Export Finance

Export Finance
SUMMER TRAINING REPORT SUBMITTED TOWARDS THE PARTIAL FULFILLMENT OF MASTER DEGREE IN MANAGEMENT STUDIES
EXPORT FINANCE
SUBMITTED BY SHIVALI MEHTA MMS (2009-2011) Roll No. : 426
INDUSTRY GUIDE Mr. Hitesh Shah AVP - Finance Alok Industies Ltd
N.L.DALMIA INSTITUTE OF MANAGEMENT STUDIES AND RESEARCH
Export Finance
ACKNOWLEDGEMENT
Every endeavor in itself is an impression of the efforts of not only those who pursue it but of those as well who provide guidance and motivation towards its successful completion. Likewise, this project bears an imprint of all those who helped me at various stages and it would be unfair on my part not to thank them. I would like to express my sincere gratitude to Mr. Sunil Kandelwal(CFO), and Mr.Alok Mehrotra for providing me with an opportunity to undergo training with their esteemed organization. The successful completion of this project could not have been possible without the co-operation and encouragement of Mr. Hitesh Shah AVP Finance and Mr. Hussain Tayebkhan and the entire Product Team who provided me with their unending support from the very beginning of the project, which helped in timely completion of the project. I would also like to thank Mr.Satyanarayan, Mr.Sagar, Mr.Ajit, Mr. Sandeep, Ms. Shilpy, Mr. Saurabh for all their valuable assistance in the project work. I think it is most essential to thank Prof P.L. Arya, My Mentor Prof Gulab Mohite and all other Professors who continued to have an impact on my thinking which helped me to complete this project. Doing training at Alok Industries Ltd was a wonderful experience for me, as it instilled in me a great deal of confidence and ability to work with the co-team members which bought in the ability to coordinate with compliance.
Export Finance Certificate of Originality
This is to certify that this project Export Finance is the original work of Ms. Shivali Mehta and is being submitted in partial fulfillment of the requirement of the MBA program of N.L. Dalmia Institute Of Management Studies And Research. No part of this project has been submitted prior to this to any college or institution. The project is based on export procedure and export finance and has been compiled at the Corporate Office of Alok Industries under the guidance and supervision of the company guide, Mr. Hitesh Shah.
For Alok Industries Limited
Mr. Hitesh Shah Assistant Vice-President, Finance
Export Finance SUMMARY

Finance is the very life-blood of a business organization. Before we can even start setting financial goals, we need to determine where we stand financially. It goes without saying that being such a vital cog in the machine, the lack of it can stifle even the most mammoth of organizations. In a world as turbulent as the one we live in, financial freedom is a term that is rarely even whispered in the most sophisticated financial circles. A big part of financial freedom is having your heart and mind free from worry about the what-ifs of life. Colorless as this may sound; in the export business the what-ifs of life are usually the volatility in the currency markets! Sudden, unforeseen movements in exchange rates can cripple an organizations finances. While there can be no absolute manner to determine and predict the movements as a consequence of such volatility, there can always be a strategy to neutralize it. The essence of this project attempts to explain the means through which that strategy may be achieved. It would be injudicious however to dive straight into the world of export finance without discussing in some detail the procedures that precede it and therefore the first two sections of the report are dedicated to the pre and post-shipment procedures, the documentation involved and the terms of financial settlement in international trade. Export finance has only been dealt with in the next two sections and has been backed with appropriate examples and illustrations wherever required. It is my intention, to develop a project/manual that simplifies the procedures and the fundamentals of export finance for the reader. I hope to have achieved this through this project.
Export Finance TABLE OF CONTENTS Sr. No.

1. Introduction World India
Page No.
1 2 3 4 6 9 12 15 16 18 21 22 37 39 43 45
2. Swot Analysis Of Indian Textile Industry 3. Company Profile of Alok Industries 4. Export 5. Technicalities involved in export 6. Pre shipment Process Quotation & Order Confirmation Modes of Payment Inco terms Documentation
7. Shipment of Goods 8. Export Incentive Schemes 9. Post-Shipment 10. Risk in Export Finance
11. Export Finance And Risk Mitigation

12. Pre-shipment Finance 13. Post-shipment Finance 14. Application of interest rates 15. Period of credit N.L.DALMIA INSTITUTE OF MANAGEMENT STUDIES AND RESEARCH
48
48 55 58 61
Export Finance
16. Export Factoring Vis--Vis Other Payment Options 17. Risk Arbitrage Tools 18. Foreign Exchange Market 19. Conclusion 20. References 64 69 78 83 84
Export Finance
OBJECTIVE OF THE REPORT Report will help company to list down all procedures of export trade. Various documents required in the report will help company to make a detailed analysis of documents prepared by various departments for SAP implementation. To study various available financing options for company by using appropriate Risk Arbitrage tools .
Scope of the project Detailed Export Procedure Types and importance of different Documents Different types mode in which payment is received by the company Types and procedure of Export Financing Various types of Incentives available and the procedure for applying for the same Different types of risk arbitrage tools.
Export Finance
Introduction Textile industry is providing one of the most basic needs of the people and the holds importance; maintaining sustained growth for improving quality of life. It has a unique position as a self reliant industry, from production of raw materials to the delivery of the finished products, with substantial value addition at each stage of processing. It is a major contribution to the countrys economy. Its vast potential for creation of employment opportunities in agricultural, industrial, organized and decentralized sectors and rural and urban areas is noteworthy Although the development of textile sector was earlier taking place in terms of general policies, in recognition of the importance of the sector, for the first time a separate policy statement was made in 1985 in regard to the development of the sector.
Export Finance
TEXTILE INDUSTRY OVERVIEW THE WORLD MARKET The global textile trade (including clothing) is estimated to be around US$ 530 billion, with a 4.5% share of the worlds merchandise. World demand for apparels and textiles is expected to reach US$ 700 billion by 2012, with the US and Europe continuing to be the dominant markets for textiles and apparel, though a substantial portion of the incremental demand will be driven by the Asian countries. Textile capacities in the developed economies have shrunk during the last few years, mainly due to high production and labor costs. On the other hand, Asian countries like India, China, Bangladesh, Vietnam and Cambodia have the advantages of relatively abundant raw material supplies and low wage costs. Moreover, a number of Asian manufacturers are now offering not only quality products at the right time and price, but also value added design solutions to demanding international customers. Europe is still a significant player; however, it has seen its share decrease from 50% of the world market share to about 30% over the last few years; this share is expected to reduce even further. Asian textile manufacturers in general and Indian textile manufacturers in particular are likely to capture more of the global market share in the coming years, given their increasing technological capabilities, capacities to service large volume orders and competitive pricing. Thus, over a period of time, the textile manufacturing is going to be dominated by the Asian countries.
Export Finance
INDIA India is the second largest producer of textiles and garments in the world and also the second largest producer of cotton. The textiles sector is Indias second largest employer, giving direct employment to over 35 million people and providing for indirect employment to an additional 56 million people. It contributes towards 15% of Indias exports and 4% of Indias GDP. The industry also accounts for 14% of total industrial production. The Indian textiles industry is estimated at US$ 52 billion. The domestic textile market, is expected to grow at a CAGR of 10%, while exports are expected to grow at 19% CAGR. By 2012, the industry is expected to be at US$ 110 billion, of which US$ 50 billion would be in exports and US$ 60 billion would be domestic sales. On the export front, international retailers and private label brands are increasingly looking at India as a viable and quality supply source. Indias design and fashion abilities will add to its quest in becoming a destination of choice for textiles. Speciality fabrics is also an area where there is potential for export growth.
Export Finance
SWOT ANALYSIS OF INDIAN TEXTILE INDUSTRY STRENGTHS: Strong and diverse raw material base -Third largest producer of cotton -Fifth largest producer of man-made fiber and yarn Vertical and horizontal integrated textile value chain Globally competitive spinning industry Average cotton yarn spinning cost at US$ 2.5 per kg, which is lower countries including China Low wages: Rate at 0.51 US$ per operator hour as compared to USD USD 2.5 of Turkey Unique strength in traditional handlooms and handicrafts Flexible production system Diverse design base 1 of China and than all the
WEAKNESSES: Structural weaknesses in weaving and processing 2% of shuttle-less looms as percentage of total looms as against world average of 16% and China, Pakistan and Indonesia 15%, 9% and 10% respectively. Highly fragmented and technology backward textile processing sector Highly fragmented garment industry Except spinning, all other segments are predominantly decentralized.
Export Finance
Rigid labor laws: proving a bottleneck particularly to the garment sector. Large seasonal orders cannot be taken because the labour strength cannot be reduced during the slack season. Inadequate capacity of the domestic textile machinery manufacturing sector. Big demand and supply gap in the training facilities in textile sector. Infrastructural bottlenecks in terms of power, utility, road transport etc. OPPORTUNITIES Quota phase out pushing the export growth Buoyant domestic economy Increasing disposable income levels. Increasing working female population: The propensity to spend in the case of working women is higher by 1.3 times as compared to a house wife. Increased usage of credit cards and availability of cheap finance would also fillip to impulsive apparel purchases. The revolution in organized retailing would increase the consumption of apparel and made-ups. THREATS Possibility of a global recession triggered by a weakening dollar. Higher competition especially after 2008 when China cannot be restrained under WTO. Non-availability of indigenous textile machinery. Lack of domestic capital and absence of appetite of domestic industries to invest in the quantities envisaged for 12 percent growth target.
N.L.DALMIA INSTITUTE OF MANAGEMENT STUDIES AND RESEARCH 5
provide
Export Finance
COMPANY PROFILE INDUSTRIES LTD
OF
ALOK
Alok was established in 1986 as a private limited company, it set up its first polyester texturising plant 1989. It became a public limited company in 1993. Over the years, it has expanded into weaving, knitting, processing, home textiles and garments. And to ensure quality and cost efficiencies it has integrated backward into cotton spinning and manufacturing partially oriented yarn through the continuous polymerisation route. It also provide embroidered products through Grabal Alok Impex Ltd., its associate company. That is how it has evolved into a diversified manufacturer of world-class home textiles, garments, apparel fabrics and polyester yarns, selling directly to manufacturers, exporters, importers, retailers and to some of the worlds top brands. Alok has recently entered the domestic retail segment through a wholly owned subsidiary, Alok Retail India Limited, with a chain of stores named H&A that offer garments and home textiles at attractive price points. It has also ventured into the realty space through wholly owned subsidiaries with investments in some prestigious projects in Mumbai.
Export Finance
Textiles Offerings: Alok is an end-to-end textile solutions provider. Its products entire encompass chain the from
value
cotton and blended yarn to fabrics to garments and
home textiles. A significant portion of these products are cotton based - manufactured from both organic cotton and 'regular'
Strengths: Alok has a diversified customer base, both in India and overseas. In India, it supplies textile offerings to top-of-the-line retailers, garment and home textile manufacturers and exporters. It is also a nominated / preferred vendor for several brands and retailers in the overseas markets, where its wide range and product quality command loyalty and earn respect. It exports to over seventy countries in North and South America, Europe, Africa, the Middle East and Asia.
Financial Performance: It has well established business with net sales of Rs. 4314.67 Crores for the year 20092010.Their plants are located at Silvassa, Rakholi, Dadra Nagar Haveli, Vapi, Pawne, Turbhe & Bhiwandi. Alok has established a foothold in diversified markets viz; Direct exports, Garment exporters & Domestic market with large customer base comprising of reputed international buying houses/ retailers in the overseas market & reputed garment manufactures /exporters & retailers in the domestic market. Operating profit before tax for the year 2009-2010 is Rs 367.29 crores and operating profit after tax is Rs 242.45 crores. Export Sales for the last quarter of year 2010 was Rs.607.60 crore, a growth of 134.35% over the corresponding quarter of the previous year (Rs. 259.27 crore).
Export Finance
Export Finance
As mentioned the project is about export finance, so the first thing on which I would like to throw some light is nothing but export. What is export? In economics, an export is any good or commodity, transported from one country to another country in a legitimate fashion, typically for use in trade. Export is an important part of international trade. Its counterpart is import. Export goods or services are provided to foreign consumers by domestic producers. Export of commercial quantities of goods normally requires involvement of the Customs authorities in both the country of export and the country of import. But the question arises why to export? General objectives will probably be: To increase profitability To utilized production capacity to the full
More specifically: The small domestic market may not provide you with the opportunity for growth that your company needs You may be manufacturing a specialized product and find there are not enough customers through international trade. You may be looking for the increased security your company can achieve by spreading its risks over a variety of markets You may want to ensure that your product is kept up to date by exposure to competition in international markets. One major benefit of exporting is that it provides scope to develop a company's strengths and abilities by improving its balance of payment position. Selling in an international environment
Export Finance
will sharpen your innovative edge and open up opportunities that might never come your way if you limit yourself to the home market. Pursuing export markets is recommended in a number of situations: demonstrated international demand for your products higher international prices for your manufactured goods moderate or slow domestic market growth with strong, unsaturated or growing markets abroad competitive pressures in your domestic market reducing prices and margins competitors leveraging their profitability in foreign markets to increase their market share in your domestic market relatively low labor or capital costs as compared with foreign manufacturers Strategic needs: capital, technology, capacity, partners, government assistance, etc. intangible needs conforming with multi-cultural or internationally oriented corporate culture What points to be taken into consideration to form a export strategy. Has ALOK followed those strategies while starting their business in export or giving it a new height in export business? Export Strategy Preparation of an Export Plan is a must for achieving success in Export. The Company should do a basic SWOT analysis identifying its Strengths, Weaknesses, Opportunities and Threats. In addition to the above, due compliance with all the Government Rules and Regulations in force, costs, time schedules, operational steps, impact of export on the company etc. should be kept in mind. The steps can be discussed as under:
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Export Finance
Objective Determine how exporting will enhance the company's short, medium and long-term goals. The very first step that is setting objective is well explained by ALOK industries. ALOK is going for export for profit, and its gaining a huge profit from export. Assessment of Markets Examine foreign markets through research. The purpose is to identify marketing opportunities and constraints abroad, as well as to identify prospective buyers and customers. All this is done well with different department of ALOK like marketing, export, R&D, etc Selecting and preparing the Product: Selecting and preparing the product for export requires not only product knowledge but also knowledge of the unique characteristics of each market being targeted. Market research conducted will give the company an idea of what products can be sold and where It is important to ascertain the cost of the product at the very beginning. The cost of procuring or manufacturing the product should be very economical so that it is competitive and you dont lose out to other exporters for the same product in this respect. Mode of operation: You can operate your export business as: Merchant exporter: i.e. buy goods from merchant/manufacturer and then sell them to buyer, Manufacturer Exporter i.e manufacture the goods and then sell them to buyer, or Agent i.e act on behalf of seller/buyer and charge commission
ALOK is operating as a manufacturing exporter and Merchant exporter

