CERTIFICATE

This is to certify that the project work Export Finance is a bonafide record of work done by Ms Shah Sumaiya under my guidance in partial fulfillment of the requirements for the

training programme in Alok Industries Ltd.

Mr Hitesh Shah Asst. V.P Finance, Alok Industries Ltd

Export Finance
Project Report submitted to the Department of Business & Financial Studies University Of Kashmir

In Partial Fulfillment of the requirements for the Degree of Masters in Finance & Control

Submitted By Shah Sumiya

Project Advisor: Mr. Hitesh Shah

Alok Industries Ltd

Acknowled gement

First and foremost, I would like to express my sincere gratitude to my project guide,Mr. Hitesh Shah,Asst V.P Finance. I was privileged to experience a sustained enthusiastic and involved interest from his side. This fueled my enthusiasm even further and encouraged me to boldly step into what was a totally dark and unexplored expanse before me.I also want to thank him for providing me with a good environment and facilities to complete this project.

The guidance and support received from all the team members including Mr Sagar,Mr Satyanayaran,Ms Nidhi, Mr Ajit,Mr Sandeep, Mr Ram,Ms Megha, who contributed to this project, was vital for the success of the project. I am grateful for their constant support and help.

Finally, an honorable mention goes to my family and friends for their understanding and support.

Introduction: Textile industry in India is the second largest employment generator after agriculture. It holds significant status in India as it provides one of the most fundamental necessities of the people. Textile industry was one of the earliest industries to come into existence in India and it accounts for more than 30% of the total exports. In fact Indian textile industry is the second largest in the world, second only to China. Textile Industry is unique in the terms that it is an independent industry, from the basic requirement of raw materials to the final products, with huge valueaddition at every stage of processing. Textile industry in India has vast potential for creation of employment opportunities in the agricultural, industrial, organised and decentralised sectors & rural and urban areas, particularly for women and the disadvantaged. Indian textile industry is constituted of the following segments: Readymade Garments, Cotton Textiles including Handlooms, Man-made Textiles, Silk Textiles, Woollen Textiles, Handicrafts, Coir, and Jute. ores Strengths of Indian textile Industry

India has rich resources of raw materials of textile industry. It is one of the largest producers of cotton in the world and is also rich in resources of fibres like polyester, silk, viscose etc. India is rich in highly trained manpower. The country has a huge advantage due to lower wage rates. Because of low labour rates the manufacturing cost in textile automatically comes down to very reasonable rates. India is highly competitive in spinning sector and has presence in almost all processes of the value chain.

Indian garment industry is very diverse in size, manufacturing facility, type of apparel produced, quantity and quality of output, cost, requirement for fabric etc. It comprises suppliers of ready-made garments for both, domestic or export markets.

Weakness Massive Fragmentation: A major loop-hole in Indian textile industry is its huge fragmentation in industry structure, which is led by small scale companies. Despite the government policies, which made this deformation, have been gradually removed now, but their impact will be seen for some time more. Since most

of the companies are small in size, the examples of industry leadership are very few, which can be inspirational model for the rest of the industry. The industry veterans portrays the present productivity of factories at half to as low as one-third of levels, which might be attained. In many cases, smaller companies do not have the fiscal resources to enhance technology or invest in the high-end engineering of processes. The skilled labor is cheap in absolute terms; however, most of this benefit is lost by small companies. The uneven supply base also leads barriers in attaining integration between the links in supply chain. This issue creates uncontrollable, unreliable and inconsistent performance. Political and Government Diversity: The reservation of production for very small companies that was imposed with an intention to help out small scale companies across the country, led substantial fragmentation that distorted the competitiveness of industry. However, most of the sectors now have been de-reserved, and major entrepreneurs and corporate are putting-in huge amount of money in establishing big facilities or in expansion of their existing plants. Secondly, the foreign investment was kept out of textile and apparel production. Now, the Government has gradually eliminated these restrictions, by bringing down import duties on capital equipment, offering foreign investors to set up manufacturing facilities in India. In recent years, India has provided a global manufacturing platform to other multi-national

companies that manufactures other than textile products; it can certainly provide a base for textiles and apparel companies.Despite some motivating step taken by the government, other problems still sustains like various taxes and excise imbalances due to diversification into 35 states and Union Territories. However, an outline of VAT is being implemented in place of all other tax diversifications, which will clear these imbalances once it is imposed fully. Labour Laws: In India, labour laws are still found to be relatively unfavorable to the trades, with companies having not more than ideal model to follow a 'hire and fire' policy. Even the companies have often broken their business down into small units to avoid any trouble created by labour unionization.

In past few years, there has been movement gradually towards reforming labour laws, and it is anticipated that this movement will uphold the environment more favourable

Company Profile Of Alok Industries Ltd

1. 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.

2. Textiles Offerings: Alok is an end-to-end textile solutions provider. Its products encompass the entire value chain from 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 2009-2010.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).

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 authorised to deal in foreign exchange.The Bank will ask for a copy of the incorporation document i.e., partnership deed or company Memorandum & Articles as applicable. Today 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. Application for obtaining Import Export Code No. should be to the Director General Of Foreign Trade in the Aayaat Niry aat Form accompanied withBank Reciept for payment of application fee Certificate from Banker of Exporting firm evidencing that the exporter is maintaining an account there Self Ceftified Copy of Permanent Account Number (PAN). Two copies of passport size photographs of applicant duly attested.

The exporter has to site the IEC No. so allotted by DGFT on all export declerations forms. It shall be valid for all branches,units,divisions etc., as indicated on the IEC No.

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. The Exporter has to apply in the prescribed Form to the Export Promotion Council along with the following documents:Self Certified Copy of the Import Export Code No. Bank Certificate in support of the applicants financial soundness. The concerned Registering Authority shall issue the RCMC indicating the status of the status of the applicant as Manufacturer-Exporter or Merchant Exporter. The RCMC shall be deemed to be valid from 1st April of the licensing year in which it was issued & shall be valid for 5 years ending 31st March of the licensing year, unless otherwise specified. 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. The DGFT maintains PAN based validated directory of importers & exporters. In view of this, the processing of documents relating to exports & imports based on PAN & IEC No. is mandatory as the system will process only such

documents having the aforesaid data in the directory validated by DGFT. Therefore all exporters should submit their PAN particulars to the DGFT promptly. Registration for Value Added Tax (VAT): VAT is levied on the difference between the the sale price of the goods produced or the services rendered,& the cost thereof that is ,the difference between the output & the input.

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. It is the person, NOT the enterprise ,who is registered for VAT. Exporter will need to complete the registration application form, which will be supplied by the office, & take it or post it to the local VAT office. The local VAT office will deal with the application & send you a Certificate of VAT Registration. 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 (list given in Appendix 2) in duplicate in the prescribed form given in Appendix 1.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.The duly signed application form should be supported by the following documents: Bank Receipt (in duplicates)/Demand Draft for the payment of the fee of Rs.1,000/Certificate from the Banker of the applicant firm as per Annexure 1 to the form given in Appendix 1 of this book. Two copies of Passport size photographs of the applicant duly attested by the banker to the applicants.

