BASIC DOCUMENTS USED IN INTERNATIONAL TRADE

In any trade, documents are used to record a written evidence of having carried out a
transaction. International trade is no exception. In fact, it calls for execution of more documents than
in local trade. Normally, documents are required to satisfy two basic requirements, namely:
a) Regulatory Requirements
b) Operational Requirements
Documents used or executed to satisfy the statutory requirements or requirements of any
trade and other regulatory authorities are Regulatory Documents or Official Documents. For
example, in the International Trade the commercial parties need to execute documents to satisfy the
requirements of Trade Control Authorities, Banking Authorities etc.
Documents used or executed to satisfy the normal commercial requirements of the parties to
the transactions are referred to as operational or commercial documents.
Classification of Documents used in International Trade Transactions
Documents used in International trade transactions are broadly classified into five categories,
namely.
1. Financial Documents
2. Commercial Documents
3. Transport Documents
4. Risk Covering Documents
5. Official/Regulatory Documents
The above classifications are based on functional aspects of the documents. Sometimes, a
document may perform more than one function. In such cases it can be classified into more than one
category. For example: A commercial invoice may contain declaration regarding origin of goods
which is duly attested by a competent authority. In such a case it is an invoice-cum-certificate of
origin and fulfils the functions of commercial as well as regulatory requirements. Accordingly it can be
classified as a commercial document or as regulatory document. Other examples are inspection
certificate, health certificate etc. Hence, it should be remembered that functional classification of
documents is not a water-tight classification.
In International trade scores of documents are used to fulfill the requirements of buyer, seller,
buyers countrys requirement as well as sellers country requirements. In the following pages only a
few basic documents are discussed which are very common and important from the banks point of
view.
1. Financial Documents
As the name indicates financial documents are the documents which perform the function of
obtaining finance, collection of payment etc. The most common financial document used is a Bill of
Exchange.
A. Bill of Exchange
A Bill of Exchange (or B/E shortly) is also referred to as ``Draft or ``Hundi. In many of the
countries, a Bill of Exchange is recognised as a legal document. In India, section 5 of the Negotiable
Instruments Act, 1881 defines the Bill of Exchange. As per the definition given, it has three basic
parties namely Drawer, Drawee and Payee and has following five important characteristics.
It is an instrument in writing
It is an unconditional order signed by maker (Drawer)
It is a direction given to a specific person (Drawer)
It is a direction to make payment of a specific or fixed amount
It is made payable to a certain person or to his order or Bearer
The Act does not specify any particular format for a Bill of Exchange but it must satisfy the
above characteristics.
A B/E performs the following five basic functions
a) Means for collecting payment: It is a well-known fact that the basic function of a B/E is to
show that there is a commercial or trade transaction underlying the B/E drawn and it s a means for
collecting payment arising out of such a transaction.
b) Means for Demanding Payment: When a payment is due from a person, generally a
demand has to be made on him. A B/E is drawn for demanding such payment. When a B/E is drawn
and presented to the drawee for payment, it amounts to having made a demand on the drawee to pay
the amount. Thus, a B/E serves as a means for demanding payment.
c) Means for extending credit: A B/E can be drawn in such a way that it can be made payable
at sight or at a future date (Tenor). When it is drawn for a particular tenor it means that the drawer is
allowing the drawee (or buyer) to make payment at a future date. In effect he is extending his buyer a
credit. Thus, a B/E is a means for extending credit.
d) It is a promise of Payment: Certain B/Es are drawn on acceptance basis i.e. the drawee
will be given the documents upon his acceptance to pay the bill at a specified tenor. Such an
accepted B/E is suffiecient evidence of promise of payment after it is accepted for payment by the
drawee at a specified tenor.
e) It is a Receipt for payment: When the amount shown on a B/E is paid by the drawee, the
payee endorses the Bill of Exchange as Received payment and hands it over to the drawee. Such a
discharged B/E acts as a receipt for having paid the amount stated thereon. Thus, B/E also acts as a
receipt for payment.
The drawing of a Bill of Exchange is not always necessary. In certain countries a B/E is not a
recognized legal documents, while in certain other countries it is discouraged because it attracts
heavy stamp duty (seven if it is drawn on sight basis). In certain credits like Payment Credit and
Deferred payment credit bills of exchange are not to be drawn.
In International trade generally Bills of Exchange are drawn in sets of two so that each can be
sent with a set of documents. When they are drawn in sets of two, each one bears the exclusion
clause making the other part of the draft invalid. The first of exchange contains the words The
second of the same tenor and date unpaid or similar words. The second of exchange contains the
words The first of the same tenor and date unpaid or similar words.
Bills of exchange can be classified into two categories depending upon the time of payment
ordered thereunder:
Sight Bill of Exchange: It is also known as on Demand Bill of Exchange. Under such a Bill of
Exchange the drawee has to make payment on presentation/ sight/demand.
Usance Bill of Exchange: They are also known as TENOR or TIME Bills of Exchange. The
drawee is directed to make payment after a stated number of days or a period from a particular date
or event. In International trade usance bills of exchange are normally drawn in two ways