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TRADE FINANCE An Overview

A PROJECT REPORT Under the guidance Of Prof. R.V. Rajwade. ______________________________ Submitted by Pankaj Prakash Karkhanis. (REGD. NO. 521022422) ______________________________ in partial fulfillment of the requirement for the award of the degree Of MBA IN Finance

DNYANASADHANA ASIAN INSTITUTE OF CORE COMPETENCE, THANE CENTRE CODE - 2816 2011 - 2012

DECLARATION

I hereby declare that the project report entitled Trade Finance An Overview submitted in partial fulfillment of the requirement for the award of the degree of Masters of Business Administration to Sikkim Manipal University, India. In the Academic year 2011-2012 it is not submitted for the award of any other degree, diploma, fellowship or any other similar title or prizes.

Signature of the student

Place :- Thane KARKHANIS Date :-

PANKAJ PRAKASH (REGD NO: 521022422)

ACKNOWLEDGEMENT

It gives me immense pleasure to present the project report on Trade Finance An Overview carried in partial fulfillment of post-graduate course M.B.A. Finance.

No work can be carried out without the help and guidance of valuable individuals. I am happy to take this opportunity to express my gratitude to those who have assisted me for completing this project report.

I would like to thank Prof. R. V. Rajwade for his guidance and valuable advice on various aspects of this project. Last but not least I would like to thank my Parents, Friends, the Staff of Dnyanasadhana Asian Institute Of Core Competence, Thane & my boss Mrs. Priti Arjunwadkar, who encouraged me for the project and all those who contributed directly or indirectly in completing this project to whom I am obligated to.

Pankaj Prakash Karkhanis.

DNYANASADHANA ASIAN INSTITUTE OF CORE COMPETENCE, THANE CENTRE CODE - 2816

BONAFIDE CERTIFICATE
Certified that this project report titled Trade Finance An Overview is the bonafide work of Pankaj Prakash Karkhanis -(REGD NO: 521022422) who carried out the project work under my supervision.

SIGNATURE

SIGNATURE

Mrs. Janhavi Khandekar. (Principal - DAICC)

Prof. R.V. Rajwade. (Project guide- DAICC)

(External Examiner)

Executive Summary
The most vital area of any business is FINANCE. No country is self sufficient. In todays competitive world, Trade between foreign countries is unavoidable. Foreign trade refers to inflow / outflow of goods and services from one country to another. When there is inflow of goods and services to domestic country from foreign country, it is called as import trade whereas Export trade refers to sale of goods & services from domestic country to foreign country. Sometimes goods are imported into a country for the purpose of re-exporting it to some other country. Such a trade is called as entreport trade. Foreign trade helps to sell / buy goods produced in one country to another country. Since there is an unequal distribution of natural resources in the world, a country having immense natural resources, exports it to another country, enjoys the profit and imports those goods wherever there is a shortage or cost disadvantage in producing the same. Foreign trade helps in optimizing the use of natural resources.It also helps in maintaining balance of payments. Since balance of payments is a barometer of the international health of any country, every country is interested in maintaining favourable balance of payment. Foreign Trade helps to earn foreign exchange to a country. This strengthens the economy of the country. Strong foreign exchange position also enables the country to face contingency without major dislocation.Foreign exchange earnings is the most fundamental pre-requisite without which growth and stability cannot be achieved. I am sure that my project Trade Finance An Overview will prove to be a valuable study resource for management students. Thanks & Regards Yours Truly,

Pankaj Prakash Karkhanis

CONTENTS
SR.NO. I II What is Trade Finance? Company Profile CHAPTER PG. NOS. 7-8

1. Company Overview 2. Vision and Mission 3. Corporate History 4. Business Overview 5. Locations 6. Global Network
III IV V VI Glimpses on Indian Tyre Industry Importance of Various Documents INCOTERMS Imports

9 9 10 11 12 13

14 15-22 23-26

1. L/C and its types 2. Import Finance (Buyers Credit) 3. Import Procedure & Methods of Payment 4. Daily Reports to be Maintained
VII Exports

27-29 30-31 32-35 36 37 38 39

1. Export Finance A. Pre-shipment Finance (Packing Credit) PCFC and EPC

B. Post-shipment Finance 2. Export Procedure 3. Daily Reports to be Maintained


VIII Governing Bodies

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1. Export Credit Guarantee Corporation (ECGC) 2. Uniform Customs and Practices for Documentary Credit (UCPDC) 3. Foreign Exchange Management Act (FEMA)
IX X Special Cases Bibliography

CHAP: I

TRADE FINANCE

Trade finance is related to international trade. While a seller (the 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, export and others. In many countries, trade finance is often supported by quasi-government entities known as export credit agencies that work with commercial banks and other financial institutions. Trade finance refers to financing international trading transactions. In this financing arrangement, the bank or other institution of the importer provides for paying for goods imported on behalf of the importer. In case of imports, if the benefits are more, procuring from the overseas party is considered and in case of exports, exploring new markets is considered. It is very difficult to trust a dealer from completely other part of the world. Thus, comes the picture of documentation, banks and the finance. Exporter does not want to take chance and always prefers to work under the processes of Letter of Credit since its payment is at stake. Exporters also need to finance their manufacturing and find the shipping activities for the completion of exporters. Banks in such cases provide funding services to their customers under the operation of various documents. Such types of finances are known as Packing Credit. If the loan is before shipment, it is known as pre-shipment packing credit and if it is after shipment it is known as post-shipment finance. As the shipment is done, pre-shipment finance turns into postshipment finance. Then there are packing credit in foreign currency and export packing credit.

Importers also need to carry the whole procedure safely so that the goods to be imported reach the port of destination safely, in good condition and on time. Importers also would like to avail finance from the banks since their goods are at stake. So again the banks and loan arrangement comes into picture. The credit availed by the importer is known as Buyers Credit. Similarly, it is very important that the whole documentation between the importer and the exporter take place. Exporter should receive proper payment and the importer should get delivery of goods. Thus, it is actually the banks which deal with each other on behalf of their customers. The customers just have to decide the method of payment, terms of payment, credit period. Than the last and the final stage is the method of payment. What is the method and mode of payment depends on the terms decided by the importer and the exporter. Which option of hedging has to be taken, which bank has to be approached for payment.

CHAP: II

COMPANY OVERVIEW

On the road since 1958, CEAT has run up to be one of the best tyre manufacturers in the business. They not only produce trailblazing tyres, but also market tubes and flaps. And that's not all. CEAT is young and revving to go; with a maturity that comes with years of market presence. More than 4500 Cr annual turnover, an impressive list of clients and OEMs, various awards and certificates are statistics that could speak for CEAT. But they would rather scorch the road with our performance! CEAT believes that tyres are not just accessories; they are the force that moves your aspirations. With CEAT you get to choose from a wide range of tyres that suit your needs and vehicle type. (Not to mention, our radials are racers in the world market!) Strength is one of the most important attributes of our products, which complements our solid foundation as a part of RPG Enterprises. Their commitment to quality ensures that you have a safe ride, always. So go on, defy destiny. Vision: "CEAT will at all times provide total customer satisfaction through products and services of highest quality and reliability." Mission: "To nurture an exciting and challenging work environment with fairness and transparency."

CORPORATE HISTORY
The recollection of the past gives CEAT Ltd. pride, but it is the responsibility of the future that will make them wise. CEAT International was first established in 1924 at Turino in Italy and manufactured cables for telephones and railways. In 1958, CEAT came to India, and CEAT Tyres of India Ltd was established in collaboration with the TATA Group. In 1982, the RPG Group took over CEAT Tyres of India, and in 1990, renamed the company CEAT Ltd. The journey than has been smooth with ups and downs. Today, CEAT is on a roll and looking long distance. Their current mileage: 1. 2. 3. 4. Over 6 million tyres produced every year Operations in Mumbai Nasik & Halol plants Exports to USA, Africa, America, Australia and other parts of Asia Network of 34 regional offices, 7 Zones, over 3,500 dealers and more than 100 C&F agents , with customer service managers in all four divisional offices, assisted by 50 service engineers.

