Documents involved in International trade, INCOTERMS, Trade and Exchange Control Formalities

Documents involved in International trade: Statutory Documents, Financial Documents, Transport Documents, Risk Bearing Documents. INCOTERMS: C.I.F., F.O.B., C.I.P. Financing of Imports by Opening of Letter of Credit: Documents required, Trade and Exchange Control Formalities, Sanction of LC Limit. -- Export Finance: Financing of Export/ Deemed Export: Pre ship, and Post Ship Finance, Export Methods --, E.C.G.C. and other formalities. Uniform Custom Practices of Documentary Credits -- Uniform Rules Collection

1. FINANCE ELECTIVE / IB ELECTIVE UNIVERSITY OF CALICUT MASTER OF BUSINESS ADMINISTRATION BUS4E F05 / IB05 FOREX MANAGEMENT Module 3 Study Material Prepared By: Mr. Mohammed Jasir PV Asst. Professor MIIMS Contact: 9605 69 32 66

2. Module III - Syllabus Documents involved in International trade: Statutory Documents, Financial Documents, Transport Documents, Risk Bearing Documents. INCOTERMS: C.I.F., F.O.B., C.I.P. Financing of Imports by Opening of Letter of Credit: Documents required, Trade and Exchange Control Formalities, Sanction of LC Limit. Export Finance: Financing of Export / Deemed Export: Pre ship, and Post Ship Finance, Export Methods, E.C.G.C. and other formalities. Uniform Custom Practices of Documentary Credits - Uniform Rules Collection

3. Documents involved in International trade

4. Documents involved in International trade

5. Commercial Documents Quotation Sales Contract Pro Forma Invoice Commercial Invoice Packing List Inspection Certificate Insurance Policy Insurance Certificate Product Testing Certificate Health Certificate Phytosanitary Certificate Fumigation Certificate ATA Carnet Consular Invoice

6. Transport Documents Shipping Order S/O Dock Receipt D/R or Mate's Receipt Bill of Lading (B/L) House Bill of Lading ( Groupage ) Sea Waybill Air Waybill (AWB) House Air Waybill (HAWB) Shipping Guarantee Packing List (sometimes as packing note)

7. Financial Documents Documentary Credit D/C Standby Credit Collection Instruction Bill of Exchange (B/E) or Draft Trust Receipt (T/R) Promissory Note

8. Government Documents Certificate of Origin (CO) Certificate of Origin Generalized Systems of Preferences (GSP) Form A (or as Form A) Import / Export Declaration   Import / Export License International Import Certificate (IIC) Delivery Verification Certificate (DVC) Landing Certificate Customs Invoice

9. Quotation An offer to sell goods and should state clearly the price, details of quality, quantity, trade terms, delivery terms and payment terms. Prepared by: exporter Sales Contract An agreement between the buyer and the seller stipulating every detail of the transaction. Since this is a legally binding document , it is therefore advisable to seek legal advice before signing the contract. Prepared by: exporter and importer

10. Pro Forma Invoice An invoice provided by a supplier prior to the shipment of merchandise, informing the buyer of the kinds and quantities of goods to be sent, their value, and importation specifications (weight, size and similar characteristics). This is not issued for demanding payment but may be used when applying for an import license / permit or arranging foreign currency or other funding purposes. Prepared by: exporter Commercial Invoice A formal demand note for payment issued by the exporter to the importer for goods sold under a sales contract. It should give details of the goods sold, payment terms and trade terms. It is also used for the customs clearance of goods and sometimes for foreign exchange purpose by the importer. Prepared by: exporter

11. Packing List A list with detailed packing information of the goods shipped. Prepared by: exporter Inspection Certificate A report issued by an independent surveyor (inspection company) or the exporter on the specifications of the shipment, including quality, quantity, and / or price, required by certain buyers and countries. Prepared by: inspection company or exporter ATA Carnet An international customs document used to obtain a duty-free temporary admission for goods such as exhibits for international trade fairs, samples and professional equipment , into the countries that are signatories to the ATA Convention. Prepared by: exporter

12. Insurance Policy An insurance document, with full details of the insurance coverage, evidencing insurance has been taken out on the goods shipped. Prepared by: insurer or insurance agent or insurance broker Insurance Certificate This certifies that the shipment has been insured under a given open policy and is to cover loss of or damage to the cargo while in transit. Prepared by: insurer or insurance agent or insurance broker Product Testing Certificate This certifies the products are conformed to a certain international / national technical standard, such as product quality, safety and specifications. Prepared by: accredited laboratories