A copy of Permanent Account No issued by Income Tax Authorities.If PAN has not been allotted,a copy of application of PAN submitted to Income Tax Authorities. In case the application is signed by an authorised signatory,a copy of the letter of legal authority may be furnished. If there is any non-resident interest in the firm & NRI investment is to be made with repatriation benefits,a simple declaration indicating whether it is held with the general/specific permission of the RBI on the letter head of the firm should be furnished.In case of specific approval,a copy may also be furnished. Exporters Profile as per form attached to Appendix 1 of this book (See Appendix 1A of this Book). The Regional Licensing Authority concerned wil on merits grant an IEC number to the applicant.The number should normally be given within 3 days provided the application is complete in all respects & is accompanied by the prescribed documents.An IEC number allotted to a applicant shall be valid for all its branches/divisions as indicated on the IEC number. 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. For this purpose you should apply in the prescribed form,given at Appendix 3 of this Book to the Export Promotion Council relating to your main line of business. For list of Registering Agencies,please refer to Appendix 4 of this book.However,if the export is such that it is not covered by any EPC,RCMC in respect thereof may be obtained from the Regional Licensing Authority concerned. An application for registration is granted, the EPC or FIEO shall issue the RCMC indicating the status of the applicant as merchant exporter or manufacturer exporter. The RCMC shall be valid for five years ending 31st March of the licensing year in which it was issued.

Registration with Sales Tax Authorities: Goods which are to be shipped out of the country for export are eligible for exemption from both Sales Tax and Central Sales Tax. For this purpose, you should get yourself registered with the Sales Tax Authority of your state after following the procedure prescribed under the Sales Tax Act applicable to your State. Every license/certificate/permission shall be valid for the period of specified in the license/certificate/permission and shall contain such terms and conditions as may be specified by the licensing authority which may include:

The quantity, description and value of the goods Actual user condition Export obligation Value addition to be achieved Minimum export price EXPORTS Export in simple words means selling goods abroad. International market being a very wide market, huge quantity of goods can be sold in the form of exports. Export refers to outflow of goods and services and inflow of foreign exchange.Export occupies a very prominent place in the list of priorities of the economic set up of developing countries because they contribute largely to foreign exchange pool. Exports play a crucial role in the economy of the country. In order to maintain healthy balance of trade and foreign exchange reserve it is necessary to have a sustained and high rate of growth of exports.The export procedure has been split into two stages preshipment & postshipment.

PROCEDURE
PRE - SHIPMENT PROCEDURE
The exporting company issues a quotation to its prospective buyer mentioning its terms and conditions related to shipping of goods, payments, 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 send a Purchase order (PO) and if payment term is a L/C payment then Letter Of Credit (L/C) is opened in favor of the seller (beneficiary / exporter ) and is handed over to the exporter via the negotiating bank / advising bank . On receipt of the LC by the seller it is scrutinized and if there is any discrepancy in it from the terms and conditions mentioned in quotation or any terms that cannot be complied with, then an amendment is asked from buyer . On receipt of PO/LC production orders are sent to the production dept . and preshipment finance is also obtained. Preshipment finance can also be obtained on a provisional basis from banks

before receiving the PO/LC. As soon as goods are ready for dispatch the export department prepares various documents required as per the Indian Customs norms and also books space with the shipping company, which is done on the basis of measurement of the consignment and after this shipping is taken care by authorized clearing and forwarding agent s(C&F) appointed by the exporter . On sale of goods the excise

paid on the inputs and capital goods can be claimed back through CENVAT credit and in case of exports the excise payment on final goods is exempted. The CENVAT credit may be utilized for payment of (a) Any duty of excise on any final product ; or (b) An amount equal to CENVAT credit taken on inputs if such inputs are

removed as such or after being partially processed; or (c) An amount equal to the CENVAT credit taken on capital goods if such

capital goods are removed as such; or (d) Service tax on any output service The goods can be exported under bonds in which exporter furnishes

bond and hence he need not pay excise duty on his inputs and there is no cash out flow for him. But the goods purchased under bond can be used only for export purposes. In case of exports under bond an account of exporter is

opened with excise dept wherein amount equivalent to duty payable is debited. When the exporter furnishes proof of exports the amount so mentioned in the proof is credited. As soon as the goods are ready in factory invoice and packing list is prepared by export department . These documents are forwarded to the CHA (clearing agent ) . The CHA prepares the shipping bill and forwards the necessary documents to the customs for endorsement . The goods are then released from factory to be sent to customs. When the customs gives its clearance then only the goods are loaded on the vessel . After the goods are loaded the captain of the vessel issues a Mate Receipt , which gives the confirmation that the goods have been loaded on the vessel in good condition and if the goods are not in good condition the Captain issues a Stained Mate Receipt .

CUSTOM CLEARANCE PROCEDURE:

For custom clearance following documents are to be sent : Invoice- 4 copies Packing list - 4 copies Exchange control GR form- 1 (duplicate) copy SDF form- 1 copy EP copy- 1 DEPB copy- 1 Application for removal of excise (ARE) copy- 1

For examination custom checks all the documents and 10% of the goods. On 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 send to negotiating bank. The clearing agent prepares the Bill of Lading draft on the basis of specimen given by the exporter and the same is forwarded to the shipping company. On the basis of draft the shipping company checks the relevant details like whether the goods are loaded or not and the loaded particulars match with the details in shipping bill & draft . On verification of documents and after they receive all their charges in full , shipping company

issues the Bill of Lading. The CHA collects the BL from the shipping company duly signed and the following documents is handed over to the exporter . Invoice/Packing List Purchase Order Generalized System of Preferences Certificate of origin (GSP form A) Shipping Bill ARE1&2 GR form/SDF form L/C The Pre Shipment procedure closes here .

POST SHIPMENT PROCEDURE

The export department on receiving documents from CHA prepares post shipment documents and sends them to the

various

advising/negotiating bank to get the payment . The post shipment documents are prepared in two sets; one set is for buyer and one set for advising/negotiating bank. Buyer Set Number Bank Set Number Bill Of Exchange 1+1 Covering Letter Invoice 4 originals Invoice 1 copy Packing List 4 originals Packing List 1 copy Bill of lading 3 originals Bill of lading 1 copy Certificate of Origin 1 copy Exchange Control 1+1

Any other document as per LC SDF 1+1 If the export is against an LC then the bank documents to be sent

is mentioned in L/C. The negotiating bank will scrutinize these documents and if found in order , negotiate the same. If the export is DA/DP then one set of documents is sent to bank in which payment from that particular buyer is going to be received and one to buyer directly for release of goods from port . The issuing bank makes the payment to the negotiating bank if there is no discrepancy in the terms and conditions as mentioned in L/C. If there is any discrepancy then the issuing bank asks for a NOC or a discrepancy waiver approval from the importer and after it is given then only the payment is released to the negotiating bank. Then the beneficiarys bank gets the payment from issuing bank and on receiving the payment it issues a Bank Realization Certificate (BRC) . This document confirms the export realization and is used for getting the incentives hence it is send to the Director General of Foreign Trade (DGFT) for the Duty. Entitlement Pass Book (DEPB) scheme application. A copy of Bank Realization Certificate (BRC) is sent to RBI directly by the negotiating bank.

