EXPORT MARKETING

Imports and Exports

What are Imports and Exports?
Imports are the goods and services that are purchased from the rest of the world by a country’s
residents, rather than buying domestically produced items. Imports lead to an outflow of funds
from the country since import transactions involve payments to sellers residing in another
country.
Exports are goods and services that are produced domestically, but then sold to customers
residing in other countries. Exports lead to an inflow of funds to the seller’s country since export
transactions involve selling domestic goods and services to foreign buyers.
What is Gross Domestic Product (GDP)?

Gross Domestic Product (GDP) is the gross market value of the total goods and services produced
within the domestic boundaries of a country during a given period of time. It is also known as
National Income (Y). Total imports and total exports are essential components for the estimation
of a country’s GDP. They are taken into account as “Net Exports”.
GDP = C + I + G + X – M
Where:
• C = Consumer expenditure
• I = Investment expenditure
• G = Government expenditure
• X = Total exports
• M = Total imports

Net Exports

(X-M) in the above equation represents net exports. Net exports are the estimation of the total
value of a country’s exports minus the total value of its imports. A positive net exports figure
indicates a trade surplus.

On the other hand, a negative net exports figure indicates a trade deficit. A trade surplus or trade
deficit reflects a country’s balance of trade (which is, essentially, whether a country is a net
exporter or importer, and to what extent).

How to Decrease Imports/Increase Exports

1. Taxes and quotas

Governments decrease excessive import activity by imposing tariffs and quotas on imports. The
tariffs make importing goods and services more expensive than purchasing them domestically.
Imposing tariffs is one way a country can work to improve its balance of trade.

2. Subsidies
Governments provide subsidies to domestic businesses in order to reduce their business costs.
This helps bring down the price of domestic goods and services hopefully, encouraging consumers
to buy domestic rather than imported goods. By enabling domestic producers to produce goods
less expensively and, thus, lower their prices, subsidies may also increase exports as the cheaper
goods become more attractive to foreign buyers.
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Quality of goods must still be factored into the equation. If consumers are convinced that a certain
product made in country “X” is of substantially better quality than the same product as made in
country “Y”, then they may continue purchasing the product from manufacturers in country “X”
even if government subsidies to manufacturers in country “Y” have made it significantly less
expensive to buy from country “Y”.

An example of the quality issue is illustrated by Sony televisions, which are perceived by many
consumers as being of notably superior quality to other brands. Therefore, despite the fact that
Sony TVs carry a significantly higher price tag, they still outsell many other brands because
consumers are willing to pay more for superior quality.

A good example of quality perception affecting imports/exports can be drawn from the wine
industry. For years, wineries in the United States experienced difficulties even selling their
products domestically, largely because of the fact that U.S. wines were not considered to be of
the same quality as, say, French or Italian wines.

However, as the quality of U.S. vintages improved and became acknowledged in the
marketplace, sales by U.S. wineries not only reduced imports of foreign wines – but also began
to develop a sizable export business as many European consumers began buying wines produced
in the States.

3. Trade agreements
Sometimes, countries ensure a regular flow of international trade, i.e., a high volume of both
imports and exports, by entering into a trade agreement with another country. Such agreements
are aimed at stimulating trade and supporting economic growth for both countries involved.

Trade agreements typically focus on the exchange of different types of products. For example,
the U.S. might enter into a trade agreement with Japan where Japan agrees to buy a certain amount
of American made automobiles in exchange for the U.S. increasing its imports of Japanese rice.

4. Currency devaluation
Another method of increasing exports and decreasing imports is by devaluing the domestic
currency. Governments devalue their currency with the aim of bringing down the prices of
domestic goods and services, the ultimate goal being to increase net exports. The currency
devaluation also makes purchasing from other countries more expensive, thus discouraging
imports.

How important are Imports and Exports?

Countries vary considerably with regard to how important imports and exports, and their overall
balance of trade is to their economies. For China, the world’s largest exporting country, exports
and a net positive balance of trade are critical to the success and growth of the country’s
economy. Maintaining a high level of exports is also very important to the economies of the
U.K. and Australia.

The growth of economies of developing countries is often fuelled by massive exports of

commodities and raw materials to developed nations. For this reason, mining is commonly a
key industry in such countries.

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What is Aggregate Supply and Demand?

Aggregate supply and demand refers to the concept of supply and demand but applied at a
macroeconomic scale. Aggregate supply and aggregate demand are both plotted against the
aggregate price level in a nation and the aggregate quantity of goods and services exchanged at
a specified price.

Aggregate Supply

The aggregate supply curve measures the relationship between the price level of goods supplied
to the economy and the quantity of the goods supplied. In the short run, the supply curve is fairly
elastic, whereas, in the long run, it is fairly inelastic (steep). This has to do with the factors of
production that a firm is able to change during these two different time intervals.

In the short run, a firm’s supply is constrained by the changes that can be made to short run
production factors such as the amount of labor deployed, raw material inputs, or overtime hours.
However, in the long run, firms are able to open new plants, expand plants or adopt new
technologies, indicating that maximum supply is less constrained.

The reason why the supply curve is more inelastic (steeper) in the long run is because firms will
be able to adapt to changes in price levels better. For instance, suppose that a firm can only
increase production by 5% by changing short-run production factors and that the price level
increases by 15%. Assuming unit-elasticity for simplicity, the firm cannot supply the equilibrium
supply quantity in the short run. Thus, its short-run aggregate supply curve will flatten as the
firm cannot keep supplying goods at the same rate as prices increase.

However, in the long run, the firm is able to manipulate long-run production factors and provide
the equilibrium quantity by producing 15% more. Thus, the curve is more inelastic as the firm
becomes more responsive to price changes. In this case, short and long-run production are usually
correlated with output quantity; such that a firm is able to better keep up with changes in output
when long- run factors of production need to be changed to meet the equilibrium quantity. The
graph below illustrates this concept:

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Aggregate Demand

Since consumer demand does not face the same constraints faced by suppliers, there is no
relative change in the elasticity of demand itself. Rather, the steepness of the demand curve
depends on the price elasticity of demand for the good. Thus, the aggregate demand curve
follows a consistent downward slope, whose elasticity is subject to change due to factors such
as:

• Changing consumer preferences

• New literature about certain products
• Changes in the rate of inflation
• Changes in interest rates
• Changes in the level of household wealth
• Foreign currency risk

Balance of Payments

What is the Balance of Payments?

The Balance of Payments is a statement that contains the transactions made by residents of a
particular country with the rest of the world over a specific time period. It is also known as
the balance of international payments and is often abbreviated as BOP. It summarizes all
payments and receipts by firms, individuals, and the government. The transactions can be both
factor payments and transfer payments.

There are two accounts in the BOP statement: the Current Account and Capital Account. The
Current account records all transactions involving goods, services, investment income and
current transfer payments. The Capital account shows the net change in ownership of foreign
assets and transactions in financial instruments.

The balance of payments account follows a double-entry system. All receipts are entered on
the credit side, whereas all payments are entered on the debit side. Theoretically, a balance of
payments accounts is always zero, with the total on the debit side equalling the total on the
credit side. Practically, however, there might be an error of some degree due to the different
sources of data and fluctuation of currency exchange rate.

Components of BOP

The BOP comprises two accounts: Current and Capital.

Current Account

The four major components of the Current account are as follows:

1. Visible trade – This is the net of export and imports of goods (visible items). The balance
of this visible trade is known as the trade balance. There is a trade deficit when imports are
higher than exports and a trade surplus when exports are higher than imports.
2. Invisible trade – This is the net of exports and imports of services (invisible items).
Transactions mainly consist of shipping, IT, banking, and insurance services.
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3. Unilateral transfers to and from abroad – These refer to payments that are not factor
payments – for example, gifts or donations sent to the resident of a country by a non-
resident relative.
4. Income receipts and payments – These include factor payments and receipts. These are
generally rent on property, interest on capital, and profits on investments.

Capital Account

The capital account is used to finance the deficit in the current account or absorb the surplus in
the current account. The three major components of the capital account:

1. Loans to and borrowings from abroad – These consist of all loans and borrowings
given to or received from abroad. It includes both private sector loans, as well as
public sector loans.
2. Investments to/from abroad – These are investments made by nonresidents in
shares in the home country or investment in real estate in any other country.
3. Changes in foreign exchange reserves – Foreign exchange reserves are maintained
by the central bank to control the exchange rate and ultimately balance the BOP.

A Current account deficit is financed by a surplus in the Capital account and vice versa. This
can be done by borrowing more money from abroad or lending more money to non-residents.

Significance of BOP

The balance of payments data is important to a lot of users. Investment managers, government
policymakers, the central bank, businessmen, etc., all use the BOP data to make important
decisions. The BOP data is affected by vital macroeconomic variables such as exchange rate,
price levels, interest rates, employment, and GDP.

Monetary and fiscal policies are formed in a way to achieve very specific objectives, which
generally exert a significant impact on the balance of payments. Policies can be formed with
the objectives to induce or curb foreign inflows or outflows.

Businesses use BOP to analyse the market potential of a country, especially in the short term.
A country with a large trade deficit is not as likely to import as much as a country with a trade
surplus. If there is a large trade deficit, the government may adopt a policy of trade restrictions,
such as quotas or tariffs.

Starting Export Introduction

How to Start Export is a fair question that every first time exporter wants to ask. Export in
itself is a very wide concept and lot of preparations is required by an exporter before starting
an export business.

A key success factor in starting any export company is clear understanding and detail
knowledge of products to be exported. In order to be a successful in exporting one must fully
research its foreign market rather than try to tackle every market at once. The exporter should
approach a market on a priority basis. Overseas design and product must be studies properly

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and considered carefully. Because there are specific laws dealing with International trade and
foreign business, it is imperative that you familiarize yourself with state, federal, and
international laws before starting your export business.

Price is also an important factor. So, before starting an export business an exporter must
considered the price offered to the buyers. As the selling price depends on sourcing price, try
to avoid unnecessary middlemen who only add cost but no value. It helps a lot on cutting the
transaction cost and improving the quality of the final products.

However, before we go deep into "How to export?” Let us discuss what an export is and how
the Government of Indian has defined it.

In very simple terms, export may be defined as the selling of goods to a foreign country.
However, As per Section 2 (e) of the India Foreign Trade Act (1992), the term export may be
defined as 'an act of taking out of India any goods by land, sea or air and with proper
transaction of money”.

Exporting a product is a profitable method that helps to expand the business and reduces the
dependence in the local market. It also provides new ideas, management practices, marketing
techniques, and ways of competing, which is not possible in the domestic market. Even as an
owner of a domestic market, an individual businessman should think about exporting.
Research shows that, on average, exporting companies are more profitable than their non-
exporting counterparts.

Why Need to Export

There are many good reasons for exporting:

➢ The first and the primary reason for export is to earn foreign exchange. The foreign
exchange not only brings profit for the exporter but also improves the economic
condition of the country.
➢ Secondly, companies that export their goods are believed to be more reliable than their
counterpart domestic companies assuming that exporting company has survive the test
in meeting international standards.
➢ Thirdly, free exchange of ideas and cultural knowledge opens up immense business
and trade opportunities for a company.
➢ Fourthly, as one starts visiting customers to sell one’s goods, he has an opportunity to
start exploring for newer customers, state-of-the-art machines and vendors in foreign
lands.
➢ Fifthly, by exporting goods, an exporter also becomes safe from offset lack of demand
for seasonal products.
➢ Lastly, international trade keeps an exporter more competitive and less vulnerable to
the market as the exporter may have a business boom in one sector while
simultaneously witnessing a bust in a different sector.

No doubt that in the age of globalization and liberalizations, Export has become of the most
lucrative business in India. Government of India is also supporting exporters through various
incentives and schemes to promote Indian export for meeting the much-needed requirements
for importing modern technology and adopting new technology from MNCs through Joint
ventures and collaboration.
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 Basic Planning For Export

Introduction

Before starting an export, an individual should evaluate his company’s “export readiness”.
Further planning for export should be done only, if the company’s assets are good enough for
export.

There are several methods to evaluate the export potential of a company. The most common
method is to examine the success of a product in domestic market. It is believed that if the
products has survived in the domestic market, there is a good chance that it will also be
successful in international market, at least those where similar needs and conditions exist.

One should also evaluate the unique features of a product. If those features are hard to
duplicate abroad, then it is likely that you will be successful overseas. A unique product may
have little competition and demand for it might be quite high.

Once a businessman decides to sell his products, the next step is to developing a proper export
plan. While planning an export strategy, it is always better to develop a simple, practical and
flexible export plan for profitable and sustainable export business. As the planners learn more
about exporting and your company's competitive position, the export plan will become more
detailed and complete.

Objective
The main objective of a typical export plan is to:

• Identifies what you want to achieve from exporting.

• Lists what activities you need to undertake to achieve those objectives.
• Includes mechanisms for reviewing and measuring progress.
• Helps you remain focused on your goals.

From the start, the plan should be viewed and written as a management tool, not as a static
document. Objectives in the plan should be compared with actual results to measure the
success of different strategies. The company should not hesitate to modify the plan and make
it more specific as new information and experience are gained.

Some "Do's and Don'ts of Export Planning

DO ensure your key staff members are ‘signed on’ to the Plan.
DO seek good advice – and test your Export Plan with advisers
DO review the Export Plan regularly with your staff and advisers.
DO assign responsibility to staff for individual tasks.
DO create scenarios for changed circumstances – look at the “what ifs” for changes in the
market environment from minor to major shifts in settings. e.g. changes of government, new
import taxes.
DO develop an integrated timeline that draws together the activities that make up the Export
Plan.
DO make sure that you have the human and financial
resources necessary to execute the Export Plan. Ensure
existing customers are not neglected

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DON’T create a bulky document that remains static.
DON’T use unrealistic timelines. Review them regularly – they often slip.

Identifying Export Product

Introduction

A key factor in any export business is clear understanding and detail knowledge of products to be
exported. The selected product must be in demand in the countries where it is to be exported.
Before making any selection, one should also consider the various government policies associated with
the export of a particular product.

Whether companies are exporting first time or have been in export trade for a long time - it is better for
both the groups to be methodical and systematic in identifying a right product. It’s not sufficient to have
all necessary data 'in your mind' - but equally important to put everything on paper and in a structured
manner. Once this job is done, it becomes easier to find the gaps in the collected information and
take necessary corrective actions.

There are products that sell more often than other product in international market. It is not very
difficult to find them from various market research tools. However, such products will invariably have
more sellers and consequently more competition and fewer margins. On the other hand - a niche
product may have less competition and higher margin - but there will be far less buyers.

Fact of the matter is - all products sell, though in varying degrees and there are positive as well as flip
sides in whatever decision you take - popular or niche product.

Key Factors in Product Selection

• The product should be manufactured or sourced with consistent standard quality, comparable to
your competitors. ISO or equivalent certification helps in selling the product in the
international market.
• If possible, avoid products which are monopoly of one or few suppliers. If you are the
manufacturer - make sure sufficient capacity is available in-house or you have the wherewithal to
outsource it at short notice. Timely supply is a key success factor in export business
• The price of the exported product should not fluctuate very often - threatening profitability to the
export business.
• Strictly check the government policies related to the export of a particular product. Though
there are very few restrictions in export - it is better to check regulatory status of your selected
product.
• Carefully study the various government incentive schemes and tax exemption like duty
drawback and DEPB.
• Import regulation in overseas markets, especially tariff and non-tariff barriers. Though a major non-
tariff barrier (textile quota) has been abolished - there are still other tariff and non-tariff barriers.
If your product attracts higher duty in target country - demand obviously falls.
• Registration/Special provision for your products in importing country. This is specially
applicable for processed food and beverages, drugs and chemicals.
• Seasonal vagaries of selected products as some products sell in summer, while others in winter.
Festive season is also important factor, for example certain products are more sellable only
during Christmas.

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 • Keep in mind special packaging and labeling requirements of perishable products like processed
food and dairy products.
• Special measures are required for transportation of certain products, which may be bulky or
fragile or hazardous or perishable.

Registration of Exporters

Registration with Reserve Bank of India (RBI)

Prior to 1997, it was necessary for every first time exporter to obtain IEC number from Reserve
Bank of India(RBI) before engaging in any kind of export operations. But now this job is being
done by DGFT.

Registration with Director General of Foreign Trade (DGFT)

For every first time exporter, it is necessary to get registered with the DGFT (Director General
of Foreign Trade), Ministry of Commerce, Government of India.

DGFT provide exporter a unique IEC Number. IEC Number is a ten digits code required for
the purpose of export as well as import. No exporter is allowed to export his good abroad
without IEC number.

However, if the goods are exported to Nepal, or to Myanmar through Indo-Myanmar boarder
or to China through Gunji, Namgaya, Shipkila or Nathula ports then it is not necessary to
obtain IEC number provided the CIF value of a single consignment does not exceed Indian
amount of Rs. 25, 000 /-.
Application for IEC number can be submitted to the nearest regional authority of DGFT.

Application form which is known as "Aayaat Niryaat Form - ANF2A" can also be submitted
online at the DGFT web-site: http://dgft.gov.in.

While submitting an application form for IEC number, an applicant is required to submit his
PAN account number. Only one IEC is issued against a single PAN number. Apart from PAN
number, an applicant is also required to submit his Current Bank Account number and Bankers
Certificate.

A amount of Rs 1000/- is required to submit with the application fee. This amount can be
submitted in the formof a Demand Draft or payment through EFT (Electronic Fund Transfer
by Nominated Bank by DGFT.

Registration with Export Promotion Council

Registered under the Indian Company Act, Export Promotion Councils or EPC is a non-profit
organisation forthe promotion of various goods exported from India in international market.
EPC works in close association with the Ministry of Commerce and Industry, Government of
India and act as a platform for interaction between the exporting community and the
government.

So, it becomes important for an exporter to obtain a registration cum membership certificate
(RCMC) from the EPC. An application for registration should be accompanied by a self

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certified copy of the IEC number. Membership fee should be paid in the form of cheque or
draft after ascertaining the amount from the concernedEPC.

The RCMC certificate is valid from 1st April of the licensing year in which it was issued and shall
be valid for fiveyears ending 31st March of the licensing year, unless otherwise specified.

Registration with Commodity Boards

Commodity Board is registered agency designated by the Ministry of Commerce, Government

of India for purposes of export-promotion and has offices in India and abroad. At present,
there are five statutory Commodity Boards under the Department of Commerce. These Boards
are responsible for production, development and export of tea, coffee, rubber, spices and
tobacco.

Registration with Income Tax Authorities

Goods exported out of the country are eligible for exemption from both Value Added Tax and
Central Sales Tax. So, to get the benefit of tax exemption it is important for an exporter to get
registered with the Tax Authorities.

Export License

An export license is a document issued by the appropriate licensing agency after which an
exporter is allowed to transport his product in a foreign market. The license is only issued after
a careful review of the facts surrounding the given export transaction. Export license depends
on the nature of goods to be transported as well as the destination port. So, being an exporter
it is necessary to determine whether the product or good to be exported requires an export
license or not.

Canalisation

Canalisation is an important feature of Export License under which certain goods can be
imported only by designated agencies. For an example, an item like gold, in bulk, can be
imported only by specified banks like SBI and some foreign banks or designated agencies.

Application for an Export License

To determine whether a license is needed to export a particular commercial product or service,

an exporter must first classify the item by identifying what is called ITC (HS) Classifications.
Export license are only issued for the goods mentioned in the Schedule 2 of ITC (HS)
Classifications of Export and Import items. A proper application can be submitted to the
Director General of Foreign Trade (DGFT). The Export Licensing Committee under the
Chairmanship of Export Commissioner considers such applications on merits for issue of
export licenses.

Exports Free unless regulated

The Director General of Foreign Trade (DGFT) from time to time specifies through a public
notice according to which any goods, not included in the ITC (HS) Classifications of Export
and Import items may be exported without a license. Such terms and conditions may include
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Minimum Export Price (MEP), registration with specified authorities, quantitative ceilings
and compliance with other laws, rules, regulations.

Myths about Exporting Products

Introduction

Many first time exporters or firm managers believe the myths about exporting that it’s too
difficult or too costly to sell their product in a foreign country. But given below the some of
the important facts that will help a first time exporter to clear all his misconceptions.

1. Myth: I Am Too Small to Export

Only large firms with name recognition, abundant resources, and formal export
departments can export successfully.

It is true that large firms typically account for far more total exports but the real fact is that
vast majority of exporting firms in most countries are small and medium-sized enterprises
(SMEs).

2. Myth: I Cannot Afford to Export

I don't have the money for hiring new employees, for marketing abroad, or expanding
production for new business.

There are various low-cost ways to market and promote abroad, handle new export orders,
and finance receivables. This does not require hiring new staff or setting up an export
department. At little or no cost for example, you can receive product and country market
research, worldwide market exposure, generate trade leads, and find qualified overseas
distributors through various Commodity Boards and Export Promotion Councils.

3. Myth: I Cannot Compete With Large Overseas Companies

My products are unknown and my prices are too high for foreign markets.

If the product is known in the domestic market then it’s a plus point but even an unknown
product can be exported in a foreign market. Low demand of a product doesn’t indicates that
it will be also not accepted in the international market.

Price is also an important, but it is not the only selling point. Other competitive factors play a
large role including quality, service, and consumer taste - these may override price. Also
prices of a product may not be relatively high in countries with a strong currency, as in the
European Union.

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 4. Myth: Exporting is Too Risky

I might not get paid.

Selling anywhere has risks even in the domestic market, but it can be reduced with reasonable
precautions. To assure you get paid, use Letters of Credit (L/Cs). A L/C is a letter from a bank
guaranteeing that a buyer's payment to a seller will be received on time and for the correct
amount. In the event that the buyer is unable to make payment on the purchase, the bank will
be required to cover the full or remaining amount of the purchase. Proper documentation can
minimize the risk associated with the export business.

5. Myth: Exporting is Too Complicated

Exporting is too complicated; I won’t understand the laws and documentation

requirements.
You don't need to be an expert to export. There is an abundance of resources available online
that helps the first time exporter about all ins and outs of the export operations. Government
of India and its associated agencies like Commodity Boards and Export Promotion Councils
also provide guidelines to the exporters.

Export Sales Leads

Introduction

Export Sales leads are initial contacts a seller or exporter seeks in order to finalize a deal or
agreement for export of goods and are considered as the first step in the entire sales process.
After getting the first lead, a company should respond to that lead in a very carefully manner
in order to convert that opportunity into real export deal.

➢ Generating Sales Leads: Sales leads can be generated either through a word-of-mouth or
internet research or trade show participation.

➢ Qualifying sales leads: As the buyer is far away and sometimes communication process
can be difficult, so it’s always better to make an extra effort to understand the exact need
of the customer.

➢ Sending Acknowledgement: After receiving a lead it is quite important to acknowledge

the enquirer within 48 hours of receiving the enquiry either through e-mail or fax.
Acknowledgement also gives an option to provide further detail about the product or to
make an enquiry about the buyer.

➢ Responding with quality products: Quality products strengthen buyer seller relationship,
so it’s always better to provide quality products to the buyers.

➢ Follow Ups: Always try to be in touch with the buyer or customer. For this purpose one
can ask a phone number and a convenient time to call. It is always better to make the call
in the presence of an Export Adviser. One should avoid high pressure call during follow
up.

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 Foreign Exchange Rates

Introduction

An exporter without any commercial contract is completely exposed of foreign exchange risks
that arises due to the probability of an adverse change in exchange rates. Therefore, it becomes
important for the exporter to gain some knowledge about the foreign exchange rates, quoting
of exchange rates and various factors determining the exchange rates. In this section, we have
discussed various topics related to foreign exchange rates in detail.

Spot Exchange Rate

Also known as "benchmark rates", "straightforward rates" or "outright rates", spot rates
represent the price that a buyer expects to pay for a foreign currency in another currency.
Settlement in case of spot rate is normally done within one or two working days.

Forward Exchange Rate

The forward exchange rate refers to an exchange rate that is quoted and traded today but for
delivery and payment on a specific future date.

Method of Quoting Exchange Rates

There are two methods of quoting exchange rates:

• Direct Quotation: In this system, variable units of home currency equivalent

to a fixed unit of foreign currency are quoted.
For example: US $ 1= Rs. 42.75
• Indirect Quotation: In this system, variable units of foreign currency as equivalent
to a fixed unit of home currency are quoted.
For example: US $ 2.392= Rs. 100

Before 1993, banks were required to quote all the rates on indirect basis as foreign currency
equivalent to RS. 100 but after 1993 banks are quoting rates on direct basis only.

Exchange Rate Regime

The exchange rate regime is a method through which a country manages its currency in respect
to foreign currencies and the foreign exchange market.

• Fixed Exchange Rate

A fixed exchange rate is a type of exchange rate regime in which a currency's value is matched
to the value of another single currency or any another measure of value, such as gold. A fixed
exchange rate is also known as pegged exchange rate. A currency that uses a fixed exchange
rate is known as a fixed currency. The opposite of a fixed exchange rate is a floating exchange
rate.
A fixed exchange rate is when a country ties the value of its currency to some other widely-
used commodity or currency. The dollar is used for most transactions in international trade.
Today, most fixed exchange rates are pegged to the U.S. dollar. Countries also fix their
currencies to that of their most frequent trading partners.

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 • Floating Exchange Rate
A Floating Exchange Rate is a type of exchange rate regime wherein a currency's value is
allowed to fluctuate according to the foreign exchange market. A currency that uses a floating
exchange rate is known as a floating currency. A Floating Exchange Rate or a flexible exchange
rate and is opposite to the fixed exchange rate.

A floating exchange rate is one whose value changes, or floats, based on a number of factors,
such as the supply and demand for the currency on the open market and general economic
conditions. For example, if the market demand for a currency is high, then its value will
increase, and if demand is low, then the value of the currency will decrease.

• Linked Exchange Rate

A linked exchange rate system is used to equalize the exchange rate of a currency to another.
Linked Exchange Rate system is implemented in Hong Kong to stabilize the exchange rate
between the Hong Kong dollar (HKD) and the United States dollar (USD).

Forward Exchange Contracts

A Forward Exchange Contract is a contract between two parties (the Bank and the customer).
One party contract to sell and the other party contracts to buy, one currency for another, at
an agreed future date, at a rate of exchange which is fixed at the time the contract is entered
into.

Benefits of Forward Exchange Contract

• Contracts can be arranged to either buy or sell a foreign currency against your
domestic currency, or against another foreign currency.
• Available in all major currencies.
• Available for any purpose such as trade, investment or other current commitments.
• Forward exchange contracts must be completed by the customer. A
customer requiring more flexibility may wish to consider Foreign Currency
Options.

Foreign Currency Options

Foreign Currency Options is a hedging tool that gives the owner the right to buy or sell the
indicated amount of foreign currency at a specified price before a specific date. Like forward
contracts, foreign currency options also eliminate the spot market risk for future transactions.
A currency option is no different from a stock option except that the underlying asset is foreign
exchange. The basic premises remain the same: the buyer of option has the right but no
obligation to enter into a contract with the seller. Therefore the buyer of a currency option has
the right, to his advantage, to enter into the specified contract.

Flexible Forwards

Flexible Forward is a part of foreign exchange that has been developed as an alternative to
forward exchange contracts and currency options. The agreement for flexible forwards is
always singed between two parties (the ‘buyer’ of the flexible forward and the 'seller' of the
flexible forward) to exchange a specified amount (the ‘face value’) of one currency for another
currency at a foreign exchange rate that is determined in accordance with the mechanisms set

14
out in the agreement at an agreed time and an agreed date (the ‘expiry time’ on the ‘expiry
date’). The exchange then takes place approximately two clear business days later on the
‘delivery date’).

Currency Swap

A currency swap which is also known as cross currency swap is a foreign exchange agreement
between two countries to exchange a given amount of one currency for another and, after a
specified period of time, to give back the original amounts swapped.
Foreign Exchange Markets

The foreign exchange markets are usually highly liquid as the world's main international
banks provide a market around-the-clock. The Bank for International Settlements reported
that global foreign exchange market turnover daily averages in April was $650 billion in 1998
(at constant exchange rates) and increased to $1.9 trillion in 2004. Trade in global currency
markets has soared over the past three years and is now worth more than $3.2 trillion a day.
The biggest foreign exchange trading centre is London, followed by New York and Tokyo.

International Business
Contents: INCOTERMS 2000

Background – Introduction
• Incoterms are the most commonly accepted terms of sale in international business
• Published and developed by the International Chamber of Commerce (ICC)
• Incoterms have been adopted by most countries
• Defines the responsibilities and risks for transactions.
• First established in 1936, updated periodically with the latest version being
“Incoterms 2000”
• They are used as part of the overall sales agreement.

Scope and Purpose

• Commercial terms defining the roles of the buyer and seller in the arrangement of
international transportation and other responsibilities related to the international
shipment of tangible goods.
• Provides a set of international rules for the interpretation of the most commonly
used trade terms in foreign trade
• