by the regulator(s) in order to test if the candidates keep themselves
abreast of the current developments. However, there could be changes in the developments / guidelines
from the date the question papers are prepared and the dates of the actual examinations.

In order to address these issues effectively, it has been decided that:

(i) In respect of the examinations to be conducted by the Institute for the period

February to July of a calendar year, instructions / guidelines issued by the regulator(s) and important
developments in banking and finance up to 31st
December will only be considered for the purpose of inclusion in the question papers".
(ii) In respect of the examinations to be conducted by the Institute for the period August to January of a
calendar year, instructions / guidelines issued by the regulator(s) and important developments in banking
and finance up to 30th June will only be considered for the purpose of inclusion in the question papers.

The table given below Cut-off Date of Guidelines

further clarifies the situation. / Important
Particulars
Developments for Developments for
Examination/s Examination/s
For the examinations to be 31st December 2017
conducted by
the Institute for the period February 2018
to July 2018
For the examinations to be 30th June 2018
conducted by
the Institute for the period August 2018 to
January 2019

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 Syllabus

Bank -to- bank reimbursements under Documentary Credits ICC Brochure no 725 (URR 725)
• URC – Uniform customs Rules for Collection

• URDG - Uniform Rules for Demand Guarantee

• URR 525 - Uniform Rules for Reimbursement

• Foreign Trade Policy 2015-2020.

• Customs Procedures – Imports / Exports

• Role of FEDAI, EXIM Bank, ECGC

• Various facilities to Exporters and Importers including forfaiting and factoring.

• Counter trade and Merchanting trade.

• Theories of International Trade.

• Terms of Trade.

• WTO - Its Impact

• Exchange Control / relating to International Trade

• Inco terms Meaning - Obligation of buyers and sellers

• Letter of Credit and UCPDC 600 - Meaning Parties to LC, Different types of LC,
Mechanics of LC, Articles of UCPDC
• Exports s

• Pre Shipment - Credit

• Post Shipment - CreditImports
• Bilateral trade, counter trade, high seas sales.
• Maritime frauds, modus operandi and prevention initiatives
• International Finance - method of finance
• Buyers Credit
• Suppliers Credit
• Packing Credit
• LIBOR
• Documents used in Trade - Bill of Exchange, Invoice, Bill of Lading, Airway Bill, Insurance Policy etc.
• Insurance including marine insurance.

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 Trade finance
Trade finance is the financing of international trade flows. It exists to mitigate, or reduce, the risks
involved in an international trade transaction.

There are two players in a trade transaction: (1)an exporter, who requires payment for their goods or
services, and (2)an importer who wants to make sure they are paying for the correct quality and quantity
of goods.

WHAT ARE THE RISKS?

As international trade takes place across borders, with companies that are unlikely to be familiar with one
another, there are various risks to deal with. These include:

Payment risk: Will the exporter be paid in full and on time? Will the importer get the goods they wanted?

Country risk: A collection of risks associated with doing business with a foreign country, such as
exchange rate risk, political risk and sovereign risk. For example, a company may not like exporting
goods to certain countries because of the political situation, a deteriorating economy, the lack of legal
structures, etc.

Corporate risk: The risks associated with the company (exporter/importer): what is their credit rating? Do
they have a history of non-payment?

To reduce these risks, banks – and other financiers – have stepped in to provide trade finance products.

TYPES OF TRADE FINANCE PRODUCTS

The market distinguishes between short-term (with a maturity of normally less than a year) and medium to
long-term trade finance products (with tenors of typically five to 20 years)

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Trade finance signifies financing for trade, and it concerns both domestic and international trade
transactions. A trade transaction requires a seller of goods and services as well as a buyer. Various
intermediaries such as banks and financial institutions can facilitate these transactions by financing the
trade.

While a seller (or exporter) can require the purchaser (an importer) to prepay for goods shipped, the
purchaser (importer) may wish to reduce risk by requiring the seller to document the goods that have
been shipped. Banks may assist by providing various forms of support. For example, the importer's bank
may provide a letter of credit to the exporter (or the exporter's bank) providing for payment upon
presentation of certain documents, such as a bill of lading. The exporter's bank may make a loan (by
advancing funds) to the exporter on the basis of the export contract.
Other forms of trade finance can include Documentary Collection, Trade Credit Insurance,
Finetrading, Factoring or Forfaiting. Some forms are specifically designed to supplement traditional
financing.
Secure trade finance depends on verifiable and secure tracking of physical risks and events in the chain
between exporter and importer. The advent of new information and communication technologies allows
the development of risk mitigation models which have developed into advance finance models. This
allows very low risk of advance payment given to the Exporter, while preserving the Importer's normal
payment credit terms and without burdening the importer's balance sheet. As trade transactions become
more flexible and increase in volume, demand for these technologies has grown.

Products and services

Banks and financial institutions offer the following products and services in their trade finance branches.

 Letter of credit: It is an undertaking/promise given by a Bank/Financial Institute on behalf of the

Buyer/Importer to the Seller/Exporter, that, if the Seller/Exporter presents the complying documents
to the Buyer's designated Bank/Financial Institute as specified by the Buyer/Importer in the Purchase
Agreement then the Buyer's Bank/Financial Institute will make payment to the Seller/Exporter.
 Bank guarantee: It is an undertaking/promise given by a Bank on behalf of the Applicant and in
favour of the Beneficiary. Whereas, the Bank has agreed and undertakes that, if the Applicant failed
to fulfill his obligations either Financial or Performance as per the Agreement made between the
Applicant and the Beneficiary, then the Guarantor Bank on behalf of the Applicant will make payment
of the guarantee amount to the Beneficiary upon receipt of a demand or claim from the Beneficiary.
Bank guarantee has various types like 1. Tender Bond 2. Advance Payment 3. Performance Bond 4.
Financial 5. Retention 6. Labour

 Export
 Import
 Collection and discounting of bills: It is a major trade service offered by the Banks. The Seller's Bank
collects the payment proceeds on behalf of the Seller, from the Buyer or Buyer's Bank, for the goods
sold by the Seller to the Buyer as per the agreement made between the Seller and the Buyer.
Supply Chain intermediaries have expanded in recent years to offer importers a funded transaction of
individual trades from foreign supplier to importers warehouse or customers designated point of receipt.
The Supply Chain products offer importers a funded transaction based on customer order book.

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New developments
Trade finance is going through a revolution. New technologies and development are energizing traditional
players, transforming their offerings and pulling trade into the 21st century. One of the main
developments is the introduction of blockchain technology into the trade finance ecosystem. The promise
of blockchain is that it has the ability to streamline the trade finance process. In the past, trade finance
has been provided primarily by financial institutions, unchanged for years, with many manual processes
on old-legacy systems that are expensive and costly to update. Such structures are mostly managed
manually or through antiquated systems, which are not scalable and result in higher operational costs for
financial institutions.
Blockchain technology can provide enormous benefits to solve these technological challenges in trade
finance. It can be used to provide the basic services that are essential in trade finance. At its core,
blockchain relies on a decentralized, digitalized ledger model, which by its nature is more robust and
secure than the proprietary, centralized models which are currently used in trade finance. As a
consequence, blockchain can lead to radical simplification and cost reduction for large parts of
transactions in trade finance, whilst making it more secure and reliable. It keeps an immutable record of
all the transactions, back to the originating point of a transaction, also known as the provenance, which is
essential in trade finance as it allows financial institutions to review all transaction steps and reduce the
risk of fraud. One of the blockchain’s advantages is the speeding up of transaction settlement time which
currently takes days, increasing transparency between all parties, and unlocking capital that would
otherwise be tied up waiting to be transferred between parties in the transaction. Several companies are
working on trade finance solutions leveraging blockchain technology such as the R3 consortium, which
brings together the world's biggest financial institutions and TradeIX, which developed a connected and
secured platform infrastructure for corporates, financial institutions, and B2B networks through standard
communication channels (APIs) leveraging blockchain technology.

Methods of payment

International trade financing is required especially to get funds to carry out international trade operations.
Depending on the types and attributes of financing, there are five major methods of transactions in
international trade. In this chapter, we will discuss the methods of transactions and finance normally
utilized in international trade and investment operations.

International Trade Payment Methods

The five major processes of transaction in international trade are the following −

Prepayment

Prepayment occurs when the payment of a debt or installment payment is done before the due date. A
prepayment can include the entire balance or any upcoming part of the entire payment paid in advance
of the due date. In prepayment, the borrower is obligated by a contract to pay for the due amount.
Examples of prepayment include rent or loan repayments.

Letter of Credit

A Letter of Credit is a letter from a bank that guarantees that the payment due by the buyer to a seller
will be made timely and for the given amount. In case the buyer cannot make payment, the bank will
cover the entire or remaining portion of the payment.

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Drafts

Sight Draft − It is a kind of bill of exchange, where the exporter owns the title to the transported goods
until the importer acknowledges and pays for them. Sight drafts are usually found in case of air
shipments and ocean shipments for financing the transactions of goods in case of international trade.

Time Draft − It is a type of foreign check guaranteed by the bank. However, it is not payable in full until
the duration of time after it is obtained and accepted. In fact, time drafts are a short-term credit vehicle
used for financing goods’ transactions in international trade.

Consignment

It is an arrangement to leave the goods in the possession of another party to sell. Typically, the party
that sells receives a good percentage of the sale. Consignments are used to sell a variety of products
including artwork, clothing, books, etc. Recently, consignment dealers have become quite trendy, such
as those offering specialty items, infant clothing, and luxurious fashion items.
cash with order(CWO)-the buyers pay cash when he places an order.
cash on delivery(COD)-the buyer pays cash when the goods are delivered.
documentary credit(L/C)-a Letter of credit (L/C) is used; gives the seller two guarantees that the payment
will be made by the buyer:one guarantee from the buyer's bank and another from the seller's bank.
bills for collection(B/E or D/C) -here a Bill of Exchange (B/E)is used; or documentary collection (D/C) is a
transaction whereby the exporter entrusts the collection of the payment for a sale to its bank (remitting
bank), which sends the documents that its buyer needs to the importer’s bank (collecting bank), with
instructions to release the documents to the buyer for payment.
open account-this method can be used by business partners who trust each other; the two partners need
to have their accounts with the banks that are correspondent banks.
Methods of payment: Cash in Advance (Prepayment) Documentary Collections Letters of Credit Open
Account Combining Methods of Payment Summary Resources Activities Assessment

Open account is a method of making payments for various trade transactions. In this arrangement, the
supplier ships the goods to the buyer. After receiving and checking the concerned shipping documents,
the buyer credits the supplier's account in their own books with the required invoice amount.

The account is then usually settled periodically; say monthly, by sending bank drafts by the buyer, or
arranging through wire transfers and air mails in favor of the exporter.

Trade Finance Methods

The most popular trade financing methods are the following −

Accounts Receivable Financing

It is a special type of asset-financing arrangement. In such an arrangement, a company utilizes the

receivables – the money owed by the customers – as a collateral in getting a finance.

In this type of financing, the company gets an amount that is a reduced value of the total receivables
owed by customers. The time-frame of the receivables exert a large influence on the amount of financing.
For older receivables, the company will get less financing. It is also, sometimes, referred to as "factoring".

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Letters of Credit

As mentioned earlier, Letters of Credit are one of the oldest methods of trade financing.

Banker’s Acceptance

A banker’s acceptance (BA) is a short-term debt instrument that is issued by a firm that guarantees
payment by a commercial bank. BAs are used by firms as a part of the commercial transaction. These
instruments are like T-Bills and are often used in case of money market funds.

BAs are also traded at a discount from the actual face value on the secondary market. This is an
advantage because the BA is not required to be held until maturity. BAs are regular instruments that are
used in international trade.

Working Capital Finance

Working capital finance is a process termed as the capital of a business and is used in its daily trading
operations. It is calculated as the current assets minus the current liabilities. For many firms, this is fully
made up of trade debtors (bills outstanding) and the trade creditors (the bills the firm needs to pay).

Forfaiting

Forfaiting is the purchase of the amount importers owe the exporter at a discounted value by paying
cash. The forfaiter that is the buyer of the receivables then becomes the party the importer is obligated
to pay the debt.

Countertrade

It is a form of international trade where goods are exchanged for other goods, in place of hard currency.
Countertrade is classified into three major categories – barter, counter-purchase, and offset.

 Barter is the oldest countertrade process. It involves the direct receipt and offer of goods and
services having an equivalent value.

 In a counter-purchase, the foreign seller contractually accepts to buy the goods or services
obtained from the buyer's nation for a defined amount.

 In an offset arrangement, the seller assists in marketing the products manufactured in the buying
country. It may also allow a portion of the assembly of the exported products for the
manufacturers to carry out in the buying country. This is often practiced in the aerospace and
defense industries.

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MACRO PERSPECTIVE
Smith theory (1723-90) contribution is known as the theory of absolute advantage.
Theory of absolute advantage means producer needs to produce the goods at low cost and than export
Example if any foreign country is trying to produce goods at low cost than domestic country it is better to
import from them.
Vice versa situation also plays
And also mutual exchange of goods between the countries looks good
David Ricardo (1772-1823) given the idea of comparative advantage
In case of comparative advantage we need to look into productiveness of industries and productiveness
of countries
Productive ness means labour which are involved in producing goods
Hechscherohlin theory looks after the production factors like land labour capital and natural resources
It will export abundant used factors and import scarce resources
Factor price equalisation theory states that the most abundant resource price may rise and scare may fall
so there is need of equalisation
Factor price equalisation eliminates comparative advantage based on factor price

Policy Framework for International Trade

1. Introduction to India’s Foreign Trade:

International business operations at firm level are considerably influenced by various policy measures

employed to regulate trade, both by home and host countries. Exportability and importability of a firm’s

goods are often determined by trade policies of the countries involved. Price-competitiveness of traded

goods is affected by import and export tariffs.

The host country’s trade and FDI policies often influence entry decisions in international markets. Policy

incentives help exporters increase their profitability through foreign sales. High import tariffs and other

import restrictions distort free market forces guarding domestic industry against foreign competition and

support indigenous manufacturing.

Therefore, a thorough understanding of the country’s trade policy and incentives are crucial to the

development of a successful international business strategy.

Trade policy refers to the complete framework of laws, regulations, international agreements, and

negotiating stances adopted by a government to achieve legally binding market access for domestic firms.

It also seeks to develop rules providing predictability and security for firms. To be effective, trade policy

needs to be supported by domestic policies to foster innovation and international competitiveness.

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Besides, the trade policy should have flexibility and pragmatism.

Trade in developing countries is characterized by heavy dependence on developed countries, dominance

of primary products, over-dependence on few markets and few products, and worsening of terms of trade

and global protectionism, all of which make formulation and implementations of trade policy critical to

economic development.

The strategic options for trade policy may either be inward or outward looking. As a result of liberalization

and integration of national policies with WTO agreements, there has been a strategic shift in trade

policies. Like other developing countries, India’s trade policies have also made a gradual shift from highly

restrictive policies with emphasis on import substitution to more liberal policies geared towards export

promotion.

India’s foreign trade policy is formulated under the Foreign Trade (Development and Regulation) Act, for

a period of five years by the Ministry of Commerce, Government of India. The government is empowered

to prohibit or restrict subject to conditions, export of certain goods for reasons of national security, public

order, morality, prevention of smuggling, and safeguarding balance of payments.

Policy measures to promote international trade, such as schemes and incentives for duty-free and

concessional imports, augmenting export production, and other export promotion measures are

discussed in-depth

The multilateral trading system under the WTO trade regime significantly influences trade promotion

measures and member countries need to integrate their trade policies with the WTO framework. The

WTO trade policy review mechanism provides an institutional framework to review trade policies of

member countries at regular intervals.

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Trade Policy Options for Developing Countries:

There exists a huge gap in per capita income between the developed and the developing countries. Most

of the world’s population lives in countries that are considerably poor.

Efforts to bridge the income gap between developed and developing countries, to raise living standards

by increasing income levels, and to cope with the uneven development in the domestic economy, remain

the central concern of economic and trade policies of developing countries. With low production base and

constraints in value addition, most developing countries remain marginal players in international trade

Key characteristics of developing countries’ trade include the following:

(i) Heavy Dependence Upon Developed Countries:

Developing countries’ trade is often dependent upon developed countries which form export destinations

for the majority of their goods. Moreover, developing countries also heavily depend on developed

countries for their imports. Trade among developing countries is relatively meagre.

(ii) Dominance of Primary Products:

Exports from developing countries traditionally comprised primary products, such as agricultural goods,

raw materials and fuels or labour-intensive manufactured goods, such as textiles. However, over recent

years, dependence on primary products has considerably decreased, especially for newly industrialized

countries, such as South Korea and Hong Kong.

India’s dependence on agro exports has also declined considerably from 44.2 per cent in 1960-61 to

about 10 per cent in 2006-07.

(iii) Over-dependence on a Few Markets and a Few Products:

A large number of developing countries are dependent on just a few markets and products for their

exports. For instance, Mexico is heavily dependent on the US which is the destination for 89 per cent of

its total exports whereas the Dominican Republic exports 80 per cent and Trinidad and Tobago 68 per

cent of its goods to the US.

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In terms of product composition, petroleum accounts for 96 per cent of total exports from Nigeria, 86 per

cent of total exports from Saudi Arabia, and 86 per cent of total exports from Venezuela. Over the years,

India’s basket of export products has widened remarkably with decreased dependence on any single

product category

(iv) Worsening Terms of Trade:

Distribution of gains from trade has always been disproportionate and therefore, a controversial issue.

Developing countries often complain of deterioration in their terms of trade, mainly due to high share of

primary products in their exports.

(v) Global Protectionism:

Developed countries often provide heavy subsidies to their farmers for agricultural production and shield

them from competition from imported products, besides imposing tariffs. Moreover, a number of non-tariff

barriers such as quality requirements, sanitary and phytosanitary measures, and environmental and

social issues, such as child labour offers considerable obstacles to products emanating from developing

countries.

Trade Policy Strategic Options for International Trade:

‘Economic dualism’, where a high-wage capital-intensive industrial sector co-exists with a low-wage

unorganized traditional sector, prevails in most developing countries. Promoting indigenous

industrialization and employment generation become key concerns of their economic policies. A country

may adopt any of the following strategic options for its trade policy

i) Inward Looking Strategy (Import Substitution):

Emphasis is laid on extensive use of trade barriers to protect domestic industries from import competition

under the import-substitution strategy. Domestic production is encouraged so as to achieve self-

sufficiency and imports are discouraged.

Import- substitution trade strategy is often justified by the ‘infant industry argument’, which advocates the

need of a temporary period of protection for new industries from competition from well-established foreign

competitors.

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Most developing countries, such as Brazil, India, Mexico, Argentina, etc., during the 1950s and 1960s

employed an inward-looking trade strategy. The uses of high tariff structure and quota restrictions along

with reserving domestic industrial activities for local firms rather than foreign investors were the key

features of this import substitution policy. The pros and cons of such strategy are given below.

Pros:

i. Protecting start-up industries so as to enable them to grow to a size where they can compete with the

industries of developed nations

ii. Low risk in establishing domestic industry to replace imports especially when the size of domestic

market is large enough to support such industries

iii. High import tariffs that discourage imports but provide foreign firms an inbuilt incentive to establish

manufacturing facilities, leading to industrial development, growth in economic activities, and employment

generation

iv. Relative ease for developing countries to protect their manufacturers against foreign competition

compared to getting protectionist trade barriers reduced by developed countries, in which they have little

negotiating power

Cons:

i. Overprotection of domestic industries against international competition tends to make them inefficient

ii. Protection primarily available to import substituting industries which discriminates against other

industries

iii. Manufacturers based in countries with relatively small market size find it difficult to take advantage of

economies of scale and therefore have to incur high per unit costs

iv. Industries that substitute imports become competitive because of government incentives and import

prohibitions, leading to considerable investment. Any attempt to reduce incentives or liberalize trade

restrictions face strong resistance

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v. Government subsidies and trade restrictions tend to breed corruption

Since independence, India’s trade strategy had been largely inclined to import substitution rather than

export promotion. Earning foreign exchange through exports and conservation thereof had always been a

high-priority task for various governments, irrespective of their political ideologies. Till 1991, India followed

a strong inward-oriented trade policy to conserve foreign exchange

In order to facilitate industrialization with the objective of import substitution, important instruments used

by the government included outright ban on import of some commodities, quantitative restriction,

prohibitive tariff structure, which was one of the highest in the world and administrative restrictions, such

as import licensing, foreign exchange regulations, local content requirements, export obligations, etc.

The policy makers of India had long believed that these policy measures would make India a leading

exporter with comfortable balance of trade. In reality, these initiatives did not yield the desired results,

rather gave rise to corruption, complex procedures, production inefficiency, poor product quality, and

delay in shipment, and, in turn, decline in India’s share in world exports.

The protectionist measures of the inward-oriented economy increased the profitability of domestic

industries, especially in the import substitution sector. The investment made to serve the domestic market

was less risky due to proven demand potential by the existing level of imports.

Formidable tariff structure and trade policy barriers discouraged the entry of foreign goods into the Indian

market. There was little pressure on domestic firms to be internationally competitive.

(ii) Outward Looking Strategy (Export-led Growth):

Under the outward looking strategy, the domestic economy is linked to the world economy, promoting

economic growth through exports. The strategy involves incentives to promote exports rather than

restrictions to imports.

Major benefits of an outward looking strategy include:

i. Industries wherein a country has comparative advantage are encouraged, for instance labour-intensive

industries in developing countries

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ii. Increase in competition in the domestic market leads to competitive pressure on the industry to

increase its efficiency and upgrade quality

iii. Facilitating companies to benefit from economies of scale as large output can be sold in international

markets

The economic liberalization during the last decade paved the way for access of foreign goods to Indian

market, applying competitive pressure even on purely domestic companies. In order to make exports, the

engine of growth, export promotion, gained major thrust in India’s trade policies, especially in recent years

With the integration of national trade policies and export promotion incentives with the WTO, promotional

measures to encourage international marketing efforts, rather than export subsidization, have gained

increased significance.

Accordingly, policies were aimed at creating a business-friendly environment by eliminating redundant

procedures, increasing transparency by simplifying the processes involved in the export sector, and

moving away from quantitative restrictions, thereby improving the competitiveness of Indian industry and

reducing the anti-export bias.

Steps were taken to promote exports through multilateral and bilateral initiatives. With the decline in

restrictions on trade and investment, constraints related to infrastructure and regulatory bottlenecks

became increasingly evident.

Instruments of Trade Policy for International Trade:

Various methods employed to regulate trade are known as instruments of trade policy, which include

tariffs, non-tariff measures, and financial controls

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(i) Tariffs:

These are official constraints on import or export of certain goods and services and are levied in the form

of customs duties or tax on products moving across borders. However, tariffs are more commonly

imposed on imports rather than exports. The tariff instruments may be classified as below.

On the basis of direction of trade: import vs. exports tariffs:

Tariffs may be imposed on the basis of direction of product movement, i.e., either on exports or imports.

Generally, import tariffs or customs duties are more common than tariffs on exports However, countries

sometimes resort to impose export tariffs to conserve their scarce resources. Such tariffs are generally

imposed on raw materials or primary products rather than on manufactured or value-added goods.

On the basis of purpose: protective vs. revenue tariffs:

The tariffs imposed to protect the home industry, agriculture, and labour against foreign competitors is

termed as protective tariffs which discourage foreign goods. Historically, India had very high tariffs so as

to protect its domestic industry against foreign competition.

A tariff rate of 200 to 300 per cent, especially on electronic and other consumer goods

created formidable barriers for foreign products to enter the Indian market.

The government may impose tariffs to generate tax revenues from imports which are generally nominal.

For instance, the UAE imposes 3-4 per cent tariffs on its imports which may not be termed as protective

tariffs.

On the basis of time length: tariff surcharge vs. countervailing duty:

On the basis of the duration of imposition, tariffs may be classified either as surcharge or countervailing

duty. Any surcharge on tariffs represents a short term action by the importing country while countervailing

duties are more or less permanent in nature. The raison d’etre for imposition of countervailing duties is to

offset the subsidies provided by the governments of the exporting countries.

On the basis of tariff rates: specific, ad-valorem, and combined:

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Duties fixed as a specific amount per unit of weight or any other measures are known as specific duties.

For instance, these duties are in terms of rupees or US dollars per kg weight or per meter or per liter of

the product. The cost, insurance, and freight (c.i.f.) value, product cost, or prices are not taken into

consideration while deciding specific duties.

Specific duties are considered to be discriminatory but effective in protection of cheap- value products

because of their lower unit value.