DOCUMENTATIONS
The documents generally required for post shipment procedure: Invoice Packing list Bill of exchange Certificate of origin Forward Cargo Receipt /Lorry Receipt /Airways Bill or Bill of Lading Shipping Bill A.R.E. 1&2 Mates Receipt Declaration Form

INVOICE:

A commercial invoice is a prima - facie evidence of the contract of sale and

purchase. It is a document made by the exporter on the importer indicating details like description of the goods consigned, consignor s name, consignees name , name of the steamer , number and date of bill of lading, country of origin of goods, price, terms of payment , amount of freight etc. Following are the conditions that must be exercised in order to ensure that an invoice is considered valid: The invoice should be made out in the name of the applicant or the party specified in LC To be signed by an authorized signatory of the exporter. The invoice should be drawn in the same currency of LC unless otherwise specified also mentioning the terms of delivery & routing of merchandize. The invoice should not include any charges not stipulated in the LC. Also, the gross value of invoice should not exceed credit value. The invoice should show deduction towards advance payment made, agency commission payable etc. as applicable. Final amount of invoice or the percentage of drawing as permitted in the LC should correspond with the draft amount. If partial shipments are affected, amount of drawings should preferably correspond to proportionate quantities shipped. If invoices issued for an amount in excess of the amount permitted by the credit , the drawing should not exceed the amount of credit . Details stated on the invoice should correspond exactly to details specified in al l other documents. Also, the details should certify the facts like origin of goods etc, stipulated in the LC

PACKING LIST:

It contains minute details of the goods, which are to be exported. It is used

to describe the goods in detail for the verification in clearance process. It is a pre-shipment document prepared by exporting company. It contains following details: Excise number Color , Size, Set /pair , Cartoons, Pieces, Weight , Measurement & Dimension of the goods packing. Shipping company utilizes this information to calculate the volume of space to be occupied by a consignment . It also states other details like name of exporter , cosignee, port of loading, discharge & destination.

BILL OF LADING:
A bill of lading is a document issued by the shipping company or its agent acknowledging the receipt of the goods for carriage which are deliverable to the consignee or his assignee in the same condition as they were received. Bill of lading is closely related to the LC. It is a very important document when it comes to LC mode of payment . Each & every LC has the

provision of presentation of Bill of Lading before payment is discharged on it . The possession of the original bill of lading enables the holder to claim the goods from the carrier . It is the only negotiable document & is a title to the goods. It is generally issued in three originals and all the three are sent to the buyer as a post shipment document . The bill of lading must contain the following elements: Show the name of the carrier and must be issued by a named carrier or his agent , the bill of lading must also be signed by the named carrier or his agent . Bear a distinct number Indicate the date and place of issuance Indicate the name of the consignor and consignee Indicate a brief description of the goods being carried Indicate port of loading and/or taking in charge Indicate port of discharge Be issued in full set of originals. Meet all other stipulation of the credit Must indicate whether freight is prepaid or payable Delivery agent contact details All terms & conditions of carriage at the reverse There are different types of bill of lading enlisted below: Container bill of lading House bill of lading Master bill of lading Express bill of lading Charter party bill of lading Combined transport bill of lading Clean bill of lading Claused bill of lading Short - form bill of lading Liner bill of lading

Through bill of lading Switch bill of lading

Lash bill of lading Stale bill of lading On-board bill of lading It is important to use proper terms in a LC for a bill of lading because the BL has to be generated a s per the LC terms & conditions. Signing of bill of lading : The signing of bill of lading must be reflected by means of a signature of an Identified owner Identified agent of the master or owner Identified master (captain)

CERTIFICATE OF ORIGIN:

Many countries require a certificate of origin from the

supplier of goods stating the origin of goods and certified by the chamber of commerce or any other recognized authority in the exporter s country. It must contain the following features: It must be signed and issued by an independent recognized by the govt. of the exporting country such as chamber of commerce etc. certifying the origin of the goods. The country of origin certified must be as per the LC requirement and consistent with the declaration given by the beneficiary in his invoice/other documents. It must indicate the description of goods and should be consistent with other documents. It must indicate the quantity/weight of the goods and should be consistent with other documents. It must indicate the name of the consignor /seller and name of the consignee/buyer , invoice no. & date.

SHIPPING BILL:
This document is issued by the customs and is certificate of custom clearance. A copy of shipping bill is sent to the seller s bank as a post shipment document . It contains all the details about the goods like: Bears a distinct number known as SB number. Indicate the date and place of issuance Name and mode of the carrier

Indicate the name of the consignor and consignee Indicate a brief description of the goods being carried Indicate port of loading or taking in charge Indicate 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 For ex a cocount number also.

A.R.E.1&2 (Application for Removal of Excisable Goods):

It is an export document for export clearance. It is an application made to Excise department for taking the goods out of the factory. There are two types of ARE forms ARE1 & ARE2. ARE1 is used if export made is in discharge of export obligation under any scheme. ARE2 is used when export is not in discharge of any obligation. It is issued in five copies: Original Rebate Claim Duplicate Rebate Claim Triplicate Excise Department Quadruplicate Plant / Factory Quintuplicate Plant / Factory It contains the following information -

A running serial number beginning from the first day of the financial year . Manufacturer s name, address and excise registration number . Brief description of goods like quantity, weight & packaging. Value & rate of duty imposed and Amount of rebate claimed.

FCR / LR / Airway Bill:

Al l the three documents are issued for the same purpose but for different means. Freight cargo receipt is issued when the goods are exported through sea route, Lorry receipt is issued in the case when goods are exported by road and Airways Bill is issued when goods are exported via airways. In absence of BL these documents act as a proof for export of goods. These documents are issued in lieu of BL, which is issued and sent to the buyer with the shipment itself by the shipping company.

MATES RECEIPT
It is issued by the Chief of the vessel after the goods are loaded. It contains: the name of shipping line the name of vessel the name of port of loading the name of port of discharge the name of place of delivery Marks and nos Kind of packages Description of goods Container no. Gross weight condition of cargo at time of receipt

Shipping bill no. & date The Mates Receipt is transferable and it must be presented at the shipping Companys office to be exchanged into Bill of Lading.

DECLARATION FORMS
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. PP Form: (in duplicate) for export by post SOFTEX: (in triplicate) for export of software otherwise than in physical form. The above forms are printed in a distinctive colour and each set bears a printed number which appears on both copies of the form. Exporter can obtain these forms from Reserve Bank of India. (They can be obtained from authorized dealers also.)