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BUSINESS OVERVIEW
CEAT Ltd. is the flagship company of RPG Enterprises is one of the Indias leading tyre industries. The company also markets tubes which are outsourced from its partners. Renowned for its world class quality and durability, CEAT manufactures the widest range of tyres for all user segments including Heavy Duty Trucks and Buses, Light Commercial Vehicles, Earthmovers and Forklifts (Speciality Segment), PC tractors, Trailers, Scooters (2-3 wheelers). Motorcycles, Autorickshaws and OTR (Off the road). CEAT enjoys a major share in the light truck and truck tyre segments and has a strong presence in both the domestic as well as the international markets. The company exports tyres to 112 countries across America, Europe, Africa and Asia. CEAT products have found high acceptance with several OEMs in Europe, despite stiff competition from other global players. Over the years, the companys export basket has improved both in terms of price realization and profitability. CEAT has 3 manufacturing plants situated in Mumbai (Bhandup), Maharashtra (Nashik) and Gujarat (Halol). Robust and extensive network consists of 34 regional offices and 3500 dealers of which approximately 100 are exclusive dealers running the CEAT Shoppe outlets for the PC segment and 96 run the CEAT Hubs for the truck and bus segments.

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LOCATIONS The company is headquartered in Mumbai. It has manufacturing plants in Mumbai,Nashik & Halol. HEAD OFFICE ADDRESS: CEAT MAHAL, Dr. Annie Besant Rd., Worli, Mumbai. FACTORY ADDRESS (Nahur): CEAT Ltd., Bhandup Village Rd., Bhandup (W), Mumbai 400 078 CEAT has undertaken to set up a radial tyre plant at Baroda near Halol as a part of their growth programme and has already started the production activity. CEAT owns: 1. 4 Manufacturing plants - 3 in India and 2 in Sri Lanka 2. 10 outsourcing units for tyres, tubes and flaps 3. 3 dedicated 2-3-wheeler plants controlled by CEAT

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GLOBAL NETWORK
Eyes on the road, Head firmly on shoulders. Thirst in heart. And the world is highway. 130 countries. Does that sound big? Because it isn't. The world is a big place and there are inroads to be made yet. But it feels good to know there are people around the world riding safe on our tyres. They don't believe in flashing numbers, but let quality do the talking. And it is with reason that CEAT marks the highest exports from India in truck, OTR and LCV categories. That's not all, it has a whole range to suit the global market. CEAT takes special interest in fulfilling the needs of our global customers: special sizes, quality that matches world standards, and a global presence.

Reaching out to the end-users makes business; pleasing them with a reliable product makes business sense.

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CHAP: III

GLIMPSE ON INDIAN TYRE INDUSTRY

The Indian tyre industry accounts for around 5% of the global demand as well as global supply of tyres. The Indian tyre industry is enjoying strong growth and will continue to do so in the near future on the back of several demand drivers that include the countrys fast paced GDP growth, growth in the automobile industry, faster development of road infrastructure, increasing levels of radialisation as well as growing demand from the Off-theroad (OTR) segment. Operating margins of the tyre industry improved due to reduction of prices of the raw material. Raw material mainly comprising of natural rubber, nylon tyre cord, fabric, carbon black, synthetic rubber, styrene butadiene rubber, poly butadiene rubber takes away major portion of sales revenue. MARKET SEGMENTS REPLACEMENT The replacement segment constitutes of around 65% of the industry. This market is growing at a steady pace on the back of economic recovery. This segment is the most sought after amongst tyre manufacturers as the margins are much better in comparison to those in the Original Equipment Manufacturers (OEM). OEM are few and enjoy higher bargaining power. ORIGINAL EQUIPMENT MANUFACTURERS This segment constitutes around 23% of the industry. The main players are Maruti, Mahindra & Mahindra. EXPORTS Exports constitute approximately 12% of the industry. The major countries to which CEAT exports are the Middle East, South Africa, Sri Lanka and North America. Many customers are in Pakistan who though do not directly purchase from CEAT but has a middle party.

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CHAP: IV
COMMERCIAL INVOICE

IMPORTANCE OF VARIOUS DOCUMENTS

Commercial invoice is the statement of account sent by the seller to the buyer and is prepared on the sellers letter head. It is an exporters bill for the goods shipped. Commercial invoice contains detailed information of the export trade transaction. It is called the basic document as the information needed for the preparation of other export documents is available in the invoice. It must bear signature of the seller. It must be made in the name of the opener. The description of the goods in the invoice must confirm strictly to the description in credit. All other documents must bear general description. Price, quantity and measurement details on the invoice should not deviate. Shipping marks and weight on transport documents and invoice should agree. Various certifications of seller should be incorporated in the invoice and it must be submitted in the number of copies called for. Invoice should not show any deduction or addition not authorized by credit.

USES OF COMMERCIAL INVOICE a. (i) (ii) TO THE EXPORTER It is used for the collection of payment from the importer for the goods sold out. It is used for completing export formalities with export inspection agency, negotiating bank, excise and customs authorities. (iii) (iv) (v) b. a. b. c. d. It is useful to settle payment dispute. It is useful for collection of export incentives and preparation of shipping bill. It is useful for accounting purposes. TO THE IMPORTER It is useful for payment of customs duty. It indicates exact amount payable to the exporter. It is useful for accounting and filing purposes. It is used to obtain loan from the bank against the import of goods.

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CERTIFICATE OF ORIGIN
Certificate of Origin declares that the goods which are being exported are manufactured in a specific country. Certificate of origin is sent by the exporter to the importer and is useful for claiming special concession on the import duties charged. This certificate needs to be produced before the customs authorities for the assessment of the duty and clearance of goods with concessional duty. When imports from certain countries are favorably treated in the matter to levy import duty, the custom authorities of concerned country insists on some proof of the fact that the goods are genuine products of such countries. It is the sort of testifying the origin of the exports. The certificate ensures that the goods have not been reshipped by the exporter after importing from some other country. Certificate of origin is issued by Chamber of Commerce and Export Promotion Council.

USES OF CERTIFICATE OF ORIGIN a. a. b. b. a. b. c. TO THE EXPORTER It certifies that the goods are of Indian Origin. It facilitates clearance of goods from the customs of the exporters country. TO THE IMPORTER An importer gets quick delivery of goods from the customs. An importer gets adequate proof about the origin of goods. An importer is convinced that those goods are not reshipped.

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MATES RECEIPT
Mates receipt is issued by the Mate, master or captain of the vessel in which the goods are shipped for onward journey to the specific port of destination. It is issued by the Mate after the Cargo is loaded on the ship. It is a prima facie evidence that the goods are loade in the vessel. Mates receipt is to be passed on to the port trust authorities to enable them to recover port dues from the exporter. After the payment of the dock dues, the exporter or his agent collects the Mates Receipt from the port trust authorities and hands over the same to the port trust authorities and hands over the same to the shipping company for preparing bill of lading. Bill of lading is prepared on the basis of Mates receipt. Mates Receipt contains various details like the name of the ship, port of shipment, port of destination, name of the shipping company, description of the goods and their package, number of packages, special marks or symbols on them, condition of the cargo when it was received on the board, freight paid or payable, signature of the issuing authority. USES OF MATES RECEIPT 1. 2. 3. 4. It serves as an acknowledgement of goods received for transportation. It is used for the issue of Bill of Lading by the Shipping Company. It enables the exporter to pay port dues. It enables the CHA of the exporter to present mates receipt to the customs officer who records certificate of shipment on all the copies of the shipping bill and other documents. 5. It is a transferable document.

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BILL OF LADING
Bill of lading is a receipt issued by the shipping company. It is the document of title to the goods. It is an acknowledgement of the receipt of the goods by the shipping company which undertakes to carry the goods accepted in the ship, to the port of destination in return of the payment of freight. It serves as an official receipt of the goods. The party who has the bill of lading has the liability of the goods. The importer cannot take the delivery of the goods without getting bill of lading before hand from the exporter. It is a semi negotiable instrument since it is not negotiable like cheque or bill of exchange and is also not mentioned in the negotiable instrument act. A bill of lading should be a clean bill and only then it can be transferred by endorsement and delivery. It should be issued in the set of three. It certifies the number and weight of packages. It is regarded as the symbol of titled goods in the packages. It can be transferred from person to person by endorsement and delivery. The person to whom the bill is endorsed is entitled to receive the delivery of the goods from the shipping company. Bill of lading will not be issued to the exporter the cargo is loaded on the ship and Mates Receipt is obtained. The bank insists on all the copies of bill of lading. The bank accepts the bill of lading endorsed in blank so that the responsibility to pay the freight remains with the customer itself. The bank ensures that the goods covered by the bill of lading have proper insurance policy. IMPORTANCE OF BILL OF LADING a. 1. 2. 3. 4. 5. TO THE EXPORTER It is a legal document. In the event of dispute it can be presented in a court of law. It is contract of transportation. It is an acknowledgement of the receipt of the goods on board the ship. It enables the exporter to send a shipment advice to the buyer. It helps the exporter to file the claim of compensation, if goods are damaged in transit. 6. It helps the exporter to calculate the exact amount of freight while submitting CIF quotation. 7. It is used while claiming duty drawback.