13. Health Certificate Document issued by the competent country when agricultural or food products are being exported, to certify that they comply with the relevant legislation in the exporter's country and were in good condition at time of inspection, prior to shipment and fit for human consumption. Prepared by: exporter / inspection authority Phytosanitary Certificate Frequently an international requirement that any consignment of plants or planting materials importing into a country shall be accompanied by a Phytosanitary Certificate issued by the exporting country stating that the consignment is found substantially free from diseases and pests and conforms with the current phytosanitary regulations of the importing country. Prepared by: exporter

14. Fumigation Certificate A pest control certificate issued to certify that the concerned products have been undergone the quarantine and pre-shipment fumigation by the approved fumigation service providers. It is mainly required by the US, Canada, Australia, New Zealand and UK's customs on solid wood packing material from Hong Kong and the Chinese Mainland. Prepared by: exporter or inspection company Consular Invoice A document required by some foreign countries, showing shipment information such as consignor, consignee, and value description, etc. Certified by a consular official of the importing country stationed in the foreign country, it is used by the country's customs officials to verify the value, quantity and nature of the shipment. Prepared by: exporter

15. Transport Documents Shipping Order S/O Dock Receipt D/R or Mate's Receipt Bill of Lading (B/L) House Bill of Lading ( Groupage ) Sea Waybill Air Waybill (AWB) House Air Waybill (HAWB) Shipping Guarantee Packing List (sometimes as packing note)

16. Shipping Order S/O A document with details of the cargo and the shipper's requirements, Basic document for preparing other transport documents such as bill of lading, air waybill, etc. Prepared by: shipper / transport companies Dock Receipt D/R or Mate's Receipt A receipt to confirm the receipt of cargo on shipyard / warehouse pending shipment. The dock receipt is used as documentation to prepare a bill of lading. It has no legal role regarding processing financial settlement. Prepared by: shipping company

17. Bill of Lading (B/L) An evidence of contract between the shipper of the goods and the carrier. The customer usually needs the original as proof of ownership to take possession of the goods. Prepared by: shipping company House Bill of Lading ( Groupage ) A bill of lading issued by a forwarder and, in many cases, not a title document. Shippers choosing to use a house bill of lading, should clarify with the bank whether it is acceptable for letter of credit purpose before the credit is opened. Advantages include less packing, lower insurance premiums, quicker transit, less risk of damage and lower rates than cargo as an individual parcel / consignment. Prepared by: forwarder

18. Sea Waybill A receipt for cargo which incorporates the contract of carriage between the shipper and the carrier but is non-negotiable and is therefore not a title document. Prepared by: shipping company Air Waybill (AWB) A kind of waybill used for the carriage of goods by air. This serves as a receipt of goods for delivery and states the condition of carriage but is not a title document or transferable / negotiable instrument. Prepared by: airline House Air Waybill (HAWB) An air consignment note issued by an air freight agent to provide the cargo description and records. Again, it is not a title document. Prepared by: forwarding agent

19. Shipping Guarantee Usually a pre-printed form provided by a shipping company or the bank, given by an importer's bank to the shipping company to replace the original transport document. The consignee may then in advance take delivery of goods against a shipping guarantee without producing the original bill of lading. The consignee and the importer bank will be responsible for any loss or charges occurred to the shipping company if fault is found in the collection. It is usually used with full margin or trust receipt to protect the bank's control to the goods. Prepared by: importer's bank / shipping company / consignee

20. Packing List (sometimes as packing note) A list providing information needed for transportation purpose, such as details of invoice, buyer, consignee, country of origin, vessel / flight date, port / airport of loading, port / airport of discharge, place of delivery, shipping marks / container number, weight / volume of merchandise and the fullest details of the goods, including packing information. Prepared by: shipper

21. Financial Documents Documentary Credit D/C Standby Credit Collection Instruction Bill of Exchange (B/E) or Draft Trust Receipt (T/R) Promissory Note

22. Documentary Credit D/C A bank instrument (issuing or opening bank), at the request of the buyer, evidencing the bank's undertaking to the seller to pay a certain sum of money provided that specific requirements set out in the D/C are satisfied. Prepared by: the issuing bank upon an application made by the importer Standby Credit An arrangement between a customer and his bank by which the customer may enjoy the convenience of cashing cheques , up to a value. Or a credit set up between the exporter and the importer guaranteeing the exporter will pay the importer a certain amount of money if the contract is not fulfilled. It is also known as performance bond. This is usually found in large transactions, such as crude oil, fertilizers, fishmeal, sugar, urea, etc. Prepared by: exporter / issuing bank

23. Collection Instruction An instruction given by an exporter to its banker, which empowers the bank to collect the payment subject to the contract terms on behalf of the exporter. Prepared by: exporter Bill of Exchange (B/E) or Draft An unconditional written order, in which the importer addressed to and required by the exporter to pay on demand or at a future date a certain amount of money to the order of a person or bearer. Prepared by: exporter Trust Receipt (T/R) A document to release a merchandise by a bank to a buyer (the bank still retains title to the merchandise), the buyer, who obtains the goods for processing is obligated to maintain the goods distinct from the remainder of his / her assets and to hold them ready for repossession by the bank. Prepared by: importer