Export Finance
Channels of Export: Distribution of the product is an important aspect in export and an exporter has to decide how the overseas sale is to be conducted. The following channels of distribution are generally used Export through Overseas Agent (by appointing agent in the overseas Country) Export by opening a branch office overseas Export through a canalizing agency Export through Trading House / Export House Direct Exports (i.e exporter himself promoting sale of his product)
ALOK is having its branches overseas like it has branches in U.K, Srilanka and Czhek Republic and it also do direct export and have big agents in oversea too.
TECHNICALITIES INVOLVED IN EXPORT
All exporters have to comply with the legal formalities & duly obtain registrations & certifications as required under various enactments of the Government before starting the process of export business.
Bank A/c Open a Current Account with a reputed Bank which is authorized to deal in foreign exchange. Alok is well established company it has its a/c in banks like standard chartered bank, Bank of India, BOB, etc.
Import Export Code No. No person is allowed to export or import goods without obtaining the IEC No. from the regional licensing authority unless specifically exempted under any other provision of the Export Import Policy.
Export Finance
Registration cum Membership Certificate (RCMC): For availing various concessions under the current Foreign Trade Policy, the exporter is required to get registered with the concerned Export Promotion Council or Commodity Board by obtaining Registration-cum Membership Certificate.
Permanent Account Number (PAN): All exporters & importers who have IEC No. are compulsorily required to have a PAN No. as well. The Permanent Account Number issued by the Income Tax Authorities is taken as the common business identifier for all importers & exporters in Customs operation.
Registration for Value Added Tax (VAT): All legal & natural persons who provide goods, works or services & have an annual sales turnover exceeding the threshold limit (to be decided by each sate) should register as taxpayer. All importers are required to register irrespective of their annual turnover.
Registration with Regional Licensing: The Customs authorities will not allow you to import or export goods into or from India unless you hold a valid IEC number. For obtaining IEC number you should apply to Regional Licensing Authority in duplicate in the prescribed form. Before applying for IEC number it is necessary to open a bank account in the name of your company/firm with any commercial bank authorised to deal in foreign exchange.
Register With Export Promotion Council:In order to enable you to obtain benefits/concession under the export-import policy, you are required to register yourself with an appropriate export promotion agency by obtaining registration-cum-certificate.
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Export Finance
Shipment Procedure Once the contract has been won, the export department takes over with preparation of all the documents necessary to be prepared at each stage of the transaction. The export procedure can be split into 3 stages: (i) Pre-shipment (ii) Shipment (iii)Post-shipment
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Export Finance
Flow Chart Of Pre Shipment Process
Performa is issued
LC is opened and PO is recieved
Preshipment finance is obtained on PO / LC
Documents Prepared by Export Dept. 1. 2. 3. 4. 5. Invoice Packing list Shipping bill GSPA ARE
Pre shipment
Documentation work
Custom clearance is obtained
Goods are stuffed in the container
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Export Finance
Quotation & Order Confirmation The organization, upon inquiry from a prospective buyer issues a quotation mentioning its terms and conditions related to shipping of goods, payments, price and quality of goods. It also provides value & volume of goods, terms for letter of credit, as per the case and other details related to trade like date and time period for shipment, destination port, and final destination. The importer on accepting the terms & conditions, sends a Purchase order (PO). Once the customer has sent the purchase order, it is usually followed up by an order confirmation from the seller. This must also be accompanied by a pro-forma invoice, which is prepared by the exporter and is an indication of what the real invoice will look like after delivery. The importance of this document should not be overlooked as it forms the basis for the preparation of all the documents required at various stages of the transaction. It is issued against the export order and is basically an acceptance and reconfirmation of the terms of contract. Providing a detailed and unambiguous pro-forma invoice is essential, since it provides a base for establishing Letter of Credit (L/C) or receiving remittance from the importer as the case may be. The opening of a letter of credit (hereinafter referred to as L/C) is made easier with a pro-forma invoice since it establishes in advance the various terms and conditions, how the buyer and seller intend to divide the risks arising out of the export contract, how payment will be made and other specifications. Thus it allows the bankers to make an accurate assessment of the essentials of the contract and open the L/C on behalf of the importer. Given below are the various details/terms/clauses that must be mentioned while preparing the pro-forma invoice. The various clauses for a pro-forma invoice include: Address of the prospective buyer/consignee Details of goods to be shipped Details of the price, quantity, rate and amount of shipment Mode of shipment (Air/Sea/Road) Port of Loading (Any Port/Airport in India) Port of Discharge (Named port and country)
Export Finance
Final Destination (place of delivery, port of discharge or inland destination) Terms of Payment (TT, L/C, D/P(CAD), D/A etc) Price Basis (FOB, CFR, CIF etc, which are incoterms) Apart from these mandatory details that are required to be included in the pro-forma invoice, other details that must be disclosed vary according to the terms and mode of payment.
In case the mode of payment is Letter of Credit the following additional details/terms must be mentioned: Specify date/s of shipment L/Cs should be irrevocable and opened by a prime bank Tolerance (+/- in % ) in quantity and value to be permitted L/C to be freely negotiable with any bank in India Place of expiry of L/C should be India Provide sufficient time to present original documents to the negotiating bank Partial and Transshipment to be allowed All bank charges outside country of issue (of L/C) to be on applicants account (importers account).
In case the mode of payment is through T/T, D/P, and D/A the following additional details/terms must be included: Specify date/s of shipment Tolerance (+/- in % ) in quantity and value to be permitted To provide beneficiarys banking details (exporters banking details) for calling funds in case of payment by T/T Partial and Transshipment to be allowed Specify payment terms, i.e. T/T or documents against payment (D/P), Cash against documents (CAD) or documents against acceptance (D/A)
Export Finance
Bank details of the buyer need to be obtained in case of payment terms being D/P
Modes of Payment Since mention has been made of the various modes of payment in the above section, it would be appropriate to briefly explain the various modes of payment in international trade. There are four commonly used methods of payment in international trade. They are: Cash in Advance: In this method the payment is made by the importer before the goods are shipped and before ownership of the goods is transferred. This is easily the most beneficial option for the exporter since the inflow of cash before the shipment of goods obviates cash flow problems that arise in other methods of payment. Wire transfers (Telegraphic Transfer (T/T) is the widely used cash in advance option. Conversely it is also the riskiest option for the importer since it creates cash flow problems. Letters of Credit: L/Cs are the popular and secure instruments available to international traders. An L/C is a commitment made by the importers bank on his behalf, stating that the payment will be made to the exporter on fulfillment of the terms and conditions of the L/C. The bank charges a fee from the importer for this service. An L/C is secure since it protects the importer from payment until the goods are delivered to him while at the same time protecting the exporter from credit risk (non-payment by importer). An irrevocable letter of credit is one which cannot be canceled. It guarantees that a buyer's payment to a seller will be received on time and for the correct amount.
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Export Finance
Figure below illustrates pictorially an L/C transaction in proper sequence:

Exporter 4. LC is forwarded to the exporter
5b. Forwards documents 8. Makes Payment
Advising Bank
6. Checks docs for compliance with LC and forwards them to issuing bank 7. Makes payment
3.Issues LC to advising bank
1. Contract 5a. Ships Goods
LETTER OF CREDIT TRANSACTION
10. Releases Docs required to collect goods 9. Makes payment