MODES OF RECEIVING PAYMENTS ADVANCE PAYMENT:

under export trade / international trade viz

It refers to the mechanism under which payment is made in

advance by the importer , after which the exporter makes the shipment . Advantage to the buyer under advance payment mechanism: None Advantage to the seller: Use of funds No binding

Risk to the buyer: Following are the risks being under taken by the buyer in case of advance payment mechanism. Funds committed No control over goods Seller may not ship Risk to the seller: None Thus, under this system, while the seller enjoys a highly favorable position, the buyer is exposed to large-scale peril s.

OPEN ACCOUNT MECHANISM:

It refers to a mode of payment whereby the

shipping documents are sent by the exporter directly to the importer , without coursing the documents through the banks, upon the buyer s promise to pay at some future date after shipment . Advantage to the buyer : The buyer enjoys the following advantages. Pay when you like Control over goods Advantages to the sellers : None Risk to the buyer : None Risk to the seller: No control over goods or payment

Buyers may refuse to pay

DELIVERY AGAINST PAYMENT:

In this mode payment is made when documents

pertaining to delivery of goods are received. The exporter submits the documents in his bank , which is transferred to buyer s bank . The buyer s bank makes the payment and passes over the documents to the buyer who in turns receives the goods against those documents. Advantages to the buyer:

No commitment of funds in advance No risk involved as payment made against documents Advantages to the seller: Risk is minimized as banks come in the picture Release of funds quick with delivery of goods Control over goods and payment exists Risk associated with buyer: none Risk associated with seller: none

DELIVERY AGAINST ACCEPTANCE:

In this mode of payment the seller receives

money after a certain period of time. This time is provided as credit period to the buyer . The date of credit is calculated from the date of shipment i.e. date given in Bill of Lading. Advantages to the buyer: Gets extra time to pay for the goods at no extra cost . Advantages to the seller: The provision of extra credit period helps in getting more customers. Risk associated with buyer: none Risk associated with seller: none

LETTER OF CREDIT:

A letter of credit can be defined as a conditional under taking of

payment given by a bank. Expressed more fully, it is a written conditional under taking issued on behalf of the importer (applicant ) by the issuing bank to the exporter of goods (beneficiary) to pay for the goods or services, provided the documents submitted conform strictly to terms and conditions of the credit . From this definition it can be seen that there are basically three parties to a letter of credit : a) the buyer/ importer , who requires that a credit be issued in his favour; b) the beneficiary ( the supplier of goods) ; and c) the issuing bank which issues the credit at the request of the buyer or importer . The credit is

usually (but not always) advised to the beneficiary through a bank in the beneficiary's country ( the advising bank) . Following are the parties to a letter of credit . The Applicant The Issuing bank The Beneficiary The Advising bank The Confirming bank The Nominated bank The Reimbursement bank

THE APPLICANT: Generally, the applicant of an LC is the buyer of the goods who has to
make payment to the seller . At his request and instructions the issuing bank opens the LC. An issuing bank itself can also be an applicant

THE ISSUING BANK:

It is the bank, which opens the LC in favor of the beneficiary. By

opening the LC the issuing bank under takes the responsibility to make payment to the seller on compliance of the required terms and conditions. T he issuing bank is the applicant s bank that opens, issues or establishes the credit . It is accountable to honor the documents if it is in order .

THE BENEFICIARY:

The beneficiary is the party who is to receive payment from the

applicant . The LC is opened in his favor to enable him to receive payment on the submission of the stipulated documents.

THE ADVISING BANK:

The advising bank advises the credit to the beneficiary.

Advising of credit is done only after verifying the authenticity of the credit . When a bank advises a credit , it implies that it authenticates the signatures of the issuing bank. The advising bank is usually located in the country of the beneficiary.

THE CONFIRMING BANK:

The advising bank or any other bank so authorized by the

issuing bank may assume the role of a confirming bank and add its confirmation to the LC

opened by an issuing bank .The bank which has been asked to confirm an LC is under no obligation to confirm it . It can independently chose either to confirm or not , but it should advise its decision t the issuing bank immediately. A confirming bank for all practical purpose enters the role of an issuing bank and assumes primary responsibility of effecting payment under the LC to the beneficiary, upon hi s complying with the terms of the LC.

THE NOMINATED BANK:

authorized by the issuing bank To pay if the LC is a payment LC

Nominated bank is the bank that is nominated and

Incurred a deferred payment undertaking Accept drafts, if the credit stipulates so Negotiate Where a credit is specified as freely negotiable, any bank can negotiate the document s under such an LC. However , where credit is specified as freely negotiable, any bank can negotiate the document s under such an LC. However , where credit is restricted for negotiation the issuing bank specifies the banks which are nominated banks and to whom the documents are to be presented for negotiation etc. Any other bank than the nominated bank in the LC cannot negotiate bills under an LC with restricted for negotiation clause.

THE REIMBURSING BANK:

It is the bank, nominated by the issuing bank authorized

to honor to reimburse the claim in settlement of negotiation/acceptance/payment lodged with it by the paying, negotiating or accepting bank. It is normally the bank, which the issuing bank has accounted, from which payment is to be made.

FEATURES OF LETTER OF CREDIT:

as under : It is a conditional bank under taking of payment .

The features of letter of credit may be outlined

It ensures payment provided the terms and conditions of the credit have

been fulfilled. It is based on documents only and not on merchandise. It is an arrangement by banks to facilitate and settle international trade. Important aspects to be looked in an Inward LC: Does the credit comply with all the terms of commercial contract , such as description of goods, unit price( s) , quantity, payment / shipment terms etc? Are the name and address of buyer as well as seller are mentioned correctly? Does the credit contain any conditions, which are unacceptable or difficult to comply with? Can the documents required by the credit be easily obtained and presented? Is the documentary credit duly authenticated by the advising bank and irrevocable? Does the credit state that it is subject to Uniform Customs and Practices (UCP) for documentary credits, ICC publication No.500? Does the credit clearly state the date(s) and place( s) of shipment and expiry? Are the dates and period sufficient to ensure compliance and obtain payment under the credit? Does the credit contain excessive details and ambiguous terms which are difficult to comply with; documents are inconsistent or contradictory with each other ; non-documentary conditions which are unclear or difficult to comply? In case if any of the terms and conditions are not acceptable then immediately a request has to be made to the buyer for the necessary amendments under the credit .The scrutinized LC if ok is sent to the bank for negotiations after the shipment. Before sending the documents to banks they are thoroughly to avoid any discrepancies, which could lead to rejection from the credit -opening bank. Some of commonly observed discrepancies are: Documentary Credit has expired

Late Shipment of goods Description of goods on invoice differs from that in the credit Shipment is uninsured Documents not presented within the specified time after shipment of goods Claused bill of lading Insurance cover expressed in a currency other than that of the credit Absence of signatures, where required on the documents presented

Opening of letter of credit: The following basic rules should be exercised during the course of opening up of a letter of credit. Instructions to the opening bank should be clear , precise, and correct . All terms and conditions should be documentary in nature. The terms and conditions should agree with those of the contract .