Duties levied ‘on the basis of value’ are termed as ad-valorem duties. Such duties are levied as a fixed

percentage of the dutiable value of imported products. In contrast to specific duties, it is the percentage of

duty that is fixed. Duty collection increases or decreases on the basis of value of the product. Ad-valorem

duties help protect against any price increase or decrease for an import product.

A combination of specific and ad-valorem duties on a single product is known as combined or compound

duty. Under this method, both specific as well as ad-valorem rates are applied to an import product.

On the basis of production and distribution points:

These are as below:

Single stage sales tax:

Tax collected only at one point in the manufacturing and distribution chain is known as single stage sales

tax. Single stage sales tax is generally not collected unless products are purchased by the final consumer.

Value added tax:

Value added tax (VAT) is a multi-stage non-cumulative tax on consumption levied at each stage of

production, distribution system, and value addition. A tax has to be paid at each time the product passes

from one hand to the other in the marketing channel.

However, the tax collected at each stage is based on the value addition made during the stage and not on

the total value of the product till that point. VAT is collected by the seller in the marketing channel from a

buyer, deducted from the VAT amount already paid by the seller on purchase of the product and remitting

the balance to the government.

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Since VAT applies to the products sold in domestic markets and imported goods, it is considered to be

non-discriminatory. Besides, VAT also conforms to the WTO norms.

Cascade tax:

Taxes levied on the total value of the product at each point in manufacturing and distribution channel,

including taxes borne by the product at earlier stages, are known as cascade taxes. India had a long

regime of cascade taxes wherein the taxes were levied at a later stage of marketing channel over the

taxes already borne by the product.

Such a taxation system adds to the cost of the product, making goods non-competitive in the market.

Excise tax:

Excise tax is a one-time tax levied on the sale of a specific product. Alcoholic beverages and cigarettes in

most countries tend to attract more excise duty.

Turnover tax:

In order to compensate for similar taxes levied on domestic products, a turnover or equalization tax is

imposed. Although the equalization or turnover tax hardly equalizes prices, its impact is uneven on

domestic and imported products.

(ii) Non-Tariff Measures:

Contrary to tariffs, which are straightforward, non-tariff measures are non-transparent and obstruct trade

on discriminatory basis. As the WTO regime calls for binding of tariffs wherein the member countries are

not free to increase the tariffs at their will, non-tariff barriers in innovative forms are emerging as powerful

tools to restrict imports on discriminatory basis. The major non-tariff policy instruments include.

Government participation in trade:

State trading, governments’ procurement policies, and providing consultations to foreign companies on a

regular basis are often used as disguised protection of national interests and barrier to foreign firms. A

subsidy is a financial contribution provided directly or indirectly by a government that confers a benefit.

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Various forms of subsides include cash payment, rebate in interest rates, value added tax, corporate

income tax, sales tax, insurance, freight and infrastructure, etc. As subsidies are discriminatory in nature,

direct subsidies are not permitted under the WTO trade regime.

Customs and entry procedure:

Custom classification, valuation, documentation, various types of permits, inspection requirements, and

health and safety regulations are often used to hinder free flow of trade and discriminate among the

exporting countries. These constitute an important non-tariff barrier.

Quotas:

Quotas are the quantitative restrictions on exports/imports intended at protecting local industries and

conserving foreign exchange. The various types of quotas include

Absolute quota:

These quotas are the most restrictive, limiting in absolute terms, the quantity imported during the quota

period. Once the quantity of the import quota is fulfilled, no further imports are allowed.

Tariff quotas:

They allow import of specified quantity of quota products at reduced rate of duty. However, excess

quantities over the quota can be imported subject to a higher rate of import duty. Using such a

combination of quotas and tariffs facilitates some import, but at the same time discourages through higher

tariffs, excessive quantities of imports.

Voluntary quotas:

Voluntary quotas are unilaterally imposed in the form of a formal arrangement between countries or

between a country and an industry. Such agreements generally specify the import limit in terms of product,

country, and volume.

The multi-fibre agreement (MFA) had been the largest voluntary quota arrangement wherein developed

countries forced an agreement on economically weaker countries so as to provide artificial protection to

their domestic industry.

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However, with the integration of multi-fibre agreement with the WTO, the quota regime got scrapped by 1

January 2005. Summarily, all sorts of quotas have a restrictive effect on free flow of goods across

countries.

Other trade restrictions:

Other trade restrictions include minimum export price (MEP), wherein the government may fix a minimum

price for exports so as to safeguard the interests of domestic consumers. Presently, India’s trade policy

does not impose any restriction of minimum export price.

(iii) Financial Controls:

Governments often impose a variety of financial restrictions to conserve the foreign currencies restricting

their markets. Such restrictions include exchange control, multiple exchange rates, prior import deposit,

credit restrictions, and restriction on repatriation of profits. India had long followed a stringent exchange

control regime to conserve foreign currencies.

(iv) Demand vs Supply Side Policy Measures:

Policy instruments for promoting exports may also operate on the supply and demand side. Initiatives for

creating and expanding export production, developing transportation networks, port facilities, tax and

investment systems form parts of supply side policies.

The demand side initiatives for export promotion include programmes to alert companies to the

opportunities present in international markets and to strengthen the commitment and skills of those

already involved.

Policy Initiatives and Incentives by the State Governments for International Business:

State governments generally do not distinguish between production for domestic market and production

for export market. Therefore, there had been few specific measures taken by state governments targeted

at exporting units.

Though, state governments have taken a number of policy measures so as to encourage

industrial activity in the state which mainly relate to:

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i. Capital investment subsidy or subsidy for preparation of feasibility reports, project reports, etc.

ii. Waiver or deferment of sales tax or providing loans for sales tax purposes

iii. Exemption from entry tax, octroi, etc.

iv. Waiver of electricity duty

v. Power subsidy

vi. Exemption from taxes for certain captive power generation units

vii. Exemptions from stamp duties

viii. Provision of land at concessional rate

These concessions extended by state governments vary among policies of individual state

governments and have broadly been based on the following criteria:

(a) Size of the unit proposed (cottage, small and medium industry)

(b) Backwardness of the districts or area

(c) Employment to weaker sections of society

(d) Significance of the sector, for example, software, agriculture

(e) Investment source, such as foreign direct investment (EDI) or investment by NRIs

(f) Health of the unit (sick), etc.

Therefore, it may be noted that most of the exemptions tend to encourage capital- or power-intensive

units though some concessions are linked to turnover. Most of the concessions in the state industrial

policies have been designed keeping in view the manufacturing industries.

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An analysis of industrial policies of various states indicates that most state governments do compete

among themselves in extending such concessions. On examination of export promotion initiatives by the

state governments, it is difficult to find commonality among various states.

However, some of the common measures taken by the state governments are:

i. Attempting to provide information on export opportunities

ii. Preference in land allotment for starting an EOU

iii. Planning for development of Export Promotion Industrial Parks

iv. Exemption from entry-tax on supplies to EOU/EPZ/SEZ units

v. Exemption from sales tax or turnover tax for supplies to EOU/EPZ/SEZ units and inter-unit transfers

between them.

WTO and India’s Export Promotion Measures for International Business:

The emergence of the rule-based multilateral trading system under the WTO trade regime has affected

India’s trade policies and promotional efforts. It provides a rule based framework as to which subsidies

are prohibited, which can face countervailing measures, and which are allowed. The impact of WTO

agreements on trade policy and export promotion measures is examined here.

The framework of the GATT is based on four basic rules:

(i) Protection to Domestic Industry Through Tariffs:

Even though GATT stands for liberal trade, it recognizes that its member countries may have to protect

domestic production against foreign competition. However, it requires countries to keep such protection at

low levels and to provide it through tariffs. To ensure that this principle is followed in practice, the use of

quantitative restrictions is prohibited, except in a limited number of situations.

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(ii) Binding of Tariffs:

Countries are urged to reduce and, where possible, eliminate protection to domestic production by

reducing tariffs and removing other barriers to trade in multilateral trade negotiations. The tariffs so

reduced are bound against further increase by being listed in each country’s national schedule. The

schedules are integral part of the GATT legal system.

(iii) Most-Favoured-Nation Treatment:

This important rule of GATT lays down the principle of non-discrimination. The rule requires that tariffs

and other regulations should be applied to imported or exported goods without discrimination among

countries. Thus it is not open to a country to levy customs duties on imports from one country, at a rate

higher than it applies to imports from other countries. There are, however, some exceptions to the rule.

Trade among members of regional trading arrangements, which are subject to preferential or duty-free

rates, is one such exception. Another is provided by the Generalized System of Preferences; under this

system, developed countries apply preferential or duty-free rates to imports from developing countries,

but apply MFN rates to imports from other countries.

(iv) National Treatment Rule:

While the MFN rule prohibits countries from discriminating among goods originating in different countries,

the national treatment rule prohibits them from discriminating between imported products and equivalent

domestically produced products, both in the matter of the levy of internal taxes and in the application of

internal regulations.

Thus it is not open to a country, after a product has entered its markets on payment of customs duties, to

levy an internal tax (for example, sales tax or VAT) at rates higher than those payable on a product of

national or domestic origin.

The four basic rules are complemented by rules of general application, governing goods entering the

customs territory of an importing country.

These include rules which countries must follow:

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i. In determining the dutiable value of imported goods where customs duties are collected on an ad-

valorem basis

ii. In applying mandatory product standards, and sanitary and phytosanitary regulations to imported

products

iii. In issuing authorizations for imports

In addition to the rules of general application described above, the GATT multilateral system has

rules governing:

i. The grant of subsidies by governments

ii. Measures which governments are ordinarily permitted to take if requested by industry

iii. Investment measures that could have adverse effects on tirade

The rules further stipulate that certain types of measures which could have restrictive effects on imports

can ordinarily be imposed by governments of importing countries only if the domestic industry which is

affected by increased import petitions that such actions be taken.

These include:

i. Safeguard actions

ii. Levy of anti-dumping and countervailing duties

Under safeguard action the importing country is allowed to restrict imports of a product for a temporary

period by either increasing tariffs or imposing quantitative restrictions. However, the safeguard measures

can only be taken after it is established through proper investigation that increased imports are causing

serious injury to the domestic industry.

The anti-dumping duties can be imposed if the investigation establishes that the goods are ‘dumped’.

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The agreement stipulates that a product should be treated as being ‘dumped’ where its export price is

less than the price at which it is offered for sale in the domestic market of the exporting country, whereas

the countervailing duties can be levied in cases where the foreign company has charged low export price

because its product has been subsidized by the government.

The WTO’s Trade Policy Review Mechanism:

In order to enhance transparency of members’ trade policies and facilitate smooth functioning of the

multilateral trading system, the WTO members established the Trade Policy Review Mechanism (TPRM)

to review trade policies of member countries at regular intervals.

Under annexure 3 of the Marrakesh Agreement, the four members with largest shares of world trade (i.e.,

European communities, the US, Japan, and China) are to be reviewed every two years, the next sixteen

to be reviewed every four years, and the others be reviewed every six years. For the least developed

countries a longer period may be fixed.

Reviews are conducted by the Trade Policy Review (TPR) Body on the basis of a policy statement by the

member under review and a report prepared by staff in the WTO Secretariat’s TPR Division. Although the

secretariat seeks cooperation of the members in preparing the report, it has the sole responsibility for the

facts presented and the views expressed.

The TPR reports contain detailed reports examining the trade policies and practices of the member and

describing policy-making institutions and the macroeconomic situation. The member’s subsidies

contained in the TPR is of particular interest for the purpose of the report.

Information on subsidies distinguished in the subsidies and countervailing measures (SCM) can

be found in the following three parts of the TPR report:

i. Measures directly affecting exports

ii. Trade policies and practices by sector

iii. Government incentives or subsidies that do not directly target imports and exports but nevertheless

have an impact on trade flows

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The contents of the report are mainly driven by the member’s main policy changes and constraints rather

than subsidy-related issues and problems. Besides, the coverage of the report is determined to a large

extent by the availability of data.

As a result, the amount of information contained in the reports varies from member to member. The TPR

reports normally do not attempt to assess the effects of the subsidies on trade.

Due to limited availability of detailed information, in many cases, it is difficult to identify the extent to which

a benefit is actually being conferred or the identity of the recipient of the subsidy.

Despite the shortcomings, especially with respect to cross-country comparability, the TPR report

constitutes one of the few sources that systematically collects and compiles information on subsidies for a

broad range of countries and economic activities.

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Organizational bodies

WTO
The World Trade Organization (WTO) is an intergovernmental organization that regulates international
trade. The WTO officially commenced on 1 January 1995 under the Marrakesh Agreement, signed by 124
nations on 15 April 1994, replacing the General Agreement on Tariffs and Trade (GATT), which
commenced in 1948. It is the largest international economic organization in the world.

The WTO deals with regulation of trade in goods, services and intellectual property between participating
countries by providing a framework for negotiating trade agreements and a dispute resolution process
aimed at enforcing participants' adherence to WTO agreements, which are signed by representatives of
member governments and ratified by their parliaments. The WTO prohibits discrimination between trading
partners, but provides exceptions for environmental protection, national security, and other important
goals. Trade-related disputes are resolved by independent judges at the WTO through a dispute
resolution process.

WTO came into being on 1995.

It has come into existence after GAAT General Agreement on Tariffs and Trade (GAAT)
It helps producers of good and services, importer, exporters to do their business
Uruguay rounds of talks made for the formation of WTO
Totally 164 countries present in WTO as of July 29th 2016
In 2000 agriculture and services discussions started in Doha round of talks
Fourth ministerial conference held in Doha Qatar in november20001
In the fourth conference non-agricultural tariff antidumping details are discussed
World bank identified 32 major regional trade blocks

Trade block means group of countries that have established preferential trade agreements among

member countries

PTA stands for preferential trade agreements

Most commonly used PTA is Free Trade agreement
Free Trade Agreement means reducing or removing the tariff and non-tariff barrier between member
nations but not with the non-member nations
A step forward for the FTA is the Custom Union (CU) where not only removing trade barrier with the
member nations but also maintaining the identical trade with non-members.
Regional and Bi lateral trade agreements can cause trade diversion and trade distortions
List of RTB:
ASEAN: It was founded in August 8th 1967
Meeting will be held annually
APEC: Asia Pacific Economic Cooperation
It has 21 members called Member Economies
EAEC: East Asia Economic Caucus
It is known as Asian Plus Three
ASEM: Asia Europe Meeting
It is established in 1996
CHOGM: Common Wealth Heads of Government Meetings

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EU: European Union strong international trade
There are five EU institutions namely European Parliament, Council of EU, E Commission, Court of
Justice, Court of Auditors
NAFTA: North America Free Trade Agreement
CIS: Common Wealth of Independent States
COMESA: Common Market for Eastern and Southern Africa
SAARC: South Asian Association of Regional Cooperation established on Dec 8th 1985
ITR: Intellectual Property rights
It will be held annually.
MERCOSUR: It is a tariff union of South American Countries
It is the fastest growing trading blocks
G-15 group established in 1989
G7 economic power group became G8 after adding Russia

G77 is the third largest world coalition in United Nations

D8 is the group of developing eight countries

IOR-ARC (Indian Ocean Rim Association for Regional Cooperation) established in Mauritius March 1995

International Chamber Of Commerce - ICC

The International Chamber of Commerce is the largest, most diverse business organization in the world.
The ICC has hundreds of thousands of member companies from more than 100 countries and broad
business interests. The ICC's vast networks of committees and experts belong to all sectors and keep
members fully informed of all issues that affect their industries. They also maintain contact with the United
Nations, the World Trade Organization and other intergovernmental agencies.

BREAKING DOWN 'International Chamber Of Commerce - ICC'

The ICC fosters international trade and commerce to promote and protect open markets for goods and
services, and the free flow of capital. The ICC performs three primary activities: establishment of rules,
dispute resolution and policy advocacy. The ICC also wages war on commercial crime and corruption to
bolster economic growth, create jobs and stabilize employment, and ensure overall economic prosperity.
Because members of the ICC and their associates engage in international business, the ICC has
unparalleled authority in setting rules that govern cross-border business. While these rules are voluntary,
thousands of daily transactions abide by the ICC-established rules as part of regular international trade.

The History of the ICC

The ICC was founded in Paris, France in 1919. The organization’s international secretariat was also
established in Paris, and its International Court of Arbitration was formed in 1923. The first chairman of
the chamber was Etienne Clementel, the early-20th-century French politician.

The ICC’s Governing Bodies

There are four primary governing bodies of the ICC. The lead governing body is the World Council, which
is composed of national committee representatives. The highest officers of the ICC, the chairman and
vice-chairman, are elected by the World Council every two years.

The executive board provides strategic direction for the ICC. The board is elected by the World Council,
and it is comprised of 30 business leaders and ex-officio members. The executive board's prominent
duties are the development of ICC strategies and policy implementation.

The international secretariat is the operational arm of the ICC and is responsible for developing and
implementing the ICC’s work program and introducing business perspectives to intergovernmental

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organizations. The secretary-general, who is appointed by the World Council, oversees this governing
body.

The finance committee acts as an advisor to the executive board on all financial aspects. This committee
prepares the budget on behalf of the board, submits regular reports, reviews the financial implications of
ICC activities and oversees all expenses and revenue flow.

TRADE TRANSACTIONS

Trade transactions are generally divided into three categories namely

Movement of goods, Movement of Documents, Movement of Funds.
Banks play an important role in Movement of Documents and funds but Movement of goods is dependent
on persons involved in between
When it comes to international trade there will be risks they are classified as country risk, foreign
exchange risk, and commercial risk
Under Country Risk factor that are effecting the trade transactions are Political Environment, Economic
Environment, Legal Infrastructure, Foreign Exchange Restrictions.
Foreign exchange risk comes when there is uncertainty in the value of future payments in that currency
Under Commercial Risk the factors that are effecting are Reliability of information which means as the
parties are staying in different locations so financial status information of each parties will be limited
Trade dispute: Domestic Trade dispute is different from the International Trade disputes so in solving the
issues legal proceedings will be expensive

INTERNATIONALCOMMERCIAL TERMS (INCOTERMS)

The Incoterms 2010 rules

The Incoterms 2010 rules are standard sets of trading terms and conditions designed to assist traders
when goods are sold and transported. INCOTERMS are generally used in both International trade and
Domestic Trade . INCO terms are a series of international sales terms, published by International
Chamber Of Commerce
(ICC) and widely used in international commercial transactions. These are accepted by governments,
legal
authorities and practitioners worldwide for the interpretation of most commonly used terms in international
trade. This reduces or removes altogether, uncertainties arising from different interpretation of such terms
in different countries. They closely correspond to the U.N. Convention on contracts for the international
sale of goods. The first version of INCO terms was introduced in 1936. INCO terms 2010 (8th edition)
were
published on Sept 27, 2010 and these came into effect wef Jan 1, 2011.
Main changes in INCOTERMS 2010
1. Removal of 4 terms (DAF, DES, DEQ and
DDU) and introduction of 2 new terms (DAP - Delivered at Place and DAT - Delivered at
Terminal). As a result, there are a total of 11
terms instead of 13 (2 additions, DAP and DAT and 4 deletions, DAF, DDU, DEQ and DES).
2. Creation of 2 classes of INCOTERMS - (1)
rules for any mode or modes of transport and (2) rules for sea and inland waterway [INCOTERMS 2000
had 4 categories namely E (covering departure), F (covering main carriage unpaid), C (covering main
carriage paid) and D (covering arrival)

Each Incoterms rule specifies:

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*the obligations of each party (e.g. who is responsible for services such as transport; import and export

clearance etc)

*the point in the journey where risk transfers from the seller to the buyer

So by agreeing on an Incoterms rule and incorporating it into the sales contract, the buyer and seller can

achieve a precise understanding of what each party is obliged to do, and where responsibility lies in event

of loss, damage or other mishap.

The Incoterms rules are created and published by the International Chamber of Commerce (ICC) and are

revised from time to time. The most recent revision is Incoterms 2010 which came into force on 1st

January 2011.

The definitive publication on the Incoterms 2010 rules is the ICC publication number 715, which is

available from various national bookshops.

This is essential reading for those with responsibility for setting a corporate policy or negotiating contracts

with trading partners or service providers.

The logic of the Incoterms 2010 rules

The elevenrules are divided into two main groups

Rules for any transport mode

• Ex Works EXW

• Free Carrier FCA

• Carriage Paid To CPT

• Carriage & Insurance Paid to CIP

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• Delivered At Terminal DAT

• Delivered At Place DAP

• Delivered Duty Paid DDP

Rules for sea & inland waterway only

• Free Alongside Ship FAS

• Free On Board FOB

• Cost and Freight CFR

• Cost Insurance and Freight CIF

In general the “transport by sea or inland waterway only” rules should only be used for bulk cargos (e.g.

oil, coal etc) and non-containerised goods, where the exporter can load the goods directly onto the vessel.

Where the goods are containerised, the “any transport mode” rules are more appropriate.A critical

difference between the rules in these two groups is the point at which risk transfers from seller to buyer.

For example, the “Free on Board” (FOB) rule specifies that risk transfers when the goods have been

loaded on board the vessel. However the “Free Carrier” (FCA) rule specifies that risk transfers when the

goods have been taken in charge by the carrier.

Another useful way of classifying the rules is by considering:

Who is responsible for the main carriage – the buyer or the seller?

If the seller is responsible for the main carriage, where does the risk pass from the seller to the buyer –

before the main carriage, or after it?

This gives us these fourgroups:

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Buyer responsible for all carriage – EXW

Buyer arranges main carriage – FAS; FOB; FCA

Seller arranges main carriage, risk passes after main carriage – DAT; DAP; DDP

Seller arranges main carriage, but risk passes before main carriage – CFR; CIF; CPT; CIP

Eleven terms

Group-1 INCO terms

1. EXW means that a seller has the goods ready for collection at his premises (works, factory,
warehouse, plant) on the date agreed upon. The buyer pays transportation costs and bears the
risks for
bringing the goods to their final destination. This term places the greatest responsibility on the
buyer and
minimum obligations on the seller.
2.FCA — Free Carrier (named places) : The seller hands over the goods, cleared for export,
into the
custody of the first carrier (named by the buyer) at the named place. This term is suitable for all
modes of
transport, including carriage by air, rail, road, and containerized / multi-modal sea transport.
3. CPT — Carriage Paid To (named place of destination): (The
general/containerized/multimodal
equivalent of CFR) The seller pays for carriage to the named point of destination, but risk
passes when
the goods are handed over to the first carrier.
4. CIP — Carriage and Insurance Paid (To) (named
place of destination): The containerized transport/multimodal equivalent of CIF. Seller pays for
carriage
and insurance to the named destination point, but risk passes when the goods are handed over
to the first
carrier,
5. DAP : delivered at place
6. DAT I. delivered at terminal
7. DDP — Delivered Duty Paid (named destination place): This term means that the seller pays
for all
transportation costs and bears all risk until the goods have been delivered and pays the duty.
Also used
interchangeably with the term "Free Domicile". It is the most comprehensive term for the buyer.
In most of
the importing countries, taxes such as (but not limited to) VAT and excises should not be
considered
prepaid being handled as a "refundable" tax. Therefore VAT and excise usually are not
representing a
direct cost for the importer since they will be recovered against the sales on the local (domestic)
market.

Group-2 INCO terms

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8. FAS — Free Alongside Ship (named loading port): The seller must place the goods alongside
the ship
at the named port. The seller must clear the goods for export. Suitable for maritime transport
only but NOT
for multimodal sea transport in containers. This term is typically used for heavy-lift or bulk cargo.
9. FOB — Free on board (named loading 'port): The seller must themselves load the goods on
board the
ship nominated by the buyer, cost and risk being divided at ship's rail. The buyer must instruct
the seller
the details of the vessel and port where the goods are to be loaded, and there is no reference to,
or
provision for, the use of a carrier or forwarder.
10.CFR or CNF — Cost and Freight (named destination port): Seller must pay the costs and
freight to
bring the goods to the port of destination. The risk is transferred to the buyer once the goods
have
crossed the ship's rail. Maritime transport only and Insurance for the goods is NOT included.
Insurance is
at the Cost of the Buyer.
11.CIF — Cost, Insurance and Freight (named destination port): Exactly the same as CFR
except that theseller must in addition procure and pay for insurance for the buyer (Maritime
transport only).