24. Promissory Note A financial instrument that is negotiable evidencing the obligations of the foreign buyer to pay to the bearer.  Prepared by: importer

25. Government Documents Certificate of Origin (CO) Certificate of Origin Generalized Systems of Preferences (GSP) Form A (or as Form A) Import / Export Declaration   Import / Export License International Import Certificate (IIC) Delivery Verification Certificate (DVC) Landing Certificate Customs Invoice

26. Certificate of Origin (CO) This certifies the place of manufacture of the exported goods to meet the requirements of the importing authorities.     Prepared by: Trade and Industry Department and five Chambers of Commerce [1] Certificate of Origin Generalized Systems of Preferences (GSP) Form A (or as Form A) A CO to support the claim for preferential tariff entry (a reduced or zero rate) of the exporting country's products into the GSP donors under the GSP they operate. In general, a Form A is issued only when the goods concerned have met both the origin rules of the preference receiving country as well as the origin criteria of the respective donor country's GSP.      Prepared by: Trade and Industry Department and five Chambers of Commerce

27. Import / Export Declaration   A statement made to the Director of Customs at port of entry / exit, declaring full particulars of the shipment, eg . the nature and the destination / exporting country of the ship's cargo. Its primary use is for compiling trade statistics.     Prepared by: exporter / importer Import / Export License A document issued by a relevant government department authorizing the imports and exports of certain controlled goods. Prepared by: Trade and Industry Department, Customs & Excise Department, etc

28. International Import Certificate (IIC) A statement issued by the government of country of destination, certifying the imported strategic goods will be disposed of in the designated country. In Hong Kong, it is issued only to meet an exporting country's requirement.     Prepared by: Trade and Industry Department Delivery Verification Certificate (DVC) A statement issued by the government of country of destination, certifying a specific strategic commodity has been arrived in the designated country. In Hong Kong, it is issued only to meet an exporting country's requirement. Prepared by: Trade and Industry Department

29. Landing Certificate A document issued by the government of country of destination, certifying a specific commodity has been arrived in the designated country. In Hong Kong, it is issued by the Census and Statistics Department. Application requirements include letter stating the reason for the application, import declaration & receipt; bill of lading, sea waybill & land manifest; supplier's invoice; and packing list (if any). Prepared by: Census and Statistics Department Customs Invoice A document specified by the customs authorities of the importing countries stating the selling price, costs for freight, insurance, packing and payment terms, etc, for the purpose of determining the customs value.

30. INCOTERMS C.I.F F.O.B C.I.P

31. INCOTERMS International Commercial TERMS First created in 1936 by the International Chamber of Commerce INCOTERMS are uniform, internationally recognized foreign trade terms that refer to the type of agreement for the purchase and shipping of goods internationally There are 13 different terms, each of which helps users deal with different situations involving the movement of goods.

32. Contd.. The difference between the 2000 and the 2010 version  is the number of INCOTERMS has been reduced from 13 to 11. (Four INCOTERMS (DAF, DES, DEQ, DDU) have been replaced by two new INCOTERMS (DAT, DAP). The replaced INCOTERMS DAF, DES and DEQ were not used much in day to day trading.) Major areas in INCOTERMS Costs : Expenses Control : Owns Liability : Damage

33. Major Areas 1. Costs: Who is responsible for the expenses involved in a shipment at a given point in the shipment's journey? 2. Control: Who owns the goods at a given point in the journey? 3. Liability: Who is responsible for paying damage to goods at a given point in a shipment's transit?

34. Rules for any modes of transportation Rules for inland and sea transportation EXW FCA CPT CIP DAT DAP DDP FAS FOB CFR CIF Ex works (WH) Free Carrier Carriage paid to Carriage and Insurance paid to Delivered at Terminal Delivered at Place Delivered duty paid Free Alongside ship Free on Board Cost and Freight Cost Insurance and Freight The Seller The Buyer EXW FCA CPT CIP Transport Paid Transport and Insurance Paid Customs Unpaid Loading Port Destination Port FOB DAT CFR CIF FAS Transport & Insurance Paid Transport Paid Customs Unpaid DDP DAP

35. Rules for any modes of transportation Rules for inland and sea transportation EXW FCA CPT CIP DAT DAP DDP FAS FOB CFR CIF Ex works Free Carrier Carriage paid to Carriage and Insurance paid to Delivered at Terminal Delivered at Place Delivered duty paid Free Alongside ship Free on Board Cost and Freight Cost Insurance and Freight The Seller The Buyer EXW FCA CPT CIP DAP Transport Paid Transport and Insurance Paid Customs Unpaid Loading Port Destination Port FOB DAT CFR CIF FAS Transport & Insurance Paid Transport Paid Customs Unpaid DDP