ADVANTAGES OF LC:

There are advantages to both the buyer and seller when

settlement is arranged by letter of credit. From the perspective of sellers Credit worthiness of bank replaces that of buyer Shift the sovereign risk of the buyer s country to a bank Low cost financing options are available for LC backed bills From the buyer s perspective : Seller will not be paid unless his documents conform to the terms and conditions of the LC. Flexible payment terms

DIFFERENT TYPES OF LETTER OF CREDITS.

A Revocable Credit is one, which can be amended or cancelled at any time without prior notice or warning to the seller . It involves risks to the beneficiary, as the credit may be amended or cancelled while the goods are in transit and before correct documents are presented. The seller of goods would then face the problem of obtaining payment directly from the buyer . A revocable credit gives the buyer maximum flexibility, as it can be amended or cancelled without prior notice to the seller up to the moment of presentation of documents to the bank at which the issuing bank has made the credit available for payment . An Irrevocable Credit cannot be amended or cancelled without the agreement of the issuing bank, the confirming bank ( if the credit is confirmed) and the seller (beneficiary) . An irrevocable credit gives the seller greater comfort of payment but is really only dependent

upon the under taking of a bank abroad. The buyer can request the advising bank to add its confirmation to an irrevocable credit if he is not satisfied with the assurance of the credit issuing bank. If the advising bank agrees, the irrevocable credit becomes a confirmed irrevocable credit. For adding confirmation, the bank will charge commission, which may have to be paid by seller. A confirmed irrevocable credit gives the seller a double assurance of payment, since a bank in the seller 's country has now added its own under taking in addition to that of the issuing bank to pay for the documents drawn under the letter of credit , provided of course, the documents are drawn strictly in compliance with the terms of the credit . A transferable credit under Article 48 of the UCP is one under which the beneficiary has the right to give instructions to the bank, which is authorized, by the credit -issuing bank to effect payment , accept drafts or negotiate documents to make the credit available in whole or in part to one or more parties. A letter of credit can be transfer red only if it is expressly designated as transferable by the issuing bank and can be transfer red once only (however , if part shipments are not prohibited, fractions of a transferable credit may be transfer red to more than one beneficiary) . When a credit is transfer red to a second beneficiary or a number of second beneficiaries, it must be transfer red on the terms and conditions specified in the original credit , except that : The amount of the credit may be reduced

Any unit price may be reduced The validity may be curtailed The specified period of time after the date of shipment for presentation of documents may be curtailed The latest shipment date may be curtailed The name of the first beneficiary can be substituted Insurance cover percentage may be increased in such a way as to provide the amount of cover stipulated in the original credit The first beneficiary may request that payment or negotiation be effected at the place to which the credit has been transferred, up to and including the original expiry date.

A Back-To-Back Credit can be described as credit and counter -credit . It is a method of financing both sides of a transaction in which a middleman buys goods from one customer and sells them to another , both settlements being made under documentary credits. When the documents are received under back -to-back credit by the bank, they will advise the opener of the receipt of documents under the back -to-back credit. The opener substitutes his own invoices and drafts made out in the name of the foreign buyer and tenders the documents for negotiation under the export letter of credit . The bank will then negotiate both the documents and honor the documents submitted under back-to-back credit from the proceeds of the original export credit . The difference, if any, between the amount paid under the back-to-back credit and amount reimbursed from the foreign bank under the export credit will be paid to the original beneficiary, less bank charges. Revolving Credits are those, which renew themselves automatically. If the renewal is not automatic but subject to reinstatement instructions, the credit is not , in a true sense, a revolving credit in international usage. It is rather a credit of fixed amount , which has to be increased by means of amendment instructions after each drawing or , alternatively, a credit of a fixed total amount is payable by specific instalments. Under a revolving credit , the drawings made under the credit can be re-available to the beneficiary, upon receipt of instructions from the opening bank to the effect that the amount

has been reinstated in the credit . A credit can be made revolving as to time or up to a maximum amount of drawing. Installment credit : It stipulates that shipment may be made in installments at specified periods of time. Installment credit differs from simple credit which permits partial shipment in the sense that under installment credit , the time a s well as the quantity is stipulated .on the contrary, under a simple credit , which permits partial shipment , there is no stipulation as to time and quantity. Deferred credit : It is mostly used in those trades where a portion of money is paid by the buyer after verification of goods or after assessing the value of the goods taken into account the quality, shortages etc. date for payment of credit may or may not be specified. Hence, such scheme is known as deferred credit . Transit credit : Normally, when an LC is opened, it will be advised to the beneficiary by a bank that is based in the beneficiary s country. In case of a transit credit , the services of a bank located in a third country will be used. Such a requirement may be cal led for where the

opening bank has no correspondent relations with any bank in the beneficiary s country. Countries may open transit credit whose credit may not be readily accepted by in the beneficiary s country. In such a case, a bank in a third country may be requested to open the LC. Reimbursement credit : When a credit is denominated in the currency of a third country, such credit of is the termed opening as reimbursement or by credits. to Sometimes the nostrum credits account where of a the paying/accepting/negotiating bank is reimbursed in manner other than by debit to the vector account bank credit paying/accepting/negotiating bank held with the opening bank are also referred to as reimbursement credits. Anticipatory credit : Payment under a letter of credit is usually made at the post shipment stage. Hence, under anticipatory credit payment is made to the exporter at the pre -shipment stage in anticipation of goods and submission of bills at a later stage. Anticipatory credit is of two types: red clause credit and green clause credit . The Red Clause in the credit enables him to borrow money from the bank to pay for the goods

to be shipped. The beneficiary thus purchases the goods and Effects the shipments. After shipment s are made, the documents are tendered to the bank. However, the opening bank immediately on effecting payment will Reimburse the bank making payment under the redclause credit to beneficiary. The object of the inclusion of the red clause in a letter of credit is to enable the beneficiary to obtain pre - finance from a bank in his country. It is called so because, historically, it was usually printed in red on the advice of credit . There are two types of red -clause credits. One is secured and other , unsecured. Under unsecured credit , the payment in advance will be made to the beneficiary against presentation of clean drafts only, drawn on the advising bank/opening bank. Under secured or documentary red -clause credit , the advance will be made against warehouse receipts or similar document s and the beneficiary's under taking to deliver the relative Bills of Lading upon shipment . A Green-Clause Credit is one, which envisages the granting of storage facilities at the port in addition to the pre -shipment payment to the beneficiary.

A Standby letter of credit , while possessing all the elements of a documentary credit subject to UCP, is often used in lieu of performance guarantee. Basically, the standby credit is intended to cover a non -performance (default ) situation, as with the traditional letter of credit . The bank authorized to make payment under a standby letter of credit will affect payment on presentation of requisite documents called for in the credit to the beneficiary, although the opener may claim performance. Credits are available for settlement by acceptance/ negotiation payment /deferred payment . The negotiation under a confirmed credit is without recourse while one under an unconfirmed credit is with recourse to drawer unless specified otherwise. Typically, a letter of credit nominated in any other currency other than that of the beneficiary will be available by `negotiation'.

EXPORT FINANCING
Foreign Trade implies a trade transaction between two parties, each one of whom is located in a different country. In other words, trading between two different countries is referred to as foreign trade. It is to be distinguished from the home trade, which takes place within the frontiers of the same country. The basic task of financing the foreign trade is similar to that of the home

trade i.e. to receive payments from the buyers and to make payments to the sellers. This task is largely performed through the instrument of bills of exchange, which are called foreign bills of exchange. Banks play an important role in facilitating the process of receipt of payments in case of foreign trade. But the international character of foreign trade gives rise to a number of problems which render the task of financing complicated. These complexities are as follows: Lack of uniformity in the currencies of the two countries; Lack of personal contacts between the buyers and the sellers; Variations in the trade practices and usages in the two countries; and Different legal and regulatory systems in the two countries. Hence banks adopt their practices and techniques to suit the needs of financing the foreign trade. Letters of credit play an important role in financing the foreign trade. Reserve Bank of India provides refinance to the banks at concessional rate. Export Import Bank also provides refinance in respect of medium term export credit and directly extends export credit.

Guarantees issued by Export Credit Guarantee Corporation of India facilitate the task of financing the foreign trade.

TYPES OF EXPORT CREDIT

The credit required by an exporter from a banker is broadly divided into two categories, viz (i) Pre-shipment credit, and (ii) Post-shipment credit. Both of these may be acquired either in Indian Rupees or in Foreign Currencies. Pre - Shipment Credit means any loan or advance or any other credit provided by a bank to an exporter for financing the purchase, processing, manufacturing or packing of goods prior to shipment. Post - Shipment Credit means any loan or advance granted or any other credit provided by a bank to an exporter of goods from India after the shipment of goods to the realization of the export proceeds. Thus the dividing line between the two types of export credits is the date of shipment. Generally, the pre-shipment credit is extinguished by the submission of export bills and connected documents. Thereafter, it is called post-shipment credit.

PRE - SHIPMENT CREDIT

The pre - shipment credit meets the working capital needs of an exporter at the pre-shipment 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 pre-shipment 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 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: 1. 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. 2. Packing credit may be released in one lump sum or in instalments as required by the exporter. Banks must monitor the end-use of the funds and ensure their utilization for genuine requirement of exports. 3. 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. 4. In case of agro-based products, the non-exportable products are to be sold within the country. Banks must charge interest at commercial rate, as applicable to domestic advance, on packing credit covering non-exportable portion. 5. 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. Spread 1. The spread for pre-shipment credit in foreign currency will be related to the international reference rate such as LIBOR/EURO LIBOR/EURIBOR (6 months). 2. The lending rate to the exporter should not exceed 0.75 per cent over LIBOR/EURO LIBOR/EURIBOR, excluding withholding tax. 3. LIBOR/EURO LIBOR/EURIBOR rates are normally available for standard period of 1, 2, 3, 6 and 12 months. Banks may quote rates on the basis of standard period if PCFC is required for

periods less than 6 months. However, while quoting rates for non-standard period, banks should ensure that the rate quoted is below the next upper standard period rate. 4. Banks may collect interest on PCFC at quarterly intervals against sale of foreign currency or out of balances in EEFC accounts or out of discounted value of the export bills if PCFC is liquidated within the quarterly rest for collection of interest. Period of Credit (i) 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. (ii) 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.

(iii)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). Disbursement of PCFC (i) In case, full amount of PCFC or part thereof is utilized to finance domestic input, banks may apply appropriate spot rate for the transaction. (ii) As regards the minimum lots of transactions, it is left to the operational convenience of banks to stipulate the minimum lots taking into account the availability of their own resources. However, while fixing the minimum lot, banks may take into account the needs of their small customers also. (iii)Banks should take steps to streamline their procedures so that no separate sanction is needed for PCFC once the packing credit limit has been authorized and the disbursement is not delayed at the branches. 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 detailed in para 2.2 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)Packing credit in excess of F.O.B. value In certain cases, (viz. agro based products like HPS Groundnut, defatted & deoiled cakes, tobacco, pepper, cardamom, cashew nuts, etc.) where packing credit required is in excess of FOB value, PCFC would be available only for exportable portion of the produce. (iii)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. 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. Sharing of EPC under PCFC (i) The rupee export packing credit is allowed to be shared between an export order holder and the manufacturer of the goods to be exported. (ii) Similarly, banks may extend PCFC also to the manufacturer on the basis of the disclaimer from the export order holder through his bank. PCFC granted to the manufacturer can be repaid by transfer of foreign currency from the export order holder by availing of PCFC or by discounting of bills. Banks should ensure that no double financing is involved in the transaction and the total period of packing credit is limited to the actual cycle of production of the exported goods. (iii) The facility may be extended where the banker or the leader of consortium of banks is the same for both the export order holder and the manufacturer or, the banks concerned agree to such an arrangement where the bankers are different for export order holder and

manufacturer. The sharing of export benefits will be left to the mutual agreement between the export order holder and the manufacturer. 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 USD100,000 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 (we will deal with is in further detail under Post shipment credit). 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 (dealt with under forward cover section). 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 (details under Post shipment finance). Here, the interest liability of the exporter is on libor related rates; 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.

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.

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. 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 As explained earlier 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. 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 with in 25 days form the date of discount. Any of the following scenario 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.

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 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.

PERIOD OF CREDIT
Export bills are of two types.

DEMAND 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 dvance 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

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-(a) purchase or discounting of the bills and (b) 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. We shall study about these guarantees later in this unit. 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.

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. A Letter of Credit is defined as a letter issued by the banker of the buyer, at the latter's request, in favour of the seller (exporter) informing him that the issuing banker undertakes to accept the bills drawn in respect of exports made to the buyer specified therein. It is thus, a written

intimation from the banker issuing it, that they have been instructed to open a credit for a certain amount of goods to be exported under certain terms and conditions. The importer at whose request the L/C is issued is called the applicant, the exporter is called the beneficiary and the banker issuing it is called the issuing banker. 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.

ADVANTAGES OF 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 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. In such Working Capital Loan arrangement, the customer may withdraw the fund in lump sum and repays the loan by instalments. 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 turn around 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

India provides

In order to promote exports

from the country and to increase the competitiveness of Indian exporters, Reserve Bank of

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 : (i) 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 (ii) 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 postshipment 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: (i) 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. (ii) Banks would clearly specify the benefits they would be offering to gold card holders. (iii) Request from card holders would be processed quickly within a prescribed time frame. (iv) 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 (v) Card holders would be given preference in the matter of granting packing credit in foreign currency. (vi) Banks would consider waiver of collateral and exemption from ECGC guarantee schemes on the basis of card-holders credit-worthiness and track record.

INTEREST RATES ON EXPORT CREDIT

In order to reduce the cost of export credit to the exporters, so as to increase their competitiveness in the international markets, Reserve Bank of India has prescribed ceiling rates for different categories of export credit. Banks are free to charge any rate below the ceiling rates. Present rates, effective from May 1, 2004, are as follows:
Table 6.2: Interest Rate on Export Credit

VARIOUS INCENTIVES BEING AVAILABLE TO EXPORTERS:

In order to encourage the exporters to go for higher production and thereby higher exports, the government has introduced a variety of schemes. Incentives have helped the exporters to attain higher level of efficiency and to increase their competitiveness in the global market

DUTY DRAWBACK
Under the Duty Drawback Scheme, the relief is given from the burden of duty incidence of Customs & Central Excise on basic inputs like raw materials, components, intermediates and packing. No relief by way of drawback is ext ended for duties suffered on capital goods, fuels and consumables used in relation to the product ion of export goods. Conditions for Duty Drawback Export is an essential condition. Item for which drawback is admissible. Sale proceeds should be realized within time limit. Only customs drawback can be availed if CENVAT is availed, drawback on excise is available only when CENVAT has not been availed. The drawback credit amount is remitted to the company in cash form. Procedure for Filling Drawback Claims This procedure now is done through EDI process, which is less cumbersome than the manual process. We will have a look at both the procedures starting with manual procedure. The shipping bill is required to be filed in green colour in quadruplicate. It contains description, quantity and value of goods to be exported. It acts as declaration/statement made on exports and done at the time of exporting goods. The said claim for drawback should be accompanied by: Copy of export contract or letter of credit Copy of packing list Copy of ARE1 form Insurance certificate The drawback amount is directly credited in the account and received as a pay order in cash. In case the claim form is not complete the exporter will be informed within 10 days and if the claim were complete than the company would get its claim within period of 3 months

excluding the one -month period if required for testing of the export goods. If an exporter is not able to realize his export proceeds than the customs can recover the amount of drawback with an interest @ 15% p.a. Drawback Rates

The drawback rate is fixed by central government for each class of goods. There are two types of drawback rates, all industry rates & brand rates. All industry rate is fixed taking due notes of the various considerations as laid down in Rule 3 of Drawback Rules, 1995. All industry rates are generally revised every year immediately after the year s budget proposals are announced, taking into account the changes in utilization; CIF/assessable values indigenous substitution, etc. For textiles it is covered from chapter 50 -63 of Drawback Rules, 1995. Where the central government has not determined the all industry rates in respect of any export product eligible for it or manufacturer has availed of certain duty free facilities then they may apply under Rule 6 to the commissioner of central excise and customs for the determination of the drawback rate for his product. Sometimes the all industry rates do not compensate different exporters fully for the Customs & Central Excise duties actually suffered by them. Under rule 7 they can apply for fixation of appropriate rate of drawback is less than 4/5t
h

of the duties paid on the materials or component s used in the product ion. The

minimum rate of drawback is 2% of FOB value or Rs500 whichever is the maximum. Benefits of Using Duty Drawback Scheme Return of excise duty on raw materials for export goods. Return of customs duty in ca se of imported raw materials for export goods. The drawback money fetches extra income for the company.

ADVANCE LICENSE
An advance license is issued to allow duty free import of inputs, which are physically incorporated in the export product (making normal allowance for wastage) . It creates an obligation to export. E.g. suppose 40% polyester, 60% cotton yarn is imported for value of Rs xxxx. The export against this can be 40% polyester, 60% cot ton made-ups (bed sheet ) for value of Rs xxxx. There is a value addition in the import after which it is exported and this value addition should be positive. The license exempts from payment of basic custom duty, additional customs duty, education cess, anti -dumping duty, & safeguard duty, if any. An advance license is non -transferable license and can be used by the one in whose name it is issued.

Procedure An application is made in Aayaat Niryaat Form along with the documents mentioned in it to the licensing authority (DGFT) . It contains information like Name & description of items to be imported & exported. The quantity & value of each item to be imported. The aggregate CIF value of imports.

The FOB value & quantity of exports. The standard Input -Output Norm-SION It is verified by customs and then bulleted which makes it a valid license. A license, which is not bulleted, is not a valid license. Now this license can be used for the exemption of duties on imports. As mentioned a n advance license creates an obligation to export and this obligation is calculated on the CIF value of imports as per the input -output norms.

Advance License for Annual Requirements

This can be availed by any star house, other categories of exporters having exports in preceding 2 yrs & merchant exporter provided they agree to the endorsement of names of supporting manufacturers of the relevant license. Enhancement of obligation The export obligation value/volume can be enhanced/ reduced subject to positive value addition. For enhancement the application fee is different in the CIF values of original & final license. For reduction no fees, if applicant has paid maximum fee of Rs. 150000 for manual & Rs. 75000 for digitally signed respectively in original application for advance license. The period of fulfilment of export obligation shall commence from the date of issuance of license and is to be fulfilled within a period of 24 months. Extension can be granted by applying to regional licensing authority and payment of charges. Extension Period Composition fee as a % of duty saved on utilized imports 1s t time for 6 mths 2nd time for 6 mths Further Extension 2% p.a. 5% p.a. 2% p.m.

Table 7.1: Advance License Extension Payment Charges

After the expiry of export obligation period, including the extended obligation period, if any, the license holder shall furnish proof of having fulfilled his obligation by submitting following documents: BRC- Bank Realization Certificate EP copy of shipping bill

Statement of exports Statement of imports Non-Fulfilment of Export Obligation If obligation is fulfilled in terms of value but not quantity Custom duty on the unutilized value of imported material along with interest @ 15% p.a. Amount equivalent to 3% of CIF values of unutilized imported material . If obligation is fulfilled in terms of quantity but not value No penalty if minimum value addition is achieved i.e. positive value addition. If minimum value addition not achieved then, Amount to be deposited so that 100 times the amount plus FOB value realized is equal to prescribed minimum value addition. If obligation is not fulfilled in terms of quantity as well as value Then both the above -mentioned rules are applicable. Benefits We can import raw material on a 0% duty. Sometimes when the export is more than the obligation then the raw materials imported under that license could be used for domestic sales. This reduces the cost of materials. The cost of product ion comes down and increases competitiveness in foreign market . It can also be used to purchase goods from a domestic manufacturer, which helps us to procure materials at 0% excise duty.

DUTY ENTITLEMENT PASSBOOK SCHEME (DEPB Scheme)

The DEPB neutralizes the incidence of customs duty on the import content of the export product . It is provided by way of duty credit certificate with certain value against the export product , which can be used to pay either the customs duty or can be sold in market . An exporter can apply for credit as a specified % of FOB value of exports made in freely

convertible currency. DEPB credit is available on export of goods. However, only those goods specified in the list of the goods notified by the Director General of Foreign Trade by way of a public notice issued in this behalf will be eligible for credit . Thus, unless the item is specified in the list notified by the DGFT, no DEPB credit can be availed of.

Procedure The application for DEPB credit amount has to be filed within 12 months from the date of exports or within 6 months from date of realization or within 3 months from release of shipping bill , whichever is less, has to be made to DGFT in along with: Original EP copy Original BRC Copy of DEPB. Then the DEPB license is verified by customs, which makes it valid. The documents to be submitted for customs verification are : Original DEPB copy Copy of ARE 1 Copy of BRC Copy of BL Copy of mate receipt Copy of custom certified invoice T he DEPB application is now made online through EDI process. On the DGFT s website the form pertaining to DEPB is filled. This form has three parts namely Part 1, Part 2 & sub-section V. Part 1 contains IEC details, Application firm details, Industrial registration details, RCMC registration details, Status house details, Excise & vat details and past turnover . Part 2 contains IEC code, name & ad dress, ECOM no. , payment details and online application no. to identify the application. Details of part 1 & part 2 are common for all types of applications.

In subsection V invoice no, Item description and FOB value is given. It generates the total DEPB claim as per the information given.

The product group code for textiles is 89 and all the entitlement is done as per the rates given against each type of textile product . There is a value cap, which is the maximum permissible credit that can be given on that particular product . E.g. for grey/dyed or printed fabrics manufactured out of man -made fibre, the DEPB rate for the product is 13% with a value cap of Rs.300/kg. DEPB is issued in two ways either as Transferable or Nontransferable . Transferable is issued after realization of exports i.e. post shipment . Non transferable is issued before the realization of payment i.e. pre shipment . A transferable DEPB can be sold in open market as well as can be used for payment of import duties. Benefits A transferable DEPB license can be sold in market , so this optionality of a DEPB license gives extra income to the company. If the DEPB license is used for self than it gives cost benefit and increases competitiveness in domestic as well as international market .

EXPORT PROMOTION CAPITAL GOODS SCHEME (EPCG Scheme)

EPCG Scheme allows import of capital goods for pre -production & post - production at 5 % customs duty. This scheme s main objective was to boost the growth of textile industries and increase their competitive strength in global market . The scheme aimed at up gradation of technology in existing plants and also new technology for new plants. Features All merchant exporters and manufacturer exporters are eligible for this scheme. An obligation to export certain value of goods is created to claim benefit under this scheme. The export obligation under the scheme should be linked to the duty saved and shall be eight times the duty saved. Greater flexibility for fulfilment of export obligation under the scheme by al lowing export of any other product manufactured by the exporter .

Thus, the dynamics of international market would be taken care of. Capital goods up to 10 years old shall also be al lowed under the scheme. To facilitate the up gradation of existing plant and machinery, import of spares shall also be allowed under the scheme.

Procedure An application has to be made to the licensing authority along with the documents as required with the Aayaat Niryaat Form . For duty saved up to 50 crores, application has to be made to Regional Licensing Authority. For duty saved above 100 crores, application has to be made to DGFT. The documents required are: Profile of company in Appendix 2 Self certified copy of relevant Performa invoice Manufacturers illustrated pamphlet /catalogue Chartered Engineering Certificate Justification for import of capital goods Import item list Now the application is made online by downloading the form from DGFT s website. The form contains three parts Part 1, Part 2 and Sub Section vi . First two parts are common for all other schemes but subsections differ as per the schemes. In sub section vi following information is given: Address of factories where the goods will be used Past export performance Details of EPCG licenses already held inclusive of % of obligation fulfilled for them Details of new capital goods sought to be imported Condition for fulfilment of Export Obligation: Export obligation has to be fulfilled by export of goods capable of being manufactured or produced by the use of the capital goods imported under the scheme. The goods can be manufactured or produced in different manufacturing units of the license holder . The E.O. under the scheme shall be, in addition to any other export obligation under taken by the importer , except the export obligation under advance license, DFRC, DEPB or Drawback Scheme.

Exports shall be physical exports. Export proceeds shall be realized in freely convertible currency except for deemed exports. Non-Fulfilment & Extension of Export Obligation: If obligation of any particular block of years is not fulfilled in terms of the proportions as mentioned above, the license holder has to pay duties plus interest @ 15% on the duty saved in the proportion of unfulfilled portion of export to total export obligation. E.g. Duty saved- Rs 100 Export Obligation fulfilled - 50% Export Obligation not fulfilled - 50% Amount to be paid = custom duty + 15*50/100 = 50 + 7.5 = 57.5 Benefits: The cost of machinery and spare parts are reduced. Around Rs31.60 is saved on investment of every Rs100 on import of machinery ( if the machinery is not in list 30&31) . Lower cost of capital goods invites more investment in technology and expansion. The duty saved on capital investment reduces the break -even point , which in turn means early profits for the company.

FOCUS MARKET SCHEME (FMS)

Alok Industries does not opt of this scheme. Objective is to offset high freight cost and other externalities to select international markets with a view to enhance our export competitiveness in these countries. Entitlement Exporters of all products to notified countries as per in Appendix 37C of HBP v1 shall be entitled for Duty Credit scrip equivalent to 2.5% of FOB value of exports for each licensing year commencing from 1st April, 2006. However new additional Markets notified in Foreign Trade Policy 1st September 2004 31st March 2009 w.e.f 1.4.2008 (Appendix 37C of HBP v1) shall be entitled for Duty Credit scrip on exports.

FOCUS PRODUCT SCHEME (FPS)

Alok Industries does not opt of this scheme.

Objective is to incentivize export of such products, which have high employment intensity in rural and semi urban areas, so as to offset infrastructure inefficiencies and other associated costs involved in marketing of these products. Entitlement: Exports of notified products as per Foreign Trade Policy 1st September 2004 31st March 2009 w.e.f 1.4.2008 (as in Appendix 37D of HBP v1) to all countries (including SEZ units) shall be entitled for Duty Credit scrip equivalent to 1.25% of FOB value of exports for each licensing year commencing from 1st April, 2006. New additional products notified / clarified in Appendix 37D of HBP v1 of FTP shall be entitled for Duty Credit scrip on exports w.e.f 1.4.2008.

RISK ARBITRAGE TOOLS:

- Buyer Credit Guarantee - External Commercial Borrowing (ECB) - Foreign Currency Non Resident Loan (FCNR) - Commercial Papers

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 3mnths 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 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. However, offers from unrecognized sources will not be entertained. 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 millions 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. 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
Table 8.1: 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 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 1. 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 1. Investment in stock market

2. 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 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: (i) Prepayment approval for ECBs other than Bonds/Debentures/FRNs will be 15 days or period up to next interest payment date, whichever is later.

(ii) 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 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. 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). 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. Example1 The cost of a 6-month Dollar FCNR (B) Loan is as follows Date of Draw down suppose 31st May 2008 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%

Table 8.2: 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.

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. Example:A Corporate can raise a loan through the issue of commercial paper around @ 9-11% cost. On the other hand the cost of capital through the CC account is 12%.This will directly result in a saving of 2-3% to the company.