Ten common mistakes in using the Incoterms rules

Here are some of the most common mistakes made by importers and exporters:
• Use of a traditional “sea and inland waterway only” rule such as FOB or CIF for
containerised goods, instead of the “all transport modes” rule e.g. FCA or CIP. This exposes the
exporter to unnecessary risks. A dramatic recent example was the Japanese tsunami in March
2011, which wrecked the Sendai container terminal. Many hundreds of consignments awaiting
despatch were damaged. Exporters who were using the wrong rule found themselves
responsible for losses that could have been avoided!
• Making assumptions about passing of title to the goods, based on the Incoterms rule in
use. The Incoterms rules are silent on when title passes from seller to buyer; this needs to be
defined separately in the sales contract
• Failure to specify the port/place with sufficient precision, e.g. “FCA Chicago”, which
could refer to many places within a wide area
• Attempting to use DDP without thinking through whether the seller can undertake all the
necessary formalities in the buyer’s country, e.g. paying GST or VAT
• Attempting to use EXW without thinking through the implications of the buyer being
required to complete export procedures – in many countries it will be necessary for the exporter
to communicate with the authorities in a number of different ways
• Use of CIP or CIF without checking whether the level of insurance in force matches the
requirements of the commercial contract – these Incoterms rules only require a minimal level of
cover, which may be inadequate.
• Where there is more than one carrier, failure to think through the implications of the risk
transferring on taking in charge by the first carrier – from the buyer’s perspective, this may turn
out to be a small haulage company in another country, so redress may be difficult in the event of
loss or damage
• Failure to establish how terminal handling charges (THC) are going to be treated at the
point of arrival. Carriers’ practices vary a good deal here. Some carriers absorb THC’s and
include them in their freight charges; however others do not.

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• Where payment is with a letter of credit or a documentary collection, failure to align the
Incoterms rule with the security requirements or the requirements of the banks.
• When DAT or DAP is used with a “post-clearance” delivery point, failure to think through
the liaison required between the carrier and the customs authorities – can lead to delays and
extra costs

In India there is a special form introduced by RBI related to remittances against exports of software and
related IT service by name SOFTEX
Bilateral trade means instead of payment of money the trade will be done on the basis of exchange of
goods and services
Merchant trading means buying the good from one country by another country and suppling those goods
to an another country so between the three countries the trade exist
Condition for merchant trading: good should not enter domestic tariff area and good should not undergo
transformation
Goods that are to be exported should follow the foreign trade policy on the date of shipment
Under merchant trading the transaction should be routed to same bank
Merchant trade transaction should be completed in 9 months
Outlay of foreign exchange should not be more than 4 months
Any import leg beyond 200000 per transaction should be made against bank guarantee
Any deviation in the transaction should be reported to RBI
Any merchant trader whose outstanding is 5% than he should be shortlisted
High seal sale: It means the ownership is transferred to other party when the goods are still in transit

Modes of International Trade

The three way to do international trade are

Clean Payments: All trading documents, title documents are under the control of trading parties
They are two types of clean Payments
Advance payment: Exporter send the goods only after the receiving the payment form the importer

Open Account:
Importer pays to exporter only after the receiving the good from exporter.
Bills for Collection:
The official documents which will be given by exporter to banks and give instruction to release the
documents to the importer
Document against Payment: Document will be released only after payment to exporter.
Documents against Acceptance: only against the acceptance of draft documents are released
Documentary Letter of Credit: It is the underwriting given by the Importer bank on behalf of the customer
promising the payment to the exporter
Revocable LC: Can be cancelled without the consent of exporter
Irrevocable LC: Both parties should accept for cancellation
If the payment is made at the time of presentation of documents it is called sight LC
If the payment is made at future date from the date of presentation of documents it is called as Term LC
Confirming LC: The bank under this will give confirmation to issuing bank that payment will reach the
exporter. The confirming bank can be as per the choice of Exporter. Like if he has bank which is well
known to him

Clean payment Transactions

Clean payments are classified in two types
1.Payment in advance
2.Open account
Advantages of open account to importer: no risk, delays use of company cash resources
Advantages of Advance payment to importer: low cost

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Risk Spectrum will summarize the risk that is associated with the payment methods in relation to the
exporter and importer
No risk will be assumed in case of advance payment to exporter

Documentary collection and credit

Documentary letter of credit means exporter gives the instructions to the bank to release the documents
to the importer
Documentary letter of credit is also called as collection against bills
In the case of Documentary collection the exporter is Drawer and Importer is Drawee
The exporter Bank and remitting bank need not be the same
Collecting bank and presenting bank need not be the same
There are different parties involved namely
Exporter: He will submit the documents to bank in that details of payment of importer will be present
(When and How)
Exporter Bank is called as Remitting Bank which it send the documents to Buyers Country bank and give
the instructions to pay for the exporter when payment is received from the collecting bank
Buyer duty is to pay the bill and take the documents
Importer Bank is the collecting bank and act as an agent for remitting bank
It release the documents to importer when received the payment.
If suppose importer did not pay than the collecting bank will provide the storage and insurance for the
goods till the due is paid
In case of dishonour than the collecting bank will protest the bill
Settlement of Bills will be done in two ways D/P or D/A
D/P Documents against payment: It is also called as Cash against Documents/ Cash on Delivery
The importer should pay usually within 3 days from the date of presentation of documents
In the above case if the importer does not pay exporter can go for court.
CASE OF NEED is something who can help or do arrangements in the importer country if the importer do
not pay the bill
D/A Documents against Acceptance: There will be an small agreement between two parties where the
importer is required to accept the bill. In this case importer will pay on some date in future
Generally exporter provide credit to importer this credit is called as Usance
Term here implies Multiples of 30 days
Risk here is exporter loses the control on the goods
Few risk for the exporter here is importer may be bankruptcy, may say some good are damaged, may
cheat the importer
Usance Bill means importer accepts the bill payable at a specific future date but does not receive the
documents until the payment is done

Documentary Credits

‘Letters of Credit’ also known as ‘Documentary Credits’ is the most commonly

accepted instrument of settling international trade payments

Why Documentary Credits

• Exchange of goods and services across national boundaries brings greater problems
to both buyer and seller than does domestic business.
• Diversity of customs, standards, currencies, local regulations, languages and legal
systems
• The Documentary Letter of Credit is widely used to reduce the financial risks of
trade.
• Importer wants to ensure performance while exporter wants to secure payment.
• Few of the rules are subject to any national or international law. Provisions of
International Chamber of Commerce & Industry (ICC) important, but not foolproof.
• Generally adopted set of rules for credits known as the Uniform Customs and
Practice for Letters of Credit (UCP) issued by ICC, publication no.600, 2007 (earlier
version no. 500, 1993).

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Introduction
• This revision of the Uniform Customs and Practice for Documentary Credits
(commonly called "UCP") is the sixth revision of the rules since they were first
promulgated in 1933.
• The objective of UCP, since attained, was to create a set of contractual rules that
would establish uniformity in that practice, so that practitioners would not have to
cope with a plethora of often conflicting national regulations. The universal
acceptance of the UCP by practitioners in countries with widely divergent economic
and judicial systems is a testament to the rules' success.
• It is important to recall that the UCP represent the work of a private international
organization, not a governmental body.

‘Letters of Credit’ also known as ‘Documentary Credits’ is the most commonly

accepted instrument of settling international trade payments. A Letter of
Credit is an arrangement whereby Bank acting at the request of a customer
(Importer / Buyer), undertakes to pay for the goods / services, to a third party
(Exporter / Beneficiary) by a given date, on documents being presented in
compliance with the conditions laid down.

PARTIES TO A LETTER OF CREDIT (LC)

A letter of credit transaction normally involves the following parties :
i) APPLICANT / OPENER – the buyer of the goods / services (Importer) on
whose behalf the credit is issued
ii) ISSUING BANK - the Bank which issues the credit and undertakes to make
the payment on behalf of the applicant as per terms of the L/C.
iii) BENEFICIARY - the seller of the goods / services (exporter) in whose
favour the credit is issued and who obtains payment on presentation of
documents complying with the terms and conditions of the LC.
iv) ADVISING BANK – Banks which advises the LC, certifying its authenticity to
beneficiary and is generally a bank operating in the country of the
beneficiary.
v) CONFIRMING BANK – A bank which adds its guarantee to the LC opened by
another Bank and thereby undertakes responsibility for
payment/acceptance/negotiation/incurring deferred payment under the
credit in addition to that of the Issuing Bank. It is normally a bank
operating in the country of the beneficiary and hence it’s guarantee adds
to the acceptability of the LC for the beneficiary. This is being done at
the request / authorization of the Issuing Bank.
vi) NOMINATED BANK – A Bank in exporter’s country which is specifically
authorized by the Issuing Bank to receive, negotiate, etc., the documents
and pays the amount to the exporter under the LC.

vii) REIMBURSING BANK – Bank authorised to honour the reimbursement claim

made by the paying, accepting or negotiating bank. It is normally the
bank with which Issuing Bank has Nostro Account from which the payment
is made to the nominated bank.
viii) TRANSFERRING BANK – In a transferable LC, the 1st Beneficiary may
request the nominated bank to transfer the LC in favour of one or more
second beneficiaries. Such a bank is called Transferring Bank. In the case
of a freely negotiable credit, the bank specifically authorised in the LC as
a Transferring Bank, can transfer the LC.

TYPES OF LETTERS OF CREDIT

1. REVOCABLE LETTER OF CREDIT

A revocable letter of credit is one which can be cancelled or amended
by the issuing bank at any time and without prior notice to or consent of
the beneficiary. From the exporter’s point of view such LCs are not safe.
Besides exporter cannot get such LCs confirmed as no bank will add
confirmation to Revocable LCs. However, if any bank has negotiated bills

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before receipt of notice of revocation, opening bank is liable to honour
its commitments. The LC should clearly state that the same is revocable.
As per Article-3 of UCP 600, a credit is irrevocable even if there is no
indication to that effect. Further UCP 600 does not provide for
revocable LCs and therefore such credits no longer exist.
2. IRREVOCABLE LETTER OF CREDIT
An Irrevocable Letter of Credit is one which cannot be cancelled or
amended without the consent of all parties concerned.
3. REVOLVING LETTER OF CREDIT

A Revolving Letter of Credit is one where, under terms and conditions

thereof, the amount is renewed or reinstated without specific
amendments to the credit being needed. It can revolve in relation to
time and value. This type of credit is generally used in local trade and
sometimes for import also. Such credits are opened for a stated amount
and the drawings under the LC are reinstated as soon as the documents
are paid. The LC can be restricted to the individual amount of drawing
at a time as well as aggregate amount of drawings. The Issuing bank has
to confirm to the negotiating bank about the acceptance / payment of
the documents for reinstatement of the amount in the LC. In revolving
LC for import, the maximum drawings and the validity would be to the
extent permitted by the import licence, if such imports are backed by
Import Licence. Generally, we do not open Revolving LCs for import.
However in exceptional cases such L/C may be opened with adequate
safeguards / conditions subject to strict compliance of Foreign Trade
Policy and Exchange Control Regulations particularly with reference to
aggregate drawings under such L/C & shipment dates etc.

4. TRANSFERABLE LETTER OF CREDIT

A Transferable Credit is one that can be transferred by the original
(first) beneficiary to one or more second beneficiaries. When the sellers
of goods are not the actual suppliers or manufacturers, but are
dealers/middlemen, such credits may be opened, giving the sellers the
right to instruct the advising bank to make the credit available in whole
or in part to one or more second beneficiaries. The LC can be
transferred to more than one second beneficiary provided LC permits
partial shipment and aggregate value of amounts so transferred does not
exceed value of original LC. The LC can be transferred only once and
only on terms stated in the credit, with the exception of :
- The amount of the Credit,
Any unit price stated therein,
- The expiry date,
- The latest shipment date or given period for shipment,
- The period for presentation of documents,
any or all of which may be reduced or curtailed.
The percentage for which insurance cover must be effected may be
increased to provide the amount of cover stipulated in the credit.
The LC is deemed to be transferable only if it is stated to be
‘Transferable’ in the LC. Second beneficiary has no right to transfer to
third beneficiary. However, he can retransfer to the first beneficiary. As
per our Bank’s policy, Transferable Import LCs is normally not opened.
However, transferable LCs can be opened in exceptional case, by
specifying the second beneficiaries in the LC itself or by amendment,
provided.
i) Second beneficiaries should be specific and limited in number,
ii) Satisfactory credit report on second beneficiary should have been
received. Further the second beneficiary must be a shipper /
manufacturer or supplier of goods.
iii) Second beneficiary should normally be residing in the same
country. If resident of another country, method of payment of

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second beneficiary’s country should conform to Exchange Control
Regulations.
iv) Underlying contract indent/order should provide for such
transfers.

5. BACK TO BACK LETTER OF CREDIT

In case of a transferrable LC, the beneficiary can ask the nominated
Bank to transfer the credit in favour of his suppliers. But, where the

credit is not transferrable and in cases where in a middle man enters

into a contract to supply goods to be obtained from other suppliers but
is unwilling to disclose the identity of the buyer and the buyer also is
unwilling to open a Transferable Letter of Credit, such Back to Back
credits are opened. Irrevocable letter of credit opened by the buyer, is
used by the beneficiary as security with his bank against which it agrees
to open LC in favour of the actual supplier / manufacturer. The
beneficiary of the original L/C will become the applicant for the second
set of L/C (back to back L/C). The terms of back to back L/C will be
almost identical to the L/C received from the buyer except to the extent
of amount, unit price and delivery dates, which will be prior to the
expiry of original L/C.
The original credit which is offered as security / backing is called the
PRINCIPAL CREDIT or OVERRIDING CREDIT and the credit opened on its
backing is called the BACK TO BACK credit or COUNTERVAILING CREDIT.

6.RED CLAUSE LETTER OF CREDIT

Such letters of credit contain a clause which enables the beneficiary to
avail of an advance before effecting shipment to the extent stated in
the LC. The clause used to be printed in red, hence the LC is called Red
Clause LC. The nominated bank provides the pre-shipment credit to the
beneficiary as per the authority given by the issuing Bank. In case the
beneficiary fails to export the goods or fails to repay the advance the
nominated bank gets the amount paid by the issuing bank.

7.GREEN CLAUSE LETTER OF CREDIT

This is an extension of Red Clause Letter of Credit, in that it provides
for advance not only for purchase of raw materials, processing and/or
packing but also for warehousing and insurance charges at the port

pending availability of shipping space. Generally advance is granted

under this LC only after goods are put in bonded warehouses etc. up to
the period of eventual shipment. In such cases warehouse receipts are
obtained as security / documentary evidence.

8.PAYMENT LETTER OF CREDIT

Payment credit is a sight credit which is available for payment at sight
basis against presentation of requisite documents to the issuing bank or
the nominated bank. In a payment credit, beneficiary may or may not be
called upon to draw a Bill of Exchange. In many countries, because of
stamp duties even on sight bills, drawing Bill of Exchange is dispensed
with.

9. DEFERRED PAYMENT LETTER OF CREDIT

Deferred Payment Credit is an usance credit where, payment will be
made by Issuing bank, on respective due dates, determined in
accordance with the stipulations of the credit, without the drawing of
Bill of Exchange. In a way, it is an extended payment credit. Under
deferred payment credit, no Bill of Exchange will be called upon to be
drawn, but it must specify the maturity at which payment is to be made
and how such maturity is to be determined. Deferred payment

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arrangements for Imports, providing for payment beyond 6 months from
the date of shipment up to a period of less than three years are treated
as Trade Credits for which procedural guidelines laid down by RBI for
External Commercial Borrowing and Trade Credits are required to be
followed.

10.ACCEPTANCE LETTER OF CREDIT

Acceptance Credit is similar to deferred payment credit except for the
fact that in this credit drawing of a usance Bill of Exchange is a must.
Under this credit, Bill of Exchange must be drawn on the specified bank
for specified tenor, and the designated bank will accept and honour the
same, by making payment on the due dates.

11.NEGOTIATION LETTER OF CREDIT

Negotiation Credit can be a sight credit or a usance credit. A Bill of
Exchange is usually drawn in negotiation credit. The draft can be drawn
as per credit terms. In a negotiation credit, the negotiation can be
restricted to a specific bank or it may allow free negotiation, in which
case it is called as ‘Freely Negotiable Credit’ whereby any bank who is
willing to negotiate can do so. Under a negotiation credit, if the bank
nominated as a negotiating bank refuses to negotiate, then the
responsibility of issuing bank would be to pay as per terms of that credit.
However, if the Bill of Exchange is drawn at a tenor (on DA basis) the
issuing bank can pay less discount. In other words, in all circumstances
under a negotiation credit, responsibility of the issuing bank is to pay
and it cannot say that it is the responsibility of the negotiating bank. A
bank which effectively negotiates draft(s)/document(s) buys them from
the beneficiary, thereby becoming a holder in due course.

12.CONFIRMED LETTER OF CREDIT

Confirmed Letter of Credit is a Letter of Credit to which another bank
(bank other than the issuing bank) has added its confirmation. This is to
say, in a Confirmed Letter of Credit the beneficiary will have a firm
undertaking of not only the bank issuing the credit, but also of confirming
bank. The bank which adds its confirmation is called a confirming bank and it
becomes a party to the contract of LC. Generally the confirmation to a credit is
desired by beneficiary from a bank known to him, preferably the one located in
his country so that his risk becomes localised and he can deal easily with a
local bank rather than deal with a bank abroad which has issued the credit. But
this type of LC is costlier to the parties concerned, since there would be
charges of confirming bank. The LC will be confirmed by another bank with
prior arrangement, only when it is advised to do so by the opening bank.
Confirmation can be added only to irrevocable credits and not to revocable
credits. When a bank acts as an advising bank, it has the only responsibility to
verify the genuineness of the credit. But when it adds its confirmation, it
becomes a prime obligor like the issuing bank and undertakings to pay /
negotiate / accept the documents as per the terms of the credit.

13. STANDBY CREDIT

The standby credit is a documentary credit or similar arrangement however

named or described which represents an obligation to the beneficiary on the
part of the issuing bank to make payment on account of any indebtedness
undertaken by the applicant, money borrowed or for any default by the
applicant in the performance of an obligation.
These credits are generally used as a substitute for financial guarantees. In
countries like USA, Japan it is not permissible to issue bank guarantees.
Therefore, banks in these countries issue standby letter of credit in situations
where normally a letter of guarantee should have been issued. The document
generally called for under such credits is a simple statement of claim as

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certificate of non performance. The standby works as a guarantee in the
background of the underlying transaction and it is expected that it will never
be drawn.
This facility may be extended on a selective banks for applicants with good
track record. The nature of transaction is clean and hence is risky.

SWIFT:
It is a worldwide interbank financial telecommunications
It is two fold
It allows the customers to exchange the information reliably and securely
It helps in settling the transactions fast and with low cost and reducing operational risk
It head Quarters is in Brussels, Belgium
It transport the messages the information from two financial institutions and maintain the integrity and
confidentiality
Swift messages are categorised by numbers called MT numbers
MT 800 deals with traveller’s cheque
MT 300 deals with foreign exchange deals
Swift India services started in India on 7th march 2014
In case of LC the following are the documents that are required namely Bill of Exchange, Commercial
Invoice, Transportation Document, Insurance Document, Inspection Certificate, and Certificate of Origin
The documents should be prepared in the language of LC
Modifications in the LC can be done but with the acceptance of the both parties
Confirmed LC is costlier to the parties concerned since there would be charges of confirming bank
Back to Back LC is also called as Countervailing Credit
On one LC if another LC is drawn than it is termed as Back To Back LC
The original Credit is referred to as Overriding Credit or Principal Credit
Back to Back LC is not preferable by the banks because the person who open the Back to Back LC may
not produce the same documents at the other end

Transferable LC means transfer of Ownership of documents is shifted to second Beneficiary from first
beneficiary. Here first beneficiary will become intermediary
Import Operations will takes place when the resident in India is importing goods into India
There are two types of charges when a Importer LC is opened
Opening charges: This include LC opening charges, fee charged by the LC opening Bank during the
commitment period is referred to as Commitment fees
Usance period may vary from 7 days to 90/180 days
The fees will be charged by the bank during usance period is called as Usance Charges
After the Retirement of LC the retirement charges will be collected from the beneficiary
The following are the risk while opening import LC
a) The financial status of importer
b) The goods
c) The status of the exporter
d) Country risk
e) Foreign exchange risk

The LC is opened by the person staying abroad on the name of person in India is called as Export LC
Under the Scheme of ECGC both Commercial and Political Risk are covered
The reimbursement bank always earn the commission per transaction for the balance kept with the
reimbursement bank by the issuing bank
It will look after the payment details not the documentation
Roles and responsibilities of Reimbursement are governed by ICC uniform rules for Reimbursement
Trade Control in India will look after the physical movement of goods and make sure that are doing as per
the Foreign Trade policy guidelines
ICC Publications name ISBP International Standard Banking Practice for examining the documents under
Documentary LC
First ISBP is in 2002
Now 2013 publication is running and it covers Packing list, weigh list, Beneficiary Certificate, Non-
negotiable Sea Waybill, Inspection, health etc.

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FEDAI Self-Regulated Organisation
It authorise the bank to do foreign transactions

Important Trade documents

Generally there are few documents which we need to take while doing LC
Air Waybill: This is the receipt given from the Airline Company. It is not any Document and also not
considered as Negotiable Document.
Bill of Lading: Transport by means of Ship. It is negotiable documents as goods will be handover to the
destination person only after the producing the goods
2 or 3 copies of bill of lading will be taken when one is presented the others will be considered as void
There are some parties in Bill Of lading:
Shipper, Consignee, Notify Party, Carrier
Certificate of Origin: shows that goods are originated in a particular country
Combined Transport Document: This List contain place of receipt place of delivery and different modes of
transport.
Another name of this transport is multimodal transport document, inter modal transport document or
combined transport bill of lading
The liability will lies from the starting and end place of delivery
Commercial invoice: It is statement of goods shipped and also includes statement of payment due
Draft: This is the demand for payment issued by the exporter to the importer
They are issued in the set of two: first of exchange/second of exchange OR Singly(Sola bill of exchange)
Insured amount must be the same currency as the credit and usually for the bill amount plus 10 percent
As per the UCPDC guidelines if the LC does not stipulate the value insurance value that should be
specified is 110 percent of CIF value
Packing List/ Specification means packing material that is used for packing and also labelling is also done
after packing
Exporter need to submit the inspection certificate

Documents under LC
1. Bill of exchange.
2. Invoice
3. Transport Documents: Bill of Lading & Airway Bill
4. Insurance Documents (Insurance is done at 110% of CIF value)
5. Certificate of Origin
Short Bill of Lading: Which does not carry detailed terms and conditions
Thorough Bill of Lading covers entire voyage with several modes of
transport
Straight Bill of Lading is issued directly in the name of consignee.
Clause Bill of Lading: It bears super imposed clause that declared
defective condition of Goods.
Clean Bill of Lading: It has no such super imposed clause declaring
goods or packaging as defective.

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Bill of Lading

A bill of lading is a receipt issued by a carrier for goods to be transported to a named destination, which
details
the terms and conditions of transit. In the case of goods shipped by sea, it is the document of title which
controls
the physical custody of the goods. There are two different types of bill of lading:
• A STRAIGHT BILL OF LADING is one that names a specific consignee to whom goods are to be
delivered.
It is a non-negotiable document.
• An ORDER BILL OF LADING is one that is written “to order” or to order of a named party making the
instrument negotiable by endorsement. Letters of credit usually call for an order bill of lading blank
endorsed, meaning the holder of the bill of lading has title to the goods.
Given that each bill of lading must be either “straight” or “order”, the following is a list of more common
types of bill of lading:
• An OCEAN BILL OF LADING is one issued by an ocean carrier in sets, usually three signed originals
comprising a complete set, any one of which gives title to the goods. Ocean bills of lading may be issued
in “straight” or “order” form.
• A SHORT FORM BILL OF LADING is one issued by a carrier which does not indicate all the conditions
of
the contract of carriage. This is acceptable unless otherwise specified in the letter of credit.
• A CHARTER PARTY BILL OF LADING, is one which shippers may, when large or bulk cargoes are
concerned, lease the carrying vessel for a stated time or specific voyage under a charter party contract
with the owner. Goods carried are then covered under a form of bill of lading issued by the charterer and
indicate as being shipped, subject to the term and conditions of the charter party. Charter party bills
of lading are not acceptable unless specifically authorized by the letter of credit.
• A MULTIMODAL TRANSPORT DOCUMENT is one covering shipments by at least two different modes
of transport.
Checklist
• Ensure that the port of loading and port of discharge are as stipulated in the letter of credit.
• The shipment must be consigned in the manner stipulated in the letter of credit.
• A general description of the goods is acceptable if consistent with but not necessarily identical with the
description specified in the letter of credit and other documents.
• If the letter of credit calls for an “on board” bill of lading, it must be evidenced by a “shipped on board”
bill of lading, or by marked or stamped “on board” notation indicating the date the goods were loaded
on board.
• If the letter of credit stipulates that freight is to be prepaid; or if the invoice is priced CIF or CFR; or if the
ocean freight has been added to the FOB or FAS value: the bill of lading must be marked “freight paid”
or “freight prepaid”. Expressions such as “freight to be paid” or “freight payable” are not acceptable.