36. EXW - ExWorks (2000 and 2010) This term represents the seller's minimum obligation, since he only has to place the goods at the disposal of the buyer. The buyer must carry out all tasks of export & import clearance. Carriage & insurance is to be arranged by the buyer. FCA - Free Carrier (2000 and 2010) This term means that the seller delivers the goods, cleared for export, to the carrier nominated by the buyer at the named place. Seller pays for carriage to the named place FAS - Free Alongside Ship (2000 and 2010) This term means that the seller delivers when the goods are placed alongside the vessel at the named port of shipment. The seller is required to clear the goods for export. The buyer has to bear all costs & risks of loss or damage to the goods from that moment. This term can be used for ocean transport only.

37. FOB - Free On Board (2000 and 2010) This term means that the seller delivers when the goods pass the ship's rail at the named port of shipment. This means the buyer has to bear all costs & risks to the goods from that point. The seller must clear the goods for export. This term can only be used for ocean transport. If the parties do not intend to deliver the goods across the ship's rail, the FCA term should be used.   CFR - Cost and Freight (2000 and 2010) This term means the seller delivers when the goods pass the ship's rail in the port of shipment. Seller must pay the costs & freight necessary to bring the goods to the named port of destination, BUT the risk of loss or damage, as well as any additional costs due to events occurring after the time of delivery are transferred from seller to buyer. Seller must clear goods for export. This term can only be used for ocean transport.

38. CIF - Cost, Insurance, Freight (2000 and 2010) The seller delivers when the goods pass the ship's rail in the port of shipment. Seller must pay the cost & freight necessary to bring goods to named port of destination. Risk of loss & damage same as CFR. Seller also has to procure marine insurance against buyer's risk of loss/damage during the carriage. Seller must clear the goods for export. This term can only be used for ocean transport.   CIP - Carriage and Insurance Paid (2000 and 2010) This term is the same as CPT with the exception that the seller also has to procure insurance against the buyer's risk of loss or damage to the goods during the carriage. This term may be used for any mode of transportation.

39. CPT - Carriage Paid To (2000 and 2010) This term means that the seller delivers the goods to the carrier nominated by him but the seller must in addition pay the cost of carriage necessary to bring the goods to the named destination. The buyer bears all costs occurring after the goods have been so delivered. The seller must clear the goods for export. This term may be used irrespective of the mode of transport (including multimodal).   DAF - Delivered At Frontier (2000) This term means that the seller delivers when the goods are placed at the disposal of the buyer on the arriving means of transport not unloaded, cleared for export but not cleared for import, at the named point & place at the frontier - but before the customs border of the adjoining country. To be used when delivering to a land frontier.

40. DES - Delivered Ex Ship (2000) Seller delivers when goods are placed at the disposal of the buyer on board the ship, not cleared for import at the named port of destination. The seller bears all costs & risks in bringing the goods to the named port before discharging. This term can only be used when the goods are to be delivered by ocean.   DEQ - Delivered Ex Quay (2000) This terms is the same as DES with the exception that the seller is responsible to place the goods at the disposal of the buyer, not cleared for import, on the quay (wharf) at the named port of destination. Seller bears all costs & risks as in DES plus discharging the goods on the quay. This term can only be used in ocean transport.

41. DDU - Delivered Duty Unpaid (2000) This term means the seller delivers the goods to the buyer, not cleared for import, and not unloaded from arriving means of transport at the named place of destination. The seller bears all costs & risks involved in bringing the goods to the named place other than "duty" (which includes the responsibility for customs formalities & payment of those formalities, duties & taxes) for import into the country of destination. Buyer is responsible for payment of all customs & duties & taxes.   DDP - Delivered Duty Paid (2000 and 2010) This term represents maximum obligation to the seller. This term should not be used if the seller is unable to directly or indirectly to obtain the import license. The terms means the same as the DDU term with the exception that the seller also will bear all costs & risks of carrying out customs formalities including the payment of duties, taxes & customs fees.

42. DAT – Delivered at Terminal (terminal at port or place of destination) (2010) Seller pays for carriage to the terminal, except for costs related to import clearance, and assumes all risks up to the point that the goods are unloaded at the terminal. DAP - Delivered At Place (named place of destination) (2010) Seller pays for carriage to the named place, except for costs related to import clearance, and assumes all risks prior to the point that the goods are ready for unloading by the buyer.

43. Cost, Insurance and Freight (Named port of destination) (CIF) For example: "CIF Tokyo”. A shipping term included in contract of sale, CIF indicates that the seller agrees to take full responsibility for delivering the goods to the port of loading, clear the goods for export, and arrange and pay for transportation and marine insurance over the goods to the named port of discharge, such costs being included in the price of the goods. Nonetheless, all risk of loss of or damage to the goods, as well as any additional costs due to events occurring after the time the goods have been delivered on board the vessel, is transferred from the seller to the buyer when the goods pass the ship's rail at the port of loading. It is up to the buyer to arrange transportation from the port of discharge.

44. Free on board (Named port of shipment) (FOB) For example: "FOB Long Beach”. Or "FOB [Airport]". A shipping term included in a contract of sale, FOB indicates that the seller fulfils his obligation to deliver when the goods have passed over the ship's rail at the named port of shipment, all costs of inland transportation and loading being included in the price of the goods. The buyer has to bear all costs and risks of loss of or damage to the goods from that point.

45. Carriage and Insurance Paid - C.I.P Can be used for any transport mode, or where there is more than one transport mode. The seller is responsible for arranging carriage to the named place, and also for insuring the goods. “Carriage and Insurance Paid to” means that the seller delivers the goods to the carrier or another person nominated by the seller at an agreed place (if any such place is agreed between parties) and that the seller must contract for and pay the costs of carriage necessary to bring the goods to the named place of destination. ‘The seller also contracts for insurance cover against the buyer’s risk of loss of or damage to the goods during the carriage. The buyer should note that under CIP the seller is required to obtain insurance only on minimum cover. Should the buyer wish to have more insurance protection, it will need either to agree as much expressly with the seller or to make its own extra insurance arrangements.”

46. Financing of Imports by Opening of Letter of Credit Documents required Trade and Exchange Control Formalities Sanction of LC Limit.

47. Letter Of Credit A  letter of credit is a vital tool for facilitating international trade. It benefits both the importers and exporters. An import letter of credit enhances the credit worthiness of the importer while an export letter of credit mitigates the credit risk for the exporter and helps improve his cash flow.

48. IMPORT LETTER OF CREDIT Import letter of credit is issued by the importer’s bank on behalf of the importer with the exporter being the beneficiary. It is a guaranteed by the importer’s or buyer’s bank that the payment will be given to the exporter or seller. The credit capacity of the importer is substituted by the credit capacity of the issuing bank. This improves credibility and reduces the risk of fraud. There are terms and conditions regarding the type, quantity, place of delivery and time of delivery mentioned in the import letter of credit. It also mentions the documents to be submitted as proof of shipment. The exporter has to submit some specified documents fulfilling these conditions before the payment can be released to him.

49. Import Letters of Credit Process The importer arranges for the issuing bank to open a Letter of Credit in favor of the exporter. The issuing bank transmits the Letter of Credit to the nominated bank, which forwards it to the exporter. The exporter forwards the goods and documents to a freight forwarder. The freight forwarder dispatches the goods and either the dispatcher or the exporter submits documents to the nominated bank. The nominated bank checks documents for submission with the Letter of Credit and collects payment from the issuing bank for the exporter. The importer’s account at the issuing bank is debited. The issuing bank releases documents to the importer to claim the goods from the carrier and to clear them at customs.

50. ADVANTAGES OF IMPORT LETTER OF CREDIT The exporter has to submit valid documents as proof of shipment of agreed upon goods before the payment can be made. The terms and conditions under import letter of credit cannot be changed unless all the parties agree, so it’s legally binding. An import letter of credit increases the credit- worthiness of importer This enables importer to get a better bargain on the prices of imported goods and also access extra funding for expanding his business. Since an import letter of credit is of immense help in less established trade relationships, it provides a safe way to expand sourcing into new geographies for getting lower prices and hence increasing importer’s business margins.

51. DISADVANTAGES OF IMPORT LETTER OF CREDIT The issuing bank is required to pay the exporter as and when he presents the documents covered in terms and conditions of the import letter of credit. There is a risk of receiving bad or damaged goods even if the documents are satisfactory. An importer can mitigate this risk by verifying the exporter’s reputation and checking a sample of goods beforehand. He can also hire an independent third party to do the physical inspection of goods before they are shipped. Issuing a letter of credit adds to the cost of doing business.

52. EXPORT LETTER OF CREDIT An importer issues an import letter of credit with the exporter being the beneficiary. The same letter of credit, when received by the exporter’s bank, becomes an export letter of credit. So, both the import and export letters of credit are materially same, it’s just the perspective which is different. The exporter needs to fulfill the terms and conditions and submit the required documents as mentioned in the letter of credit before he can receive payment

53. Letter of Credit Process The importer arranges for the issuing bank to open an LC in favor of the exporter. The issuing bank transmits the LC to the nominated bank, which forwards it to the exporter. The exporter forwards the goods and documents to a freight forwarder. The freight forwarder dispatches the goods and either the dispatcher or the exporter submits documents to the nominated bank. The nominated bank checks documents for compliance with the LC and collects payment from the issuing bank for the exporter. The importer’s account at the issuing bank is debited. The issuing bank releases documents to the importer to claim the goods from the carrier and to clear them at customs.

54. ADVANTAGES OF EXPORT LETTER OF CREDIT It reduces the credit risk as the issuing bank is liable to pay even if the importer defaults. Export letter of credit can be custom-made to the needs of the exporter, hence it provides flexibility in terms and conditions as long as they are fair and legally binding. Since the exporter needs to submit documents as proof, an export letter of credit enables the exporter to receive the payment before the shipment has reached the importer. This facility improves the cash flow of the exporter.

55. DISADVANTAGES OF EXPORT LETTER OF CREDIT Although the exporter is protected in case the importer defaults on payment, he may still face credit risk if the issuing bank also defaults. He can get additional protection by getting a confirmed letter of credit where the receiving bank guarantees the payment if issuing bank defaults. This will add to the cost of getting a letter of credit, which is already high.

56. EXPORT CREDIT INSURANCE VS LETTER OF CREDIT Export credit insurance is taken by an exporter to insure the foreign accounts receivables in a case of commercial and political risks. The exporter has to pay a premium to get insurance cover. This is different from a letter of credit where the importer has to cover most of the expenses. A letter of credit has strict terms and conditions regarding the goods shipped and documents to be presented before the payment is made. Export credit insurance just needs a proof of non-payment of accounts receivables by the foreign party. A letter of credit covers 100% of the amount while export credit insurance works on risk sharing and covers only a part of the amount (usually up to 90%).

57. LC Regulations/ sanction for LC regulations Foreign Trade Policy requirements. FEMA requirements. Credit norms of Central Bank. UCPDC 600 Provisions. Bank’s Internal Credit Policies! procedures. Public notices issued by DGFT Uniform Rules for bank-to-bank reimbursements 525 Incoterms 2010

58. LETTER OF CREDIT Appraisal / Assessment Satisfactory track record Dealings with only one bank. Liabilities of the applicant to the bank and third parties. Means by which the applicant is expected to meet his commitment once the bills arrive. Margin he should deposit.

59. Deemed exports

60. Meaning of Deemed exports Deemed Exports The Government may, on the recommendations of the Council, notify certain supplies of goods as deemed exports, where goods supplied do not leave India, and payment for such supplies is received either in Indian rupees or in convertible foreign exchange, if such goods are manufactured in India. ‘Deemed Exports’ as defined in the Export and Import Polilcy , 1997-2002 means those transactions in which the goods supplied do not leave the country and the supplier in India receives the payment for the goods.  It means the goods supplied need not go out of India to treat them as ‘Deemed Export’.

61. "Deemed Exports" refers to those transactions in which the goods supplied do not leave the country and the payment for such supplies is received either in Indian rupees or in free foreign exchange.

62. The following categories of supply of goods by the main/ sub-contractors shall be regarded as "Deemed Exports" under this Policy, provided the goods are manufactured in India: Supply of goods against Advance License/Advance License for annual requirement/DFRC under the Duty Exemption /Remission Scheme; Supply of goods to Export Oriented Units (EOUs) or Software Technology Parks (STPs) or Electronic Hardware Technology Parks (EHTPs) or Bio Technology Parks (BTP); Supply of capital goods to holders of licenses under the Export Promotion Capital Goods (EPCG) scheme;

63. 4. Supply of goods to projects financed by multilateral or bilateral agencies/funds as notified by the Department of Economic Affairs, Ministry of Finance under International Competitive Bidding in accordance with the procedures of those agencies/ funds, where the legal agreements provide for tender evaluation without including the customs duty; 5. Supply of capital goods, including in unassembled/ disassembled condition as well as plants, machinery, accessories, tools, dies and such goods which are used for installation purposes till the stage of commercial production and spares to the extent of 10% of the FOR value to fertilizer plants.

64. Benefits for Deemed Exports Deemed exports shall be eligible for any/all of the following benefits in respect of manufacture and supply of goods qualifying as deemed exports. Advance License for intermediate supply/ deemed export/DFRC/ DFRC for intermediate supplies. Deemed Export Drawback. Exemption from terminal excise duty where supplies are made against International Competitive Bidding. In other cases , refund of terminal excise duty will be given.

65. Pre-shipment Finance And Post-shipment Finance

66. Pre-shipment finance Pre-shipment finance refers to the financial assistance provided to the exporters before actual shipment of goods. Pre-shipment finance is provided to the exporters for the purposes like purchase of raw materials, their processing and converting into finished goods and packaging them. Funds to cover an exporter's cost before goods are sent overseas. Pre shipment finance is issued by a financial institution when the seller want the payment of goods before shipment.

67. Pre-shipment finance The main objectives are to enable exporter to: Procure raw materials Carry out manufacturing process Provide a secure warehouse for goods & raw materials Process & pack the goods Ship goods to buyers Meet other financial costs of the business

68. For these purposes, the following pre-shipment finance is made available: 1. Packaging credit 2. Advance against Incentives 3. Advance against Duty Drawback. Pre-shipment credits are granted by the banks under concessional rates of interest at 7.5 per cent. Credit can be extended up to a maximum period of 6 months.

69. Packing Credit — A loan or advance granted or any other credit provided by a bank to an exporter for financing the purchase, processing, manufacturing & packing of goods before shipment.

70. Post-Shipment Finance Post-shipment finance may be as “any loan or advance granted or any other credit provided by a bank to an exporter of goods from India from the date of extending the credit after shipment of goods to the date of realization of export proceeds.” Post-shipment finance serves as bridge loan for the period between shipment of goods and the realization of proceeds. Such loan is usually provided for a maximum period of 6 months. Interest is charged at the rate of 8.65 per cent.

71. Post shipment finance can be classified as under Negotiation (settlement) of document under L/C Purchase of document without L/C Advance against document sent on collection basis Advance against retention money Advance against undrawn balance Person eligible for post shipment finance Basis of post shipment finance Purpose of post shipment finance Quantum of post shipment finance Period of post shipment finance Rate of post shipment finance

72. Export Goods Methods of Exporting and Channels of Distribution

73. Factors lead to DE or IDE The size of the firm. The nature of its products. Previous export experience and expertise. Business conditions in the selected overseas markets.

74. Direct Exporting Direct exporting is the method of exporting goods directly to the foreign buyers by the manufacturer himself or through his agent situated in the foreign country. Organizing channel by arranging Organizing for exporting Sales representatives Agents Distributors Foreign retailers Direct sales to end users Locating foreign representatives and buyers Contacting and evaluating foreign representatives

75. Advantages You won’t need to invest in overseas production facilities. You minimize your risk and investment, while gaining fast entry Maximum economies of scale prevent competitors from gaining “first mover” advantage in new markets. You can sell your excess production capacity. You can gain information about foreign competitors. You can stabilise seasonal market fluctuations. You can reduce your dependence on existing markets.

76. Indirect Exporting In case of indirect exporting, an exporter uses the services of some specialized agencies such as merchant exporters and export houses or trading houses for exporting goods. By Commission Agents Export Management Companies Export Trading Companies Export Agents, Merchants, Or Re-marketers Piggyback Marketing

77. Advantages Identify customers and markets Using new opportunities or markets for your product Assist with local travel and/or living arrangements Provide guidance on local government regulations.

78. The principal advantage of indirect marketing for a smaller company is that it provides a way to penetrate foreign markets without the complexities and risks of direct exporting. Several kinds of intermediary firms provide a range of export services. Each type of firm offers distinct advantages for the company.

79. Commission agents Commission or buying agents are finders for foreign firms that want to purchase domestic products. They seek to obtain the desired items at the lowest possible price and are paid a commission by their foreign clients. In some cases, they may be foreign government agencies or quasi-governmental firms empowered to locate and purchase desired goods. Foreign government purchasing missions are one example.

80. Export management companies An EMC acts as the export department for one or several producers of goods or services. It solicits and transacts business in the names of the producers it represents or in its own name for a commission, salary, or retainer plus commission. Some EMCs provide immediate payment for the producer's products by either arranging financing or directly purchasing products for resale. Typically, only larger EMCs can afford to purchase or finance exports.

81. Export trading companies An ETC facilitates the export of domestic goods and services. Like an EMC, an ETC can either act as the export department for producers or take title to the product and export for its own account. Therefore, the terms ETC and EMC are often used interchangeably. A special kind of ETC is a group organized and operated by producers. These ETCs can be organized along multiple- or single-industry lines and can represent producers of competing products.

82. Export agents, merchants, or re-marketers Export agents, merchants, or re-marketers purchase products directly from the manufacturer, packing and marking the products according to their own specifications. They then sell overseas through their contacts in their own names and assume all risks for accounts.

83. Piggyback marketing Low cost market entry strategy in which two or more firms represent one another's complementary (but non-competing) products in their respective markets. Piggyback marketing is an arrangement in which one manufacturer or service firm distributes a second firm's product or service. The most common piggybacking situation is when a domestic company has a contract with an overseas buyer to provide a wide range of products or services.

84. Piggyback marketing Piggyback marketing is an arrangement in which one manufacturer or service firm distributes a second firm's product or service. The most common piggybacking situation is when a domestic company has a contract with an overseas buyer to provide a wide range of products or services. Often, this first company does not produce all of the products it is under contract to provide, and it turns to other companies to provide the remaining products. The second company thus piggybacks its products to the international market, generally without incurring the marketing and distribution costs associated with exporting. Successful arrangements usually require that the product lines be complementary and appeal to the same customers.