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b. 1. 2.

TO THE IMPORTER It is a document of title to the goods. It is a semi-negotiable document i.e. its ownership can be transferred by endorsement and delivery.

3.

It enables importer to pay exact amount of freight under FOB quotation.

TRANSPORT DOCUMENTS
They in general should not be dated after the expiry of shipment date specified in the credit. Bill of Lading is the document of title and the following points are to be noted:All the negotiable copies are submitted It must bear the stamp of On Board duly dated It has to be port to port if trans-shipment is precluded It has to be drawn as per L/C and party specified should be notified If route is specified in the credit, requisite certificate has to be attached In case of CIF or C&F it has to be announced as Freight Paid It should neither be stale nor claused and does not certify deck shipment if precluded.

MARINE INSURANCE POLICY


A marine insurance policy is a contract that covers perils on high sea. In case of CIF contract, the responsibility of taking insurance cover is that of the exporter. The premium charged by the insurance company depends on the total value of the goods dispatched. For this following must be ensured: Type of risk, duration of policy payable at destination Currency and total value of policy should be as per the L/C terms Details of transport documents should be specified Risk of transshipment or deck shipment should be covered Policy should be in the name of beneficiary and is duly endorsed in blank Policy should not include any adverse clauses Policy should be duly stamped.

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BILL OF ENTRY
This document is used in case of import business. This document contains details like the quantity, quality, number of packages etc. when goods enter the dock of the importing country. It is prepared in three copies. In case the details of the goods are not known to the importer, the agent can prepare bill of sight and then check the goods at the dock and later prepare bill of entry. Bill of entry has to be submitted to RBI to keep records of expenditures in foreign currency. It is submitted to RBI by the importers bank when the transaction is settled. But sometimes it happens that the bank does not submit it to RBI due to several reasons and RBI keeps on sending notifications to the importer. In such a case, the importer can prepare a certificate from an authorized Chartered Accountant that the specific goods, of specific amount and quality were imported and are consumed. Such certificate is also accepted by RBI. The other option is it can go back to its records and find the bill of entries and submit it to the bank. But this is very lengthy procedure. The Bill of entry contains the name and address of the importer and exporter, description of the goods, value of the goods, importers license number, name of the port/dock where the goods will be cleared.

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BILL OF EXCHANGE
A Bill of exchange is an instrument in writing containing an unconditional order, signed by the drawer, directing a certain person to pay a certain sum of money only to or to the order of certain person or to the bearer of the instrument. It is a negotiable instrument. It may be drawn on the issuing bank or another drawee bank but not on the importer. It does not block the funds of the importer. A bill of exchange contains an order from the creditor to the debtor to pay a specified amount to person mentioned therein. When the exporter expects the importer to make immediate payment upon the presentation of draft, the draft is known as Sight Draft or Demand Draft. It contains the name and signature of the drawer, drawee, payee, endorsement of the payee where applicable, amount, stamp, fixed date or determinable future date of payment. It provides some protection to the exporter against the importer for not paying the bill amount provided it is documentary bill of exchange in D/A or D/P. In CEAT Ltd. when the bill of exchange comes to the issuing bank, it sends notification to the importer (Bank Presentation) and importer has to send an Acceptance letter that the bill of exchange is accepted and on the due date the specific amount will be paid. Thus the issuing bank accepts the bill on importers behalf only when the importer sends the Acceptance letter duly signed to the issuing bank. Thus invoice is booked by the accountants on the date on which acceptance is made. This rate is known as I.B.R. i.e. Invoice Booking Rate. It is assumed that on the day of acceptance there would not be more than 0.25 paise fluctuation in INR and Dollar exchange rate. Thus the invoice is booked in the morning at whatever rate prevailing adding 0.25 paise i.e. Prevailing rate + 0.25 paise = I.B.R. This will be the rate at which the invoice is booked and the payment will be made. It is necessary to book the invoice because, the price of the materials keep on fluctuating. Thus there should be a proper standard of the payment rate and to know profit or loss in the transaction.

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FORM 2 (FEMA DECLARATION)


Form 2 also known as FEMA Declaration is required by Reserve Bank of India when the deal involves foreign exchange i.e. foreign trade. The main aim of Form 2 is to know the nature and purpose of transaction which involves foreign exchange. It should specify the goods and the nature, quality and quantity of goods to be imported. It should also specify the amount per unit and the total amount. It signifies that the individual or firm who imports goods does not involve in any cheating or fraud or the purpose of the imports is not to contravene the FEMA. It has to be seen that all the details are appropriately mentioned and duly signed by authorized person. When the application to open an LC is given to the bank, FEMA Declaration is of utmost important. The copy of it is taken by the bank and is submitted to RBI. The whole transaction works according to the Form 2. In case of any discrepancies in the whole transaction, the party is asked to refer FEMA Declaration.

A1 FORM
A1 Form is used as an application to make payment in foreign currency against any imports to India. This form is used as an application which involves remittance in foreign currency. This form has to be duly filled in with appropriate details and signed by the authorized person. The details required are amount to be remitted in number and words, name and address of the designated bank in India, name and address of the beneficiary, import license no. and is it canalized item (included in negative list) or is under Open General License. It should also mention the invoice no. and date of invoice, term of payment, currency, quantity and description of goods, country of origin, mode of shipment and date of shipment. If the transaction involves less than USD 5000 than the authorized dealer does not insists for Form A1.

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CHAP: V

INTERNATIONAL COMMERCIAL TERMS (INCOTERMS)

The pricing decisions in respect of international market depend on the terms of delivery. Trade terms should have universal application. The terms should make the obligations of both the parties clear. This will avoid not only disputes but also undue expenses. INCOTERMS brought out by International Chamber of Commerce constitute such set of rules. It is from the INCOTERMS chosen, the importer and the exporter come to know the exact expenses to be borne by each of them. These specifically indicate the following terms: 1. 2. 3. The charges and expenses which must be borne by the exporter. The place of delivery of the goods. The point of time when the goods and the transit risks associated with the goods get transferred to the importer. These are standard trade definitions most commonly used in international sales contracts. The correct use of these terms ensures legal protection to both the parties. The scope of INCOTERMS is restricted to matters pertaining to the rights and the obligations of the parties to the contract of sale with respect to the delivery of goods. They refer to the number of identified obligations imposed on the parties and the distribution of risk between the parties. In all, 13 terms have been defined which are grouped into four basically different categories, applicable for sea and inland waterway transport or for all modes of transport. In CEAT Ltd., the generally used terms are C.I.F., F.O.B. and C & F. C.I.F. and C & F is generally used in case of imports and FOB is the term generally used for exports.

1.

F.O.B. QUOTATION (FREE ON BOARD)


Under FOB quotation, the seller quotes a price which includes all expenses incurred till the goods are actually loaded on board the ship. This means packing charges, local transport charges and dock dues are covered in the price quoted. Even the expected profit is included in the F.O.B. price. In short, F.O.B. price can be summed up as follows: F.O.B. Price = Cost of Production + Profit Margin + Expenses upto on board the ship

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SELLERS OBLIGATION UNDER F.O.B. QUOTATION 1. 2. He has to load the goods on board the ship named by the buyer. He has to obtain the bill of lading from the shipping company and forward it to the buyer to enable him to take delivery of goods. 3. He must inform the buyer of certain details like the name of the ship and the possible date of delivery. 4. 5. He has to arrange for the necessary space in the vessel. He must inform the buyer without delay that the goods have been delivered on board the vessel or aircraft. BUYERS OBLIGATIONS UNDER F.O.B. QUOTATION 1. He should inform the seller the name of the ship by which the goods are to be sent and also the expected date of delivery. 2. 3. He has to bear the risk when goods are loaded on the ship. He should make payment to the exporter as per the terms of contract. Under F.O.B. quotation the seller has no right of lein on goods and that of stoppage in transit, because the shipping company is deemed to be the agent of the buyer. As per the law, delivery to the buyers agent is treated as delivery to the buyer himself.

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2.

C & F QUOTATION (COST AND FREIGHT)


It means cost plus freight. The price quoted includes total cost of goods, packing, carriage, loading charges and the payment of freight upto the port of destination. The other expenses like cartage, unloading charges and expenses of carrying the goods from the port of delivery to the warehouse are to be borne by the importer. In short, C & F price can be summed up as: C & F Price = F.O.B. Price + Freight SELLERS OBLIGATION UNDER C & F QUOTATION In addition to the obligations mentioned under FOB quotation, the seller must pay freight charges to the shipping company that undertakes to carry the goods from the port of shipment to the port of destination.

BUYERS OBLIGATION UNDER C & F QUOTATION A. B. C. D. He has to arrange and pay for insurance. He has to pay clearing charges and import duties etc. He has to make payment as per commercial invoice. He has to bear the loss or damage to the goods, if any, from the time and place at which the sellers obligations are over.

3.

C.I.F. QUOTATION (COST INSURANCE FREIGHT)


CIF means Cost, Insurance and Freight. It includes FOB price plus marine insurance upto the port of destination. In other words, CIF price includes costs of production and all other expenses till the goods reach the port of destination in the buyers country. The unloading charges at the buyers port, custom duties, etc. are to be paid by the importer. In short, C.I.F. price can be summed up as: C.I.F. Price = F.O.B. Price + Freight + Insurance SELLERS OBLIGATIONS UNDER CIF QUOTATION In addition to the obligations mentioned under F.O.B. quotation, the seller must pay for freight and insurance cover also.

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BUYERS OBLIGATIONS UNDER CIF QUOTATION 1.


2.

He has to pay clearing charges, import duties etc. He has to make payment as per commercial invoice.

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CHAP: VI

IMPORTS

CEAT Ltd. being a very big company constantly is in need of raw materials to continuously keep their production process going. Thus there is continuous requirement of raw materials and thus there is continuous procedure of procurement of raw materials and thus continuous procedure for imports.

LETTER OF CREDIT
Letter of credit is one of the widely used methods of payment in international trade. Even CEAT is one of the practitioners of letter of credit. On the basis of the instructions given by the importer, his bank gives a written undertaking to the bank of the exporter that if the exporter presents certain shipment documents covering the goods within a fixed period, the bank can make payment to the exporter. Simply stated, letter of credit is an authorization issued by the opening bank to the negotiating bank that if the exporter presents the relevant set of shipping documents, make the payment. Parties to Letter of Credit are Importer, Opening Bank, Exporter, Negotiating Bank, Advising Bank, Confirming Bank. TYPES OF LETTER OF CREDIT There are many types of letter of credits though all are not used in CEAT. Different types of letter of credits used in CEAT are as follows:

Revocable Letter of Credit: - It is one which can be revoked, modified or cancelled by opening bank without seeking prior permission of the exporter. When L/C is revoked, a notice must be given by the opening bank to the beneficiary so that he does not dispatch the goods.

Irrevocable Letter of Credit: - Irrevocable cannot be revoked, modified or cancelled by the importer unless prior permission is obtained from the exporter. Comparatively this is safer type of L/C.

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Confirmed Letter of Credit: - A certain opening bank may not be known in the country of the exporter under such circumstances, the importer may ask the opening bank to get the L/C confirmed by a local bank. This type of L/C is rarely used, as the amount of confirmation is charged to beneficiarys account. These charges are very high and thus preferred only in exceptional cases.

Unconfirmed Letter Of Credit: - In this type of L/C confirmation is not added by the advising bank. Therefore the bank does not accept the liability to make payment.

With Recourse Letter Of Credit: - This L/C is with a condition which is if the opening bank does not reimburse the negotiating bank, when exporter is already paid, the negotiating bank will request the exporter to refund the payment with interest.

Without Recourse Letter Of Credit: - It is popularly known as Sans Recourse L/C. In case, the bill is not honoured by the importer and the negotiating bank has already paid the exporter, the negotiating bank cannot ask the exporter to refund the money. The negotiating bank can take recourse to the opening bank and the opening bank can demand money from the importer. This is generally an irrevocable L/C which protects the interest of the exporter. Thus an irrevocable, without recourse and confirmed L/C is the most secured L/C.

Transferable Letter Of Credit (Used only in exceptional cases.): - In this type of L/C, the benefits under it can be transferred either fully or partly to one or more parties.

Non Transferable Letter Of Credit: - This type of L/C cannot be transferred to the third party only the exporter can take advantage of it provided he submits the relevant set of documents to the bank.

Restricted Letter Of Credit: - If the shipping documents are to be negotiated through a specific bank other than the negotiating bank. Such a L/C is called as the restricted L/C.

Unrestricted Letter Of Credit: - A L/C which does not specify any specific bank authorized to negotiate documents such a L/C is called a unrestricted L/C.

Fixed Letter Of Credit: - A fixed L/C is one which is issued for a fixed period and fixed amount. The exporter can draw bill upto the given amount within the given period. The L/C stands terminated when the amount is used up within the given period.

Trans Shipment Letter Of Credit

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Revolving Letter of Credit: - The importer opens a L/C with substantial amount with specific period in favour of exporter. The exporter can make one or more shipment and withdraw payment against the original L/C. When the amount is used up, the importer reimburses the amount and restores the balance. It used in case of regular flow of activities.

Back to Back Letter of Credit: - In this type of L/C, the exporter requests the negotiating bank to open a domestic L/C on the strength of original L/C in favour of local supplier(s).

Red Clause Letter of Credit: - In this L/C, the term Red Clause is printed in red ink. The opening bank authorizes the negotiating bank to provide pre-shipment finance to the exporter to enable him to purchase raw materials.

Green Clause Letter of Credit: - The term Green Clause is printed in green ink for the sake of differentiation. This L/C not only not only allows packing credit advances but also provides payment for warehousing charges at the port of shipment.

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IMPORT FINANCE (BUYERS CREDIT)


It is a financial arrangement whereby a financial institution extends loan directly or indirectly to a foreign buyer to purchase the goods and services from the exporting country. This arrangement enables the buyer to make payments due to the supplier under the contract. In this case, the goods are received and the payment is done by the opening bank / lending bank on behalf of CEAT, but CEAT will pay them only after specific time period i.e. 30, 45, 60, 90, 180 days as the case may be. When such credit is availed by CEAT from bank, the documents like Bill of Lading which is the most important one will be received only after Acceptance is made by CEAT to the opening bank that the payment will be made to them after specified period of time. This concept is also known as Documents against Acceptance. The process goes as follows: In case of Buyers Credit, CEAT has to deal with two different banks. One bank is the bank which deals with the operation of letter of credit i.e. Opening Bank and the other bank is the one which lends the money to CEAT for availing the credit facility i.e. Lending bank. Lending bank is generally the bank outside the country and it charges interest for lending. The interest quotation is in the form of LIBOR + 90bps, LIBOR + 180bps. LIBOR is London Inter Bank Offer Rate and bps are the Basepoints. The banks can be Intesa Sanpaulo, Bank of America. While taking this facility it has to be seen which bank charges lower interest. For giving this facility, CEAT submits the LoU (Letter of Undertaking) to the Lending Bank. This letter of undertaking is given by opening bank for which it blocks the limit. CEAT than has to give acceptance to the Opening Bank and the funds will be released by the Lending bank to the opening banks NOSTRO account. CEAT will than receive the documents of title to goods and thus can release the goods from the docks.

30

For availing this facility following documents have to be sent to the opening bank: Covering Letter bearing the name of the foreign lending bank Offer Letter sent by the foreign bank External Commercial Borrowings Form FEMA Declaration Form 2 A1 Form LOU Application

All these documents should be filled in and should be signed by authorized signatories. These forms should bear correct information like the name and address of the foreign bank, the rate quoted, credit period, amount, name and country of beneficiary, currency, invoice number and date, bill of lading number and date, description of goods to be imported and their country of origin, date of shipment and date of negotiation.

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IMPORT PROCEDURE AT CEAT LTD.


a. PRELIMINARY NEGOTIATIONS: - The negotiations between the importer and the exporter take place. These negotiations are related to the terms and conditions of business such as price, credit period, payment terms and delivery schedules. b. PROFORMA INVOICE AND ADDITIONAL CONDITIONS: - The materials department asks the suppliers to send them the Proforma Invoice and Additional Conditions. If the material department is satisfied with all the terms and conditions, will sign and then again fax it to the supplier along with the Purchase Order. c. APPLICATION OF OPENING LETTER OF CREDIT: - A foreign seller would like to sure about the creditworthiness of the importer. Importers bank issues a letter of credit in favour of foreign dealer. It contains the guarantee from the bank concerned that the bills of exchange drawn by the foreign dealer on the importer will be honoured to the extent of amount mentioned in L/C. In this way, L/C becomes a proof of importers creditworthiness. If the supplier asks for operation through Letter of Credit, the Letter of Credit request, Proforma Invoice, Additional Conditions and Purchase Order and OGL form is sent by the material department to the treasury department. The treasury department decides which bank has to be selected depends on the limit CEAT has with different consortium banks. It depends on the interest rates as well as the service provided by the banks. The service should be fast since there is urgent requirement of raw material. Treasury department fills the Banks Application to open the letter of credit. The Application is then submitted along with the Covering Letter, Stamp Paper, Additional Conditions, OGL Form, Purchase Order and FEMA Declaration Form in the bank. d. LETTER OF CREDIT ISSUED: - As the application is submitted to the opening bank, it scrutinizes the application and if found to be in proper order, bank sanctions necessary foreign exchange. Letter of Credit is than issued and sent to the beneficiary or to the advising bank. If the application has some discrepancies in the terms and conditions, amendments are required by the exporter. Thus these amendments are sent to CEAT by the opening bank and some amendment charges are levied. These amendments are made

32

on the covering letter which mentions the actuals and the amended part. This has to be submitted to the opening bank. There may be a situation when the exporter asks for draft Letter of Credit. This is done to avoid any amendments. Amendments can be made in the letter of credit during the initial stage when the terms and conditions of importer are not accepted by the exporter. The exporter amends the L.C. and sends back to the exporter. To avoid such amendment and any problem arising later on, the exporter requests for a draft L.C. e. OPENING BANK SENDS L/C TO ADVISING BANK VIA AGENCY BANK AND FINALLY REACHES THE EXPORTER f. GOODS DESPATCHED AND SHIPMENT DONE: - As the goods are shipped and shipment done, Bill of Lading, Packing Credit, Weight List, Measurement List are issued which is received by the beneficiary from his CHA. Along with all these documents Certificate of Origin, Commercial Invoice are attached and submitted to the advising bank. g. RECEIVING NNDO SET: - As shipment is done, advising bank has to send NNDO set (Non Negotiable Document Set) to the opening bank via agent bank within 21 days of negotiations. This NNDO set will be required to CEATS CHA to clear the goods from the docks when they reach Nhava Sheva especially the Bill of Lading which is very important document. h. GOODS REACHING PORT OF DESTINATION: - The goods will than reach the Mumbai Port i.e. Nhava Sheva. To transfer the title of goods in CEATs name or to release the goods from the dock authorities, the original NNDO set has to be presented, especially the bill of lading. These can be acquired by carrying out the following steps: i. RECEIPT OF DOCUMENTS AND CLEARING GOODS: - The exporter draws bill of exchange on the importer for the full value of invoice of the goods imported. BOE is attached with the NNDO set. Because of this reason it is a documentary bill. Documentary bill is sent directly by the exporters bank to the importers bank along with the NNDO set. Documentary bill can either be Documents Against Acceptance (D/A) and Documents Against Payment (D/P). In case of D/P, bank hands over the documents against the payment of goods. In case of D/A, bank hands over the documents to the importer on acceptance of the bill. For giving acceptance, a covering letter is prepared in the name of the opening bank and banks presentation and A1

33

Form is prepared. Plus BOE is signed by authorized signatories and sent to the bank. The day on which acceptance is made; invoice is booked on that days rate. It is known as Invoice Booking Rate (IBR) For clearing the goods from the docks CEAT has to either give acceptance that CEAT will make payment on the due date or make payment and collect the documents. These documents are given to CHA to clear the goods. If any freight has to be paid, he pays the freight and obtains delivery order. The shipping company gives the delivery order by stamping endorsement for delivery on the reverse of bill of lading. CHA than clears the port dues and receives Bill of Entry. Customs duty is than paid. Thus the ownership is finally transferred in the name of CEAT. Sometimes it happens that the goods have reached Nhava Sheva but the documents have not been cleared, in such case goods are kept in the warehouse itself. Sometimes no warehouse is booked and the goods are kept in open and thus goods get spoilt. Thus, detention and demurrage charges are levied to prevent these goods from spoilage. j. PAYMENT MADE: - Payment terms depend on the credit arrangement with the supplier. The payment can be made on sight and usance. On sight payment is on the spot payment and usance is with credit period. It can be 30, 45, 60, 90, 115, 180 days. Payment terms can also be Advance, Remittance, Sight, Part Payment. CEAT can also enter into an arrangement with the bank for Buyers Credit. k. BOOKING FORWARD COVER: - To make payment in foreign currency forward cover is taken. If it is on credit terms, forward cover is taken and if it is on sight, spot rate is taken. Different methods of payment are: a. REMITTANCES: In such a case, first the money is paid to the opening bank which remits the money to the advising bank. Once the money is received by the advising bank, only then, the documents will be sent to the opening bank and than the goods could be cleared. Sometimes it happens that the goods have already reached the docks but since either the payment is not made or the documents are not available. The goods will remain at the docks until and unless the payment is not done and the charges for holding on such goods has to be borne by CEAT. Once the payment is done the goods will be released.

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b.

ADVANCE PAYMENT: In such a case, the payment is made in advance i.e. 30, 45, 60, 90, 180 days according to the terms and conditions of the contract. Once the payment is made by CEAT to the beneficiary, via opening and advising bank, only than the beneficiary will ship the goods after specific time. Advance payment is made to fund the production of the raw materials to the beneficiary and the beneficiary is also relieves himself about the payment.

c.

SIGHT: Under such a case, the goods are first received at the docks. The CHA goes at the docks, has a glance on the goods and inspects it. If the goods are in proper order according to CEATs specification, the payment is made to the beneficiary via opening bank. As the payment is made, NNDO set can be received from the opening bank, than the goods can be cleared from the dock authorities.

d.

PART PAYMENT / DEFERRED PAYMENT: In this case the payment is done partly i.e. some percent when the contract is signed, some percent when the letter of credit is received by the beneficiary and full payment after the goods are received.

e.

PAYMENT THROUGH LETTER OF CREDIT: Letter of credit is an authorization issued by the


opening bank to the negotiating bank that if the exporter presents the relevant set of shipping documents, make the payment.

f.

PAYMENT THROUGH BILL OF EXCHANGE: - When the payment is made through documentary bill of exchange is known as payment through bill of exchange. The documents involved are invoice, certificate of origin, bill of lading, packing list, weight list, measurement list.

g.

DOCUMENTS AGAINST ACCEPTANCE: In this case documents can be availed only if the acceptance is made.

h.

DOCUMENTS AGAINST PAYMENT: In this case, the documents could be availed only after the payment is made.

DAILY REPORTS MAINTAINED AS PART OF INFORMATION SYSTEM


a. b. c. d. e. Details of letter of Credit issued Due Date of Letter of Credit Payment Buyers Credit Principal Repayment Schedule Buyers Credit Interest Repayment Schedule Acceptance Sheet maintained

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f. g. h. i.