• The bill of lading must be “clean”. Any superimposed marking indicating a defect in the packaging or
condition of the goods renders the bill of lading “unclean” and unacceptable.
• Bills of lading indicating goods shipped “on deck” are not acceptable unless specifically allowed in the
letter of credit.
• The total number of packages comprising the shipment, shipping marks and numbers, and any gross
weight must agree with those on the commercial invoice and other documents.
• Letters of credit should stipulate a period of time after date of issue of the bill of lading or other shipping
document for presentation of drawings. If no such period is specified, banks will refuse documents and
consider them to be stale dated if presented later than 21 days after the date of “on board” endorsement,
or, in the case of a shipped bill of lading or other shipping document, 21 days after the date of issue.
• The bill of lading is to cover only goods described in the invoice and specified in the letter of credit.
• Any correction or alteration must be initialled by the party signing the bill of lading.
• The name of the carrier must appear on the front of the bill of lading where the particulars of the
shipment are shown.
• If the bill of lading is signed by an agent, the name of the agent as well as the name of the carrier must
be shown.

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Air Waybill
An air waybill is a receipt issued by an air carrier indicating receipt of goods to be transported by air and
showing goods consigned to a named party. Being a non-negotiable receipt it is not a document of title.
Checklist
• Only the goods invoiced and specified in the letter of credit may be covered by the air waybill.
• If the letter of credit stipulates that freight is to be prepaid; or if the invoice is priced CIF or CFR;
or if freight is otherwise included in the invoice: the air waybill must indicate that freight has been paid.
• The airport of departure and airport of destination must be as stipulated in the letter of credit.
• The number of packages and gross weight shown on the air waybill must be consistent with the other
documents.
• An air waybill issued by a forwarder is not acceptable

Certificate of Origin
As the name suggests, a certificate of origin certifies as to the country of origin of the goods described
and
should comply with any stipulations in the letter of credit as to originating country and by whom the
certificate
is to be issued. The certificate should be consistent with and identified with the other shipping documents
by
shipping marks and numbers, and must be signed.

Commercial Invoice
The commercial invoice is an itemized account issued by the beneficiary and addressed to the applicant,
and
must be supplied in the number of copies specified in the letter of credit.
Checklist
• The invoice description of the goods must be identical to that stipulated in the letter of credit.
• Unit prices and shipping terms, ie., CIF, FOB, etc., must be as stipulated in the letter of credit.
Extensions
and totals should be checked for arithmetical correctness. For definitions of CIF, FOB etc.,

Draft
A draft is a bill of exchange and a legally enforceable instrument which may be regarded as the formal
evidence of debt under a letter of credit. Drafts drawn at sight are payable by the drawee on presentation.
Term (usance) drafts, after acceptance by the drawee, are payable on their indicated due date.
Checklist
• Drafts must show the name of the issuing bank and the number and date of the letter of credit under
which they are drawn.
• Drafts must be drawn and signed by the beneficiary of the letter of credit.
• The terms of the draft must be expressed in accordance with the tenor shown in the letter of credit;
e.g., at sight or at a stated number of days after bill of lading/shipment date.
• The amount in words and figures must agree and be within the available balance of the letter of credit
and in the same currency as the letter of credit.
• The amount must agree with the total amount of the invoices unless the letter of credit stipulates that
drafts are to be drawn for a given percentage of the invoice amount.

Insurance Policy or Certificate

Under the terms of a CIF contract, the beneficiary is obliged to arrange insurance and furnish the buyer
with
the appropriate insurance policy or certificate. The extent of coverage and risks should be agreed upon
between the buyer and seller in their initial negotiations and be set out in the sales contract.
Since the topic of marine insurance is extremely specialized and with conditions varying from country to
country, the services of a competent marine insurance broker are useful and well-advised.
Checklist

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• If the letter of credit calls for an insurance policy, an insurance certificate is not acceptable and the
policy
must be provided. Broker’s cover notes are not acceptable unless specifically allowed in the letter of
credit.
• If the insurance policy or certificate indicates that it is issued in duplicate, both copies must be presented.
• Unless the amount to be insured is stipulated in the letter of credit, the amount should cover at least the
CIF value plus 10 percent if invoiced in those terms. Otherwise, the amount should be for the greater of
the draft amount or the total invoice value plus 10%.
• The amount insured must be expressed in the same currency as the letter of credit.

• The description of the goods insured must be consistent with that in the other documents although not
necessarily identical.
• The number of packages comprising the shipment and shipping marks and numbers must agree with
those shown on the invoice and bill of lading.
• The name of the carrying vessel, port of loading and port of discharge must agree with those shown on
the bill of lading.
• The insurance document must cover transshipment if transshipment is indicated on the bill of lading.
• The insurance document must cover specifically those risks stipulated in the letter of credit. The “all
risks”
clause in the insurance document does not cover risks of war, which must be separately shown as
covered,
if required by the letter of credit.
• Unless the letter of credit specifies to whom loss is to be payable, the insurance document must be
endorsed by the party to whose order it is made so as to be in negotiable form.
• The date of the insurance document should not be later than the date of shipment as shown by the bill
of lading or other transport document. However, the insurance document may be dated after the date of
shipment provided it evidences that cover is effective from date of dispatch ie., by way of “warehouse to
warehouse” clause.
• Any alterations or corrections to the insurance document must be initialed by the party signing the
document.
• The insurance document must be signed by an authorized person.
The foregoing are the most common documents usually called for in an export letter of credit. The
following may
also be asked for to satisfy government requirements or for the convenience of the buyer.

Packing List
A packing list is usually requested by the buyer to assist in identifying the contents of each package or
container. It must show the shipping marks and number of each package. It is not usually required to be
signed.

Inspection Certificate
When a letter of credit calls for an inspection certificate it will usually specify by whom the certificate is to
be
issued; otherwise, the same general comments as in the case of the certificate of origin apply.
As a preventative measure against fraud or as a means of protecting the buyer against the possibility of
receiving substandard or unwanted goods, survey or inspection certificates issued by a reputable third
party
may be deemed prudent. Such certificates indicate that the goods have been examined and found to be
as
ordered.

Summary of Major Issues in LC Transactions

Check List for Issuing/Accepting L/C

• Quality of Issuing Bank

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• Method of Payment: Sight or Deferred Basis

• Transport Documents

• Other Documents

• Documents: Banks deal in documents not in goods, services or performance

• Should not refer to underlying contract

• Timing: UCP norm is max. 21 days after shipment date for presentation of

documents

Responsibilities and Obligations of Banks

• Irrevocable unless otherwise mentioned

• Issuing Bank: Prime obligation

• Advising Bank: Only obligation to authenticate the credit and passing it on promptly

to beneficiary

• Confirming Bank: takes over payment responsibilities of the issuing bank as far as the

beneficiary is concerned

• Reimbursing Bank: Responsibility of Issuing Bank to provide proper reimbursement

instructions

• Applicability of Force Majeure clause limiting banks’ liability on account of Acts of

God, riots, etc.

• Banks have five banking days to examine documents after receipt of documents

• Banks will examine documents with reasonable care

• Documents should be consistent with each other and complete

• Documents should conform with the terms of the credit

• Documents should comply with the provisions of UCP

Common Defects in Documentation

Commonly found discrepancies between the letter of credit and supporting documents

include:

• Letter of Credit has expired prior to presentation of draft.

• Bill of Lading evidences delivery prior to or after the date range stated in the credit.

• Stale dated documents.

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• Changes included in the invoice not authorized in the credit.

• Inconsistent description of goods.

• Insurance document errors.

• Invoice amount not equal to draft amount.

• Ports of loading and destination not as specified in the credit.

• Description of merchandise is not as stated in credit.

• A document required by the credit is not presented.

• Documents are inconsistent as to general information such as volume, quality, etc.

• Names of documents not exact as described in the credit. Beneficiary information

must be exact.

• Invoice or statement is not signed as stipulated in the letter of credit.

Options for Banks dealing in Discrepant Documents

• Ask beneficiaries to make corrections

• Accept minor discrepancies and pay under reserve

• Obtain indemnity from seller

• Telex/fax details of discrepancies to the issuing bank and request permission to pay

• Send the documents on collection

Marine or Ocean Bill of Lading

• They are documents of title. Should be signed by ship’s master or his named agent

• If stated that goods are on board, then dated

• Load port and disport should be named

• `On Deck’ transport document not allowed

• Clean Transport Document

• Quasi-negotiable: transferable by endorsement and physical delivery, but no

recourse

• Transhipment allowed unless prohibited in L/C

Other Transport Documents

• Some multi-modal transport operators (MTOs) also issue negotiable documents for

transport operations where the goods are carried by several different modes of

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transport.

• Today goods often travel faster than the related documents. Rail, road and air

transport documents are issued only in non-negotiable form with the goods

consigned direct to a named consignee. Usually this will be the buyer unless the

goods are consigned to a bank

Non-Transport Documents

• Insurance Documents (Article 28): Same currency as the Credit, Minimum amount to

be CIF or CIP plus 10%,

• Commercial Invoices (Article 18)

• Consular Invoice

• Certificate of Origin

• Weight List

• Packing List

• Inspection or Survey Certificate

• Test Certificates

Trade Finance

Trade finance provide alternate solutions that balance risk and payments
Pre-shipment finance means the material and labour that is required to meet sales order
Post shipment finance means generate cash while offering payment terms to buyers
The factor that apply for the financing are
Financing can make a sale
Financing cost
Financing terms
Risk management
In case any additional guarantee is need government programs will help the lender to provide
additional financing
Trade financing refers to financing the individual transaction or series of revolving transactions
Working capital loans are normally associated with pre shipment financing
Labour material and inventory generally requires loans
Prepayment by clean remittance means importer will pay before the shipment of the goods

Pre shipment
Pre shipment is the finance given by financial institution for exporter and is a part of working capital
finance.
The advantages of Pre shipment finance is to enable the exporter to have the facilities like buy raw
material , warehouse of good and raw material, process and pack the goods, shipping.

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There are three types of Pre shipment finance namely packing credit , Advance against Receivables,
Advance against cheque/draft
It is extended to packing credit in Indian rupees and foreign rupees
Condition for the exporter to export are, he need to have 10 digit importer exporter code number, should
not be caution list of RBI and ECGC
If there are any good that are restricted in exporting he has to take permission from DGFT
If the export order is divided between more than one exporter pre shipment credit can be shared between
them
Percentage of margin will be decided by the bank based on nature of order, nature of commodity, and
capability of exporter.
There are different stages of Pre shipment Finance
1) Appraisal and Sanction of limits
2) Disbursement of Packing Credit Advance
3) Follow up of Packing Credit Advance
4) Liquidation of Packing Credit Advance
5) Overdue Packing credit
6) Packing Credit to Sub Supplier
7) Running Account Facility
8) Pre shipment credit in Foreign Currency
RCC stands for Restricted Cover Countries
If the good are send to the countries where this countries are restricted, need a approval from ECGC
Packing credit should not exceed 180 days, but bank may extend 90 days and further extension of 90
days on its own discretion without permission from RBI
MDF: Market Development Fund
If the export does not takes place entire advance is recovered with commercial interest rate Plus penal
rate
Packing credit can be adjusted from EEFC Funds of exporter or local funds
EOH: Export Order Holder
Banks will collect interest on PCFC at monthly intervals against sale of foreign currency
PCFC maximum period 360 days
If there is export takes place in 360 days PCFC will be adjusted to TT selling Rate
PCFC balances can be placed in the EEFC, RFC(D) and Foreign Currency (Non Residents) Accounts
Deemed exports should be liquidated with in 30 days
LIBOR: London interbank offered rate
There are 7 tenors ranging from overnight LIBOR to months LIBOR
ECB are benchmarked against LIBOR

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 :

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Packing Credit in Indian Rupee
Packing Credit in Foreign Currency (PCFC)
Requirment for Getting Packing Credit
This facility is provided to an exporter who satisfies the following criteria

A ten digit importerexporter code number allotted by DGFT.

Exporter should not be in the caution list of RBI.
If the goods to be exported are not under OGL (Open General Licence), the exporter should have the
required license /quota permit to export the goods.
Packing credit facility can be provided to an exporter on production of the following evidences to the bank:

Formal application for release the packing credit with undertaking to the effect that the exporter would be
ship the goods within stipulated due date and submit the relevant shipping documents to the banks within
prescribed time limit.
Firm order or irrevocable L/C or original cable / fax / telex message exchange between the exporter and
the buyer.
Licence issued by DGFT if the goods to be exported fall under the restricted or canalized category. If the
item falls under quota system, proper quota allotment proof needs to be submitted.
The confirmed order received from the overseas buyer should reveal the information about the full name
and address of the overseas buyer, description quantity and value of goods (FOB or CIF), destination port
and the last date of payment.

Eligibility
Pre shipment credit is only issued to that exporter who has the export order in his own name. However,
as an exception, financial institution can also grant credit to a third party manufacturer or supplier of
goods who does not have export orders in their own name.

In this case some of the responsibilities of meeting the export requirements have been out sourced to
them by the main exporter. In other cases where the export order is divided between two more than two
exporters, pre shipment credit can be shared between them

Quantum of Finance
The Quantum of Finance is granted to an exporter against the LC or an expected order. The only
guideline principle is the concept of NeedBased Finance. Banks determine the percentage of margin,
depending on factors such as:

The nature of Order.

The nature of the commodity.
The capability of exporter to bring in the requisite contribution.
Different Stages of Pre Shipment Finance
Appraisal and Sanction of Limits
1. Before making any an allowance for Credit facilities banks need to check the different aspects like
product profile, political and economic details about country. Apart from these things, the bank also looks
in to the status report of the prospective buyer, with whom the exporter proposes to do the business. To
check all these information, banks can seek the help of institution like ECGC or International consulting
agencies like Dun and Brad street etc.

The Bank extended the packing credit facilities after ensuring the following"

The exporter is a regular customer, a bona fide exporter and has a goods standing in the market.
Whether the exporter has the necessary license and quota permit (as mentioned earlier) or not.
Whether the country with which the exporter wants to deal is under the list of Restricted Cover
Countries(RCC) or not.
Disbursement of Packing Credit Advance
2. Once the proper sanctioning of the documents is done, bank ensures whether exporter has executed
the list of documents mentioned earlier or not. Disbursement is normally allowed when all the documents
are properly executed.

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Sometimes an exporter is not able to produce the export order at time of availing packing credit. So, in
these cases, the bank provide a special packing credit facility and is known as Running Account Packing.

Before disbursing the bank specifically check for the following particulars in the submitted documents"

Name of buyer
Commodity to be exported
Quantity
Value (either CIF or FOB)
Last date of shipment / negotiation.
Any other terms to be complied with
The quantum of finance is fixed depending on the FOB value of contract /LC or the domestic values of
goods, whichever is found to be lower. Normally insurance and freight charged are considered at a later
stage, when the goods are ready to be shipped.

In this case disbursals are made only in stages and if possible not in cash. The payments are made
directly to the supplier by drafts/bankers/cheques.

The bank decides the duration of packing credit depending upon the time required by the exporter for
processing of goods.

The maximum duration of packing credit period is 180 days, however bank may provide a further 90 days
extension on its own discretion, without referring to RBI.

Follow up of Packing Credit Advance

3. Exporter needs to submit stock statement giving all the necessary information about the stocks. It is
then used by the banks as a guarantee for securing the packing credit in advance. Bank also decides the
rate of submission of this stocks.

Apart from this, authorized dealers (banks) also physically inspect the stock at regular intervals.

Liquidation of Packing Credit Advance

4. Packing Credit Advanceneeds be liquidated out of as the export proceeds of the relevant shipment,
thereby converting preshipment credit into postshipment credit.

This liquidation can also be done by the payment receivable from the Government of India and includes
the duty drawback, payment from the Market Development Fund (MDF) of the Central Government or
from any other relevant source.

In case if the export does not take place then the entire advance can also be recovered at a certain
interest rate. RBI has allowed some flexibility in to this regulation under which substitution of commodity
or buyer can be allowed by a bank without any reference to RBI. Hence in effect the packing credit
advance may be repaid by proceeds from export of the same or another commodity to the same or
another buyer.However, bank need to ensure that the substitution is commercially necessary and
unavoidable.

Overdue Packing
5. Bank considers a packing credit as an overdue, if the borrower fails to liquidate the packing credit on
the due date. And, if the condition persists then the bank takes the necessary step to recover its dues as
per normal recovery procedure.

Special Cases
Packing Credit to Sub Supplier
1. Packing Credit can only be shared on the basis of disclaimer between the Export Order Holder (EOH)
and the manufacturer of the goods. This disclaimer is normally issued by the EOH in order to indicate that
he is not availing any credit facility against the portion of the order transferred in the name of the
manufacturer.

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This disclaimer is also signed by the bankers of EOH after which they have an option to open an inland
L/C specifying the goods to be supplied to the EOH as a part of the export transaction. On basis of such
an L/C, the subsupplier bank may grant a packing credit to the subsupplier to manufacture the
components required for exports.
On supply of goods, the L/C opening bank will pay to the sub supplier's bank against the inland
documents received on the basis of the inland L/C opened by them.

The final responsibility of EOH is to export the goods as per guidelines. Any delay in export order can
bring EOH to penal provisions that can be issued anytime.

The main objective of this method is to cover only the first stage of production cycles, and is not to be
extended to cover supplies of raw material etc. Running account facility is not granted to subsuppliers.

In case the EOH is a trading house, the facility is available commencing from the manufacturer to whom
the order has been passed by the trading house.

Banks however, ensure that there is no double financing and the total period of packing credit does not
exceed the actual cycle of production of the commodity.

Running Account facility

2. It is a special facility under which a bank has right to grant preshipment advance for export to the
exporter of any origin. Sometimes banks also extent these facilities depending upon the good track record
of the exporter.
In return the exporter needs to produce the letter of credit / firms export order within a given period of time.

Preshipment Credit in Foreign Currency (PCFC)

3. Authorised dealers are permitted to extend Preshipment Credit in Foreign Currency (PCFC) with an
objective of making the credit available to the exporters at internationally competitive price.This is
considered as an added advantage under which credit is provided in foreign currency in order to facilitate
the purchase of raw material after fulfilling the basic export orders.

The rate of interest on PCFC is linked to London Interbank Offered Rate (LIBOR). According to guidelines,
the final cost of exporter must not exceed 0.75% over 6 month LIBOR, excluding the tax.

The exporter has freedom to avail PCFC in convertible currencies like USD, Pound, Sterling, Euro, Yen
etc. However, the risk associated with the cross currency truncation is that of the exporter.

The sources of funds for the banks for extending PCFC facility include the Foreign Currency balances
available with the Bank in Exchange, Earner Foreign Currency Account (EEFC), Resident Foreign
Currency Accounts RFC(D) and Foreign Currency(NonResident) Accounts.

Banks are also permitted to utilize the foreign currency balances available under Escrow account and
Exporters Foreign Currency accounts. It ensures that the requirement of funds by the account holders for
permissible transactions is met. But the limit prescribed for maintaining maximum balance in the account
is not exceeded. In addition, Banks may arrange for borrowings from abroad. Banks may negotiate terms
of credit with overseas bank for the purpose of grant of PCFC to exporters, without the prior approval of
RBI, provided the rate of interest on borrowing does not exceed 0.75% over 6 month LIBOR.

Packing Credit Facilities to Deemed Exports

4. Deemed exports made to multilateral funds aided projects and programmes, under orders secured
through global tenders for which payments will be made in free foreign exchange, are eligible for
concessional rate of interest facility both at pre and post supply stages.

Packing Credit facilities for Consulting Services

5. In case of consultancy services, exports do not involve physical movement of goods out of Indian
Customs Territory. In such cases, Preshipment finance can be provided by the bank to allow the exporter
to mobilize resources like technical personnel and training them.

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Advance against Cheque/Drafts received as advance payment

6. Where exporters receive direct payments from abroad by means of cheques/drafts etc. the bank may
grant export credit at concessional rate to the exporters of goods track record, till the time of realization of
the proceeds of the cheques or draft etc. The Banks however, must satisfy themselves that the proceeds
are against an export order

Packing credit has the following features:

1. Calculation of FOB value of order/LC amount or Domestic cost of
production (whichever is lower).
2. IEC allotted by DGFT.
3. Exporter should not be on the “Caution List” of RBI.
4. He should not be under “Specific Approval list” of ECGC.
5. There must be valid Export order or LC.
6. Account should be KYC compliant.
Liquidation of Pre-shipment credit
Out of proceeds of the bill.
Out of negotiation of export documents.
Out of balances held in EEFC account
Out of proceeds of Post Shipment credit.
Concessional rate of interest is allowed on Packing Credit up to 270
days. Previously, the period was 180 days. Running facility can also be
allowed to good customers.

Post shipment

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.

Post shipment finance is made available to exporters on the following

conditions:
IEC accompanied by prescribed declaration on GR/PP/Softex/SDF
form must be submitted.
Documents must be submitted by exporter within 21 days of
shipment.
Payment must be made in approved manner within 6 months.
Normal Transit Period is 25 days.
The margin is NIL normally. But in any case, it should not exceed
10% if LC is there otherwise it can be up to 25%.
Types of Post Shipment Finance:
Export Bills Purchased for sights bills and Discounting for Usance
bills.
Export bills negotiation.
Discrepancies of Documents
Late Shipment, LC expired, Late presentation of shipping documents, Bill
of Lading not signed properly, Incomplete Bill of Lading, Clause Bill of
Lading , Short Bill of Lading or Inadequate Insurance.
Advance against Un-drawn Balance
Undrawn balance is the amount less received from Importers. Bank can
finance up to 10% undrawn amount up to maximum period of 90 days.
Advance against Duty Drawback
Duty drawback is the support by Government by way of refund of
Excise/Custom duty in case the domestic cost of the product is higher than
the Price charged from the importer. This is done to boost exports despite

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international competition. Bank can make loan to exporter against Duty
Drawback up to maximum period of 90 days.

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 :

Export Bills purchased/discounted.

Export Bills negotiated
Advance against export bills sent on collection basis.
Advance against export on consignment basis
Advance against undrawn balance on exports
Advance against claims of Duty Drawback.
1. Export Bills Purchased/ Discounted.(DP & DA Bills)

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Export bills (Non L/C Bills) is used in terms of sale contract/ order may be discounted or purchased by the
banks. It is used in indisputable international trade transactions and the proper limit has to be sanctioned
to the exporter for purchase of export bill facility.

2. Export Bills Negotiated (Bill under L/C)

The risk of payment is less under the LC, as the issuing bank makes sure the payment. The risk is further
reduced, if a bank guarantees the payments by confirming the LC. Because of the inborn security
available in this method, banks often become ready to extend the finance against bills under LC.

However, this arises two major risk factors for the banks:

The risk of nonperformance by the exporter, when he is unable to meet his terms and conditions. In this
case, the issuing banks do not honor the letter of credit.
The bank also faces the documentary risk where the issuing bank refuses to honour its commitment. So,
it is important for the for the negotiating bank, and the lending bank to properly check all the necessary
documents before submission.
3. Advance Against Export Bills Sent on Collection Basis
Bills can only be sent on collection basis, if the bills drawn under LC have some discrepancies.
Sometimes exporter requests the bill to be sent on the collection basis, anticipating the strengthening of
foreign currency.
Banks may allow advance against these collection bills to an exporter with a concessional rates of
interest depending upon the transit period in case of DP Bills and transit period plus usance period in
case of usance bill.
The transit period is from the date of acceptance of the export documents at the banks branch for
collection and not from the date of advance.

4. Advance Against Export on Consignments Basis

Bank may choose to finance when the goods are exported on consignment basis at the risk of the
exporter for sale and eventual payment of sale proceeds to him by the consignee.
However, in this case bank instructs the overseas bank to deliver the document only against trust receipt
/undertaking to deliver the sale proceeds by specified date, which should be within the prescribed date
even if according to the practice in certain trades a bill for part of the estimated value is drawn in advance
against the exports.
In case of export through approved Indian owned warehouses abroad the times limit for realization is 15
months.

5. Advance against Undrawn Balance

It is a very common practice in export to leave small part undrawn for payment after adjustment due to
difference in rates, weight, quality etc. Banks do finance against the undrawn balance, if undrawn balance
is in conformity with the normal level of balance left undrawn in the particular line of export, subject to a
maximum of 10 percent of the export value. An undertaking is also obtained from the exporter that he will,
within 6 months from due date of payment or the date of shipment of the goods, whichever is earlier
surrender balance proceeds of the shipment.

6. Advance Against Claims of Duty Drawback

Duty Drawback is a type of discount given to the exporter in his own country. This discount is given only,
if the inhouse cost of production is higher in relation to international price. This type of financial support
helps the exporter to fight successfully in the international markets.

In such a situation, banks grants advances to exporters at lower rate of interest for a maximum period of
90 days. These are granted only if other types of export finance are also extended to the exporter by the
same bank.

After the shipment, the exporters lodge their claims, supported by the relevant documents to the relevant
government authorities. These claims are processed and eligible amount is disbursed after making sure
that the bank is authorized to receive the claim amount directly from the concerned government
authorities.

Crystallization of Overdue Export Bills

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Exporter foreign exchange is converted into Rupee liability, if the export bill purchase / negotiated
/discounted is not realize on due date. This conversion occurs on the 30th day after expiry of the NTP in
case of unpaid DP bills and on 30th day after national due date in case of DA bills, at prevailing TT selling
rate ruling on the day of crystallization, or the original bill buying rate, whichever is higher.

Forfeiting and factoring

Factoring is financing and collection of Receivables. The client sells Receivables at discount to Factor in
order to raise finance for Working Capital. It may be with or without recourse. Factor finances about
80% and balance of 20% is paid after collection from the borrower. Bill should carry LR/RR. Maximum
Debt period permitted is 150 days inclusive of grace period of 60 days. Debts are assigned in favour of
Factor. There are 2 factors in International Factoring. One is Export Factor and the other is Import Factor.
Importer pays to Import factor who remits the same to Export Factor. Forfaiting is Finance of Export
Receivables to exporter by the Forfaitor. It is also called discounting of Trade Receivablessuch as drafts
drawn under LC, B/E or PN.It is always No Recourse Basis (i.e. without recourse to exporter). Forfaitor
after sending documents to Exporters‟ Bank makes 100% payment to exporter after deducting applicable
discount. Maximum period of Advance is 180 days.

Forfeiting and factoring are services in international market given to an exporter or seller. Its main
objective is to provide smooth cash flow to the sellers. The basic difference between the forfeiting and
factoring is that forfeiting is a long term receivables (over 90 days up to 5 years) while factoring is a
shorttermed receivables (within 90 days) and is more related to receivables against commodity sales.

Definition of Forfeiting
The terms forfeiting is originated from a old French word ‘forfait’, which means to surrender ones right on
something to someone else. In international trade, forfeiting may be defined as the purchasing of an
exporter’s receivables at a discount price by paying cash. By buying these receivables, the forfeiter frees
the exporter from credit and the risk of not receiving the payment from the importer.

How forfeiting Works in International Trade

The exporter and importer negotiate according to the proposed export sales contract. Then the exporter
approaches the forfeiter to ascertain the terms of forfeiting. After collecting the details about the importer,
and other necessary documents, forfeiter estimates risk involved in it and then quotes the discount rate.
The exporter then quotes a contract price to the overseas buyer by loading the discount rate and
commitment fee on the sales price of the goods to be exported and sign a contract with the forfeiter.
Export takes place against documents guaranteed by the importer’s bank and discounts the bill with the
forfeiter and presents the same to the importer for payment on due date.

Documentary Requirements
In case of Indian exporters availing forfeiting facility, the forfeiting transaction is to be reflected in the
following documents associated with an export transaction in the manner suggested below:

Invoice : Forfeiting discount, commitment fees, etc. needs not be shown separately instead, these could
be built into the FOB price, stated on the invoice.
Shipping Bill and GR form : Details of the forfeiting costs are to be included along with the other details,
such FOB price, commission insurance, normally included in the "Analysis of Export Value "on the
shipping bill. The claim for duty drawback, if any is to be certified only with reference to the FOB value of
the exports stated on the shipping bill.
Forfeiting
The forfeiting typically involves the following cost elements:
1. Commitment fee, payable by the exporter to the forfeiter ‘for latter’s’ commitment to execute a specific
forfeiting transaction at a firm discount rate with in a specified time.
2. Discount fee, interest payable by the exporter for the entire period of credit involved and deducted by
the forfaiter from the amount paid to the exporter against the availised promissory notes or bills of
exchange.

Benefits to Exporter

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100 per cent financing : Without recourse and not occupying exporter's credit line That is to say once the
exporter obtains the financed fund, he will be exempted from the responsibility to repay the debt.
Improved cash flow : Receivables become current cash in flow and its is beneficial to the exporters to
improve financial status and liquidation ability so as to heighten further the funds raising capability.
Reduced administration cost : By using forfeiting , the exporter will spare from the management of the
receivables. The relative costs, as a result, are reduced greatly.
Advance tax refund: Through forfeiting the exporter can make the verification of export and get tax refund
in advance just after financing.
Risk reduction : forfeiting business enables the exporter to transfer various risk resulted from deferred
payments, such as interest rate risk, currency risk, credit risk, and political risk to the forfeiting bank.
Increased trade opportunity : With forfeiting, the export is able to grant credit to his buyers freely, and thus,
be more competitive in the market.
Benefits to Banks
Forfeiting provides the banks following benefits:

Banks can offer a novel product range to clients, which enable the client to gain 100% finance, as against
8085% in case of other discounting products.
Bank gain fee based income.
Lower credit administration and credit follow up.
Definition of Factoring

Definition of factoring is very simple and can be defined as the conversion of credit sales into cash. Here,
a financial institution which is usually a bank buys the accounts receivable of a company usually a client
and then pays up to 80% of the amount immediately on agreement. The remaining amount is paid to the
client when the customer pays the debt. Examples includes factoring against goods purchased, factoring
against medical insurance, factoring for construction services etc.

Characteristics of Factoring
1. The normal period of factoring is 90150 days and rarely exceeds more than 150 days.
2. It is costly.
3. Factoring is not possible in case of bad debts.
4. Credit rating is not mandatory.
5. It is a method of offbalance sheet financing.
6. Cost of factoring is always equal to finance cost plus operating cost.

Different Types of Factoring

1. Disclosed
2. Undisclosed

1. Disclosed Factoring
In disclosed factoring, client’s customers are aware of the factoring agreement.
Disclosed factoring is of two types:

Recourse factoring: The client collects the money from the customer but in case customer don’t pay the
amount on maturity then the client is responsible to pay the amount to the factor. It is offered at a low rate
of interest and is in very common use.
Nonrecourse factoring: In nonrecourse factoring, factor undertakes to collect the debts from the customer.
Balance amount is paid to client at the end of the credit period or when the customer pays the factor
whichever comes first. The advantage of nonrecourse factoring is that continuous factoring will eliminate
the need for credit and collection departments in the organization.

2. Undisclosed
In undisclosed factoring, client's customers are not notified of the factoring arrangement. In this case,
Client has to pay the amount to the factor irrespective of whether customer has paid or not

Bank Guarantees

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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.

Legal Requirements

Bank guarantee is issued by the authorised dealers under their obligated authorities notified vide FEMA
8/ 2000 dt 3rd May 2000. Only in case of revocation of guarantee involving US $ 5000 or more need to be
reported to Reserve Bank of India (RBI).

Types of Bank Guarantees

1. Direct or Indirect Bank Guarantee: A bank guarantee can be either direct or indirect.

Direct Bank Guarantee It is issued by the applicant's bank (issuing bank) directly to the guarantee's
beneficiary without concerning a correspondent bank. This type of guarantee is less expensive and is
also subject to the law of the country in which the guarantee is issued unless otherwise it is mentioned in
the guarantee documents.

Indirect Bank Guarantee With an indirect guarantee, a second bank is involved, which is basically a
representative of the issuing bank in the country to which beneficiary belongs. This involvement of a
second bank is done on the demand of the beneficiary. This type of bank guarantee is more time
consuming and expensive too.
2. Confirmed Guarantee
It is cross between direct and indirect types of bank guarantee. This type of bank guarantee is issued
directly by a bank after which it is send to a foreign bank for confirmations. The foreign banks confirm the
original documents and thereby assume the responsibility.

3. Tender Bond
This is also called bid bonds and is normally issued in support of a tender in international trade. It
provides the beneficiary with a financial remedy, if the applicant fails to fulfill any of the tender conditions.

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4. Performance Bonds
This is one of the most common types of bank guarantee which is used to secure the completion of the
contractual responsibilities of delivery of goods and act as security of penalty payment by the Supplier in
case of nondelivery of goods.

5. Advance Payment Guarantees

This mode of guarantee is used where the applicant calls for the provision of a sum of money at an early
stage of the contract and can recover the amount paid in advance, or a part thereof, if the applicant fails
to fulfill the agreement.

6. Payment Guarantees
This type of bank guarantee is used to secure the responsibilities to pay goods and services. If the
beneficiary has fulfilled his contractual obligations after delivering the goods or services but the debtor
fails to make the payment, then after written declaration the beneficiary can easily obtain his money form
the guaranteeing bank.

7. Loan Repayment Guarantees

This type of guarantee is given by a bank to the creditor to pay the amount of loan body and interests in
case of nonfulfillment by the borrower.

8. B/L Letter of Indemnity

This is also called a letter of indemnity and is a type of guarantee from the bank making sure that any
kind of loss of goods will not be suffered by the carrier.

9. Rental Guarantee
This type of bank guarantee is given under a rental contract. Rental guarantee is either limited to rental
payments only or includes all payments due under the rental contract including cost of repair on
termination of the rental contract.

10. Credit Card Guarantee

Credit card guarantee is issued by the credit card companies to its customer as a guarantee that the
merchant will be paid on transactions regardless of whether the consumer pays their credit.

Bank Guarantees vs. Letters of Credit

A bank guarantee is frequently confused with letter of credit (LC), which is similar in many ways but not
the same thing. The basic difference between the two is that of the parties involved. In a bank guarantee,
three parties are involved; the bank, the person to whom the guarantee is given and the person on whose
behalf the bank is giving guarantee. In case of a letter of credit, there are normally four parties involved;
issuing bank, advising bank, the applicant (importer) and the beneficiary (exporter).

Also, as a bank guarantee only becomes active when the customer fails to pay the necessary amount
where as in case of letters of credit, the issuing bank does not wait for the buyer to default, and for the
seller to invoke the undertaking.

Risk Elements

Transport risk

It is quite important to evaluate the transportation risk in international trade for better financial stability of
export business. About 80% of the world major transportation of goods is carried out by sea, which also
gives rise to a number of risk factors associated with transportation of goods.
The major risk factors related to shipping are cargo, vessels, people and financing. So it becomes
necessary for the government to address all of these risks with broadbased security policy responses,
since simply responding to threats in isolation to one another can be both ineffective and costly.

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While handling transportation in international trade following precaution should be taken into
consideration.

In case of transportation by ship, and the product should be appropriate for containerization. It is worth
promoting standard order values equivalent to quantities loaded into standard size containers.
Work must be carried out in compliance with the international code concerning the transport of dangerous
goods.
For better communication purpose people involve in the handling of goods should be equipped with
phone, fax, email, internet and radio.
About the instructions given to the transport company on freight forwarder.
Necessary information about the cargo insurance.
Each time goods are handled; there risk of damage. Plan for this when packing for export, and deciding
on choice of transport and route.
The expected sailing dates for marine transport should be built into the production programme, especially
where payments is to be made by Letter of Credit when documents will needs to be presented within a
specified time frame.
Choice of transport has Balance Sheet implications. The exporter is likely to received payments for goods
supplied while they are in transit.
Driver accompanied road transport provides peace of minds, but the ability to fill the return load will affect
pricing.
Transport Insurance
Export and import in international trade, requires transportation of goods over a long distance. No matter
whichever transport has been used in international trade, necessary insurance is must for ever good.

Cargo insurance also known as marine cargo insurance is a type of insurance against physical damage
or loss of goods during transportation. Cargo insurance is effective in all the three cases whether the
goods have been transported via sea, land or air.

Insurance policy is not applicable if the goods have been found to be packaged or transported by any
wrong means or methods. So, it is advisable to use a broker for placing cargo risks.

Scope of Coverage
The following can be covered for the risk of loss or damage:

Cargoimport, export cross voyage dispatched by sea, river, road, rail post, personal courier, and including
associated storage risks.
Good in transit (inland).
Freight service liability.
Associated stock.
However there are still a number of general exclusion such loss by delay, war risk, improper packaging
and insolvency of carrier. Converse for some of these may be negotiated with the insurance company.
The Institute War Clauses may also be added.

Regular exporters may negotiate open cover. It is an umbrella marine insurance policy that is activated
when eligible shipments are made. Individual insurance certificates are issued after the shipment is made.
Some letters of Credit Will require an individual insurance policy to be issued for the shipment, While
others accept an insurance certificate.

Specialist Covers
Whereas standard marine/transport cover is the answer for general cargo, some classes of business will
have special requirements. General insurer may have developed specialty teams to cater for the needs of
these business, and it is worth asking if this cover can be extended to export risks.

Cover may be automatically available for the needs of the trade.

Example of this are:

Project Constructional works insurers can cover the movement of goods for the project.
Fine art
Precious stonesSpecial Cover can be extended to cover sending of precious stones.

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Stock through put cover extended beyond the time goods are in transit until when they are used at the
destination.
Seller's Buyer's Contingent Interest Insurance
An exporter selling on, for example FOB (INCOTERMS 2000) delivery terms would according to the
contract and to INCOTERMS, have not responsibility for insurance once the goods have passed the
ship's rail. However, for peace of mind, he may wish to purchase extra cover, which will cover him for loss
or will make up cover where the other policy is too restrictive . This is known as Seller's Interest Insurance.

Similarly, cover is available to importers/buyers.

Seller's Interest and Buyer's Interest covers usually extended cover to apply if the title in the goods
reverts to the insured party until the goods are recovered resold or returned.

Loss of Profits/ Consequential Loss Insurance

Importers buying goods for a particular event may be interested in consequential loss cover in case the
goods are late (for a reason that id insured) and (expensive) replacements have to be found to replace
them. In such cases, the insurer will pay a claim and receive may proceeds from the eventual sale of the
delayed goods.

Contract risk and credit risk

Contract risk and credit risk are the part of international trade finance and are quite different from each
other.

A contract risk is related to the Latin law of "Caveat Emptor", which means "Buyer Beware" and refers
directly to the goods being purchase under contract, whether it's a car, house land or whatever.

On the other hand a credit risk may be defined as the risk that a counter party to a transaction will fail to
perform according to the terms and conditions of the contract, thus causing the holder of the claim to
suffer a loss.

Banks all over the world are very sensitive to credit risk in various financial sectors like loans, trade
financing, foreign exchange, swaps, bonds, equities, and inter bank transactions.

Credit Insurance
Credit Insurance is special type of loan which pays back a fraction or whole of the amount to the
borrower in case of death, disability, or unemployment. It protects open account sales against
nonpayment resulting from a customer's legal insolvency or default. It is usually required by
manufacturers and wholesalers selling products on credit terms to domestic and/or foreign customers.

Benefits of Credit Insurance

1. Expand sales to existing customers without increased risk.

2 Offer more competitive credit terms to new customers in new markets.
3. Help protect against potential restatement of earnings.
4. Optimize bank financing by insuring trade receivables.
5. Supplement credit risk management.

Payment Risk
This type of risk arises when a customer charges in an organization or if he does not pay for operational
reasons. Payment risk can only be recovered by a well written contract. Recovery can not be made for
payment risk using credit insurance.

Bad Debt Protection

A bad debt can effect profitability. So, it is always good to keep options ready for bad debt like
Confirmation of LC, debt purchase (factoring without recourse of forfeiting) or credit insurance.

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Confirmation of LC
In an international trade, the confirmation of letter of credit is issued to an exporter or seller. This
confirmation letter assures payment to an exporter or seller, even if the issuing bank defaults on its
payment once the beneficiary meets his terms and conditions.

Factoring and Forfaiting

Where debt purchase is without recourse, the bank will already have advanced the funds in the debt
purchase transaction. The bank takes the risk of nonpayment.

Credit Limit
Companies with credit insurance need to have proper credit limits according to the terms and conditions.
This includes fulfilling the administrative requirements, including notification of overdoes and also terms
set out in the credit limit decision.

Payment of the claim can only be done after a fix period, which is about 6 months for slow pay insurance.
In case of economic and political events is six or more than six months, depending on the exporter
markets.

Credit insurance covers the risk of non payment of trade debts. Each policy is different, some covering
only insolvency risk on goods delivered, and others covering a wide range of risk such as :

Local sales, export sales, or both.

Protracted default.
Political risk, including contract frustration, war transfer.
Predelivery risks.
Cover for sales from stock.
Non honoring of letters of credits.
Bond unfair calling risks.
Like all other insurance, credit insurance covers the risk of fortuitous loss. Key features of credit
insurance are:

The company is expected to assess that its client exists and is creditworthy . This might be by using a
credit limit service provided by the insurer. A Credit limit Will to pay attention to the company's credit
management procedures, and require that agreed procedures manuals be followed at all times.
While the credit insurer underwrites the risk of non payment and contract frustration the nature of the risk
is affected by how it is managed. The credit insurer is likely to pay attention to the company's credit
managements procedures, and require that agreed procedures manuals be followed at all times.
The credit insurer will expect the sales contract to be written effectively and invoices to be clear.
The company will be required to report any overdue or other problems in a timely fashion.
The credit insurer may have other exposure on the same buyers or in the same markets. A company will
therefore benefits if other policyholder report that a particular potential customer is in financial difficulties.
In the event that the customer does not pay, or cannot pay, the policy reacts. There may be a waiting
period to allow the company to start collection procedures, and to resolve nay quality disputes.
Many credit insurer contribute to legal costs, including where early action produces a full recovery and
avoids a claim.
Benefits of Credit Cover
Protection for the debtor asset or the balance sheet.
Possible access to information on credit rating of foreign buyer.
Access to trade finance
Protection of profit margin
Advice on customers and levels of credit.
Disciplined credit management.
Assistance and /or advice when debts are overdue or there is a risk of loss.
Provides confidence to suppliers, lenders and investors.
Good corporate governance

Country risk

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Country risk includes a wide range of risks, associated with lending or depositing funds, or doing other
financial transaction in a particular country. It includes economic risk, political risk, currency blockage,
expropriation, and inadequate access to hard currencies. Country risk can adversely affect operating
profits as well as the value of assets.

With more investors investing internationally, both directly and indirectly, the political, and therefore
economic, stability and viability of a country's economy need to be considered.

Measuring Country Risk

Given below are the lists of some agencies that provide services in evaluating the country risk.

Bank of America World Information Services

Business Environment Risk Intelligence (BERI) S.A.
Control Risks Information Services (CRIS)
Economist Intelligence Unit (EIU)
Euromoney
Institutional Investor
Standard and Poor's Rating Group
Political Risk Services: International Country Risk Guide (ICRG)
Political Risk Services: CoplinO'Leary Rating System
Moody's Investor Services
Political Risk

The risk of loss due to political reasons arises in a particular country due to changes in the country's
political structure or policies, such as tax laws,tariffs, expropriation ofassets, or restriction in repatriation of
profits. Political risk is distinct from other commercial risks, and tends to be difficult to evaluate.

Some example of political risks are:

Contract frustration by another country, government resulting in your inability to perform the contract,
following which the buyer may not make payment and or / on demand bonds may be called.
Government buyer repudiating the contract this may be occur if there is a significant political or economic
change within the customer's country.
Licence cancellation or non renewal or imposition of an embargo.
Sanctions imposed against a particular country or company.
Imposition of exchange controls causing payments to be blocked.
General moratorium decreed by an overseas government preventing payment
Shortage of foreign exchange/transfer delay.
War involving either importing or exporting country.
Forced abandonment
Revoking of Import/ Exports licence.
Changes in regulations.
The following are also considered as political risks in relation to exporting :

Confiscation of assets by a foreign government.

Unfair calling of bonds.
Insurance companies provide political risk covers. These may be purchased:

On their own, covering only political risk on the sale to a particular country.
For a portfolio of political risks.
For the political risks in relation to the sale to another company in your group (where there is a common
shareholding and therefore insolvency cover is not available).
As part of a credit insurance policy.
PreDelivery Risks
A company can suffer financial loss, if export contract is cancelled due to commercial or political reasons,
even before the goods and services are dispatched or delivered. In such a situation, the exposure to loss
will depends on:

The nature of the contract.

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If the company can salvage any products and resell them quickly, with a small amount of re working
Any stage payments
If servicing staff have left the country.
The extent of the commitments to suppliers.
The horizon of pre delivery risk
The customer and country risks
Pre Delivery Cover
Credit insurance can be extended to cover predelivery risk, in particular, the risk of customer insolvency
predelivery or political frustration predelivery.

Some times predelivery cover can be extended included the frustration of a contract caused by non
payment of a pre delivery milestone, and or non payment of a termination account, and or bond call.

Predelivery risks are often complicated and the wording of the cover is worth careful examination.

It is to be noted that in the event that it was clearly unwise to dispatch goods, credit risk (payment risk)
cover would not automatically apply if the company nonetheless went ahead and dispatched head them.

Binding contracts cover and NonCancelable Limits

Binding contracts cover and noncancelable limits are not included in predelivery cover. However, they
provide a commitment from the credit insurer that the cover for dispatches / invoices will not be withdrawn
without a prior notice.

If the company's customer is overdue, or it is imprudent to dispatch, there is no credit insurance cover for
dispatches subsequently made, even where the company holds binding contract cover or noncancelable
limits.

Currency risk

Currency risk is a type of risk in international trade that arises from the fluctuation in price of one currency
against another. This is a permanent risk that will remain as long as currencies remain the medium of
exchange for commercial transactions. Market fluctuations of relative currency values will continue to
attract the attention of the exporter, the manufacturer, the investor, the banker, the speculator, and the
policy maker alike.

While doing business in foreign currency, a contract is signed and the company quotes a price for the
goods using a reasonable exchange rate. However, economic events may upset even the best laid plans.
Therefore, the company would ideally wish to have a strategy for dealing with exchange rate risk.

Currency Hedging

Currency hedging is technique used to avoid the risks associated with the changing value of currency
while doing transactions in international trade. It is possible to take steps to hedge foreign currency risk.
This may be done through one of the following options:

Billing foreign deals in Indian Rupees: This insulates the Indian exporter from currency fluctuations.
However, this may not be acceptable to the foreign buyer. Most of international trade transactions take
place in one of the major foreign currencies USD, Euro, Pounds Sterling, and Yen.
Forward contract. You agree to sell a fixed amount of foreign exchange (to convert this into your currency)
at a future date, allowing for the risk that the buyer’s payments are late.
Options: You buy the right to have currency at an agreed rate within an agreed period. For example, if
you expect to receive $35,000 in 3 months, time you could buy an option to convert $35,000 into your
currency in 3 months. Options can be more expensive than a forward contract, but you don't need to
compulsorily use your option.
Foreign currency bank account and foreign currency borrowing: These may be suitable where you have
cost in the foreign currency or in a currency whose exchange rate is related to that currency.
FOREX Market

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Forex market is one of the largest financial markets in the world, where buyers and sellers conduct
foreign exchange transactions. Its important in the international trade can be estimated with the fact that
average daily trade in the global forex markets is over US $ 3 trillion. We shall touch upon some important
topics that affect the risk profile of an International transaction.

Spot Rate
Also known as "benchmark rates", "straightforward rates"or "outright rates", spot rates is an agreement to
buy or sell currency at the current exchange rate. The globally accepted settlementcycle for
foreignexchange contracts is two days. Foreignexchange contracts are therefore settled on the second
day after the day the deal is made.

Forward Price
Forward price is a fixed price at which a particular amount of a commodity, currency or security is to be
delivered on a fixed date in the future, possibly as for as a year ahead. Traders agree to buy and sell
currencies for settlement at least three days later, at predetermined exchange rates. This type of
transaction often is used by business to reduce their exchange rate risk.

Forward Price vs. Spot Price

Theoretically it is possible for a forward price of a currency to equal its spot price However, interest rates
must be considered . The interest rate can be earned by holding different currencies usually varies,
therefore forward price can be higher or lower than (at premium or discount to ) the spot prices.

RBI Reference Rate

There reference rate given by RBI is based on 12 noon rates of a few selected banks in Mumbai.

Inter Bank Rates

Interbank rates rates quotes the bank for buying and selling foreign currency in the inter bank market,
which works on wafer thin margins . For inter bank transactions the quotation is up to four decimals with
the last two digits in multiples of 25.

Telegraphic Transfer
Telegraphic transfer or in short TT is a quick method of transfer money from one bank to another bank.
TT method of money transfer has been introduced to solve the delay problems caused by cheques or
demand drafts. In this method, money does not move physically and order to pay is wired to an
institutions’ casher to make payment to a company or individual. A cipher code is appended to the text of
the message to ensure its integrity and authenticity during transit. The same principle applies with
Western Union and Money Gram.

Currency Rate
The Currency rate is the rate at which the authorized dealer buys and sells the currency notes to its
customers. It depends on the TC rate and is more than the TC rate for the person who is buying them.

Cross Rate
In inter bank transactions all currencies are normally traded against the US dollar, which becomes a
frame of reference. So if one is buying with rupees a currency X which is not normally traded, one can
arrive at a rupeeexchange rate by relating the rupee $ rate to the $X rate . This is known as a cross rate.

Long and Short

When you go long on a currency, its means you bought it and are holding it in the expectation that it will
appreciate in value. By contrast, going short means you reselling currency in the expectation that what
you are selling will depreciate in value.

Bid and Ask

Bids are the highest price that the seller is offering for the particular currency. On the other hand, ask is
the lowest price acceptable to the buyer.Together, the two prices constitute a quotation and the difference
between the price offered by a dealer willing to sell something and the price he is willing to pay to buy it
back.

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The bidask spread is amount by which the ask price exceeds the bid. This is essentially the difference in
price between the highest price thata buyer is willing to pay for an asset and the lowest price for whicha
seller is willing to sell it.

For example, if the bid price is $20 and the ask price is $21 then the "bidask spread" is $1.

The spread is usually rates as percentage cost of transacting in the forex market, which is computed as
follow :

Percent spread =(Ask priceBid price)/Ask price *100

The main advantage of bid and ask methods is that conditions are laid out in advance and transactions
can proceed with no further permission or authorization from any participants. When any bid and ask pair
are compatible, a transaction occurs, in most cases automatically.

Buying and Selling

In terms of foreign exchange, buying means purchasing a certain amount of the foreign currency at the
bid or buying price against the delivery /crediting of a second currency which is also called counter
currency.

On the other hand, selling refers to a fix amount of foreign currency at the offered or selling price against
the receipt / debiting of another currency.

FOREX Rates vs. Interest Rates

Forex rates or exchange rate is the price of a country's currency in terms of another country's currency. It
specifies how much one currency is worth in terms of the other. For example a forex rate of 123Japanese
yen (JPY, ¥) to theUnited States dollar (USD, $) means that JPY 123 is worth the same as USD 1.

Choice of currency and its interest rate is a major concern in the international trade. Investors are easily
attracted by the higher interest rates which in turns also effects the economy of a nation and its currency
value.

For an example, if interest rate on INR were substantially higher than the interest rate on USD, more USD
would be converted into INR and pumped into the Indian economic system. This would result in
appreciation of the INR, resulting in lower conversion rates of USD against INR, at the time of
reconversion into USD.

Calculating the Forward Rates

A forward rate is calculated by calculating the interest rate difference between the two currencies involved
in the transactions. For example, if a client is buying a 30 days US dollar then, the difference between the
spot rate and the forward rate will be calculated as follow:

The US dollars are purchased on the spot market at an appropriate rate, what causes the forward
contract rate to be higher or lower is the difference in the interest rates between India and the United
States.

The interest rate earned on US dollars is less than the interest rate earned on Indian Rupee (INR).
Therefore, when the forward rates are calculated the cost of this interest rate differential is added to the
transaction through increasing the rate.

USD 100,000 X 1.5200 = INR 152,000

INR 152,000 X 1% divided by 12 months = INR 126.67
INR 152,000 + INR 126.67 = INR 152,126.67
INR 152,126.67/USD 100,000 = 1.5213

Regulatory frame work

RBI controls Foreign Exchange and DGFT (Directorate General of Foreign

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Trade) controls Foreign Trade. Exim Policy as framed in accordance with
FEMA is implemented by DGFT. DGFT functions under direct control of
Ministry of Commerce and Industry. It regulates Imports and Exports
through EXIM Policy.
On the other hand, RBI keeps Forex Reserves, Finances Export trade and
Regulates exchange control. Receipts and Payments of Forex are also
handled by RBI.
IEC – Importer Exporter Code
One has to apply for IEC to become eligible for Imports and Exports. DGFT
allots IEC to Exporters and Importers in accordance with RBI guidelines
and FEMA regulations. EXIM Policy is also considered before allotting IEC.
Export Declaration Form
All exports (physically or otherwise) shall be declared in the following Form.
1. GR form--- meant for exports made otherwise than by post.
2. PP Form---meant for exports by post parcel.
3. Softex form---meant for export of software.
4. SDF (Statutory Declaration Form)----replaced GR form in order to
submit declaration electronically.
SDF is submitted in duplicate with Custom Commissioned who puts its
stamp and hands over the same to exporter marked “Exchange Control
Copy” for submission thereof to AD.
Exemptions
Up to USD 25000 (value) – Goods or services as declared by the
exporter.
Trade Samples, Personal effects and Central Govt. goods.
Gift items having value up to Rs. 5.00 lac.
Goods with value not exceeding USD 1000 value to Myanmar.
Goods imported free of cost for re-export.
Goods sent for testing.
ADs may consider waiver for export of goods free of cost for export
promotion up to 2% of average annual exports of previous 3 years subject
to ceiling of Rs. 5.00 lac. The limit is Rs. 10.00 lac for Status Holder
Exporters

EXIM Policy

Export Import Policy or better known as Exim Policy is a set of guidelines and instructions related to the
import and export of goods. The Government of India notifies the Exim Policy for a period of five years
(1997 2002) under Section 5 of the Foreign Trade (Development and Regulation Act), 1992. The current
policy covers the period 2002 2007. The Export Import Policy is updated every year on the 31st of March
and the modifications, improvements and new schemes becames effective from 1st April of every year.
All types of changes or modifications related to the Exim Policy is normally announced by the Union
Minister of Commerce and Industry who coordinates with the Ministry of Finance, the Directorate General
of Foreign Trade and its network of regional offices.

Highlight of Exim Policy 2002 - 07

1. Service Exports
Duty free import facility for service sector having a minimum foreign exchange earning of Rs. 10 lakhs.
The duty free entitlement shall be 10% of the average foreign exchange earned in the preceding three
licensing years.

However, for hotels the same shall be 5 % of the average foreign exchange earned in the preceding three
licensing years. Imports of agriculture and dairy products shall not be allowed for imports against the
entitlement. The entitlement and the goods imported against such entitlement shall be non transferable.

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2. Status Holders
Duty free import entitlement for status holder having incremental growth of more than 25% in FOB value
of exports (in free foreign exchange). This facility shall however be available to status holder having a
minimum export turnover of Rs. 25 crore (in free foreign exchange).
Annual Advance Licence facility for status holder to be introduced to enable them to plan for their imports
of raw material and component on an annual basis and take advantage of bulk purchase.
Status holder in STPI shall be permitted free movement of professional equipments like laptop/computer.
3. Hardware/Software
To give a boost to electronic hardware industry, supplies of all 217 ITA1 items from EHTP units to
Domestic Tariff Area (DTA) shall qualify for fulfillment of export obligation.
To promote growth of exports in embedded software, hardware shall be admissible for duty free import for
testing and development purpose. Hardware up to a value of US$ 10,000 shall be allowed to be disposed
off subject to STPI certification.
100% depreciation to be available over a period of 3 years to computer and computer peripherals for
units in EOU/EHTP/STP/SEZ.
4. Gem & Jewellery Sector
Diamonds & Jewellery Dollar Account for exporters dealing in purchase /sale of diamonds and diamond
studded jewellery .
Nominated agencies to accept payment in dollar for cost of import of precious metals from EEFC account
of exporter.
Gem & Jewellery units in SEZ and EOUs can receive precious metal Gold/silver/platinum prior to export
or post export equivalent to value of jewellery exported. This means that they can bring export proceeds
in kind against the present provision of bringing in cash only.
5. Removal of Quantitative Restrictions
Import of 69 items covering animals products, vegetables and spice antibiotics and films removed from
restricted list
Export of 5 items namely paddy except basmati, cotton linters, rare, earth, silk, cocoons, family planning
device except condoms, removed from restricted list.
6. Special Economic Zones Scheme
Sales from Domestic Tariff Area (DTA) to SEZ to be treated as export. This would now entitle domestic
suppliers to Duty Drawback / DEPB benefits, CST exemption and Service Tax exemption.
Agriculture/Horticulture processing SEZ units will now be allowed to provide inputs and equipments to
contract farmers in DTA to promote production of goods as per the requirement of importing countries.
Foreign bound passengers will now be allowed to take goods from SEZs to promote trade, tourism and
exports.
Domestics sales by SEZ units will now be exempt from SAD.
Restriction of one year period for remittance of export proceeds removed for SEZ units.
Netting of export permitted for SEZ units provided it is between same exporter and importer over a period
of 12 months.
SEZ units permitted to take job work abroad and exports goods from there only.
SEZ units can capitalize import payables.
Wastage for sub contracting/exchange by gem and jewellery units in transactions between SEZ and DTA
will now be allowed.
Export/Import of all products through post parcel /courier by SEZ units will now be allowed.
The value of capital goods imported by SEZ units will now be amortized uniformly over 10 years.
SEZ units will now be allowed to sell all products including gems and jewellery through exhibition and
duty free shops or shops set up abroad.
Goods required for operation and maintenance of SEZ units will now be allowed duty free.
7. EOU Scheme
Provision b,c,i,j,k and l of SEZ (Special Economic Zone) scheme , as mentioned above, apply to Export
Oriented Units (EOUs) also. Besides these, the other important provisions are:

EOUs are now required to be only net positive foreign exchange earner and there will now be no export
performance requirement.
Period of Utilization raw materials prescribed for EOUs increased from 1 years to 3 years.
Gems and jewellery EOUs are now being permitted sub contracting in DTA.
Gems and jewellery EOUs will now be entitled to advance domestic sales.
8. EPCG Scheme
The Export Promotion Capital Goods (EPCG) Scheme shall allow import of capital goods for
preproduction and post production facilities also.

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The Export Obligation under the scheme shall be linked to the duty saved and shall b 8 times the duty
saved.
To facilities upgradation of existing plant and machinery, import of spares shall be allowed under the
scheme.
To promote higher value addition in export, the existing condition of imposing an additional Export
Obligation of 50% for products in the higher product chain to be done away with.
Greater flexibility for fulfillment of export obligation under the scheme by allowing export of any other
product manufactured by the exporter. This shall take care of the dynamics of international market.
Capital goods up to 10 years old shall also be allowed under the Scheme.
To facilitate diversification in to the software sector, existing manufacturer exporters will be allowed of
fulfill export obligation arising out of import of capital goods under the scheme for setting up of software
units through export of manufactured goods of the same company.
Royalty payments received from abroad and testing charges received in free foreign exchange to be
counted for discharge of export obligation under EPCG Scheme.
9. DEPB Scheme
Facility for pro visional Duty Entitlement Pass Book(DEPB) rates introduced to encourage diversification
and promote export of new products.
DEPB rates rationalize in line with general reduction in Customs duty.
10. DFRC Scheme
Duty Free Replenishment Certificate (DFRC) scheme extended to deemed export to provide a boost to
domestic manufacturer.
Value addition under DFRC scheme reduced from 33% to 25%.
11. Miscellaneous
Actual user condition for import of second hand capital goods up to 10 years old dispensed with.
Reduction in penal interest rate from 24% to 15% for all old cases of default under Exim policy
Restriction on export of warranty spares removed.
IEC holder to furnish online return of importers/exporters made on yearly basis.
Export of free of cost goods for export promotion @ 2% of average annual exports in preceding three
years subject to ceiling of Rs. 5 lakhs permitted.

Foreign Trade Policy 2015-20

The Foreign Trade Policy (FTP), 2015-20, is notified by Central Govt., in exercise of powers conferred
under Section 5 of the Foreign Trade (Development & Regulation) Act, 1992 (No. 22 of 1992).
Duration of FTP : 2015-20 FTP, incorporating provisions relating to export and import of goods and
services, came Into force w.e.f. 01.04.2015 and shall remain in force up to 31st March, 2020, unless
otherwise specified. All exports and imports made upto the date of notification shall, accordingly, be
governed by the relevant FTP.
Director General of Foreign Trade (DGFT) can, by means of a Public Notice, notify Hand Book of
Procedures, including Appendices and Aayat Niryat Forms or amendment thereto, if any, laying down
the procedure to be followed by an exporter or importer or by any Licensing/Regional Authority or by
any other authority for purposes
of implementing provisions of FT (D&R) Act, the Rules and the Orders made there under and provisions
of FTP.
IMPORTER EXPORTER CODE (IEC): No export or import can be made by any person without
obtaining an IEC number unless specifically exempted. Further, only one IEC is permitted against one
Permanent Account Number (PAN). If any PAN card holder has more than one IEC, the extra IECs is
disabled.
IEC : An IEC is a 10-digit number allotted to a person that is mandatory for undertaking any
export/import activities. The facility for IEC in electronic form or e-IEC has also been operationalised.
Exports from India Schemes: There are two schemes for exports of Merchandise and Services
respectively: (I) Merchandise Exports from India Scheme (MEIS).
(ii) Service Exports from India Scheme (SEIS).
Niryat Bandhu - Handholding Scheme for new Exporters / Importers: As per provisions of Foreign
Trade Policy 2015-20, DGFT is implementing the Niryat Bandhu Scheme for mentoring new and
potential exporter on the inbicades of foreign trade through counselling, training and outreach

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programs.
Towns of Export Excellence (TEE): Selected towns producing goods of Rs. 750 cr or more may be
notified as TEE, based on potential for growth in exports. For TEE in Handloom, Handicraft, Agriculture
and Fisheries sector, threshold limit would be Rs.150
EOU, EHTP, STP, BTP: Units undertaking to export their entire production of goods and services (except
permissible sales in Domestic Tariff Area-DTA), may be set up under Export Oriented Unit (EOU)
Scheme, Eledronics Hardware Technology Park (EHTP) Scheme, Software Technology Park (STP)
Scheme or 1310-Technology Park (BTP) Scheme for manufacture of goods, rendering of services,
development of software, agriculture induding bio-tedinology. Trading units are not covered under
these schemes.
Export Promojion Capital Goods Scheme: (a) Scheme allows import of capital goods for pre-production,
production and post-production, at Zero customs duty. The Authorisation holder may also procure
Capital Goods from indigenous sources: Capital goods shall indude capital goods as defined in foreign
trade policy; (ii) Computer software systems; (iii) Spares, moulds, dies, jigs, fixtures, tools &
refractories and spare refractories; and (iv) catalysts for initial charge-i- one subsequent charge.
(b) Import of capital goods for Project Imports notified by CBEC.
Second hand capital goods are not permitted.
Interest Equalisation Scheme on Pre and Post Shipment Rupee Export Credit (December 4,
2015): The scheme is effective from April 1, 2015. (a) The rate of interest equalisation would be 3 percent
and will be available on Pre Shipment Rupee Export Credit and Post Shipment Rupee Export Credit; (b)
The scheme would be applicable w.e.f 01.04.2015 for 5 years. (c) The scheme will be available to all
exports under 416 tariff lines [at ITC (HS) code of 4 digit] and exports made by Micro, Small & Medium
Enterprises (MSMEs) across all ITC(HS) codes; (d) Scheme would not be available to merchant exporters;
(e) A study may be initiated on the impact of the scheme on export promotion on completion of 3 years of
the operation of the scheme. The study may be done through one of the IIMs
Export Refinance
1. Who will provide? Export Refinance is provided by RBI.
2. Maximum period of refinance is 180 days.
3. Extent of Refinance: 15% (w.e.f. 27.10.2009) of eligible export finance outstanding on the reporting
Friday
of the preceding fortnight. Outstanding Export Credit for the purpose of working out refinance limits will be
aggregate outstanding export credit minus export bills rediscounted with other banks/Exim Bank/Financial
Institutions, export credit against which refinance has been obtained from NABARD/Exim Bank, pre-
shipment
credit in foreign currency (PCFC), export bills discounted/rediscounted under the scheme of
'Rediscounting of
Export Bills Abroad', overdue rupee export credit and other export credit not eligible for refinance.

Interest rate is Repo Rate. 5. Packing Credit in Foreign Currency is not eligible for export refinance
EXPORTS FROM INDIA
Export trade is regulated by DGFT under Govt. of India, which announces policies and procedures for
exports from India. AD-I banks conduct export transactions in conformity with the Foreign Trade Policy,
the Rules framed by the Govt. of India and the directions issued by RBI. Manner of receipt of export
proceeds: (i) The amount can be received through AD Banks in the form of (a) Bank draft, pay order,
banker's or personal cheques (b) Foreign currency notes/travellers' cheques from the buyer during his
visit to India. (c) Payment out of funds held in the FCNR/NRE account maintained by the buyer
(d) International Credit Cards of the buyer (e) Wef Jan 01, 2009, Asian Clearing Union participants can
settle their transactions in ACU Dollar or in ACU Euro (equivalent in value to one US Dollar and one
Euro, respectively). Payment can be received from 3rd parties named by exporters in EGF, subject to
compliance of certain conditions (RBI-Nov 08, 2013).
Time limits for realisation and repatriation of export proceeds:
(a) Units in SEZs, Status Holders, 100% Export Oriented Units and Units in EHTPs/STPsIBTPs: max 9
months
(b) Exported to a warehouse established outside India : Max 15 months from the date of shipment of
goods; and
(c) Other cases: Max 9 months.
Offices and Immovable Property for Overseas Offices: For setting up of the office, AD-I banks may
allow remittances towards initial expenses up to 15% of the average annual sales/income or turnover
during the last 2 financial years or up to 25% of the net worth, whichever is higher. For recurring
expenses, remittances up to 10% of the average annual sales/income or turnover during the last 2

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financial years may be sent.
Advance Payments against Exports: The exporter shall ensure that -
i. the shipment of goods is made within one year (ADs can allow period above one year also w.e.f.
21.2.12 subject
to the condition that refund during the last 3 years is not more than 10% of advance payments received);
ii. the rate of interest payable on the advance payment does not exceed London Inter-Bank Offered
Rate (LIBOR) + 100 basis points.
(ADs to sent quarterly report to RBI, within 21 days, for delay in utilization of advance payments —
09.02.15)
LONG TERM EXPORT ADVANCE : RBI allowed (May 21, 2014) AD banks to permit exporters, having a
minimum of 3 years' satisfactory track record, to receive long term export advance up to a maximum
tenor of 10 years for execution of long term supply contracts for export of goods. The rate of interest
should not exceed LIBOR plus 200 basis points. Receipt of advance of USD 100 million or more should
be immediately reported RBI. Where AD banks issue bank guarantee (BG) / Stand by Letter of Credit
(SBLC) for export performance, BG / SBLC may be issued for a term not exceeding 2 years at a time
and further rollover of not more than 2 years at a time may be allowed subject to satisfaction with
relative export performance as per the contract.
Part Drawings /Undrawn Balances: Where it is the practice to leave a small part of the invoice
value (maximum of 10% of the full export value) undrawn for payment after adjustment due to
differences in weight, quality, etc. to be ascertained after arrival AD-I banks may negotiate the bills.
Opening / Hiring of Ware houses abroad: Banks may grant permission for opening / hiring
warehouses abroad if export outstanding does not exceed 5% of exports made during the previous
financial year and applicant has a minimum export turnover of USD 100,000/- during the last financial
year.
Supplier's Credit
Under supplier credit contracts the exporter supplier extends a credit to the buyer importer of capital
goods. The
terms can be down payment with the balance payable in instalments. The interest on such deferred
payments
will have to be paid on the rates determined at the time of entering Into such arrangement. The deferred
payments are supported by the promissory notes or bills of exchange often carrying the guarantee of
importer's
bank. To finance the credit given to the Importer under such arrangement, the exporter raises a loan from
his
banker under the export credit schemes in force. In general, the export credit insurance will be an
inherent part
of the mechanism.
Buyer's credit
In a buyer credit transaction, the buyer importer raises a loan from a bank in the exporter's country under
the
export credit scheme in force on the terms conforming to the OECD consensus. The loan Is drawn to pay
the
exporter in full and thus for the exporter, the transaction is a cash sale. Another form of the buyer credit
arrangement is, for a bank in the exporter's country, to establish a line of credit in favour of a bank or
financial
institutions, in the importing country. The later makes available, loans under the line of credit to its
importer
clients for the purchase of capital goods from the credit giving country. In India BUM Bank makes
available
supplier/buyer credits and also extends line of credit to foreign financial institutions to promote exports of
capital
goods from India.
Interest rate is Repo Rate. 5. Packing Credit in Foreign Currency is not eligible for export refinance

Export Credit Guarantee Corporation of India Ltd. (ECGC)

Export Credit Guarantee Corporation of India Ltd. (ECGC) is a Government of India Enterprise
which provides export credit insurance facilities to exporters and banks in India. It functions under
the administrative control of Ministry of Commerce & Industry, and is managed by a Board of
Directors comprising representatives of the Government, Reserve Bank of India, banking, insurance

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and exporting community. Over the years, it has evolved various export credit risk insurance
products to suit the requirements of Indian exporters and commercial banks. ECGC is the seventh
largest credit insurer of the world in terms of coverage of national exports. Its present paid up
capital is Rs. 1200 Crores and the authorized capital is Rs. 5000 Crores.
ECGC is essentially an export promotion organization, seeking to improve the competitive
capacity of Indian exporters by giving them credit insurance covers comparable to those available
to their competitors from most other countries. It keeps it's premium rates at the lowest level
possible Provides a range of credit risk insurance covers to exporters against loss in export of goods
and services Offers export credit insurance cover to banks and financial institutions to enable
exporters to obtain better facilities from them Provides Overseas Investment Insurance to Indian
companies investing in joint ventures abroad in the form of equity or loan
How ECGC helps exporters
• Offers insurance protection to exporters against payment risks
• Provides guidance in export-related activities
• Makes available information on different countries with its own credit ratings
• Makes it easy to obtain export finance from banks/financial institutions
• Assists exporters in recovering bad debts
• Provides information on credit-worthiness of overseas buyers..

Foreign Exchange Management Act

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.
Buyers's /Supplier's Credit
Trade Credit have been subjected to dynamic regulation over a period of last two years. Now, Reserve
Bank of India (RBI) vide circular number A.P. (DIR Series) Circular No. 24, Dated November 1, 2004, has
given general permission to ADs for issuance of Guarantee/ Letter of Undertaking (LoU) / Letter of
Comfort (LoC) subject to certain terms and conditions . In view of the above, we are issuing consolidated
guidelines and process flow for availing trade credit .

Definition of Trade Credit : Credit extended for imports of goods directly by the overseas supplier, bank
and financial institution for original maturity of less than three years from the date of shipment is referred
to as trade credit for imports.

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Depending on the source of finance, such trade credit will include supplier's credit or buyers credit ,
Supplier 's credit relates to credit for imports into India extended by the overseas supplier , while Buyers
credit refers to loans for payment of imports in to India arranged by the importer from a bank or financial
institution outside India for maturity of less than three years.

It may be noted that buyers credit and suppliers credit for three years and above come under the
category of External Commercial Borrowing (ECB), which are governed by ECB guidelines. Trade credit
can be availed for import of goods only therefore interest and other charges will not be a part of trade
credit at any point of time.
Amount and tenor : For import of all items permissible under the Foreign Trade Policy (except gold),
Authorized Dealers (ADs) have been permitted to approved trade credits up to 20 millions per import
transaction with a maturity period ( from the date of shipment) up to one year.

Additionally, for import of capital goods, ADs have been permitted to approved trade credits up to USD 20
millions transactions with a maturity period of more than one year and less than three years. No roll over/
extension will be permitted by the AD beyond the permissible period.
All in cost ceiling : The all in cost ceiling are as under: Maturity period up to one year 6 months LIBOR
+50 basis points.

Maturity period more than one year but less than three years 6 months LIBOR* + 125 basis point
* for the respective currency of credit or applicable benchmark like EURIBOR., SIBOR, TIBOR, etc.
Issue of guarantee, letter of undertaking or letter of comfort in favour of overseas lender : RBI has given
general permission to ADs for issuance of guarantee / Letter of Undertaking (LOU) / Letter of Comfort
(LOC) in favour of overseas supplier, bank and financial instruction, up to USD 20 millions per transaction
for a period up to one year for import of all non capital goods permissible under Foreign Trade Policy
(except gold) and up to three years for import of capital goods.

In case the request for trade credit does not comply with any of the RBI stipulations, the importer needs to
have approval from the central office of RBI.

FEMA regulations have an immense impact in international trade transactions and different modes of
payments.RBI release regular notifications and circulars, outlining its clarifications and modifications
related to various sections of FEMA.

FEDAI Guidelines for Foreign Exchange

Established in 1958, FEDAI (Foreign Exchange Dealers' Association of India) is a group of banks that
deals in foreign exchange in India as a self regulatory body under the Section 25 of the Indian Company
Act (1956).

Foreign Exchange association of India is a non-profit body

. All public sector banks, Private Banks, Foreign Banks and
Cooperative banks are its members. The functions of FEDAI are:
Forming uniform rules
Providing training to bankers; and
Providing guidance and information from time to time.
The important rules are:
1. Export TransactionsForex liability must be crystallized into Indian
rupees on 30th day after expiry of NTP at TT selling rate(Notional
Transit Period) in case of Sight bills and on 30th day after notional
due date in case of Usance bills. The rule has since been relaxed
and bank can frame its own rule for nos. of days for
crystallization.
2. Concessional rate of interest is applied up to Notional due date or
up to value date of realization of export dues (whichever is earlier)
3. Import Transactions: For retirement of Import bills whether under LC
or otherwise, Bill selling rate or Contracted selling rate

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whichever is higher, will be applied.
DP Bills (sight) are retired after crystallization on 10th day
after receipt.
DA Bills are retired (crystallized) on Due Date.
4. All Foreign Currency bills under LC, if not retired on receipt, shall be
crystallized into Rupee liability on 10th day after date of receipt of
documents atBill Selling Rate or contracted rate whichever is
higher.
Normal Transit Period is:
- 25 days for export bills,
- 3 days for Rupee bills drawn under LC and payable locally
- 7 days for rupee bills drawn under LC and payable at other centers
- 20 days for Rupee bills not drawn under LC.
- For exports to Iraq, normal transit period is 60 days.
Compensation on Delayed payment:
All Foreign Inward remittances up to Rs.1.00 lac should be converted into
Indian Rupees immediately
The proceeds of any Inward remittance should be credited to the account
within 10 days and advice of receipt is to be sent within 3 days, failing
which, compensation @2% above SB rate will be paid to the beneficiary.
Forward Contracts
Exchange contracts will be for definite amount and period.
Contracts must state first and last date of contracts e.g. from 1-31
Jan or from 17th Jan to 16th Feb.
For contracts up to 1 month, option period for delivery may be
Specified In case of extension of contract, previous contract will be cancelled
at TT Buying rate or TT selling rate as the case may be.
Overdue contracts are liable to be cancelled on 7th working day
after maturity date if no instructions are received. The contracts
must state first and last date of the contract.
Banks are now free to fix their own rates of commission and margin
etc.
AP may be imposed penalty up to 3 times of contravention amount. If
amount is not quantifiable, up to 2.00 lac and up to 5000/- per day is
imposed, if the contravention continues.

The role and responsibilities of FEDAI are as follows:

Formulations of FEDAI guidelines and FEDAI rules for Forex business.

Training of bank personnel in the areas of Foreign Exchange Business.
Accreditation of Forex Brokers.
Advising/Assisting member banks in settling issues/matters in their dealings.
Represent member banks on Government/Reserve Bank of India and other bodies.
Rules of FEDAI also include announcement of daily and periodical rates to its member banks.
FEDAI guidelines play an important role in the functioning of the markets and work in close coordination
with Reserve Bank of India (RBI), other organizations like Fixed Income Money Market and Derivatives
Association (FIMMDA), the Forex Association of India and various other market participants

ICC UPCDC Guidelines

UCP 600

Why Documentary Credits

• Exchange of goods and services across national boundaries brings greater problems
to both buyer and seller than does domestic business.
• Diversity of customs, standards, currencies, local regulations, languages and legal
systems
• The Documentary Letter of Credit is widely used to reduce the financial risks of

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trade.
• Importer wants to ensure performance while exporter wants to secure payment.
• Few of the rules are subject to any national or international law. Provisions of
International Chamber of Commerce & Industry (ICC) important, but not foolproof.
• Generally adopted set of rules for credits known as the Uniform Customs and
Practice for Letters of Credit (UCP) issued by ICC, publication no.600, 2007 (earlier
version no. 500, 1993).
Introduction
• This revision of the Uniform Customs and Practice for Documentary Credits
(commonly called "UCP") is the sixth revision of the rules since they were first
promulgated in 1933.
• The objective of UCP, since attained, was to create a set of contractual rules that
would establish uniformity in that practice, so that practitioners would not have to
cope with a plethora of often conflicting national regulations. The universal
acceptance of the UCP by practitioners in countries with widely divergent economic
and judicial systems is a testament to the rules' success.
• It is important to recall that the UCP represent the work of a private international
organization, not a governmental body.

Important Articles
Article 1 Application of UCP
• The Uniform Customs and Practice for Documentary Credits, 2007 Revision, ICC
Publication no. 600 ("UCP") are rules that apply to any documentary credit ("credit")
(including, to the extent to which they may be applicable, any standby letter of
credit) when the text of the credit expressly indicates that it is subject to these rules.
They are binding on all parties thereto unless expressly modified or excluded by the
credit.
Article 2: Definitions
• Advising bank means the bank that advises the credit at the request of the issuing
bank.
• Applicant means the party on whose request the credit is issued.
• Beneficiary means the party in whose favour a credit is issued.

Confirmation means a definite undertaking of the confirming bank, in addition to

that of the issuing bank, to honour or negotiate a complying presentation.
Confirming bank means the bank that adds its confirmation to a credit upon the
issuing bank's authorization or request.
• Issuing bank means the bank that issues a credit at the request of an applicant or on
its own behalf.
• Negotiation means the purchase by the nominated bank of drafts (drawn on a bank
other than the nominated bank) and/or documents under a complying presentation,
by advancing or agreeing to advance funds to the beneficiary on or before the
banking day on which reimbursement is due to the nominated bank.
• Nominated bank means the bank with which the credit is available or any bank in
the case of a credit available with any bank.
Article 3: Interpretations
• The expression "on or about" or similar will be interpreted as a stipulation that an
event is to occur during a period of five calendar days before until five calendar days
after the specified date, both start and end dates included.
• The words "to", "until", "till", "from" and "between" when used to determine a
period of shipment include the date or dates mentioned, and the words "before"
and "after" exclude the date mentioned.
• The terms "first half" and "second half" of a month shall be construed respectively as
the 1st to the 15th and the 16th to the last day of the month, all dates inclusive.
• The terms "beginning", "middle" and "end" of a month shall be construed
respectively as the 1st to the 10th, the 11th to the 20th and the 21st to the last day
of the month, all dates inclusive.
Article 4: Credits vs Contracts
• 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

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contract, even if any reference whatsoever to it is included in the credit.
Article 5: Documents v. Goods, Services or Performance
• Banks deal with documents and not with goods, services or performance to which
the documents may relate.
Article 6 Availability, Expiry Date and Place for Presentation
• A credit must state the bank with which it is available or whether it is available with
any bank. A credit available with a nominated bank is also available with the issuing
bank.
• A credit must state whether it is available by sight payment, deferred payment,
acceptance or negotiation.
• A credit must state an expiry date for presentation.
• The place of the bank with which the credit is available is the place for presentation.

Article 9 Advising of Credits and Amendments

• A credit and any amendment may be advised to a beneficiary through an advising
bank. An advising bank that is not a confirming bank advises the credit and any
amendment without any undertaking to honour or negotiate.
• By advising the credit or amendment, the advising bank signifies that it has satisfied
itself as to the apparent authenticity of the credit or amendment and that the advice
accurately reflects the terms and conditions of the credit or amendment received.
• A bank utilizing the services of an advising bank or second advising bank to advise a
credit must use the same bank to advise any amendment thereto.
Article 10 Amendments
• The terms and conditions of the original credit (or a credit incorporating previously
accepted amendments) will remain in force for the beneficiary until the beneficiary
communicates its acceptance of the amendment to the bank that advised such
amendment. The beneficiary should give notification of acceptance or rejection of an
amendment. If the beneficiary fails to give such notification, a presentation that
complies with the credit and to any not yet accepted amendment will be deemed to
be notification of acceptance by the beneficiary of such amendment. As of that
moment the credit will be amended.
• Partial acceptance of an amendment is not allowed and will be deemed to be
notification of rejection of the amendment.
Article 11 Teletransmitted and Pre-Advised Credits and Amendments
• An authenticated teletransmission of a credit or amendment will be deemed to be
the operative credit or amendment, and any subsequent mail confirmation shall be
disregarded.
• If a teletransmission states "full details to follow" (or words of similar effect), or
states that the mail confirmation is to be the operative credit or amendment, then
the teletransmission will not be deemed to be the operative credit or amendment.
The issuing bank must then issue the operative credit or amendment without delay
in terms not inconsistent with the teletransmission.
Article 13 Bank-to-Bank Reimbursement Arrangements
• An issuing bank must provide a reimbursing bank with a reimbursement
authorization that conforms with the availability stated in the credit. The
reimbursement authorization should not be subject to an expiry date.
• An issuing bank will be responsible for any loss of interest, together with any
expenses incurred, if reimbursement is not provided on first demand by a
reimbursing bank in accordance with the terms and conditions of the credit.
• A reimbursing bank's charges are for the account of the issuing bank.
Article 14 Standard for Examination of Documents
• A nominated bank acting on its nomination, a confirming bank, if any, and the issuing
bank must examine a presentation to determine, on the basis of the documents
alone, whether or not the documents appear on their face to constitute a complying
presentation.

• A nominated bank acting on its nomination, a confirming bank, if any, and the issuing
bank shall each have a maximum of five banking days following the day of
presentation to determine if a presentation is complying. This period is not curtailed

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or otherwise affected by the occurrence on or after the date of presentation of any
expiry date or last day for presentation.
• A presentation must be made by or on behalf of the beneficiary not later than 21
calendar days after the date of shipment as described in these rules, but in any event
not later than the expiry date of the credit.
Article 16 Discrepant Documents, Waiver and Notice
• When a nominated bank acting on its nomination, a confirming bank, if any, or the
issuing bank determines that a presentation does not comply, it may refuse to
honour or negotiate.
• When an issuing bank determines that a presentation does not comply, it may in its
sole judgement approach the applicant for a waiver of the discrepancies.
• When a nominated bank acting on its nomination, a confirming bank, if any, or the
issuing bank decides to refuse to honour or negotiate, it must give a single notice to
that effect to the presenter.
• The notice must state:
• i. that the bank is refusing to honour or negotiate; and
• ii. each discrepancy in respect of which the bank refuses to honour or negotiate; and
• iii. a) that the bank is holding the documents pending further instructions from the
presenter; or
• b) that the issuing bank is holding the documents until it receives a waiver from the
applicant and agrees to accept it, or receives further instructions from the presenter
prior to agreeing to accept a waiver; or
• c) that the bank is returning the documents; or
• d) that the bank is acting in accordance with instructions previously received from
the presenter.
• The notice required in sub-article 16 (c) must be given by telecommunication or, if
that is not possible, by other expeditious means no later than the close of the fifth
banking day following the day of presentation.
Article 20 Bill of Lading
• A bill of lading, however named, must appear to:
• i. indicate the name of the carrier and be signed by:
• the carrier or a named agent for or on behalf of the carrier, or
• the master or a named agent for or on behalf of the master.
• ii. indicate that the goods have been shipped on board a named vessel at the port of
loading stated in the credit by:
• pre-printed wording, or
• an on board notation indicating the date on which the goods have been shipped on
board.
• be the sole original bill of lading or, if issued in more than one original, be the full set
as indicated on the bill of lading.

Other Transport Documents

• Non-Negotiable Sea Waybill (Article 21)
• Charter Party Bill of Lading (Article 22)
• Multimodal Transport Document (Article 19)
• Air Transport Document (Article 23)
• Road, Rail or Inland Waterway Transport Documents (Article 24)
• Courier Receipts, Post Receipt or Certificate of Posting (Article 25)
Article 26 "On Deck”
• A transport document must not indicate that the goods are or will be loaded on
deck. A clause on a transport document stating that the goods may be loaded on
deck is acceptable.
Article 27 Clean Transport Document
• A bank will only accept a clean transport document. A clean transport document is
one bearing no clause or notation expressly declaring a defective condition of the
goods or their packaging. The word "clean" need not appear on a transport
document, even if a credit has a requirement for that transport document to be
"clean on board".
Article 28 Insurance Document and Coverage

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• Cover notes will not be accepted.
• The date of the insurance document must be no later than the date of shipment,
unless it appears from the insurance document that the cover is effective from a
date not later than the date of shipment.
• The insurance document must indicate the amount of insurance coverage and be in
the same currency as the credit.
• If there is no indication in the credit of the insurance coverage required, the amount
of insurance coverage must be at least 110% of the CIF or CIP value of the goods.
Article 29 Extension of Expiry Date or Last Day for Presentation
• If the expiry date of a credit or the last day for presentation falls on a day when the
bank to which presentation is to be made is closed for reasons other than those
referred to in article 36, the expiry date or the last day for presentation, as the case
may be, will be extended to the first following banking day.
Article 30 Tolerance in Credit Amount, Quantity and Unit Prices
• The words "about" or "approximately" used in connection with the amount of the
credit or the quantity or the unit price stated in the credit are to be construed as
allowing a tolerance not to exceed 10% more or 10% less than the amount, the
quantity or the unit price to which they refer.
• A tolerance not to exceed 5% more or 5% less than the quantity of the goods is
allowed, provided the credit does not state the quantity in terms of a stipulated
number of packing units or individual items and the total amount of the drawings
does not exceed the amount of the credit.

Article 31 Partial Drawings or Shipments

• Partial drawings or shipments are allowed.
Article 34 Disclaimer on Effectiveness of Documents
• A bank assumes no liability or responsibility for the form, sufficiency, accuracy,
genuineness, falsification or legal effect of any document, or for the general or
particular conditions stipulated in a document or superimposed thereon; nor does it
assume any liability or responsibility for the description, quantity, weight, quality,
condition, packing, delivery, value or existence of the goods, services or other
performance represented by any document, or for the good faith or acts or
omissions, solvency, performance or standing of the consignor, the carrier, the
forwarder, the consignee or the insurer of the goods or any other person.
Article 35 Disclaimer on Transmission and Translation
• A bank assumes no liability or responsibility for the consequences arising out of
delay, loss in transit, mutilation or other errors arising in the transmission of any
messages or delivery of letters or documents, when such messages, letters or
documents are transmitted or sent according to the requirements stated in the
credit, or when the bank may have taken the initiative in the choice of the delivery
service in the absence of such instructions in the credit.
• If a nominated bank determines that a presentation is complying and forwards the
documents to the issuing bank or confirming bank, whether or not the nominated
bank has honoured or negotiated, an issuing bank or confirming bank must honour
or negotiate, or reimburse that nominated bank, even when the documents have
been lost in transit between the nominated bank and the issuing bank or confirming
bank, or between the confirming bank and the issuing bank.
• A bank assumes no liability or responsibility for errors in translation or interpretation
of technical terms and may transmit credit terms without translating them.
Article 36 Force Majeure
• A bank assumes no liability or responsibility for the consequences arising out of the
interruption of its business by Acts of God, riots, civil commotions, insurrections,
wars, acts of terrorism, or by any strikes or lockouts or any other causes beyond its
control.
• A bank will not, upon resumption of its business, honour or negotiate under a credit
that expired during such interruption of its business.
Article 37 Disclaimer for Acts of an Instructed Party
• A bank utilizing the services of another bank for the purpose of giving effect to the
instructions of the applicant does so for the account and at the risk of the applicant.

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• An issuing bank or advising bank assumes no liability or responsibility should the
instructions it transmits to another bank not be carried out, even if it has taken the
initiative in the choice of that other bank.
Article 38 Transferable Credits
• A bank is under no obligation to transfer a credit except to the extent and in the
manner expressly consented to by that bank.

• Transferable credit means a credit that specifically states it is "transferable". A

transferable credit may be made available in whole or in part to another beneficiary
("second beneficiary") at the request of the beneficiary ("first beneficiary").
• Transferring bank means a nominated bank that transfers the credit or, in a credit
available with any bank, a bank that is specifically authorized by the issuing bank to
transfer and that transfers the credit. An issuing bank may be a transferring bank.
Transferred credit means a credit that has been made available by the transferring
bank to a second beneficiary.
• A credit may be transferred in part to more than one second beneficiary provided
partial drawings or shipments are allowed.
• A transferred credit cannot be transferred at the request of a second beneficiary to
any subsequent beneficiary. The first beneficiary is not considered to be a
subsequent beneficiary.
• Any request for transfer must indicate if and under what conditions amendments
may be advised to the second beneficiary. The transferred credit must clearly
indicate those conditions.
• The transferred credit must accurately reflect the terms and conditions of the credit,
including confirmation, if any, with the exception of:
- the amount of the credit,
- any unit price stated therein,
- the expiry date,
- the period for presentation, or
- the latest shipment date or given period for shipment,
any or all of which may be reduced or curtailed.
• The first beneficiary has the right to substitute its own invoice and draft, if any, for
those of a second beneficiary for an amount not in excess of that stipulated in the
credit, and upon such substitution the first beneficiary can draw under the credit for
the difference, if any, between its invoice and the invoice of a second beneficiary.

Summary of Major Issues in LC Transactions

Check List for Issuing/Accepting L/C
• Quality of Issuing Bank
• Method of Payment: Sight or Deferred Basis
• Transport Documents
• Other Documents
• Documents: Banks deal in documents not in goods, services or performance
• Should not refer to underlying contract
• Timing: UCP norm is max. 21 days after shipment date for presentation of
documents
Responsibilities and Obligations of Banks
• Irrevocable unless otherwise mentioned
• Issuing Bank: Prime obligation
• Advising Bank: Only obligation to authenticate the credit and passing it on promptly
to beneficiary

• Confirming Bank: takes over payment responsibilities of the issuing bank as far as the
beneficiary is concerned
• Reimbursing Bank: Responsibility of Issuing Bank to provide proper reimbursement
instructions
• Applicability of Force Majeure clause limiting banks’ liability on account of Acts of
God, riots, etc.
• Banks have five banking days to examine documents after receipt of documents
• Banks will examine documents with reasonable care

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• Documents should be consistent with each other and complete
• Documents should conform with the terms of the credit
• Documents should comply with the provisions of UCP
Common Defects in Documentation
Commonly found discrepancies between the letter of credit and supporting documents
include:
• Letter of Credit has expired prior to presentation of draft.
• Bill of Lading evidences delivery prior to or after the date range stated in the credit.
• Stale dated documents.
• Changes included in the invoice not authorized in the credit.
• Inconsistent description of goods.
• Insurance document errors.
• Invoice amount not equal to draft amount.
• Ports of loading and destination not as specified in the credit.
• Description of merchandise is not as stated in credit.
• A document required by the credit is not presented.
• Documents are inconsistent as to general information such as volume, quality, etc.
• Names of documents not exact as described in the credit. Beneficiary information
must be exact.
• Invoice or statement is not signed as stipulated in the letter of credit.
Options for Banks dealing in Discrepant Documents
• Ask beneficiaries to make corrections
• Accept minor discrepancies and pay under reserve
• Obtain indemnity from seller
• Telex/fax details of discrepancies to the issuing bank and request permission to pay
• Send the documents on collection
Marine or Ocean Bill of Lading
• They are documents of title. Should be signed by ship’s master or his named agent
• If stated that goods are on board, then dated
• Load port and disport should be named
• `On Deck’ transport document not allowed
• Clean Transport Document
• Quasi-negotiable: transferable by endorsement and physical delivery, but no
recourse
• Transhipment allowed unless prohibited in L/C

Other Transport Documents

• Some multi-modal transport operators (MTOs) also issue negotiable documents for
transport operations where the goods are carried by several different modes of
transport.
• Today goods often travel faster than the related documents. Rail, road and air
transport documents are issued only in non-negotiable form with the goods
consigned direct to a named consignee. Usually this will be the buyer unless the
goods are consigned to a bank
Non-Transport Documents
• Insurance Documents (Article 28): Same currency as the Credit, Minimum amount to
be CIF or CIP plus 10%,
• Commercial Invoices (Article 18)
• Consular Invoice
• Certificate of Origin
• Weight List
• Packing List
• Inspection or Survey Certificate
• Test Certificates

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EXIM Bank

Exim Bank – its functions

Exim Bank (Export/Import Bank) was established in 1981 with the objective
of financing Import Export Trade especially on Long term basis. The
functions of Exim bank are as under:
Offering Finance for Exports at competitive rates.
Developing alternate financial solution
Data and Information about new export opportunities.
Respond to export problems and pursue Policy solutions.
The finance activities of Exim bank consist of :
1. Arranging Suppliers‟ credit and Buyers‟ credit
2. Consultancy and Technical services for exporters
3. Pre-shipment credit – over 6 months
4. Setting up of EOU in EPZ (Export Processing Zones)
5. Finance for DTA (Domestic Tariff Area) units exporting minimum
25% of annual sales.
6. Finance for Import of Computer System and Development of
Software. Plant and Machinery and Technical up-gradations etc.
7. Services for Overseas Investments.
8. Line of Credit to exporters on the basis of which they receive export
orders.
EXIM Bank performs following functions for Commercial Banks:
Export Bills Rediscounting – Usance period should not exceed 180
days.
SSI Export Bills Rediscounting.
Refinance of Export credit
Refinance of TL to EOU, Software Capital goods up to 100%
Participates with banks in Issuance of Guarantees.
Besides above, the EXIM bank arranges Relending facilities for Overseas
Banks, sanctions direct credit to foreign importers and arranges line of
credit for foreign importers.
DPG (Deferred
Payment
Guarantees
It is normally beyond 6M and meant for SHE (Status Holder Exporters)
only.
Banks can approve proposals up to 25 crore.
Above 25 crore up to 100 crore are referred to EXIM bank.
Above 100 crore proposals will be considered by Inter institutional Working
Group consisting of members from RBI, FEDAI, ECGC and EXIM.
Other services
of EXIM bank
Besides above, the EXIM bank provides assistance for :
1. Project Exports – export of Engineering goods on Deferred Payment
terms
2. Turnkey Projects- supply of equipment along with related services
like design, detailed engineering etc.
3. Construction Projects
4. Funded facilities.
EXIM Bank is nodal agency designated by GOI to manage Export
Marketing Fund (EMF) which consists of loan made available to India by
World bank to promote International Trade.

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EXPORT CREDIT GUARRANTEE CORPORATION OF INDIA

ECGC was established in 1964. Export Credit and Guarantee Corporation

provides guarantee cover for risks which can be availed by the banks after
making payment of Premium. Its activities are governed by IRDA.
The functions of ECGC are 3 fold:
1. It rates the different countries.
2. It issues Insurance Policies.
3. It guarantees proceeds of Exports.
Types of Policies:
1. Standard Policies
It provides cover for exporters for short term exports. These cover
Commercial and Political Risks. The different types of Policies are:
- Shipment (Comprehensive Risk) Policy – to cover
commercial and political risks from date of shipment. Default
of 4 months.
- Shipment (Political Risks) Policy.
- Contracts (Comprehensive Risk) Policy for both commercial
and Political risks.
- Contracts (Political Risks) Policy
2. Small Exporters’ policy
A small exporter is defined whose anticipated total export turnover
for the period of 12 M is not more than 50 lac. The policy is issued
to cover shipments 24 M ahead.
The policy provides cover against Commercial risks and Political
risks covering insolvency of the buyer , failure of the borrower to
make payment due within 2 months from due date, borrower‟s failure
to accept the goods due to no fault of exporter.
3. Specific Shipment Policy
Commercial risks – Failure to pay within 4M. It covers short term
credit not exceeding 180 days.
4. Exports Specific Buyer Policy
Commercial risks – Failure to pay within 4M and Political Risks
The other Policies are Exports (specific buyers‟ Policy), Buyers‟ Exposure
Policy, Export Turnover Policy (exporters who pay minimum 10 lac premium
to ECGC are eligible) and Consignment export Policy.
Financial
Guarantees
ECGC issues following types of Guarantees for the benefit of Exporters:
Packing Credit Insurance
ECIB (WT-PC) – Exporters Credit Insurance for Banks (whole Turnover
Packing Credit)
This policy is issued to banks to guarantee export risks:
- For all exporters
- Minimum 25 accounts should be there.
- Minimum assured premium is Rs. 5.00 lac.
- Period of cover is 12M.
- The claim is payable if there is default of 4 Months.
- Premium for fresh covers is 8 paisa per month and for others is 6-9.5
paisa percent per month. It is calculated on average outstanding.
- Percentage of cover ranges from 50-75%
- If due date of export proceeds is extended beyond 360 days,
approval of ECGC is required.
- Claim is to be filed within 6M of report of default to ECGC.

DGFT Directorate General of foreign Trade

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DGFT is responsible for implementing the Foreign Trade Policy or Exim Policy with the main objective of
promoting Indian exports.

The Directorate General of Foreign Trade (DGFT) is the agency of the Ministry of Commerce and Industry
of the Government of India responsible for administering laws regarding foreign trade and foreign
investment in India.

IEC
DGFT provides a complete searchable[1] database of all exporters and importers of India. The search
can be completed only if full IEC code and first three letters of company name are entered

The Directorate General of foreign Trade (DGFT) is the agency of the Ministry of Commerce and Industry
of the Government of India, responsible for execution of the import and export Policies of India. It was
earlier known as Chief Controller of Imports & Exports (CCI&E) till 1991. DGFT plays a very important
role in the development of trading relations with various other nations and thus help in improving not only
the economic growth but also provides a certain impetus needed in the trade industry. For promoting
exports and imports DGFT establish its regional offices across the country.

Directorate General of Foreign Trade is an attached office of the Department of Commerce, Ministry of
Commerce and Industry. It’s headquartered in Udyog Bhavan, New Delhi. Under its jurisdiction, there are
four Zonal Offices at Delhi, Mumbai, Kolkata and Chennai headed by Zonal Joint Director General of
Foreign Trade. There are 35 Regional Authorities all over the country.

Functions and responsibilities of DGFT:

DGFT entrusted with the responsibility of implementing various policies regarding trade for example,
Foreign Trade Policy.
DGFT is the licensing authority for exporters, importers, and export and import business.
DGFT can prohibit, restrict and regulate exports and imports.
DGFT has important role to issue Notifications, Public notices, Circulars, etc.
DGFT grant 10 digit IEC (Importer Exporter Code), which is a primary requirement to Import Export
DGFT introduces different schemes from time to time regarding trade benefits throughout the country.
DGFT has introduced ITC (HS CODE) schedule-1 for import items in India and Schedule-2 for Export
items from India.

DGFT or Directorate General of Foreign Trade is a government organization in India responsible for the
formulation of exim guidelines and principles for indian importers and indian exporters of the country.
Before 1991, DGFT was known as the Chief Controller of Imports & Exports (CCI&E).

Functions of DGFT

Some of the major functions of DGFT and its regional offices through out the country are as follows:

To implement the Exim Policy or Foreign Trade Policy of India by introducing various schemes and
guidelines through its network ofdgft regional offices thought-out the country. DGFT perform its functions
in coordination with state governments and all the other departments of Ministry of Commerce and
Industry, Government of India.
To Grant Exporter Importer Code Number to Indian Exporter and Importers. IEC Number is a unique 10
digit code required by the traders or manufacturers for the purpose of import and export in India. DGFT
IEC Codes are mandatory for carrying out import export trade operations and enable companies to
acquire benefits on their imports/exports, indian customs, export promotion councils council etc in India.
DGFT permits or regulate Transit of Goods from India or to countries adjacent to India in accordance with
the bilateral treaties between India and other countries.
To promote trade with neighboring countries.
To grant the permission of free export in Export Policy Schedule 2.

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DGFT also play an important role in controlling DEPB Rates.
Setting standard input-output norms is also controlled by the DGFT.
Any changes or formulation or addition of new codes in ITC-HS Codes are also carried out by DGFT
(Directorate General of Foreign Trade).
Apart from the above, DGFT also acts as a trade facilitator. It also deals with the quality complaints of the
foreign buyers. Officials DGFT works in close coordination with other related economic offices like
Customs Commissionerates, Central Excise authorities, DRI authorities and Enforcement Directorate.

DGFT Digital Signature

In the year 2004, DGFT has also introduced the digital signature. DGFT

Trade finance recollected questions::

2 marks qstn from ecgc,export promotion capital goods scheme. exim ,lc, eefc, urr725 ,pcfc
1 marks from forfating, factoring, pre and post shipment ,Fedai dutydrawback urc522 heckscher ohlin theory buyers
and suppliers credit forward contract , lc., channel financing merchanting trade as well these topics in .5 marks qstn
bid bondand performance guarantee currency and credit risk , wharfage documentry credit time period related qstn ,
status holder starhouse . SEIS , liberalized remittance . NEIA (national export insurance account), ssp, src. Scp
related to ECIE-ST red clause

Extra Information for DGFT

CHAPTER 1

LEGAL FRAMEWORK AND TRADE FACILITATION

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 A. LEGAL FRAMEWORK

1.00 Legal Basis of Foreign Trade Policy (FTP)

The Foreign Trade Policy, 2015-20, (as updated) w.e.f. 05.12.2017is notified by Central Government, in exercise
of powers conferred under Section 5 of the Foreign Trade (Development & Regulation) Act, 1992 (No. 22 of
1992) [FT (D&R) Act], as amended.

1.01 Duration of FTP

The Foreign Trade Policy (FTP), 2015-2020,(as updated) w.e.f. 05.12.2017 incorporating provisions relating to
export and import of goods and services, shall come into force with effect from the date of notification and
shall remain in force up to 31st March, 2020, unless otherwise specified. All exports and imports made upto the
date of notification shall, accordingly, be governed by the relevant FTP, unless otherwise specified.

1.02 Amendment to FTP

Central Government, in exercise of powers conferred by Section 5 of FT (D&R) Act, 1992, as amended from
time to time, reserves the right to make any amendment to the FTP, by means of notification, in public interest.

1.03 Hand Book of Procedures (HBP) and Appendices & Aayat Niryat Forms (AANF)

Director General of Foreign Trade (DGFT) may, by means of a Public Notice, notify Hand Book of Procedures,
including Appendices and Aayat Niryat Forms or amendment thereto, if any, laying down the procedure to be
followed by an exporter or importer or by any Licensing/Regional Authority or by any other authority for
purposes of implementing provisions of FT (D&R) Act, the Rules and the Orders made there under and
provisions of FTP.

1.04 Specific provision to prevail over the general

Where a specific provision is spelt out in the FTP/Hand Book of Procedures (HBP), the same shall prevail over
the general provision.

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 1.05 Transitional Arrangements

(a) Any License / Authorisation / Certificate / Scrip / instrument bestowing financial or fiscal benefit
issued before commencement of FTP, 2015-20 (as updated) w.e.f. 05.12.2017shall continue to be
valid for the purpose and duration for which it was issued, such License/Authorisation/ Certificate
/ Scrip / any instrument bestowing financial or fiscal benefit Authorisation was issued, unless
otherwise stipulated.

(b) In case an export or import that is permitted freely under FTP is subsequently subjected
to any restriction or regulation, such export or import will ordinarily be permitted,
notwithstanding such restriction or regulation, unless otherwise stipulated. This is
subject to the condition that the shipment of export or import is made within the original
validity period of an irrevocable commercial letter of credit, established before the date
of imposition of such restriction and it shall be restricted to the balance value and
quantity available and time period of such irrevocable letter of credit. For
operationalising such irrevocable letter of credit, the applicant shall have to register the
Letter of Credit with jurisdictional Regional Authority (RA) against computerized receipt,
within 15 days of the imposition of any such restriction or regulation.

B. TRADE FACILITATION& EASE OF DOING BUSINESS

1.06 Objective

Trade facilitation is a priority of the Government for cutting down the transaction cost and time, thereby
rendering Indian exports more competitive. The various provisions of FTP and measures taken by the
Government in the direction of trade facilitation are consolidated under this chapter for the benefit of
stakeholders of import and export trade.

1.07 DGFT as a facilitator of exports/imports

DGFT has a commitment to function as a facilitator of exports and imports. Focus is on good governance,
which depends on efficient, transparent and accountable delivery systems. In order to facilitate international
trade, DGFT consults various Export Promotion Councils as well as Trade and Industry bodies from time to
time.

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 1.08 Niryat Bandhu - Hand Holding Scheme for new export / import entrepreneurs

(a) DGFT is implementing the Niryat Bandhu Scheme for mentoring new and potential exporter on the
intricacies of foreign trade through counselling, training and outreach programmes.

(b) Considering the strategic significance of small and medium scale enterprises in the manufacturing
sector and in employment generation, ‘MSME clusters’ have been identified, based on the export
potential of the product and the density of industries in the cluster, for focussed interventions to
boost exports.

(c) Outreach activities shall be organized in a structured way with the help of Export Promotion Councils
as ‘industry partners’ and other willing ‘knowledge partners’ in academia and research community to
achieve the objective of Niryat Bandhu Scheme. Further, in order to ensure optimum utilization of
resources, efforts would be made to associate all the stakeholders, including Customs, ECGC, Banks
and concerned Ministries.

1.09 Citizen’s Charter

DGFT has in place a Citizen’s Charter, giving time schedules for providing various services to clients. Time line
for disposal of an Application is given in Para 9.10 of HBP.

1.10 Online Complaint Registration and Monitoring System

An EDI Help Desk is available to assist the exporters in filing online applications on the DGFT portal and
resolving other EDI related issues. For assistance an email may be sent at dgftedi@nic.in or Toll Free number
1800111550 can be used. Help Desk facility is also operational at the 4 DGFT Zonal Offices (details at
http://dgft.gov.in). An Online Complaint registration and monitoring system allows users to register complaint
and receive status/ reply online (details are at http://dgft.gov.in).

1.11 Issue of e-IEC (Electronic-Importer Exporter Code)

(a) Importer Exporter Code (IEC) is mandatory for export/import from/to India as detailed in paragraph
2.05 of this Policy. DGFT

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 issues Importer Exporter Code in electronic form (e-IEC). For issuance of e-IEC an application can
be made on DGFT (http//:dgft.gov.in). Applicant can upload the documents and pay the requisite
fee through Net banking. Applicant shall, however, submit the application duly signed digitally.

(b) Processing of such applications by Regional Authority (RAs) of DGFT would be done online and a
digitally signed e-IEC would normally be issued/ e-mailed to the applicant within 2 working days.

(c) In case the application is incomplete or otherwise ineligible, the same shall be rejected and a
Rejection letter/email (with reasons for rejection) would be sent to the applicant.

(d) Application for issue of e-IEC can also be made from eBiz platform (https://www.ebiz.gov.in).

1.12 e-BRC

(a) One prominent initiative in recent times has been the e-BRC (Electronic Bank Realisation Certificate)
project and its successful implementation by DGFT. It has enabled DGFT to capture details of
realisation of export proceeds directly from the Banks through secured electronic mode. This has
facilitated the implementation of various export promotion schemes without any physical interface
with the stake holders.

(b) RBI has also developed a comprehensive IT-based system called Export Data Processing and
Monitoring System (EDPMS) for monitoring of export of goods and software and facilitating AD banks
to report various returns through a single platform.

1.13 MoU with State Governments for sharing of e-BRC data

MOU has been signed with 14 state governments for sharing of e-BRC data to facilitate refund of VAT/GST by
the state government to exporters. MOU has also been signed with Enforcement Directorate, Agricultural
Directorate, Agricultural Processed Food Products Export Development Authority and Goods & Services Tax
Network (GSTN).

1.14 Exporter Importer Profile

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 An electronic procedure has been created to upload various documents in exporter importer profile. Once
uploaded, there will be no need to submit these documents / copies of these documents to Regional Authority
repeatedly with each application. It intends to reduce the transaction cost and time and is a step towards
paperless processing of different applications in DGFT.

1.15 Reduction in mandatory documents required for Export and Import

The number of mandatory documents required for exports and imports of goods from/into India have been
reduced to three each, as prescribed under paragraph 2.06 of FTP.

1.16 Facility of online filing of applications

All the Regional Authorities (RA) of DGFT and extension counters have been networked with high speed
internet. The applications are received and processed electronically. DGFT under the EDI initiatives has
provided the facility of on line filing of applications to obtain Importer Exporter Code and various
Authorisations /scrip’s. DGFT is one of the first digital signature enabled organisation of the Government of
India (GOI), which has introduced a higher level of Encrypted 2048bit digital signature. There is a web interface
for online filing of application after accessing DGFT website (http://dgft.gov.in). The application can be filed by
exporter/CHA sitting at home or office in 24X7 environments. Application fee can also be paid online from
linked banks or by using debit/credit card. The applications are signed with a digital signature and submitted
electronically to the concerned Regional Authority of DGFT, which are then processed on computer by the
Regional Authority and Authorisations/ scrip’s are issued. Online filing of Application has minimized the
physical interface with RA.

1.17 Online Inter-ministerial consultation

Presently, the exporters are required to file applications online on the website of DGFT under the Icon E-COM
and are required to submit the duly signed and stamped printout of the online application along with all the
necessary documents viz. technical specifications, literature etc. Now, a facility is being provided to upload
copies of all the required documents including technical specifications, literature etc in PDF/JPG/JPEG/GIF
format in the online filing system in respect of (a) Fixation of norms under Advance Authorisation by Norms
Committees (b) Export of Restricted Items (c) Import of Restricted Items (d) SCOMET Items. The exporters

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 would not be required to submit the hard copy of application except architectural drawings, machine drawings
etc which may be difficult to scan and upload. The processing of the applications will also be done online.

1.18 Facility to upload documents by CA/ CS / Cost Accountant

In order to move towards paperless processing, an electronic procedure is being developed to upload digitally
signed documents by Chartered Accountant / Company Secretary / Cost Accountant. To start with, this facility
would be created for Export From India Schemes under Chapter 3. Such documents like Annexure Attached to
ANF 3B, ANF 3C and ANF 3D, which are at present signed by these signatories, can be facilitated by this
procedure. Exporter shall link digitally uploaded annexure with his online applications after creation of such
facility. These facilities may be extended in phased manner to upload documents pertaining to other schemes
like Advance Authorisation, DFIA and EPCG.

1.19 Electronic Data Interchange (EDI)

DGFT has put in place a robust EDI system for the purpose of export facilitation and good governance. DGFT
has set up a secured EDI message exchange system for various documentation related activities including
import and export Authorisations established with other administrative departments, namely, Customs, Banks
and EPCs. This has reduced the physical interface of exporters and importers with the Government
Departments and is a significant measure in the direction of reduction of transaction cost. The endeavour of
DGFT has been to enlarge the scope of EDI to achieve higher level of integration with partner departments.

1.20 Message Exchange with Community partners

Customs, Banks, Export Promotion Councils (EPCs) are major community partners of DGFT for message
exchange. An effective message exchange system is in place with various community partners which is as
follows:

(a) Message Exchange with Customs

(i) Importer Exporter Code Number.

(ai) Authorisations/Scrips for DFIA, AA, EPCG.

(iii) Shipping Bills for Duty Free Import Authorisation (DFIA), Advance Authorisation (AA), Export
Promotion Capital Goods (EPCG), Reward Scrips.

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 (b) Message Exchange with eBiz (https://www.ebiz.gov.in): Application for e-IEC.

(c) Message Exchange with Banks

(i) Application Fee

(ai) electronic Bank Realisation Certificate (e-BRC) data

(d) Message Exchange with EPCs

Registration cum Membership Certificate (RCMC) data.

(e) Message exchange with GSTN and RBI.

1.21 Encouraging development of Third Party API

DGFT will encourage development of third party software for integration with its system to offer users multiple
options for interfacing with the DGFT.

1.22 Forthcoming e-Governance Initiatives

DGFT is currently working on the following EDI initiatives:

(i) Message exchange for transmission of Bills of Entry (import

details) from Customs to DGFT.

(ii) Online issuance of Export Obligation Discharge Certificate (EODC).

(iii) Message exchange with Ministry of Corporate Affairs for CIN & DIN Information.

(iv) Message exchange with CBDT for PAN.

(v) Open API for submission of e-IEC Application.

(vi) Mobile Applications for FTP.

1.23 Free passage of Export consignment

Consignments of items meant for exports shall not be withheld/ delayed for any reason by any agency of
Central/ State Government. In case of any doubt, authorities concerned may ask for an undertaking from
exporter and release such consignment.

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 1.24 No seizure of export related Stock

No seizure shall be made by any agency so as to disrupt manufacturing activity and delivery schedule of
exports. In exceptional cases, concerned agency may seize the stock on the basis of prima facie evidence of
serious irregularity. However, such seizure should be lifted within 7 days unless the irregularities are
substantiated.

1.25 24 X 7 Customs clearance

CBEC introduced the facility of 24 X 7 customs clearance in the year 2012 for facilitated Bills of Entry and
factory stuffed container and goods exported under free Shipping Bills. At present, this facility is available at
19 sea port and 17 air cargo complexes. The 24 X 7 Customs clearance facility has now been extended to all
Bills of Entry (not only facilitated Bills of Entry) at 19 sea port and 17 Air Cargo Complexes. Further, no MOT
charges are required to be collected in respect of the services provided by the Customs officers at 24 X 7
Customs Ports and Airports.

1.26 Single Window in Customs

Indian Customs has introduced SWIFT (Single Window Interface for Facilitating trade) w.e.f. 01.04.2016 for
ensuring ease of doing business. Under SWIFT, the Importers electronically lodge Integrated Declaration at a
single point only with Customs. The required permission, if any, from other regulatory agencies (such as
Animal quarantine, Plant quarantine, Drug Controller, Textile Committee etc.) is obtained online without the
importer/exporter having to separately approach these agencies. Benefits of Single Window Scheme include:

a. Reduced Cost of doing business;

b. Enhanced transparency;

c. Reduced duplicity and cost of compliance;

d. Optimal utilization of man power.

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 1.27 Self-Assessment of Customs Duty

(a) Self-Assessment of Customs duty by importers or exporters was introduced vide Finance Act,
2011. The system is trust based. The objective is to expedite release of imported / export goods.
The system operates on an electronic Risk Management System (RMS)

(b) The Finance Act, 2017 has amended Section 47 of the Customs Act, 1962 to Authorize an
importer to pay duty/tax/cess on the date of presentation of self-assessed Bill of Entry.

1.28 Authorised Economic Operator (AEO) Programme

(a) Based upon WCO’s SAFE Framework of Standards (FoS), ‘Authorised Economic Operator (AEO)
programme’ has been developed by Indian Customs to enable business involved in the international
trade to reap the following benefits:

(i) Secure supply chain from point of export to import;

(ii) Ability to demonstrate compliance with security standards when contracting to supply
overseas importers / exporters;

(iii) Enhanced border clearance privileges in Mutual Recognition Agreement (MRA) partner
countries;
(iv) Minimal disruption to flow of cargo after a security related disruption;
(v) Reduction in dwell time and related costs; and

(vi) Customs advice / assistance if trade faces unexpected issues with Customs of countries with
which India have MRA.

(b) The AEO programmes have been implemented by other Customs administrations that give AEO status
holders preferential Customs treatment in terms of reduced examination, faster clearances and other
benefits. Thus, the AEO programme is expected to result in Mutual Recognition Agreements (MRA)
with these Customs administrations. MRAs would ensure export goods get due Customs facilitation at
the point of entry in the foreign country. Apart from securing supply chain, the benefits include
reduction in dwell time and consequent cost of doing business. Indian Customs has signed MRA with
Hong Kong Customs to recognise respective AEO Programmes to enable trade to get benefits on
reciprocal basis.

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 Indian Customs is also engaged in finalising MRA with other counties such as South Korea, Taiwan,
USA etc.

(c) As a step further towards trust based compliance, Indian Customs has introduced the new/revamped
Authorised Economic Operator (AEO) Programme wherein extensive benefits, including greater
facilitation and self-certification, have been provided to those entities who have demonstrated internal
strong control system and compliance with CBEC.

1.29 Prior filing facility for Shipping Bills

To facilitate processing of shipping bills before actual shipment, prior online filing facility for shipping bills has
been provided by the Customs - 7 days for air shipments & ICDs and 14 days for shipments by sea.

1.30 Cutting down delay in filing of Export General Manifest (EGM) for duty drawback

To facilitate quicker filing of EGMs and quicker rectification of EGM errors, there is a mechanism of monthly
monitoring of EGMs by Chief Commissioners of Customs to ensure that facilitation does not lag on this
account (Instruction No. 603/01/2011-DBK dated 31.07.2013).

1.31 Facility of Common Bond / LUT against Authorisations issued under different EP Schemes

CBEC Circular 11(A)/2011-Cus dated 25.02.2011 has provided the financial year-wise facility of executing
common Bond/LUT against Advance Authorisation (AA)/Export Promotion Capital Goods (EPCG) Authorisation
which is usable across all EDI ports/locations.

1.32 Exemption from Service Tax on Services received abroad

(Deleted)

1.33 Export of perishable agricultural Products

To reduce transaction and handling costs, a single window system to facilitate export of perishable agricultural
produce has been introduced. The system will involve creation of multi-functional nodal agencies to be
accredited by Agricultural and Processed Food Products Export Development Authority (APEDA), New Delhi.
The detailed procedure has been notified at Appendix 1C to Appendices & ANFs.

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 1.34 Time Release Study (TRS)

Customs Authority has decided to undertake ‘Time Release Study’ (TRS) as per WCO guidelines at major
Customs locations on six monthly basis. WCO Time Release Study (TRS) is a unique tool and method for
measuring the actual performance of Customs. The underlying objectives of Time Release Study are:

(i) Identifying bottlenecks in the international supply chain / or constraints affecting Customs release.

(ii) Establishing baseline trade facilitation performance measurement.

1.35 Towns of Export Excellence (TEE)

(a) Objective: Development and growth of export production centres. A number of towns have emerged
as dynamic industrial clusters contributing handsomely to India’s exports. It is necessary to grant
recognition to these industrial clusters with a view to maximize their potential and enable them to
move up the value chain and also to tap new markets.

(b) Selected towns producing goods of Rs. 750 Crore or more may be notified as TEE based on potential
for growth in exports. However, for TEE in Handloom, Handicraft, Agriculture and Fisheries sector,
threshold limit would be Rs.150 Crore. The following facilities will be provided to such TEE’s:

(i) Recognized associations of units will be provided financial assistance under MAI scheme, on
priority basis, for export promotion projects for marketing, capacity building and
technological services.

(ii) Common Service Providers in these areas shall be entitled for Authorisation under EPCG
scheme.

(c) Notified Towns (TEEs) are listed in Appendix 1 B of Appendices & ANFs.

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 1.36 DGCI&S, Kolkata as the provider of trade data

Director General of Commercial Intelligence and Statistics(DGCI&S) is an ISO certified organization under the
administrative control of DGFT . It is the provider of trade data which is a source of guidance and direction for
export & import trade and which help the exporters and importers formulate their trade strategy. Foreign trade
data is disseminated by DGCI&S through (i) Monthly & Quarterly publications in CD form and (ii) Generation of
data from the Foreign Trade database as per user’s request. The DGCI&S has a Priced Information System (PIS)
for disseminating data except for purely Central and State Governments and United Nations bodies. DGCI&S
has put in place a Data Suppression Policy. The aim of this policy is to maintain confidentiality of importer’s
and exporter’s commercially sensitive business data. Transaction level data would not be made publicly
available to protect privacy. DGCI&S trade data shall be made available at aggregate level with a minimum
possible time lag on commercial criteria. DGCI&S can be visited at http://dgciskol.nic.in.

1.37 Reducing/eliminating printout in Customs Clearance

With the aim of ease of doing business and promoting paperless clearance, CBEC has done away with routine
print-outs of several documents including GAR 7 Forms/TR6 Challans, TP copy, Exchange Control copy of Bill
of Entry and Shipping Bills and Export Promotion copy of Shipping Bill.

However, hard copy of EP copy of shipping Bill/ Bill of Entry may be provided on request only.

1.38 National Committee on Trade Facilitation (NCTF)

Consequent to India’s ratification of the WTO Agreement on Trade Facilitation (TFA) in April 2016, the National
Committee on Trade Facilitation (NCTF) has been constituted. The establishment of the Committee is part of
mandatory, institutional arrangement of the TFA. This inter-ministerial body on trade facilitation will be chaired
by the Cabinet Secretary. Its Secretariat will be housed within the Central Board of Excise and Customs (CBEC),
in the Directorate General of Export Promotion, New Delhi. The defined objective behind setting up the NCTF is
to have national level body that will facilitate domestic co-ordination and implementation of TFA provisions. It
will play the lead role in developing the Pan-India road map for trade facilitation. It will be instrumental in
synergizing the various

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 trade facilitation perspectives across the country and will also focus on an outreach programmes for
sensitization of all stakeholders about TFA.

1.39 e-mail initiatives

CBEC has initiated e-mail notification service to importers for information related to all important stages of
import clearances.

1.40 Facility of deferred payment

As a trade facilitation measure, CBEC has introduced facility of deferred payment of customs duty. Further,
Deferred Payment of Import Duty Rules, 2016 have been notified and the same have come into effect from
16.11.2016. The importers certified under AEO Programme (Tier-two) and (Tier-Three) have been notified for
availing the benefit of these Rules.

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