85. Advantages Don’t have to have international experience yourself Will gain fast entry to the international market Will have little or no increased financial commitment. Against those advantages, you will risk: Having only a low level of control Choosing the wrong market and the wrong distributor Receiving inadequate market feedback Achieving potentially lower sales Erosion of your brand.

86. Trade and Exchange Control Formalities Banning the use of foreign currency within the country Banning locals from possessing foreign currency Restricting currency exchange to government-approved exchangers Fixed exchange rates Restrictions on the amount of currency that may be imported or exported Import/Export Restrictions Currency Exchange Restrictions

87. ECGC – Its Process

88. What is ECGC and how does ECGC protect exporters? Export Credit Guarantee Corporation is a central government undertaking body to provide credit guarantee on the default of payments by the buyer. It works as an insurance firm who guarantees export payment, if the buyer defaults in making payment.

89. Functions of ECGC Provides a range of credit risk insurance covers to exporters against loss in export of goods and services. Offers guarantees 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.

90. How does ECGC help 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 debt Provides information on credit-worthiness of overseas buyers

91. Procedures with ECGC to cover insurance: Once after finalizing the order, The buyer execute a purchase order to the seller with the terms and conditions as agreed by both. The purchase order should contain full details of buyer and buyer’s bank account details. The exporter approaches Export Guarantee Corporation to get approval on the buyer with amount of limit. Here, the ECGC with their available contact with overseas network finds out the credit worthiness of the said buyer and arrives a figure of creditworthiness and inform the maximum limit of amount can be shipped at any point of time. Export Credit Guarantee Corporation collects premium on the amount of approval and issue insurance policy accordingly.

92. Contd. The exporter can apply with ECGC for insurance on shipment wise order as specific insurance policy, or at lump sum as comprehensive policy. If an exporter obtain a specific policy, the contract of insurance is only for that particular shipment. You as an exporter has to pay premium only against the said shipment. If you prefer to obtain a comprehensive policy against any buyer, you can get approval from ECGC, the amount of credit worthiness of the said buyer.

93. UCPDC Guidelines Uniform Customs and Practice for Documentary Credit

94. UCPDC is a set of predefined rules established by the International Chamber of Commerce (ICC) on Letters of Credit. Used by bankers and commercial parties in more than 200 countries including India to facilitate trade and payment through LC UCPDC was first published in 1933 and subsequently updating it throughout the years. In 1994, UCPDC 500 was released with only 7 chapters containing in all 49 articles .

95. The latest revision was approved by the Banking Commission of the ICC at its meeting in Paris on 25 October 2006. This latest version, called the UCPDC600, formally commenced on 1 July 2007. It contain a total of about 39 articles covering the following areas, which can be classified as 8 sections according to their functions and operational procedures

96. Uniform Rules for Collections (URC)

97. URC The Uniform Rules for Collections is a set of rules that help assist in the process of collecting debts or owed money or assets. The URCs were established – or proposed – by the International Chamber of Commerce (ICC)

98. What the Uniform Rules for Collections Do The latest revision of the URC, drafted in the mid-1990s, outline the issues that practitioners – businesses, banks, buyers, and sellers – face on a daily basis when trying to collect payments. The Uniform Rules for Collections also provides useful rules for such practitioners to follow when initiating the collections process. The last draft of the Uniform Rules for Collections, otherwise known as URC 522 , sets out the need for the primary or remitting bank to draw up and attach a sheet that explicitly explains the purpose of, and the process that should be followed when, collecting debts.

99. Documentary Collection It is a transaction where the exporter entrusts the collection of a payment to the remitting bank (exporter’s bank) which delivers the corresponding documents to the collecting bank (importer’s bank) along with the instructions for payment. Exporter ship the goods before payment but retain control of them until they receive payment from overseas buyer or receive a legal undertaking of future payment, such as an endorsed (signed) bill of exchange (also called a draft) or promissory note. Also known as “Sight Drafts and Time Drafts” or D/P (documents against payment) or D/A (Documents against Acceptance)

100. Documents against Payment (D/P) D/P also known as "Sight Draft" or "Cash against Documents” (CAD). The buyer must pay before the collecting bank releases the title documents. Time of Payment: After shipment, but before documents are released. Transfer of Goods: After payment is made on sight. Exporter Risk: If draft is unpaid, goods may need to be disposed.

101. Documents against Acceptance (D/A) The buyer accepts a time draft, promising to pay for the goods at a future date. After acceptance, the title documents are released to the buyer. Time of Payment: On maturity of draft at a specified future date. Transfer of Goods: Before payment, but upon acceptance of draft. Exporter Risk: Has no control of goods and may not get paid at due date

102. THANK YOU