Bill of Entry report Advance Payment Schedule Remittances Schedule Sight Payment Schedule

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CHAP: VII

EXPORTS

Sales in 2010-11 were about 30 million and in 2011-12, 100 million was planned and it is achieved . The major export countries are Europe, Africa, Thailand, Singapore, New Zealand, Australia. CEATs major buyers are in Pakistan. CEAT doesnt deal with them directly but through a Singapore based party. Total export customers of CEAT are 650, out of which 400 are active customers and major buyers are based in African countries. Marketing department has various zones at different countries who directly deal with the buyer. CEAT has entered into contract with consortium banks and thus, Fund based limit 250 crores with Cash Credit and Export Packing Credit facility. Non Fund based limit 400 crores Cash Credit interest rates 13.5% to 14.5% Export Packing Credit 11% to 11.25% (2% lesser than Cash Credit) CEAT has Cash Credit as well as Export Packing Credit facility with the consortium banks. Both accounts have respective limits. But banks have allowed to interchange the limits. Cash Credit limit can be used for EPC and vice versa. In CEAT, CC Limit is used for EPC to take advantage of lower interest rates. Once when the sanctions are made, different banks require different documents. But generally the rules are standardized for all the consortium banks. To send request for EPC to the bank, documents required are: a. Confirmed Purchase Order from buyer specifying quantity and quality of tyres and amount per unit and total amount. b. Form 2 (FEMA Declaration) specifying the reason of exports, quantity, amount, P.O. of export order. c. Covering Letter.

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EXPORT FINANCE
An exporter may require financial assistance from his bank at pre-shipment stage and postshipment stage. While extending such facilities banks are mainly governed by guidelines issued by the Reserve Bank of India, the Trade and Exchange Control Regulations and the International Codes and Conducts of International Chamber of Commerce. For the purpose of purchasing of raw materials, processing and manufacturing, transporting, warehousing, packing and shipping etc. of the goods meant for export, the pre-shipment export packing credit is made available by the banks to the exporters at the concessional rate of interest. Likewise, after shipment of goods, the post shipment finance is also made available to the exporters against negotiations/payments/acceptance of export documents under letter of credit, purchase and discount of export documents, documents for export on collection and consignment basis, against undrawn balances, duty drawback and retention money. Export Finance is broadly classified into following two categories, depending upon what stage of export activity the finance is extended: 1. Pre-shipment Finance (Packing Credit) 2. Post-shipment Finance Exporters may get pre-shipment credit and post-shipment credit from the Indian Commercial Banks and Branches of Foreign Commercial Banks in India and post-shipment credit on deferred payment terms from Commercial Banks as well as from the ExportImport Bank of India.

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PRE-SHIPMENT FINANCE (PACKING CREDIT) Packing Credit advance is made available to the eligible exporters for the purpose of purchasing, manufacturing, processing, transporting, warehousing, packing and shipping etc. of the goods meant for export against the lodgement of documentary letters of credit established in exporters favour by the overseas buyer or against confirmed order placed by the buyer for exports of goods from India. Finance is granted on production of sufficient evidence of receipt of export order i.e. cables, letter, emails, fax, telex messages. Such type of communication must contain atleast the following information:1. Name of the buyer 2. Value of the order 3. Quantity and particulars of the goods to be exported 4. Date of shipment 5. Terms of payment In such cases exporter is required to give an undertaking to the financing bank that he will submit the firm Order/Letter of Credit at a later stage as and when available for verification. The period of packing credit depends upon the circumstances of the individual case such as the time required for manufacturing, processing and shipping the relative goods. The maximum period for which the credit can be granted is 180 days from the date of disbursement. The period can be extended by another 90 days at the discretion of the Commercial Bank, subject to the payment of additional interest (Overdue Interest) by the exporter for extended period. The packing credit amount is decided by the bank on the basis of the export-order and the credit rating of the exporter. Generally the pre-shipment finance granted to the exporter does not exceed FOB value of the goods or domestic market value of the goods whichever is less. Generally CEAT takes loan of 90% of the export order. HOW TO APPLY? The RBI has not prescribed any particular form for application of packing credit. Some banks have prescribed their own formats and others accept the exporters request on the letter head supported by the following documents: -

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1. Undertaking on the exporters letter head that the advance will be utilised for the specific purpose of shipping the goods meant for exports only as stated in the relative confirmed export order / letter of credit. 2. Confirmed export order / letter of credit in original 3. FEMA Declaration giving the details of export contents and value. The bank than requires the exporter to execute the loan agreement. It than disburses the loan after proper scrutiny of the application i.e. the name of the overseas buyer, quantity purchased, amount, terms of payment, terms of sale and if satisfied, releases the proportionate amount of pre-shipment finance. Pre-shipment Credit in Foreign Currency (PCFC) Export Import Bank of India has introduced a scheme for Indian Exporters to enable them to avail of pre-shipment credit in foreign currencies to finance cost of imported inputs for manufacture of export products. Under this scheme, EXIM Bank arranges short term lines of credit in foreign currency from foreign lending agencies and lends the funds raised to the banks authorised to deal in foreign exchange. The banks re-lend these funds to their exporter customers for import of eligible items. While allocating PCFC limits to their customer banks will assess the exporters import requirement for export production. The credit period for an advance of PCFC will not exceed 180 days. The foreign currency pre-shipment credit will be made available in the major international currencies in which the EXIM Bank raises funds. The finance granted under this scheme will be liquidated by the banks out of sale proceeds of export shipments in respect of which the facility was availed by the exporter. Spread of 0.5% p.a. will be available to the EXIM Banks and 1.5% p.a. will be available to the banks lending funds under the scheme of the exporter. Thus the applicable rate of interest on credit available to the exporter will be 2% over and above the interest rates at which the funds are raised by the EXIM Bank. The interest charged is also front handed i.e. the interest for the specific number of days is charged first and at the end of the period principal amount has to be repaid. The repayment also has to be in foreign currency. Thus there is lot of exposure of currency fluctuations in PCFC and thus EPC is preferred over PCFC at CEAT.

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EPC (Export Packing Credit) EPC is similar as PCFC. In PCFC the loan is given in foreign currency and the repayment is also in foreign currency. In EPC, the loan is availed in Indian Currency and the repayment is also in Indian Currency. The interest payment is back-ended. The loan is availed for a specific period and the repayment is made after the completion of the period along with the interest. This is more preferred than the PCFC since very less calculations and exposures to currency fluctuations are involved since it is in Indian currency.

POST-SHIPMENT CREDIT
Post-shipment credit is a short term credit facility and is given by the banks after the shipment of goods and submission of commercial documents to them for negotiation or collection. The period of post-shipment credit should be from the date of negotiation or collection of export documents and upto due date (not more than 180 days in any case) mentioned on the relative export bill or till the date of realisation of export proceeds from the overseas bank. Post-shipment credit is given for exporters on deferred payment terms for the period of over one year. However, the concessive rate of interest is available only in respect of specified capital and producer of the goods are approved by the EXIM Bank. While sanctioning post-shipment credit, the bank will first liquidate the pre-shipment credit charging the applicable interest for the period for which pre-shipment credit was availed by the exporter and then convert the entire amount of the bill in to post-shipment credit. While granting post-shipment credit, banks will scrutinise the documents submitted for the compliance of exchange control provisions: 1. The documents are drawn in permitted currencies and payments are receivable as per permitted methods of payment. 2. The relevant documents are submitted within the time stipulated or in case of delay suitable explanation is made available. 3. The period of usance is in agreement with the time limit prescribed for realisation of export proceeds.

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EXPORT PROCEDURE AT CEAT LTD.


A. 1. NEW OVERSEAS PARTY CUSTOMER SURVEY: - If the order is received from a new overseas party, his credit worthiness is seen. Some surveys are done through internet, certain magazines, seeing its past records and its credit in the market. 2. DEAL CRACKED: - If all the above conditions are satisfied, some quotations are asked for. Than some negotiations takes place. All other terms and conditions like method of payment, credit days, last date of shipment, last date of negotiation, port of shipment, port of destination, certificate of which origin, number of copies of other documents required like packing list, weight list, inspection certificate required. When all these terms and conditions are satisfied, the first deal is cracked. 3. FIRST SMALL DEAL TAKES PLACE: - The first deal which takes place is the smallest one with a small order. In case the transaction is been taken place for the very first time, it is rule that the transaction will take place on part advance payment basis. 4. ADVANCE PAYMENT: - The first deal which takes place has to be on advance payment basis is the rule of CEAT. It is 30% advance payment of the total amount of the contract. It also asks the buyer to open Letter of Credit and carry all the operation through letter of credit. It also asks for Bank Guarantee. 5. 6. CEAT Ltd. has entered into contract with SBI for such advance payments. DETAILS SENT THROUGH SWIFT: - Details of the contract are sent to the importers bank through SWIFT so that all the payments and documentation take place through it. These details are sent by SBI on giving intimation. This is sent to the importer as well to let him know which the advising bank is. 7. 8. ADVANCE PAYMENT RECEIVED AGREEMENT AND CONFIRMATION: - Once the advance payment is received, marketing department has final agreement with the customer and confirmation. 9. LETTER OF CREDIT OPENED: - The customer prepares purchase order and sends it to the marketing department after having done various negotiations. Customer also opens for letter of credit and the opening bank sends it to SBI or any other advising bank, the details of the bank CEAT has given. Sometimes, P.O. is for bulk quantity and the importer does not require all the quantity at one time, so only part order is

42

fulfilled. The whole exports are made within the stipulated time in the Letter Credit. This is known as partial shipment. 10. P.O. IS SENT TO SBI OR ANY OTHER ADVISING BANK: - The purchase order sent by the customer to the marketing department is given to the treasury department to avail credit. This purchase order along with the FEMA Declaration and covering letter is sent to the SBI or Advising bank along with the standing instructions to avail Packing Credit. 11. INTIMATION IS GIVEN TO THE BANK TO PURCHASE THE BILL: - Generally when the customer is new, CEAT asks the bank to purchase the bill. In case the terms of negotiations is usance than the CEAT asks the bank to purchase the bill for the particular number of days in the credit. Bank is given notification whether these documents are against Cash Credit, Export Packing Credit or Packing Credit in Foreign Currency (PCFC) 12. PRESHIPMENT FINANCE IS AVAILED: - Pre-shipment finance is availed once the bank receives the intimation and CEAT accepts that if the buyer fails to pay, CEAT will pay on behalf of the customer. When treasury department receives a bulk P.O., CEAT generally takes Export Loan for 90% of the P.O. amount. This loan extends for about 68 months i.e. 180 days and it can be further extended for 270 days. Thus bank makes pre-shipment finance against the acceptance that if customer fails repay the loan amount, CEAT / ECGC will pay (D/P) considering Force Majeure Clause. Force Majeure means bank assumes no liability or responsibility for consequences arising out of interruption of the business by Acts of God, riots, civil commotions, insurrections, wars or any other causes beyond their control or by strikes or lockouts, bandhs. Bank sees the funding limit and gives the loan. 13. FORWARD COVER / SPOT RATE BOOKED: - When bank receives such intimation from CEAT and loan is availed, CEAT has to book forward cover or spot rate. CEAT has entered in an arrangement with the different banks by taking a monthly cover. It means that for whole month, some dates are selected, and the rates are also predetermined. When the forward cover is booked, we have to give intimation to the bank at which date and rate CEAT wants to book cover. Thus the Cash Credit account is hit.

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14.

SHIPMENT AND BILL PREPARATION: - Once the loan formalities are complete, shipment is done and simultaneously marketing department prepares a Bill for all the purchases. This bill is hypothecated with the bank and once the payment is made bank gives it to the purchaser via opening bank.

15.

NON NEGOTIABLE DOCUMENT SET IS PREPARED: - As the shipment is done, all the documents are gathered and a set is prepared known as Non Negotiable Document Set (NNDO Set). This set includes bill of lading, certificate of origin, packing list, weight list, Commercial invoice. The entire document set is with customs, which keeps the original copies and gives the Xerox to SBI or any other advising bank. This bank releases all the documents only when the payment is made.

16.

DOCUMENTATION: - Here, bank prepares Foreign Inward Remittance Certificate (F.I.R.C.). It also prepares Bank Presentation which has a detailed note of what all charges Bank has levied on CEAT for the services given. Bank sends all these documents to CEAT along with copies of Packing List / Weight List, Commercial Invoice, Bill of Lading.

17.

ONCE THE LOAN IS AVAILED AND SHIPMENT DONE, PRE-SHIPMENT FINANCE TURNS INTO POST SHIPMENT FINANCE

18.

CUSTOMERS PAYMENT: - Now as and when the customer makes payment, the loan gets nullified. But CEAT has made arrangement with the bank, that the loan gets nullified even if some other customer pays. Thus on one side loan is taken and on other side some other customer repays it. Accordingly the account balances keep on changing. It is monthly arrangement with all the consortium banks, though the customer who has not paid will no doubt remain as debtors in CEATs books of accounts. And as the customers repay the loan, they give intimation to CEAT and the bank also gives intimation to the treasury department. And thus the account is settled.

19.

IF TIMELY PAYMENT NOT RECEIVED: - Suppose the customer fails to repay the loan amount on the due date, bank will charge interest on CEATs account for the particular loan amount. This interest is known as Overdue Interest. And the rate is 2% of the total loan amount. Than the marketing department continuously reminds him about the payment and the liability of overdue interest is passed on to the customer.

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B. 1.

OLDER OVERSEAS PARTY NEGOTIATIONS AND CONFIRMATION: - This very first stage involves giving quotations and negotiations on quotations. The negotiations are also done on the terms of payment and method of payment, the credit period to be given or the advance payment to be made. The purchaser is also asked to carry on the operations through letter of credit.

2.

PURCHASE ORDER SENT BY CUSTOMER: - The very first step involves sending of Purchase Order by the customer. Sometimes the P.O. can be for bulk quantity and the party does not want to import all the goods in one shipment so it issues a bulk P.O. against CEAT and imports as and when required by issuing the new purchase order with same P.O. number. The P.O. should necessarily mention the quantity and the amount of purchases.

3.

PURCHASE ORDER SENT TO SBI OR ANY OTHER ADVISING BANK: - P.O. is sent to SBI or any other advising bank in the consortium. This P.O. is sent to the bank along with covering letter and FEMA Declaration.

4.

INTIMATION FOR COLLECTION: - While sending the documents, standing instructions are given to the bank to collect the documents sent. It means that give the set of document to the importers bank only when he makes payment (D/P). When the term of payment is remittance, collection intimation is given.

5.

SPOT RATE BOOKED: - Since the payment received in foreign currency is on the spot. Thus spot rate has to be booked in the market with an authorized dealer i.e. value cash or spot rate.

6.

SHIPMENT AND BILL PREPARATION: - In this stage, shipment is done and simultaneously marketing department prepares a Bill for all the purchases. This bill is hypothecated with the bank and once the payment is made bank gives it to the purchaser via opening bank.

7.

NON NEGOTIABLE DOCUMENT SET IS PREPARED: - As the shipment is done, all the documents are gathered and a set is prepared known as Non Negotiable Document Set (NNDO Set). This set includes bill of lading, certificate of origin, packing list, weight list, Commercial invoice. The entire document set is with customs, which keeps the

45

original copies and gives the Xerox to SBI or any other advising bank. This bank releases all the documents only when the payment is made. 8. DOCUMENTATION: - Here, bank prepares Foreign Inward Remittance Certificate (F.I.R.C.). It also prepares Bank Presentation which has a detailed note of what all charges Bank has levied on CEAT for the services given. Bank sends all these documents to CEAT along with copies of Packing List / Weight List, Commercial Invoice, Bill of Lading. 9. CUSTOMER MAKES PAYMENT: - Since the documents are sent on collection basis, payment will receive fast and thus no arrangement of loan has to be taken. As the customer makes payment, the documents will be released to the customer by the advising bank. It will be given through the opening bank or agent bank of opening bank. And the transaction is closed.

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DAILY REPORTS MAINTAINED AS PART OF INFORMATION SYSTEM


a. Limit left in each bank. b. Amount of pre-shipment loan taken. c. Amount of post-shipment loan taken. d. Payment schedule. e. Interest schedule. f. Monthly forward cover statement to be maintained to avail finances from different banks. g. Entries of all transactions are to be passed in the system to get timely reports.

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CHAP: VIII

GOVERNING BODIES

EXPORT CREDIT GURANTEE CORPORATION INDIA LTD. (ECGC)


In order to remedy the prevailing high-risk situation and provide adequate cover of insurance to exporters a special institution known as the Export Credit Guarantee Corporation (ECGC) was established in India in 1964. ECGC plays dual role in promoting exports: a. It issues suitable insurance policies to the exporters against possible risks of export

business. b. It provides financial guarantees to banks and exporters against deferred credit terms.

ECGC does not provide any direct finance to exporters. It only helps them to obtaining finance from banks and financial institutions by undertaking to share commercial and political risks with such institutions. Exporters must identify the risks to which their business is exposed. Risk management is highly systematic process. It not only deals with identification but also evaluation of losses. It also works out appropriate measures to handle such losses. FUNCTIONS OF ECGC: 1. FINANCIAL ASSISTANCE: - It helps exporters in obtaining financial assistance from commercial banks and other financial institutions on the strength of its policies and guarantees. 2. COLLECTING AND DISSEMINATING INFORMATION: - it helps exporter in collecting and disseminating information regarding credit-worthiness of overseas buyers. 3. 4. 5. It helps in DEVELOPING and DIVERSIFYING EXPORTS It INSURES EXPORTERS AGAINST CREDIT RISKS and guarantees payment. It charges LOWER RATE OF PREMIUM to enable the exporters to effectively compete in international market. 6. 7. It provides RISK COVERAGE against political and commercial risks. It provides services which are not available from commercial insurance companies.

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UNIFORM CUSTOMS AND PRACTICE FOR DOCUMENTARY CREDITS


The Uniform Customs and Practice for Documentary Credits (UCP) is a set of rules on the issuance and use of letters of credit. The UCP is utilized by bankers and commercial parties in more than 175 countries in trade finance. Some 11-15% of international trade utilizes letters of credit, totaling over a trillion dollars (US) each year. Historically, the commercial parties, particularly banks, have developed the techniques and methods for handling letters of credit in international trade finance. This practice has been standardized by the ICC (International Chamber of Commerce) by publishing the UCP in 1933 and subsequently updating it throughout the years. The ICC has developed and moulded the UCP by regular revisions, the current version being the UCP600. The result is the most successful international attempt at unifying rules ever, as the UCP has substantially universal effect. 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 UCP600, formally commenced on 1 July 2007. A significant function of the ICC is the preparation and promotion of its uniform rules of practice. The ICCs aim is to provide a codification of international practice occasionally selecting the best practice after ample debate and consideration. The ICC rules of practice are designed by bankers and merchants and not by legislatures with political and local considerations. The rules accordingly demonstrate the needs, customs and practices of business. Because the rules are incorporated voluntarily into contracts, the rules are flexible while providing a stable base for international review, including judicial scrutiny. International revision is thus facilitated permitting the incorporation of the changing practices of the commercial parties. ICC, which was established in 1919, had as its primary objective facilitating the flow of international trade at a time when nationalism and protectionism threatened the easing of world trade. It was in that spirit that the UCP were first introduced to alleviate the confusion caused by individual countries promoting their own national rules on letter of credit practice. The aim was to create a set of contractual rules that would establish uniformity in practice, so that there would be less need to cope with 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.

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FOREIGN EXCHANGE MANAGEMENT ACT, 1999


Foreign Exchange Management Bill was introduced by the Government of India on August 4, 1998. It was adopted by the Parliament in 1999 and is called Foreign Exchange Management Act, 1999. The Act aims at consolidating and amending the law relating to Foreign Exchange with the objective of facilitating external trade and payments and for promoting the orderly development and maintenance of Foreign Exchange Markets of India. The main objective of FEMA is to facilitate export trade and to promote systematic development and maintenance of foreign exchange market in India. Foreign Exchange transactions are monitored by RBI. The act makes it clear that: 1. 2. 3. No person can make payment to or for the credit of any person residing outside India. Unauthorised person cannot deal in or transfer any foreign exchange. Only authorised person can receive payment by order or on behalf of any person residing outside India. 4. An Indian person can acquire, hold, own, possess or transfer any foreign exchange or immovable property situated outside India only with prior permission of RBI. FEATURES OF FEMA, 1999 1. 2. Export of goods and services The exporter must present to RBI full details about the value of goods sent outside India. 3. The exporter has to furnish to RBI any other information required by it to ensure realization of export proceeds. 4. The exporter has to follow any directives issued by RBI regarding value or volume of transactions. 5. The exporter of services will furnish to RBI a declaration in specified form containing time and correct details about payment for such services. 6. The exporter has to take appropriate steps to ensure that any amount of foreign exchange due to him from abroad is repatriated or transferred to India as per the guidelines to RBI.

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7.

Powers are given in the hands of RBI. Only RBI is authorised to regulate, prohibit or restrict the transactions pertaining to foreign exchange.

8.

A current account transaction allows a person to sell or draw foreign exchange from an authorised dealer. RBI can impose restrictions on current account transactions as well in consultation with central government.

9.

Selling or drawing foreign exchange from an authorised dealer is permitted by RBI relating to capital account transactions. RBI specifies limits upto which the foreign exchange is permissible for current account transactions.

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CHAP: IX

SPECIAL CASES

REDUCTION IN QUANTITY OF GOODS


An amendment has been issued by reducing quantity of goods from 500 boxes Tiger Prawns at US $ 600 per boxes to 250 boxes Tiger Prawns at US $ 600 per boxes, however the credit amount remained unchanged. Amendment has been communicated to beneficiary. After two months, exporter submitted documents for US $ 300,000 covering export of 500 boxes of Tiger Prawns along with original Letter of Credit covering 500 boxes of prawns for US $ 300,000. Exporter informed orally that he refused the amendment. Banker hesitated to negotiate the documents due to amendment and subsequent on their oral refusal forwarded documents for payment. Credit opener refused to honour the commitment due to excess shipment. Beneficiary demanded settlement under credit. Is the refusal to make payment under the letter of credit is in order? There is requirement for the beneficiary to provide their notice of acceptance or rejection of amendment. It is responsibilities of the opener as well as that of the applicant to follow up with the beneficiary or with the advising bank to obtain approval for such amendment. The fact that the beneficiary tendered the documents for the full value of the original credit is an indication of rejection of amendment. Hence the credit opener is expected to make payment under their credit with interest for the delayed settlement. In such cases it is always advisable to mention in the covering letter by the forwarding banker stating that the beneficiary has not given effect to their amendment. This will reduce chances of rejection by the credit opener and unavoidable correspondent and delay can be avoided.

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RELEASE OF GOODS WITHOUT PAYMENT


As the letter of credit expired for the shipment of goods were airlifted to ensure that the same reaches to the buyer without delay instead of sending the goods by steamer without any additional cost to the buyer by allowing appropriate discount in the invoice. The goods were consigned to the credit opener to ensure payment before the release of goods. On receipt of documents credit opener refused due to this discrepancy. Buyer too refused to make the payment. All efforts to get the payment failed. When approached for reship the goods, it came to light that the consignment delivered to the overseas buyer by the airlines. How the goods were taken delivery? Bank is in order in refusing the payment under letter of credit since they have not complied with the credit terms. It appeared that the airlines, on the arrival of the goods, intimated the same to the consignee viz., the bank, under information to the importer whose name appeared there as notified. As there were no prior arrangements banker informed the airlines that they do not undertake such consignment and they dispose off the goods as they deem fit. When the importer came to know about the banks refusal to honour, approached the airline authorities with the copies of the documents received by them from the exporter and took the delivery of the goods against their personal guarantee. When contacted airline authorities transpired that the goods were delivered to notified party since banker refused to rake the goods consigned to them. This action was taken by them in the interest of all concerned to avoid damages to the goods, hence they are not responsible for wrong delivery. Since airway bill is not a negotiable documents further action was not met with any successes. PRECAUTIONS In such a situation it is always better to seek amendments to credit rather than to take ones own decision to dispatch the goods in this fashion.

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CHAP: X

BIBLIOGRAPHY

1.

EXPORT P OLICY PROCEDURES AND DOCUMENTATION..M.I. MAHAJAN

2.

DOCUMENTARY LETTER OF CREDIT WITH EXPORT-IMPORT FINANCE AND CASE STUDIES..R.R. BEEDU, Retired Deputy General Manager, Syndicate Bank, Mumbai

3.

EXPORT IMPORT PROCEDURES AND DOCUMENTATIONN.G. KALE and M. AHMED

4.

www.rbi.org.in

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