2. Applies for LC in favor of exporter
Importer
Issuing Bank
Documentary Collections: According to this method the payment is made by the importer upon receiving the documents (required for transfer of title to the goods) such as the bank commercial invoice, bill of lading and packing list. Documentary collections involve using a draft and are of two types. Documents against acceptance (D/A) and Documents against payment (D/P) also known as Cash against Documents (CAD). In the first case the importer gives an acceptance stating that he will make the payment within a stipulated period of time at a specified date in order to receive the documents. In the latter case the importer must make immediate payment at sight (of the documents) in order to receive the documents. The draft contains instructions that specify the documents required for transfer of title to the goods.
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Export Finance
Figure below illustrates pictorially a documentary collections transaction: D/P Makes payment at sight D/A Accepts Draft and makes payment on due date
Exporter
2b. Fwds documents and payment instructions Remitting Bank
7. Makes Payment
3. Forwards docs to collecting
6. Makes payment at sight or on due date
1. Contract 2a. Ships Goods
DOCUMENTARY COLLECTIONS
bank
4. Makes payment at sight or accepts draft and makes payment on due date 5. Releases docs in exchange for payment or acceptance of draft Importer
Collecting Bank
Open Account: This method is the most advantageous as far as the importer is concerned and conversely the riskiest option for the exporter. According to the terms of this transaction, the goods are shipped and delivered before the payment is made, which is usually within a period of 30-90 days from the date of shipment. Although this is least advantageous for the exporter, the intense competitiveness in the global scenario has forced exporters to offer open account terms to capture markets abroad. However, the risk of non-payment can be mitigated with the help of various credit finance instruments.
Export Finance
The diagram below clearly illustrates, on a scale, the safest option and the riskiest option for the importer and exporter. For instance Cash in Advance is the safest option for the exporter since he receives cash before shipping the goods, thus payment is guaranteed. Conversely it is the riskiest option for the importer since he has to make the payment before he receives the goods, thereby increasing risk of non-delivery.
Inco terms Inco terms or international commerce terms are internationally recognized sales terms that are used in international trade circles around the world. They are terms that illustrate the division of costs and responsibilities between the exporter and importer. 1. The E term (EXW) The only term where the seller/exporter is responsible for making the goods available at his or her own premises to the buyer/importer 2. The F terms (FCA, FAS, FOB) Here the seller/exporter is responsible to deliver the goods to a carrier named by the buyer. 3. The C terms (CFR, CIF, CPT, CIP) In this case the seller/exporter is responsible for contracting and paying for carriage of the goods, but not for additional costs/risk of loss or damage to the goods once they have been shipped. C terms evidence shipment contracts.
Export Finance
4. The D terms (DAF, DES, DEQ, DDU, DDP) The seller/exporter is responsible for all costs and risks associated with bringing the goods to the place of destination. D terms evidence arrival contracts. Documentation Once the importer has accepted the terms and conditions mentioned in the pro-forma invoice he proceeds to open the Letter of Credit in his bank, (known as the issuing bank) or makes the advance remittance as per the payment method agreed upon in the contract. In case of an L/C, a draft L/C is prepared and sent to the exporter for confirmation, who scrutinizes it and makes the desired changes or gives his acceptance for the same. Upon confirmation of order & receipt of remittance/ final Letter of Credit from the importer the raw material procurement and production activity is carried out by the concerned department and factory to produce the goods as per schedule. On receipt of packing list from the factory, pre-shipment documents are prepared under appropriate scheme, i.e. DEPB / Duty Drawback. The Reserve Bank of India has issued Foreign Exchange Management (Export of Goods & Services) Regulations, 2000. Under Regulation 3, every exporter of goods or software in physical form or through any other form, either directly or indirectly, to any place outside India other than Nepal and Bhutan shall furnish to the specified authority a declaration in prescribed form or supported by such evidence as may be specified. All exports to which the above requirement applies must be declared on appropriate forms as indicated below: GR Form: (in duplicate) for exports other than by post including export of software in physical form SDF Form: (in duplicate and appended to the shipping bill) for exports declared to Custom Offices notified by the Central Government which have introduced EDI system for processing Shipping Bill.
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Export Finance
PP Form: (in duplicate) for export by post Documents Required: The documents required to be drawn up may vary based on the country of import, category of goods etc but for the most part, the documents required are the following:
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Export Finance
Invoices
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Packing list
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Certificate of Origin: International sale contracts usually require a document certifying the country of origin of the goods, which is necessary to determine import duties payable in the country of import.
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Mates Receipt: Mates receipt is a document issued by the Chief of the vessel after the goods are loaded. It contains details such as the name of the shipping line, name of the vessel, port of loading and discharge, description and condition of the goods. The Mates Receipt is transferable and it must be presented at the shipping Companys office to collect Bill of Lading after shipment.
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Export Finance
Bill of lading: Bill of Lading is a document issued by the Shipping Company (or its agent) acknowledging the receipt of goods for shipment on board the vessel, and undertaking to deliver the goods as received, to the consignee or his order, provided that the freight and other charges as specified in the Bill of Lading have been duly paid. It is prepared in the standardized Aligned Document Format. Bill of Lading is a Negotiable Instrument. It is generally prepared in a set of three originals. All the three must be marked ORIGINAL. All the Originals are duly signed by the master of the ship or on his behalf and all the originals are equally valid for taking delivery of the goods. Therefore a Bill of Lading is: a formal receipt by the ship-owner or master of the ship a memorandum of the contract of carriage a document of title to the goods
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Shipping bill: This document is issued by Customs and it certifies custom clearance. A copy of shipping bill is sent to the exporters bank as a post shipment document. It contains details about the goods such as: Indicate the date and place of issuance Name and mode of the carrier Name of the consignor and consignee A brief description of the goods being carried Indicates the port of loading or taking in charge Indicates the port of discharge FOB value of goods in both foreign currency as well as domestic currency Amount of freight & insurance paid, if any. Invoice number and Forex account number.
In case of export by sea or air, this document is termed 'Shipping Bill', and in case of export by road it is called the 'Bill of Export'.
There are 5 types of shipping bills: (i) Shipping Bill for export of duty free goods which is white in colour. (ii) Shipping bill for export of goods under claim for duty drawback which is Green in colour. (iii)Shipping bill for export of duty free goods ex-bond i.e. from bonded warehouse. This is pink in colour. (iv) Shipping Bill for export of dutiable goods which is yellow in colour. (v) Shipping bill for export under DEPB scheme, which is blue in colour. Shipping Bill and Bill of Export Regulations prescribe form of shipping bills. It should be submitted in quadruplicate. If drawback claim is to be made, one additional copy should be
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Export Finance
submitted. Customs authorities give a serial number (called 'Thoka Number') to the shipping bill, when it is presented.
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A.R.E. From 1 & 2 : Approval for Removal of Excise
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Forwarders Cargo Receipt: This is a document issued by the importers nominated forwarding agent confirming receipt of the goods/merchandise mentioned there in. This is in accordance with the arrangement between the importer and the forwarder for Order Management which includes receiving goods from various vendors, consolidation of goods at origin port, arranging shipment of the goods to the named port at destination, initiating custom clearance and transporting the cargo to the required warehouse / store as per importers requirement. Continuing with the pre-export procedure, once the goods have been produced and are ready for shipment, a customs invoice is prepared by the exporting company which is sent to the Custom House Agents (CHA) or clearing agent. This is necessary since it is the first step in the process of getting the goods cleared by Customs authorities. It is prepared on a form being presented by the customs authorities of the importing country and allows for the entry of goods at a preferential tariff rate. At the same time the shipping bill is prepared by the shipping company and is the most important document required by Customs authorities to allow shipment. Customs checks all the documents and 10% of the goods. Following such examination they return 2 copies of Invoice and packing list. The GR form is sent to RBI by customs and the original copy with the exporter is sent to negotiating bank. The clearing agent then prepares the Bill of Lading draft on the basis of specimen given by the exporter and the same is forwarded to the shipping company. The shipping company checks the relevant details such as whether the goods are loaded or not and verifies whether the specifications of the loaded goods match with the details in shipping bill & draft. On verification of documents and after receiving all their charges in full, the shipping company issues the Bill of Lading. The CHA collects the Bill of Lading from the shipping company duly signed.
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Export Finance
Once this exercise is complete, the following documents are handed over to the exporter which completes the procedures required at the pre-shipment stage. Invoice/Packing List Purchase Order Generalized System of Preferences Certificate of origin Shipping Bill ARE1&2 GR/SDF form L/C
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Export Finance
Shipment of Goods:
Shipment process
< T
Order confirmed & eitheLC opened in beneficiarys favour
G
Upon receipt of either advance or LC, beneficiary initiates production planning
After production and completing documentation, material is despatched to load port, ready for shipment
Export Shipment Procedure
Once the pre-shipment procedures are complete shipment of goods becomes the next stage in the export process. For carrying out the procedures related to shipment of goods, selection of a freight forwarding agent is very important. Freight Forwarder: An international freight forwarder is an agent for the exporter in moving the export goods to an overseas destination. Freight forwarders assist exporters in preparing price quotations by advising on freight costs, port charges, consular fees, costs of special documentation, insurance costs, and their handling fees. Once the order is ready for shipment, freight forwarders should review all documents to ensure that everything is in order.
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Export Finance
The cost of the shipment, the delivery schedule, and the accessibility to the shipped product by the foreign buyer are all factors to consider when determining the method of international shipping. Broad categories of export shipments are: Under claim of Drawback of duty Without claim of Drawback Export by a 100% Export Oriented Unit Under Duty Entitlement Pass Book (DEPB) Scheme Largely, the following procedure may be followed for shipment of goods: Submit documents to Freight Forwarder, instructing him to book space on the steamer/ airline. The Exporter is expected to provide the following documents to the Clearing & Forwarding Agents, who are entrusted with the task of shipping the consignments, either by air or by sea. Invoice Packing List Declaration in FORM SDF (to meet the requirements as per FEMA) in duplicate. A.R.E. - From 1 and 2 copy Any other declarations, as required by Customs On account of the introduction of Electronic Data Interchange (EDI) system for processing shipping bills electronically at most of the locations - both for air or sea consignments - the C&F (Clearing & Forwarding) Agents are required to file with Customs the shipping documents, through a particular format, which will vary depending on the nature of the shipment. The C&F agents are also charged with the task of getting Shipping Bill/ Bill of Export passed by Custom
Export Finance
Authorities (obtaining customs authorities LET EXPORT (LEO) endorsement on the shipping bill). After completing the shipment formalities, the C & F Agents are expected to forward to the Exporter the following documents: Customs endorsed Export Invoice & Packing List Duplicate of Form SDF Exchange control copy of the Shipping Bill, processed electronically A.R.E. (original & duplicate) duly endorsed by Customs Bill of Lading or Airway bill, as the case may be Once the goods have been shipped, exporter is required to send a Shipment Advice in aligned format to the importer intimating the date of shipment of the consignment by a named vessel and its expected time of arrival at the destination port.
Export Incentive Schemes: Advance Authorization Scheme Inputs required for production of goods are often imported by exporters. In order to provide an incentive for export companies to flourish, the Government, through this scheme allows duty free import of inputs which will be incorporated into the exported product. Since the raw materials are imported before the export of the final product this scheme is termed Advance Authorization Scheme. However prohibited items of import cannot be imported under this scheme. The imports of raw materials are permitted on the basis of standard input-output norms (SION). The SION are finalized and quantity allowed to be imported will be based on quantity exported. The Advance Authorization issued would contain details such as the description, value and quantity of each item permitted against it and also the export obligation to be fulfilled. Validity of such authorization is 24 months from date of issue. Once the export obligation has been fulfilled, it can be revalidated for a period of 6 months on payment of a composition fee of 1%.
Export Finance
The export obligation period under advance authorizations which was 18 months has currently been extended to 36 months w.e.f. Feb 26th, 2009 due to the downturn in the global economy currently. Duty Entitlement Passbook Scheme DEPB is another export incentive scheme under which the exporter is given duty entitlement credit at pre-determined rates on the FOB value of the goods exported or the value-cap for that category of goods, whichever is lower. The DEPB scheme initially consisted of both (a) Pre-export DEPB and (b) post-export DEPB scheme. Currently however, only the latter is applicable, the pre-export scheme having been abolished w.e.f. April 1st 2000. The intension of this scheme is to neutralize the impact of customs duty on the import content of an exported product. The exporter is given a Duty Entitlement Pass Book with the respective credit which is valid for 12 months from the date of issue. The duty credit under this scheme is calculated by taking into account the deemed import content of said export product as per the SION. The duty entitlement credit can be used either to meet the incidence of customs duty on imports or it can be freely transferred to an importer in exchange for consideration. However this transfer of DEPB is applicable only for imports at the specified port from which exports have been made. Imports from any other ports are allowed under Telegraphic Release Advice (TRA) facility as per the terms and conditions of Department of Revenue notification. Export Promotion Capital Goods Scheme (EPCG): This is another export incentive scheme that was brought into effect to lower import duty on products that would be used to manufacture in export products. It allows for import of capital goods such as machinery at a mere 5% customs duty subject to an export obligation equivalent to 8 times of duty saved on such import. The export obligation should be fulfilled within a period of 8 years from Authorization issue-date. In cases where the duty saved on such imports is in excess of Rs. 100 crore, the export obligation must be fulfilled over a period of 12 years. Second hand machinery can also be imported under this scheme. Furthermore capital goods imports are also allowed for zero duty for exports of agricultural products.
Export Finance
EPCG at ALOK Alok is a manufacturing industry which imports capital goods like machinery from different part of world. ALOK tries its best to take the advantage of this scheme. It is availing this scheme for a long time is fully able to maintain the average as mentioned in the scheme by law makers. Not only this on going through its document its very clear that is it successfully fulfilling the export obligation. In some of the years, ALOK was not able to fulfill the obligation but the clause in the law regarding clubbing of previous years export with current year helped this industry to be in line with the needful. Duty Drawback: Drawback means the rebate of duty, chargeable on any imported materials or excisable materials used in manufacture or processing of goods, which are manufactured in India and exported. It is similar to the above mentioned schemes in terms of the intention i.e. reducing the incidence of import duty, but in this case the duty is not reduced on import but can be claimed as a rebate at a later stage. Duty Drawback is applicable to (a) customs duty paid on imported inputs (b) excise duty paid on indigenous inputs. Duty paid on packing material is also eligible. If customs/excise duty is paid on part of inputs or rebate/refund is obtained, only that part on which duty is paid and on which rebate/refund is not obtained will be eligible for drawback. No drawback is available on other taxes like sales tax and octroi. STATUS HOLDER Status holder is not a direct incentive but it is a t ype of differentiation done by the government to provide facilities to companies having more exports and thus having more export related needs. Grant Of Status:
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Export Finance
Application has to be given to concerned regional licensing authorit y headed by joint DGFT. It is granted on the basis of performance during current & previous 3 years are considered. Privileges of Star Export House Exemption of compulsory negotiation of documents through banks Exemption from furnishing bank guarantee Enhancement in normal repatriation period 100% retention of foreign exchange in export earned foreign currency account. Easy and cheap procurement of finance from banks .
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Export Finance
POST-SHIPMENT: Shipment Takes Place
Loading takes place and mate receipt is issued
BL is received from the shipping company
Bank Documents 1. 2. 3. 4. Invoice Packing list Bill of exchange Certificate of origin 5. FCR/LR/Airway Bill 6. Bill of Lading
Post Shipment
Bank docs are prepared and submitted
Negotiating bank scrutinizes and send docs to issuing bank
Payment is received by exporters bank.
BRC received from the bank.
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Export Finance
Once the goods have been shipped the transportation documents such as mates receipt are submitted to the exporter by the clearing agent. This will later be exchanged for the bill of lading. Upon receipt of these documents, the exporter sends a shipment advice to the importer to inform him that the goods have been shipped, the date of shipment, name of vessel, destination port and other relevant details. The next step is the preparation of documents that are required to be sent to the importer for claim of payment under the L/C terms. Thus the commercial invoice, certificate of origin, packing list are drawn up. Most of these documents would already have been prepared during the previous stages. The documents required would vary depending on the terms of the L/C but for the most part the documents required are: (i) The packing list (ii) The bill of lading (iii)The certificate of origin (iv) The commercial invoice. After an internal audit and examination these documents will be submitted to the exporters bank (negotiating bank) which will forward them to the importers bank to claim the proceeds. When the negotiating bank receives payment, it will remit the proceeds to the exporter and issue, to the exporter, a Bank Realization Certificate (BRC) which proves that the proceeds have been realized. A copy of the complete set of documents is also forwarded to the accounts department for sales booking. Although this completes the procedure with regard to export of the goods and receipt of payment, there still remains the task of claiming duty drawbacks and rebates as may be applicable. For this purpose the exporter must obtain the EP/DEPB copy of shipping bill and A.R.E. forms/Excise Invoice from the clearing agent. This would enable the exporter to claim for incentive (Duty Drawback/DEPB) with the appropriate authorities. (DGFT/Customs).The proof of shipment must also be submitted to the excise authorities for release of bond or claim of rebate. It is also important to monitor export obligation that must be fulfilled under EPCG/Advance Authorization schemes and compliance of policy requirements from time to
Export Finance
time. Payments to agent of commission etc must also be made at this stage. Freight, Clearing and Consultancy bills must be processed and forwarded to accounts for payment. This effectively completes the entire shipment procedure from beginning to end. Risk in Export Finance Before moving on to discuss the various export financing instruments that aid the exporter, both as a means of raising capital and risk mitigation, it is essential to understand the risks that the exporter exposes himself to in a trade contract. International trade has always been a profitable activity and one with vast opportunities, but it is not without a significant degree of risk. These risks which are vastly different than the ones faced in the domestic markets are not completely avoidable. Thus the impetus must be placed on minimizing them, which is the key to success in the export business. While the focus of this section of the report is on listing out and explaining the various risks that one can encounter in the export business, the following section is entirely devoted to risks mitigation strategies that are widely used by export houses in India and internationally to cover their exposure to such threats. The following are the various risks an exporter faces in international trade: i. Political Risk ii. Commercial Risk iii. Transportation Risk iv. Exchange Rate Risk Political Risk Political Risk comes into the picture when the importing country is faced with political instability, including wars, insurgency etc. While this may seem innocuous at first, it can lead to default on payments by the buyer, imposition of emergencies which could lead to confiscation of property by the government, changes in regulations and in dire circumstances even trade, currency blockages and revoking of import/export licenses. It is therefore imperative to determine a countrys political and economic stability before choosing to do business wit h it. Political instability is often a precursor to economic and financial instability in the country. This has equally disastrous consequences, such as currency fluctuations which results in reduced profits to an exporter.
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3.2. Commercial Risk Commercial Risk is the risk of default on payment by the buyer for reasons other than political or economic instability in the country, such as insolvency. Prior to entering a new market or seeking potential buyers, exporters usually conduct a thorough research on the buyer such as their credit ratings, relations with current trading partners etc, and thus, insolvency of the buyer should not be a common reason for default by the buyer. On the other hand, as was witnessed during the recent sub-prime crisis, banks and financial institutions with seemingly impeccable credit ratings went under. There is therefore no guarantee that even with thorough research commercial risk can be entirely avoided and proper precaution such as insurance covers is advisable. 3.3. Transportation Risk Transportation risk is simply the risk of damage to the goods during transit. This is usually covered through insurance, by either the buyer or the seller as decided in the contract (Inco terms). Around 80% of international trade is carried out through the sea. 3.4. Exchange Rate Risk Exchange rate risk is the risk that an exporter faces due to fluctuations in currency rates. As mentioned above, unfavorable fluctuations can adversely affect the exporters returns and consequently his profit margin. While depreciation in domestic currency can be beneficial to exporters, an appreciation in the same can eat into the gross margin of the exporter on contracts currently under execution, and also reduce his ability to generate more contracts in the future. In order to better grasp this, let us take a hypothetical example. An exporter produces goods worth 2000 Rs and exports them at a selling price of Rs 2100, with a time draft for payment to be made 3 months hence. At the time let us say the dollar/rupee exchange rate was at 1 dollar = 50 rupees. At this exchange rate the importer would have been billed for $42, i.e. 2100/50. Three months later due to fluctuations in the currency market the rupee appreciates to Rs 30 per dollar. At the time of payment the importer pays in full the amount of $42. However the exporter receives only Rs 1260, i.e. 42 x 30 in the domestic market, at the current exchange rate.This results in a loss to the exporter of Rs 840, i.e. 2100-1260.
Export Finance
In order to improve his sales revenue the exporter would have to increase his selling price and in this effort would be brushed aside by competition from exporters in other countries where the fluctuations have not been as unfavorable. This is the threat caused by fluctuating exchange rates. While the risks mentioned previously (political, commercial, transport risks) are clearly a cause for concern, probably the most ubiquitous of all the risks is that of fluctuations in exchange rates. The reason being that while other risks occur only in certain cases, fluctuations in exchange rates occur regularly due to the presence of an active currency market, making it that much more essential to have a well planned and implemented strategy to combat this risk. This is usually handled by the treasury department of an organization.
The Exporters Dilemma Having discussed the various modes of payment, it is essential to recognize the dilemma faced by the exporter in the market. Limited access to financing can dangerously hinder the trade and export potential of an economy, especially emerging market economies for which trade is an integral component of their growth strategy. The reason for placing such importance on trade financing is because exporters require adequate short term financing (working capital) to augment their trading activities, since the goods must be manufactured before payment is made by the importer, who generally makes payment only once he is in possession of the goods or even a few days after, but rarely, if ever, in advance. This is known as pre-shipment financing. Pre-shipment financing comes in the form of short-term loans, overdrafts and cash credits. Conversely post-shipment financing ensures sufficient liquidity until the importer receives the goods and the exporter receives the payment for the same. This is also short term in nature. The dilemma faced by exporters is that with the proliferation of competition in the world, importers have become increasingly demanding and insist on attractive payment terms, which presents the exporter with a tricky situation to deal with. Over the years, a number of trade financing instruments and methods of payments have been designed to cater to this very need. These financial instruments can come to the rescue of the exporter and a large portion of the risk can be mitigated even as the importers are offered attractive payment terms with a view to expand markets abroad.
Export Finance
EXPORT FINANCE AND RISK MITIGATION As mentioned previously, it is essential to be able to comprehend which financing option can be made use of in a particular situation, but this by itself is not enough to survive in the global scenario. With globalizing kicking in, competition is fierce, as a result of which it is not always possible for an exporter to get his way with the customer. The exporter must be prepared to offer more attractive terms than his competitor which may not always be in his best interests. Thus, although a particular mode of financing would be more advantageous to him, he must be prepared to make compromises in order to satisfy and win customers. Clearly, this puts the exporter at a disadvantage, since it brings in a greater degree of risk than he might have been prepared for initially. However, at such a time, it is the knowledge of the various risk mitigating options that allow him to get the advantage back, while at the same time expanding his export business. In the previous sections we have studied export finance from the point of view of the various modes of payment that the exporter has at his disposal. This section focuses on export finance from the point of view of the credit facilities extended to the exporters at pre and post shipment stages. It deals with credit extended to the exporter for financing the purchase, manufacture and packing of goods intended for overseas markets.
Pre-shipment Finance: The pre - shipment credit meets the working capital needs of an exporter at the preshipment stage. When an exporter receives an export order, the goods to be exported may not be readily available with him for shipment. He has to purchase the raw materials/semi-finished goods, process/manufacture the same, or may procure the goods from their suppliers, pack them and dispatch them to the port town. The funds required for all these purposes are called preshipment credit. Banks provide pre-shipment credit after taking into consideration all factors relevant for granting credit. But the basis of granting such credit is: A letter of credit opened by the importer in favor of the exporter, or
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Export Finance
A confirmed and irrevocable order for the export of goods from India, or any other evidence of such an order.
The following points are taken into account while granting pre-shipment credit: Pre-shipment credit is to be granted for the period which is sufficient to meet the needs of the exporter. But if the period of credit exceeds 180 days, no refinance will be granted by the Reserve Bank of India. If the pre-shipment advance is not adjusted by submission of export documents within 360 days, the advance will not remain eligible for concessional rate of interest. Packing credit may be released in one lump sum or in installments as required by the exporter. Banks must monitor the end-use of the funds and ensure their utilization for genuine requirement of exports. Pre-shipment credit must be liquidated out of the proceeds of the export bill on its purchase, discount etc by the banker. Thus the pre-shipment credit must be converted into post-shipment credit. In some cases, exporters need packing credit in anticipation of receipt of letters of credit/firm export order from importers. This happens when the raw materials are seasonal in nature or when the manufacturing time is greater than the delivery schedule. In such cases, banks may extend Pre-Shipment Credit Running Account facility and grant credit taking into account the exporter's needs and without insisting on firm export order or letter of credit.
Eligibility Packing Credit is extended to an exporter against a letter of Credit (preferably) or a confirmed export order in favour of the exporter, within his predetermined credit limit. Though the bankers insist that the exporters provide them with a confirmed export order (in the least) along with their PC application, it is at the discretion of the bankers to grant PC even on the basis of correspondence between the exporter and overseas buyer.
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Period of Credit The PCFC will be available as in the case of rupee credit initially for a maximum period of 180 days; any extension of the credit will be subject to the same terms and conditions as applicable for extension of rupee packing credit and it will also have additional interest cost of 2 per cent above the rate for the initial period of 180 days prevailing at the time of extension. Further extension will be subject to the terms and conditions fixed by the bank concerned and if no export takes place within 360 days, the PCFC will be adjusted at T.T. selling rate for the currency concerned. In such cases, banks can arrange to remit foreign exchange to repay the loan or line of credit raised abroad and interest without prior permission of RBI. For extension of PCFC within 180 days, banks are permitted to extend on a fixed roll over basis of the principal amount at the applicable LIBOR/EURO LIBOR/EURIBOR rate for extended period plus permitted margin (0.75 per cent over LIBOR/EURO LIBOR/EURIBOR).
Liquidation of PCFC Account I. General PCFC can be liquidated out of proceeds of export documents on their submission for discounting/rediscounting under the EBR Scheme or by grant of foreign currency loans (DP Bills). Subject to mutual agreement between the exporter and the banker it can also be repaid/prepaid out of balances in EEFC A/c as also from rupee resources of the exporter to the extent exports have actually taken place.
II. Substitution of order/commodity Repayment/liquidation of PCFC could be with export documents relating to any other order covering the same or any other commodity exported by the exporter. While allowing substitution of contract in this way, banks should ensure that it is commercially necessary and unavoidable. Banks should also satisfy about the valid reasons as to why PCFC extended for shipment of a particular commodity cannot be liquidated in the normal method.
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As far as possible, the substitution of contract should be allowed if the exporter maintains account with the same bank or it has the approval of the members of the consortium, if any.
Choice of Packing Credit Packing Credit can be availed as either Rupee PC or PCFC (packing credit in foreign currency)
Packing credit in Indian Rupees This, as the name suggests is a rupee advance. Let us look at it with a practical example. XYZ Exports having a confirmed order of USD 100,000 decides to take a rupee advance to process their order. Assuming the FOB value of this order is $90,000, the bank would extend a rupee advance of $90,000 times Rs.46 (notional value) = Rs. 41,40,000. Two accounts at this juncture gets affected a debit to his packing credit account and credit to his CC account, to the above extent. The interest liability on the above advance as on date is at 1 1/2 % below tenor related PLR. This credit is retired when an export document to this extent is presented to the bank.
Packing Credit Foreign Currency (PCFC) Commercial banks are also free to extend packing credit in foreign currencies (as of now in 5 major currencies USD, EURO, JPY, CHF, GBP). This scheme is designed to ensure export credit being made available at internationally competitive rates in major currencies. Considering the above case again, XYZ Exports has a choice to draw his packing credit in USD or any of the above currencies (to an equivalent extent). $90000 will be given to him at a notional exchange rate. If exporter avails PCFC in invoicing currency (in this case USD) and chooses to convert PCFC into rupees and have his CC account credited, conversion is done at the ruling spot rate or a pre-contracted forward rate. On the other hand, if PCFC is in a currency other than invoicing currency (say Euro), the (Rupee) amount to be disbursed will be determined on the basis of a notional exchange rate. Once the corporate presents an export bill, the above PC in foreign currency gets knocked off in foreign currency terms. Here, the interest liability of the exporter is on libor related rates;
Export Finance
i.e. libor of the currency in which he has availed advance + bank spread. RBI, however has advised the commercial banks to keep their spread / bank margin below 1 % p.a.
Salient features and comparison of PC (Re) and PCFC: 1. Both of the above can be maintained as running account at banks discretion. 2. The interest liability on Rupee PC is, say, 10%. However as in the above case, since the exporter has an asset (export receivable) in USD and a liability (export credit) in rupee he runs a foreign exchange risk; hence he is permitted to cover his receivable. Dollar being at a premium to rupee, he receives a premium of say 4% p.a., thus reducing his net cost to 6%. He may choose to keep his risk /position uncovered based on his view on USD/Re. If, in fact the rupee weakens to more than 4% annualized before he retires his PC, his effective cost of PC would come down further (below 6%). 3. The interest liability on Packing Credit Foreign Currency varies depending on the currency in which the exporter borrows. In case of PC in USD, the interest liability is subject to a maximum of 3.00% (USD 6 mths Libor) + 1.0% (cap by RBI) = 4.00% as on date. In this case, the exporter has both asset (export receivable) and liability (export credit) in Dollar terms. In this respect, he runs no currency risk to the extent of the advance. Hence the exporters effective cost would be as above i.e. 4.00%. If any of the above parameters change then the arithmetic will have to be reworked. 4. In PCFC, it is to be noted that an exporter with an export order in USD can borrow in Euro or any other permitted currency. Here, he would encounter an asset liability mismatch and hence allowed to take a cross currency cover. On one hand company seeks growth & on the other hand the demand to reduce costs never goes away. The company tries to find a way to do both, simultaneously. While opting for different means of finance either PCFC or RPC companies usually take two things into consideration first the low interest rate & second flexible repayment options. From the following example we can understand how company can reduce its cost. Suppose the company requires USD 1 lakh & interest rate for PCFC is 4.99% (which includes LIBOR 0.47% plus 200 basis points plus 2.50% of other charges & the interest rate for RPC is 7%.Also assume that the exchange rate is INR 46.96/USD & the credit period is 6 months. In
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Export Finance
case of PCFC interest amount comes out to be Rs 117165 & that of RPC is Rs 164360.So the company would prefer PCFC, as it can save Rs 47195 from it.
PROCESS OF AVAILING PACKING CREDIT FINANCE AT ALOK: Finance department receives the orders from various department i.e. Home Textile, Garments, Yarn, Woven Knits. Orders already in hand are checked with their execution date & payment terms. Then the limits available in banks for disbursement of packing credit are checked. If the limits are available with banks then available orders along with the application for disbursement of fund is send. In some cases orders are send within one month of disbursement of fund. The disbursed packing credit is credited to the CC account or current account of the bank & the same is informed to the treasury department. The advice of disbursed packing credit is received & the same is checked for the applicable rate of interest, exchange rate (in case of PCFC) & maturity.
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Export Finance
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Export Finance
POST-SHIPMENT CREDIT The need for post-shipment credit arises after the exporter has shipped the goods and has secured the shipping documents, such as bill of lading, etc. Now, the concern of the exporter is to realize his dues from the foreign importer. This is invariably done by drawing a bill of exchange on the importer. The bill may be drawn either on Documents Against Acceptance (D/A) basis or on Documents against Payment (D/P) basis. In the former case, the importer takes delivery of the documents by giving his acceptance on the bill, sent to him through the exporter's banker. Thereafter he takes delivery of the goods from the shipping company and makes payment of the accepted bill on its due date. In case the bill is drawn on D/P basis the documents are released to the importer at the time he makes payment of the bill to the exporter's bank, on its presentation. Exporter's bank provides post-shipment advance to the exporter in either of the two ways, viz, By purchasing, discounting or negotiating the export bills, By granting advance against bills for collections. Thus, post-shipment credit is liquidated by the proceeds of the export bills when received from the importer by the exporter's bank. Banks also grant advances to the exporters against duty drawback which he has to receive from the government. Such advance is liquidated when the amount of duty drawback is received by the exporter.
Eligibility As per packing credit
Quantum Post shipment credit / advance is restricted to the extent of value of the export bill against which the advance is sought.
Period of Credit The period for which the post shipment credit is given is based on the payment terms of the export bill. For instance, if the payment terms are CAD, bill purchased by bank (EBP) the credit is extended for notional transit period. RBIs Exchange Control Manual specifies notional transit period based on the country to which export is made. In case of DA bills (non-LC bills with usance) the period of credit will be that of Usance + notional transit period.
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Export Finance
Where the credit period is specified to commence from B/L date, the due date is known and PSC is granted till the due date. However, if usance period commences from date of acceptance, normal transit period is included to arrive at the due date. It is also to be noted that PSC account, is always maintained on bill to bill basis and not as a running account.
Extension of credit period Post shipment export credit period is based on the payment terms of the export bill. However for any reason if the exporter is forced to extend the credit period to his overseas buyer it is mandatory that the exporter seeks an extension. If the reasons for extension are valid then the authorized dealer can grant an extension up to a maximum period of 180 days (inclusive of original credit period) from the date of shipment. If extension is sought for a period that will exceed 180 days from shipment, permission has to be obtained from RBI, through the authorized dealer. There are two important aspects to be considered here; 1. For the extended credit (period) the bank is free to charge interest rates related to their PLR 2. As a general practice, Post shipment rupee credit is granted by discounting the export bill. In such a case, if the realization of export proceeds get delayed - extension of post shipment credit may be granted by the banker or RBI as the case may be, on request from the exporter ; but the bill will be crystallized , one month (grace period) from the actual due date.
Crystallization of Export Bills The exporter while discounting an export bill is committed to deliver foreign exchange on its due date; where an extension is sought for in realizing the export proceeds bank allows a grace period of 1 month from the actual due date for the exporter to fulfil his commitment. After which period the bank procures an equivalent foreign exchange from the market on behalf of the exporter. The difference in rates the rate at which the exporter had sold his foreign exchange originally and the rate at which it is bought from the market (to fulfil his commitment) is debited to the exporters account.
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Illustration: To illustrate the above, let us assume an exporter discounting his bill of $100,000 with realization period of 25days; the spot being 42.45 and 25 days premium 10 paisa . The bank would purchase the bill and extend a PSC of RS. 42.55 lacks = ($100,000*(42.45+0.10)). Exporter has a commitment to deliver $100,000 within 25 days from the date of discount. Any of the following scenarios is a possibility. 1. The exporter may realize his proceeds within 25 days in which case his PSC gets retired / knocked off and his interest liability is limited to the no. of days for which he has utilized the PSC 2. The exporter may have received his export proceeds neither within the original credit period (25days) nor within the grace period (30 days from 25 days). In which case, in the above illustration, bank would crystallize the export bill on 55th day from discounting. a) Assuming the rate on 55th day to be 46.70 / USD, then the cost to exporter is a. RS 0.15 /USD or Rs.15000 against USD 100000 is recovered from the exporter. Plus b) Interest for first 25 days at PSC interest rate and for further period (till proceeds are realized) at penal rate specified by the bank is recovered from the exporter Assuming the rate on 55th day to be 42.40 / USD, then the cost to company is a. The bill is crystallized at a no debit - no credit in spite of positive difference of Rs.0.15 in favour of exporter for the simple reason that the bill is crystallized and not cancelled. i.e. if the exporter informs the bank about the probable delay in realizing the export proceeds within the original credit period (25 days) and requests for cancellation along with request for extension, any positive difference in exporters favour will be credited to the exporter.
Salient features of Post Shipment Credit 1. Interest on Post Shipment Credit is the same as PC. 2. PSC is usually granted by purchasing or discounting an export bill. However some banks grant PSC as advance against bills sent under collection.
PROCESS OF AVAILING POST - SHIPMENT FINANCE AT ALOK:

Export Finance
Export L/C's are collected by finance department which is scrutinized and entered into the system. A copy of L/C along with a checklist is sent to respective merchandiser & department head and one copy to export documentation fro the confirmation of the L/C terms & original being retained by the finance department. The original L/C is sent to the bank along with export documents that are sent for negotiation/ purchase/ discount/ collection. The documents are normally negotiated/ purchased or discounted & sent for collection in some cases only. Bank negotiates the documents backed by L/C that are in strict conformity to the L/C terms. The proceeds of the same are credited as per the instructions given to the bank by the finance department. Bank purchases the documents which are on Delivery against Cash (CAD)/ Documents against Payment (DP sight)/ L/C sight (incase the discrepant documents). The proceeds of the same are credited as per the instructions given to the bank by the finance department. Bank discounts the documents which are on deferred payment basis i.e. Documents against Acceptance (DA 60, 90 days)/ L/C sight 30, 60, 90, 120 days/ L/C 30, 60, 90, 120 days from BL date. The proceeds of the same are credited as per the instructions given to the bank by the finance department.
APPLICATION OF INTEREST RATES The revision in interest rates made from time to time is made applicable to fresh advances as also to the existing advances for the remaining period of credit. 1. Interest on Pre-shipment Credit Banks should charge interest on pre-shipment credit up to 180 days at the rate to be decided by the bank within the ceiling rate arrived at on the basis of BPLR relevant for the entire tenor of the export credit under the category. The period of credit is to be reckoned from the date of advance. If pre-shipment advances are not liquidated from proceeds of bills on purchase, discount, etc. on submission of export documents within 360 days from the date of advance, the advances will cease to qualify for concessive rate of interest ab initio
Export Finance
In cases where packing credit is not extended beyond the original period of sanction and exports take place after the expiry of sanctioned period but within a period of 360 days from the date of advance, exporter would be eligible for concessional credit only up to the sanctioned period. For the balance period, interest rate prescribed for 'ECNOS' at the preshipment stage will apply. Further, the reasons for non-extension of the period need to be advised by banks to the exporter. In cases where exports do not take place within 360 days from the date of pre-shipment advance, such credits will be termed as 'ECNOS' and banks may charge interest rate prescribed for 'ECNOS' pre-shipment from the very first day of the advance. If exports do not materialize at all, banks should charge on relative packing credit domestic lending rate plus penal rate of interest, if any, to be decided by the banks on the basis of a transparent policy approved by their Board.
2. Interest on Post-shipment Credit Early payment of export bills In the case of advances against demand bills, if the bills are realized before the expiry of the normal transit period (NTP), interest at the concessive rate shall be charged from the date of advance till the date of realisation of such bills. The date of realisation of demand bills for this purpose would be the date on which the proceeds get credited to the banks' Nostro accounts. In the case of advance/credit against usance export bills, interest at concessive rate may be charged only up to the notional/actual due date or the date on which export proceeds get credited to the banks Nostro account abroad, whichever is earlier, irrespective of the date of credit to the borrower's/exporter's account in India. In cases where the correct due date can be established before/immediately after availment of credit due to acceptance by overseas buyer or otherwise, concessive interest can be applied only up to the actual due date, irrespective of whatever may be the notional due date arrived at, provided the actual due date falls before the notional due date. Where interest for the entire NTP in the case of demand bills or up to notional/actual due date in the case of usance bills as stated above, has been collected at the time of negotiation/purchase/discount of bills, the excess interest collected for the period from the
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date of realisation to the last date of NTP/notional due date/actual due date should be refunded to the borrowers.
3. Overdue Export Bills In case of export bills, the rate of interest decided by the bank within the ceiling rate stipulated by RBI will apply up to the due date of the bill (up to NTP in case of demand bill and specified period in case of usance bills). For the period beyond the due date viz. for the overdue period, the rate fixed for ECNOS at Post-shipment stage will apply and no penal interest should be charged additionally.
4. Interest on Post-shipment Credit Adjusted from Rupee Resources Banks should adopt the following guidelines to ensure uniformity in charging interest on post-shipment advances which are not adjusted in an approved manner due to non-accrual of foreign exchange and advances have to be adjusted out of the funds received from the Export Credit Guarantee Corporation of India Ltd. (ECGC) in settlement of claims preferred on them on account of the relevant export consignment:
In case of exports to certain countries, exporters are unable to realise export proceeds due to non-expatriation of the foreign exchange by the Governments/Central Banking Authorities of the countries concerned as a result of their balance of payment problems even though payments have been made locally by the buyers. In these cases ECGC offer cover to exporters for transfer delays. Where ECGC have admitted the claims and paid the amount for transfer delay, banks may charge interest as applicable to 'ECNOS'-postshipment even if the post-shipment advance may be outstanding beyond six months from the date of shipment. Such interest would be applicable on the full amount of advance irrespective of the fact that the ECGC admit the claims to the extent of 90 percent/75 percent and the exporters have to bring the balance 10 percent/25 percent from their own rupee resources.
In a case where interest has been charged at commercial rate or 'ECNOS', if export proceeds are realised in an approved manner subsequently, the bank may refund to the
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borrower the excess amount representing difference between the quantum of interest already charged and interest that is chargeable taking into account the said realisation after ensuring the fact of such realisation with satisfactory evidence. While making adjustments of accounts it would be better if the possibility of refund of excess interest is brought to the notice of the borrower.
5. Change of Tenor of Bill In terms of para C.14 of the AP DIR series Circular No. 12 dated 9th September2000 issued by RBI (FED), banks have been permitted, on request from exporters, to allow change of the tenor of the original buyer/ consignee, provided inter alia, the revised due date of payment does not fall beyond six months from the date of shipment. In such cases as well as where change of tenor up to six months from the date of shipment has been allowed, it would be in order for banks to extend the concessional rate of interest up to the revised notional due date, subject to the interest rates Directive issued by RBI.
PERIOD OF CREDIT Export bills are of two types.
DEMAND BILLS Demand bills represent those bills which are payable on demand or on presentation before the importer. In case of demand bills, the banker grants an advance to the exporter, but the period of advance should not exceed the normal transit period i.e. the average period normally involved from the date of purchase/ discount of the bill till the receipt of the proceeds of the bill by the bank. Such advance is thus automatically liquidated with the realization of the export bills.
USANCE BILLS Usance bills represent those bills which mature after a period of time. In case of usance bills banks grant credit for a maximum period of 180 days from the date of shipment inclusive of normal transit period and the grace period. Such bills are presented for acceptance before the importer and thereafter it is retained by the bank concerned. On its due date it is presented again before the acceptor for its payment. There are two methods of dealing with such bills
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Purchase or discounting of the bills and Collection of the bills.
PURCHASE / DISCOUNTING OF BILLS: In case of purchase of documentary bills by the exporter's banker, it is usual for the latter to give immediate credit for the bills. An amount by way of discount, fee, interest, etc, is charged by the banker from the amount of the bill and the remaining amount is immediately made available to the exporter (drawer of the bill). This facility is generally granted in case where the standing of the exporter is good and he is considered credit-worthy for the amount of the bill, because in case the drawee of the bill refuses to honour the bill, the banker shall be entitled to recover its amount from the drawer exporter. If the banker is unable to recover the amount of the bill from the exporter also his ultimate remedy would be to realize it by disposing off the goods exported. Therefore while Purchasing/discounting the export bills, the banker takes into consideration the nature of the goods covered by the bills, the nature of its demand and the possibilities of variations in its price. Moreover, the exporter is required to take a suitable guarantee issued by the Export Credit Guarantee Corporation. In addition to the above, the banker also takes into account the foreign exchange regulations in the importer's country and purchases the export bill if the importer's country has not imposed any restrictions on making such payments. The banker also examines the documents enclosed with the bill and ensures that they are genuine and are in order.
COLLECTION OF BILLS The banker collects the foreign bills on behalf of the customer in the same way as in the case of home trade: In case the exporter sends to his banker export bills for collection, the latter proceeds according to the instructions given by the exporter drawer and makes its payment to him as and when the proceeds of the bill are realized from the importer. Obviously, in case of collection of bills, the banker does not grant any advance to the exporter immediately on receipt of the bills for collection. Such practice is usually adopted when the exporter does not enjoy reputation which is required in case the bill is purchased/discounted by the banker.
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NEGOTIATION OF BILLS UNDER LETTERS OF CREDIT The above mentioned methods of realizing the export bills is prevalent in cases where the foreign buyer is well known to the exporter and the latter feels no risk or hesitation in sending the documents on D/A or DIP basis. But in circumstances where the exporter has no previous experience of dealing with the importer or has no reliable information on the financial standing and credit-worthiness of the importer, he might not like to adopt the above procedure for realizing his dues. This risk of uncertainty about receiving payment is largely mitigated by securing a letter of undertaking from the banker of the importer. Such letter is called, Letter of Credit (L/C) which plays a very important role in financing the foreign trade. The greatest benefit of securing a L/C by the exporter from the importer is the certainty of payment of the export bills, as the importer's bank gives an undertaking to this effect. This enhances the value of the export bills drawn under L/C. The bill may be easily negotiated by the exporter with his banker. Moreover, it also provides security against exchange restrictions in the importer's country.
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EXPORT FACTORING VIS--VIS OTHER PAYMENT OPTIONS
There are other payment options such as Letter of Credit, Documents against Acceptance (DA), Documents against payment (DP) and Advance payments. However all these options have shortcomings such as the cost and delay involved in LCs, no guaranteed payment in respect of DA bill and buyer not being able to satisfy himself on the quality of products before making payments in respect of DP bill. The two-factor system provides collection services and credit protection and also credit facilities to buyers on open account terms. Thus this system is superior compared to other payment options available to an exporter.
Fund Based Bank Facilities
Cash Credit (CC) Conventionally, working capital financing in India is in the form of cash credit facility. Under the cash credit system, the lending bank sanctions a maximum loan limit to a customer. Utilization is subject to availability of adequate assets pledged or hypothecated. The drawing power is adjusted at regular intervals (normally once a month) by considering the level of current asset that has been paid for and deducting margin(s) theyre from at stipulated rate(s). These margins are worked out in line with the lending norms of Tandon Committee. The amount of loan outstanding can vary freely within the drawing power and at times the balance in the cash credit account can even be in credit. Interest is payable based on the actual level of loan enjoyed on a daily product basis. Thus, a fixed limit is worked out for any loan account by assessing the customers peak requirement on the basis of its projected holding of current asset. Once this limit is set, the borrower becomes virtually entitled to draw, subject to sufficient current asset holding, any amount up to the limit. The borrower has the option to draw at any point of time, without any prior notice, up to the extent of the limit. But no corresponding obligation either to compensate the banker for this option or to ensure an optimum utilization of the facility at all points of time. Therefore, a banker may be called upon to arrange for large amounts of funds at short or no notice at pre-determined rate of interest. In such a situation, funds management and financial planning become relatively low priority issues for the borrowers. They can pass on the consequences of inadequate planning and inefficient
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management on their part to the banking system. The lending bank may try hard to arrive at a realistic estimate of the working capital requirement of a client company over a certain length of time in future. But the latter has hardly any stake in the accuracy of this exercise so long as the sanctioned limit is set at a sufficiently high level. This is a drawback of the cash credit system
WORKING CAPITAL DEMAND LOAN (WCDL) Working Capital Demand Loan is designed to satisfy customers' needs for temporary and seasonal funding the process of operation in order to guarantee the normal production and operation activities. By loan term, it can be divided into
Temporary Working Capital Loan: The loan term is within 3 months (included), mainly used for the temporary funds needed in the one-time goods purchase or making or for making up the insufficiency of other payments.
Short-term Working Capital Loan: The term is more than 3 months and less than (or equal to) one year, mainly used as the turnover funds in the process of production and operation of enterprises
Middle-term Working Capital Loan: The term is more than one year but less than (or equal to) three years, mainly used for the frequently occupied funds in the process of production and operation.
Key Features Loan with no established maturity period, which is callable on the demand of the lender, for repayment. The interest is calculated on a daily basis and paid periodically. The Working Capital Loan service is arrangement where the lender and the borrower sign ad hoc borrowing contract, and during the term stipulated in the contract, the lender permits the borrower to draw on the loan for multiple times and repay the borrowing in batches, which the credit line is revolving.
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In such Working Capital Loan arrangement, the customer may withdraw the fund in lump sum and repays the loan by installments.
PURPOSE These loans are used for financing inventories, managing internal cash flows, supporting supply chains, funding production and marketing operations, providing cash support to business expansion and carrying current assets.
NON - FUND BASED BANK FACILITIES Credit facilities, which do not involve actual deployment of funds by banks but help the obligations to obtain certain facilities from third parties, are termed as non-fund based facilities. These facilities include issuance of letter of credit, issuance of guarantees, which can be performance guarantee/financial guarantee.
BANK GUARANTEE Bank guarantee facility is one more non-fund based support for the customer. Financial and performance guarantees are available at very competitive rate and quick turnaround period. Bank guarantees in lieu of Earnest Money Deposit, Security Deposit, Bid Bonds, Advance Payment, Performance, Retention Money etc., shall be issued depending on the nature of business, requirement, Margin, security, commission; period of guarantee shall be as per Bank's norms.
REFINANCE FROM RESERVE BANK OF INDIA In order to promote exports from the country and to increase the competitiveness of Indian exporters, Reserve Bank of India provides refinance to the commercial banks at concessional rates, in respect of the export credit provided by them. Section 17 (3A) of the Reserve Bank of India Act, 1934 empowers the Reserve Bank of India to make advances to any scheduled bank against its promissory notes repayable on demand or on the expiry of fixed periods not exceeding 80 days, provided a declaration in writing is furnished by the scheduled bank that :
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It holds eligible export bills of a value not less than the amount of such loan and advance, such bills should have usance not exceeding 180 days; or
It has granted a pre-shipment loan or advance to an exporter in India to enable him to export from India. The amount of such pre-shipment loan drawn and outstanding at any time should not be less than the advance obtained by the borrowing bank from the Reserve Bank. The period of pre-shipment credit should not exceed 180 days, which may be extended, for reasons beyond the control of the exporter. Thus Reserve Bank of India provides refinance both in respect of pre-shipment credit and post shipment credit. The essential pre-requisite is the submission of a promissory note, supported by a declaration about having granted export credit. Section 17(4) enables the Reserve Bank of India to grant advances repayable on demand on the expiry of fixed period not exceeding 90 days against the security of bills arising out of export transaction repayable on demand or on the expiry of fixed periods not exceeding 180 days.
EXTENT OF REFINANCE Reserve Bank of India provides refinance which is linked with the export credit extended by a bank. With effect from May 5, 2001, scheduled commercial banks are provided export credit refinance to the extent of 15% of the outstanding export credit eligible for refinance as at the end of the second preceding fortnight. Thus with the increase in the value of export credit extended by a bank, the refinance facility also correspondingly increases.
GOLD CARD SCHEME FOR EXPORTERS Reserve Bank of India has formulated a Gold Card Scheme for creditworthy exporters with good track record for easy availability of export credit on best terms. Alok Industries Limited holds the GOLD CARD.
Salient features of the scheme available to Alok Industries Limited are as follows: All creditworthy exporters including those in small and medium sectors with good track record would be eligible as per the criteria laid down by the banks. Banks would clearly specify the benefits they would be offering to gold card holders.
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Request from card holders would be processed quickly within a prescribed time frame. In-principle' limits would be set for a period of 3 years with a provision for stand-by limit of 20% to meet urgent credit needs Card holders would be given preference in the matter of granting packing credit in foreign currency. Banks would consider waiver of collateral and exemption from ECGC guarantee schemes on the basis of card-holders credit-worthiness and track record.
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RISK ARBITRAGE TOOLS
BUYER CREDIT GUARANTEE A Buyer Credit Guarantee is a security to the lender in case of a credit risk caused by a foreign buyer, the buyer's bank or country. The exporter receives payment in cash for goods sold on credit, while the credit risks are transferred from the exporter to the lender and further to the Bank. The guarantee covers commercial risks and/or political/sovereign risks. The coverage provided is normally 90% (buyer risk) or 95% (bank risk) for commercial risks and 100% for political and sovereign risks when a sovereign entity acts as a borrower or a guarantor. A Buyer Credit Guarantee can be used for various medium/long-term credit arrangements in connection with financing of the export of capital goods. Such arrangements include buyer credits for individual transactions, bank-related and project-related credit lines, ship financing, as well as forfeiting and leasing. The guarantee can also be used for short-term exports if the buyer provides the exporter with a transferable credit instrument, e.g. bill of exchange or promissory note as payment. The guarantee can be granted to domestic and foreign financial institutions. Example: Suppose $1mn is due on 31st May 2008 to XYZ party and the exporter knows that on 31st May 2008 it will not have sufficient balance in the account so the Exporter can go for an Buyers Credit facility offered by the bank where in it will charge LIBOR + 300bps = 6% for 3mnths and for safeguarding itself the exporter will enter into a forward contract where in it will incur 2% i.e.: cost for forward cover for 3months and other transaction charges say 1% that will all result in 9% cost of fund. What this will do in long term is it will help the company to honour the bill on due date as well as avail fund at a rate which is lower than the CC rate on interest of around 12%p.a..
External Commercial Borrowing (ECB) ECB is the most fancied three-letter word in corporate India. ECBs (borrowings from lenders and investors outside India) are being permitted by the Government as a source of finance for Indian corporates for expansion of existing capacity as well as for fresh investment. ECBs are defined to include commercial bank loans, buyers credit, suppliers credit, securitised instruments such as Floating Rate Notes and Fixed Rate Bonds etc., credit from official export
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credit agencies and commercial borrowings from the private sector window of Multilateral Financial Institutions.
Sources Corporate are free to raise ECB from any internationally recognized source such as banks, export credit agencies, suppliers of equipment, foreign collaborators, foreign equity-holders, international capital markets etc.
Definition of average maturity The Finance Ministry has clearly defined the term "average maturity". Accordingly, average maturity of ECBs shall be weighted average of all disbursements taking each disbursement individually and its period of retention by the borrower. The all-in-cost ceilings for normal projects is 300 basis points over six months LIBOR, for the respective currency in which the loan is being raised or applicable benchmark(s), as the case may be.
Automatic route The Government has recently decided to place fresh ECB approvals up to USD 50 million under the automatic route. Under this scheme, Indian companies are allowed to raise ECBs up to $50 mn under the automatic approval route - which means that corporate can raise loans up to $50 mn without any approval from the Government or the RBI. "Under the automatic route arrangement, any legal entity, registered under the Companies Act, societies registration Act, Co-operative Societies act, including proprietorship and partnership concerns, will now be eligible to enter into loan agreements with overseas lender(s) for raising fresh ECB with an average maturity of not less than three years for an amount up to $ 50 mn and for refinancing of an existing ECB contracted in compliance with both the ECB guidelines framed by the Ministry of Finance and the regulations issued by the Reserve Bank in this regard". After signing the loan agreement with the overseas lender, the company has to submit three copies to the concerned regional office of the RBI through an authorised dealer. The regional office of the RBI would then acknowledge the receipt of the copy of the loan agreement and allot a loan identification number to the company.
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The onus of ensuring that the foreign loan raised is in conformity with the relevant guidelines now lies with the company interested in the ECB rather than the Government or the RBI. However, the RBI can, if it notices any violation of rules, initiate action against the company under the Foreign Exchange Management Act (FEMA). Companies can also make the necessary drawdowns under the automatic route without seeking permission from the RBI. They would, however, be required to file quarterly returns in a prescribed format through the authorised dealers. The Finance Ministry would continue to be the agency that would accord withholding tax exemptions. Application procedure has also been simplified. There is now only one uniform format for ECB applications. Earlier there were separate formats for filing applications with the RBI and the government. Exporters/Foreign Exchange Earners Corporate who have foreign exchange earnings are permitted to raise ECB up to three times the average amount of annual exports during the previous three years subject to a maximum of USD 200 million without end-use restrictions, i.e. for general corporate objectives excluding investments in stock markets or in real estate. The minimum average maturity will be three years up to USD 20 million equivalent and five years for ECBs exceeding USD 20 million. The maximum level of entitlement in any one year is a cumulative limit and debt outstanding under earlier approvals will be netted out to determine annual eligibility.
Long-term Borrowers Long-term window (outside the ECB ceiling) Borrower Minimum Average Maturity Amount Long term borrowers above 8 years but less 16 years USD 200 million Long term borrowers 16 years and above USD 400 million
Maturity of Long term Borrowers Ministry Of Finance prior approval is necessary for such borrowings. End use under this window can be for general corporate purposes which include restructuring unlike loans for shorter maturities which are only allowed for capital expenditure. DFIs may raise ECB under this window in addition to their normal annual allocation covered by the capital. Utilisation of the
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ECB approved earlier under the regular ECB cap will not be a limiting factor for considering proposals under the long-term maturity window. However, additional borrowings under either of the window i.e., regular or under long term maturity, is subject to utilisation of earlier approvals in the same window. Corporate may raise these borrowings either through FRN/Bond issues/Syndicated Loan etc. as long as the maturity and interest spread is maintained as per the guidelines. The all-in-cost ceilings for long term ECBs is 450 basis points over six months LIBOR, for the respective currency in which the loan is being raised or applicable bench mark(s), as the case may be.
End-use requirements ECBs can be used for any purpose (rupee-related expenditure as well as imports) except the following
Utilisation of ECB proceeds have been specifically disallowed for Investment in stock market Speculation in real estate Earlier, corporate were allowed to use ECB proceeds only for specific project purposes.
Repayment of loan/credit and payment of other charges With a view to simplifying procedures, authorised dealers have been delegated the powers to allow remittance of penal interest, irrespective of period of default and number of occasions. Hence, applications for remittance of penal interest for defaulting in repayment of principal/payment of interest can be referred to the Authorised Dealers.
Validity of approval All approvals are valid for a period of six months, i.e. the executed copy of the loan agreement is required to be submitted within this period. Bonds, Debentures, FRNs and other such instruments will have additional validity period of three months for all the ECB approvals across the board. In case of power projects, the approval is valid for one year and in case of telecom projects, it is valid for 9 months from the date of approval. Extension will not be granted beyond the validity period. However, borrowers are free to reapply after a gap of one month
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from the expiry of validity period. In case of infrastructure projects, however, because financial closure may get delayed for reasons beyond the investors control, extension of validity may be considered on merits.
Pre-payment The corporate can pre-pay 100 per cent of ECBs where the source of funds is EEFC accounts. In addition, corporate can avail either of the following two options for prepayment of their ECBs: 1. Pre-payment of ECBs up to 10% of the outstanding borrowings is permitted once during the life of the loan. 2. In case of loans which are outstanding and have a residual maturity of one year and less, the entire amount can be pre-paid. Validity of permission under the above two options will be as under: Prepayment approval for ECBs other than Bonds/Debentures/FRNs will be 15 days or period up to next interest payment date, whichever is later. In case of Bonds/FRNs, validity of permission will not be more than 15 days. In case of prepayments, the borrower may submit an application for pre-payment of loan through designated authorised dealer to the Reserve Bank of India, Exchange Control Department, Central Office, (ECB Division), Mumbai. RBI will give all such approvals, as per prevailing guidelines on prepayment, even in cases where ECBs have been approved earlier by Ministry of Finance. Request for prepayments should be forwarded with the following information duly certified by the Statutory Auditors. Loan amount, Sanction Letter No. and Date (Loan Key No.) Net amount drawn after making payment for fee/commission etc. Amount utilised for approved end-use duly supported by a certificate from the Statutory Auditors, indicating that the necessary documentary evidence has already been submitted to the concerned Regional Office of RBI and balance unutilised amount, if any. Amount of ECB proceeds parked abroad Name of the Bank, Account No. RBIs sanction letter, certified copy of latest statement etc. Amount of loan repaid and balance outstanding. Residual maturity of the loan and the last date of repayment. Whether any prepayment approval has been obtained by the Company against this Loan in the past. If so, details thereof. Prepayment premium (excluding
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Bonds/FRN issues). Source of funds from which the prepayment is proposed to be effected. Date of proposed prepayment. If the prepayment is proposed to be made from EEFC account, a certificate from the authorised dealer indicating the amount outstanding in EEFC Account.
Refinancing the existing foreign currency loan The Government has decided to allow all refinancing of existing ECBs under the automatic route. Rolling over of ECB will not be permitted. Further, a corporate borrowing overseas for financing its rupee - related expenditure can swap its external commercial borrowings with another corporate which requires foreign currency funds. Liability Management Corporate can undertake liability management for hedging the interest and/ or exchange rate risk on their underlying foreign currency exposure.
Foreign Currency Non Resident (Banks) Foreign Currency Non Resident (Banks) account is an investment avenue available to NRIs. Accounts can be opened only in the form of term deposits and can be maintained in four currencies viz. Pound sterling, US Dollar, Japanese Yen and the Euro. Repayments, under this scheme, are made in foreign currency and therefore it offers the depositor protection against exchange rate fluctuations. The tenor of the scheme ranges from 12 months to 36 months.
FCNR (B) loan FCNR (B) loans are a low cost, short-term funding source available to Indian corporate. Banks have been permitted to provide foreign currency denominated loans to their customers from the resources mobilised under the FCNR (B) scheme. RBI granted this permission to help banks to deploy their FCNR funds in a more commercially viable manner and make available a better avenue of credit at cheaper interest rates to resident borrowers.
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Highlight No special permission is required from the regulatory authorities for availing FCNR (B) loans and the existing rupee credit limits can be converted into a foreign currency loan. The interest rates and the tenor of the loans are left free to be decided by negotiation between banks and borrowers. They are generally granted for periods up to three years. Normally, loans under this scheme are not given for an amount less than USD 100,000. Loans are generally denominated in the four currencies in which FCNR deposits are accepted viz. US Dollar, Euro, Japanese Yen and Pound Sterling, the US Dollar being the most popular currency of choice. In recent times, FCNR (B) loans have been the preferred route for many corporate especially with regard to their working capital requirements. Even though Commercial Paper (CP) can be used to raise low cost funding, it is not possible for all corporate to issue CPs due to the requirement of an acceptable credit rating for the purpose.
Risks Involved While the introduction of the scheme has placed a low cost funding option at the disposal of Indian corporate, they have to deal with two types of risks when they avail such loans Foreign exchange risk - risk of rupee depreciation against the currency of loan as the principal and the interest have to be repaid in the foreign currency in which the loan is denominated. Interest rate risk - risk of the benchmark interest rate (LIBOR) being reset higher e.g. one year loan with interest rate fixing (reset) every three months). Therefore, the borrower has to take note of the fact that the loan is an advantage only when the overall cost of borrowing (cost of forward forex cover + interest cost) in foreign currency is less than the rupee cost of funds.
Benefits over an ECB While the guidelines for raising an ECB have been relaxed considerably over the years, FCNR (B) loans are still the preferred route for most Indian corporate for short term funding because of the ease and speed with which they can be raised. More importantly, FCNR (B) loans are relatively free of the procedural hassles involved in raising ECBs (such as getting permission from RBI, periodic reporting etc).
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Procedural aspects The interest rate for the tenor of the loan is fixed on the date of draw down and reset at the end of the period in case the loan is rolled over under a longer term arrangement. If the borrower intends to use the loan for rupee related expenditure, the proceeds of the loan should necessarily be converted into rupees as soon as the loan is disbursed. However, where the proceeds are to be used for remittances outside India (such as retirement of import bills), this condition does not apply.
Costs involved The costing works out as follows - Corporate A can avail rupee credit at 12% p.a. Alternatively, Corporate A can avail FCNR (B) loan.
Example The cost of a 6-month Dollar FCNR (B) Loan is as follows Date of Draw down suppose 31st May 2010 6 Month $ LIBOR (%) 3.00% Banks Margin (Spread over LIBOR assumed)% 2.00% Cost of forward cover (annualised %)* 2.50% Other transaction costs % 1.00% Net rate (%) 8.50%
FCNR example Indian foreign exchange regulations allow FNCR borrowers to buy foreign currency forward in FX markets. Forward contracts can be booked on the date of draw down itself if it is desired to eliminate exchange rate risk completely. Usually the four currencies in which the FCNR loans can be availed are at a premium to the rupee in the forward market. The borrower, therefore, has to pay a premium to buy the foreign currency forward. The premiums which are quoted in the market in paise can be expressed as an interest percentage. The comparative cost advantage is evident as it results in a net saving of 3.5%, on a fully hedged basis, over the rupee cost of funding. The cost can be reduced even further by not covering forward the full loan amount on the date of draw down but by following a proactive hedging policy.
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Commercial Paper Commercial Paper (CP) is an unsecured money market instrument issued in the form of a promissory note.
Uses It was introduced in India in 1990 with a view to enabling highly rated corporate borrowers/ to diversify their sources of short-term borrowings and to provide an additional instrument to investors. Subsequently, primary dealers and satellite dealers were also permitted to issue CP to enable them to meet their short-term funding requirements for their operations. Corporates, primary dealers (PDs) and the All-India Financial Institutions (FIs) are eligible to issue CP. CP can be issued in denominations of Rs.5 lakh or multiples thereof.
Credit rating requirement All eligible participants shall obtain the credit rating for issuance of Commercial Paper either from Credit Rating Information Services of India Ltd. (CRISIL) or the Investment Information and Credit Rating Agency of India Ltd. (ICRA) or the Credit Analysis and Research Ltd. (CARE) or the FITCH Ratings India Pvt. Ltd. or such other credit rating agency (CRA) as may be specified by the Reserve Bank of India from time to time, for the purpose. The minimum credit rating shall be P-2 of CRISIL or such equivalent rating by other agencies. The issuers shall ensure at the time of issuance of CP that the rating so obtained is current and has not fallen due for review and the maturity date of the CP should not go beyond the date up to which the credit rating of the issuer is valid.
Mode of redemption Initially the investor in CP is required to pay only the discounted value of the CP by means of a crossed account payee cheque to the account of the issuer through IPA. On maturity of CP, (a) When the CP is held in physical form, the holder of the CP shall present the instrument for payment to the issuer through the IPA. (b) When the CP is held in demat form, the holder of the CP will have to get it redeemed through the depository and receive payment from the IPA.
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Example: A Corporate can raise a loan through the issue of commercial paper around @ 911% cost. On the other hand the cost of capital through the CC account is 12%.This will directly result in a saving of 2%
Foreign Exchange Market The foreign exchange market commonly referred to as the FOREX or FX market is the largest financial market in the world, with a daily turnover that is nearly 30 times that of the U.S. Equity Markets. Foreign Exchange can be understood to mean the simultaneous exchange (buying of one currency and selling of another) in the market. The FOREX market is vital to an international trader since they buy/sell products and services in foreign countries and convert their foreign currency earnings to domestic currency. The FOREX market is different from a traditional stock market in that, trading is not centralized in an exchange, but is Over the Counter (OTC). Any transaction involving the use of foreign currencies is executed at the FOREX market. Booking of forward contracts is done on an everyday basis at this exchange. Foreign exchange markets are open 24/7 and overnight orders can also be executed by contacting the dealing room of the respective bank and requesting them to place an order with their overseas correspondents. The market has diversified participation in the form of commercial and investment banks, central banks, corporations, global funds, and individual traders. Quotation Before we get into the specifics of how prices are quoted in the FOREX market, it is necessary to acquaint oneself with the terminology used while quoting exchange rates. Let us take an example. If the USD/INR is trading at 45, it means that 1 USD would fetch Rs 45 at the current rate. Further if the rupee appreciates (dollar declines) it is akin to the rupee strengthening, thus the USD/INR would decline and go below Rs 45 for a dollar. Conversely, if the rupee depreciates (dollar appreciates) it is akin to the rupee weakening, thus the rate would rise above Rs45 for a dollar.
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Trading In the FOREX market, currencies are always traded in pairs, e.g. USD/INR. A trader purchases one currency while selling another at the same time. The first currency (USD) is called the base currency, while the second (INR) is called the counter currency. A participant in the Foreign Exchange Market will usually ask for a price in, for example, 'dollar-rupee', i.e. the number of Indian Rupees, which can be bought for one US Dollar. This will be quoted by way of a two-way quote ($1 = Rs 43.6362-75), called a bid price and an ask price respectively. This will be quoted as 43.6362-75, or "sixty two - seventy five", i.e. they buy dollars at 43.6362 and sell dollars at 43.6375. The difference between the two rates is the profit that the bank makes while purchasing and selling currencies. A trader who wants to buy dollars against the rupee at the market must deal at the offer of 43.6375. The trader will do this if he believes the dollar will strengthen against the yen. An exporter would use this if he cites a possibility of the dollar getting weaker (i.e. a decline in the rate). If a trader wants to sell dollars against the rupee, he must deal at the bid of 43.6362. The trader will do this if he believes that the dollar will decline (increase in the rate). The rates may be cash rates (for delivery today), Tom rates (for tomorrow), and Spot rates (settled two working days from the date of deal). Any rate more than two working days from the date of the deal is termed the forward rate. Similarly a spot deal will be settled two days from the date on which the deal is struck, Tom deals will be settled on the next day and forward deals will be settled at a future date. Value date is the date on which the trade is settled. The difference between the bid and ask rates is referred to as the "spread" and expressed in pips. In the above example the difference between the bid and ask price is 13 pips, which is the spread. It represents the cost of transacting in the FOREX market. This spread will fluctuate throughout the trading day depending on the liquidity in the market (availability of currencies). The more liquid a particular currency pair, the smaller will be the spread and hence, the cost. The rule to remember is Lower the volume lesser the liquidity wider the spread. This price transparency is another advantage of the FOREX market as the trader knows without doubt the price at which a trade can be done.
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FOREX traders often use a margin account in executing their transactions. Margin is the deposit that must be maintained in the account by the trader. This is an extremely beneficial system since it allows a trader to affect trades in large volume of for a relatively small deposit in the margin account, held with the broker. The advantage a margin account gives a trader is measured by the leverage, which is expressed as a ratio. Thus a leverage of 100:1 means that a trader can control assets equal to 100 times the margin deposit. In other words, with a 1% margin account one can control trades worth $100000 with a deposit of 1000$. The benefit of using a margin is explained through the following illustration: ILLUSTRATION Assume the following rates for USD/INR USD/INR Spot: 40.50/40.51 USD/INR 6 Months: 40.96/40.98 In the above illustration the bank is willing to buy dollars at 40.50 today and sell dollars 40.96 in 6 months time. Thus the dollar is expected to appreciate against the rupee. When the forward spot rate is greater than that current spot rate the dollar is said to be at a premium to the rupee. Conversely if the dollar forward spot rate is lesser than the current spot rate it is said to be at a discount. The dollar usually trades at a premium to the rupee. The premium or discount is added to or subtracted from the spot rate in order to determine the forward rate. Such premium or discount depends upon the interest rate differentials between the two currencies involved. The forward foreign exchange rate is a function of the two interest rates (domestic and foreign) and the spot price prevailing on the day of contract and is given by: Ft= S * [(1+R1)/ (1+R2)] Where, Ft= forward foreign exchange rate at time period t S= Todays spot foreign exchange rate R2= foreign interest rate for time period (t), R1= domestic interest rate for time period (t) The reasoning behind this can be understood clearly with the following example:
Export Finance
ILLUSTRATION: Assume the USD/INR is trading currently at Rs 45 to the dollar. The interest rate in India is currently 10% and the interest rate in the US is currently 5%. The forward exchange rate 3 months hence would be calculated as follows. 3 months hence 1 dollar would be worth 1 * 1 + [(.05*90/360)] = $1.0125. Similarly 45 Rs would be worth 45* [1 + (0.10* 90/360)] = 46.125. The forward exchange rate would then be (46.125/1.0125) = 45.56. Thus the premium in this case is Rs 0.56. It can be understood from this example that the forward spot rate is a function of the spot rate today and the interest rate in the two countries. Another finding that can be derived from the above calculation is that if the base currency in a currency pair has a lower interest rate than the counter currency the forward rate will be higher than the spot rate. While this finding is applicable in most cases, the interaction of the dollar/rupee supply and demand forces in India brings forth an interesting phenomenon. The dollar like most other currencies is at a premium to the rupee. In case of other currencies, demand/supply for the currencies leads to spot rate fluctuations, and premiums/discounts reflect the interest rate differentials. In India however, fluctuations in demand/supply leads to changes in the premium/discount with or without any movement in the spot rates. This is the case in India since the absence of a well-developed rupee money market allows arbitrage opportunities. Having understood the manner in which premiums are calculated, the following illustration will depict how a bank determines the forward rate at which it would buy dollars from an exporter. ILLUSTRATION: Assuming an exporter wants to book a forward contract 3 months hence for USD 1000000 and Dollars are being quoted in the interbank market as follows: Spot USD/INR: 42.8150/42.8190 Spot/Jan: 0200/0400 Spot/Feb: 0600/0800 Spot/March: 1000/1200
The forward exchange rate to be offered would be calculated as follows. Since contract is for a period of three months, the forward USD buying rate will be based on Spot/March.
Export Finance
USD/INR Spot: 42.8150 Add: Forward Premium: 0.1000 = Forward Rate: 42.9150. Assuming the margin charged by banks to be 2%; Rate quoted to the customer will be: 42.9150-0.0200 = 42.8950. Thus an exporter who is to receive $ 1 million in 3 months time and wants to protect his sale proceeds instability in the currency market can book a forward contract with a bank and receive Rs (1000000 * 42.8950) = 42895000 no matter what the situation is in the currency markets on the date of realization. In this manner the exporter, during times of turbulence in world markets, instability in exchange rates can book a forward contract and secure his export receivables. It is clear now why the forward currency market is an ingenious instrument that is of tremendous advantage to the international trader. It enhances profitability, while at the same time reducing risk and uncertainty.
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CONCLUSION Throughout the report I have dealt extensively on export trade, the benefits, the incentives, the financing, the economics, the procedures and its applications. It leaves no doubt that International trade is absolutely vital to a country from an economic perspective. Its GDP, economy, job market, all benefit tremendously from the proliferation of international trade. It generates invaluable foreign exchange which a country can dip into during times of financial crisis. With the easing of regulations in financial transactions, the field has opened up for foreign investors to move in and out of a country with little hassle. This is a double edged sword in that while it can improve the health of an economy it can at the same time destabilize it if large chunks of foreign currency leaks out of a country. The only saving grace at such a time is the foreign currency flowing in through exports which keeps the exchange rate stable. It is for this reason primarily that any country that wants to establish itself in the world, cannot ignore its export industry. But apart from these material gains, what I have failed so far to touch upon is one of the most significant contributions of trade, which comes from its unseen benefits. George Bernard Shaw once famously stated that If you have an apple and I have an apple and we exchange these apples then you and I will still each have one apple. But if you have an idea and I have an idea and we exchange these ideas, then each of us will have two idea. That is what international trade gives us. An interaction between countries and nations that brings about understanding and mixing of cultures. By fostering the continuance of globalization it gives countries a platform to come forward and exchange ideas, innovations, technologies in a manner that promotes peace and harmony in an increasingly turbulent world.
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RRRR
REFERENCES
Web Pages: 1. www.alokind.com 2. www.rbi.org.in 3. www.exim.indiamart.com 4. www.indianindustry.com 5. www.fibre2fashion.com 6. www.depb.net 7. www.infodriveindia.com 8. www.tradechakra.com 9. www.wikipedia.org
Books: 1. LEE JOW YIN., June 2003, Overview of Trade Finance, International Trade Institute of Singapore.
2. SABOOR H. ABDULJAAMI., Export Transactions: Finance and Risk. AbdulJaami, PLLC.

3. Economic Advisory Council to the Prime Minister of India, January 2008, Review of the Economy 2007/08, New Delhi.
4. International Financial Consulting., 2004: Concept Paper on the creation of a Regional Export Credit and Finance Scheme. (Submitted to the Asian Development Bank). April 19th 2004.
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Export Finance - Shivali Mehta

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SUBMITTED BY SHIVALI MEHTA MMS (2009-2011) Roll No. : 426

N.L.DALMIA INSTITUTE OF MANAGEMENT STUDIES AND RESEARCH

N.L.DALMIA INSTITUTE OF MANAGEMENT STUDIES AND RESEARCH

Export Finance Certificate of Originality

For Alok Industries Limited

Mr. Hitesh Shah Assistant Vice-President, Finance

N.L.DALMIA INSTITUTE OF MANAGEMENT STUDIES AND RESEARCH

Export Finance SUMMARY

N.L.DALMIA INSTITUTE OF MANAGEMENT STUDIES AND RESEARCH

Export Finance TABLE OF CONTENTS Sr. No.

11. Export Finance And Risk Mitigation

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COMPANY PROFILE INDUSTRIES LTD

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cotton and blended yarn to fabrics to garments and

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ALOK is operating as a manufacturing exporter and Merchant exporter

TECHNICALITIES INVOLVED IN EXPORT

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N.L.DALMIA INSTITUTE OF MANAGEMENT STUDIES AND RESEARCH

Flow Chart Of Pre Shipment Process

LC is opened and PO is recieved

Preshipment finance is obtained on PO / LC

Custom clearance is obtained

Goods are stuffed in the container

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N.L.DALMIA INSTITUTE OF MANAGEMENT STUDIES AND RESEARCH

Figure below illustrates pictorially an L/C transaction in proper sequence:

3.Issues LC to advising bank

1. Contract 5a. Ships Goods

LETTER OF CREDIT TRANSACTION

10. Releases Docs required to collect goods 9. Makes payment

N.L.DALMIA INSTITUTE OF MANAGEMENT STUDIES AND RESEARCH

2b. Fwds documents and payment instructions Remitting Bank

6. Makes payment at sight or on due date

1. Contract 2a. Ships Goods

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A.R.E. From 1 & 2 : Approval for Removal of Excise

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Order confirmed & eitheLC opened in beneficiarys favour

Export Shipment Procedure

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N.L.DALMIA INSTITUTE OF MANAGEMENT STUDIES AND RESEARCH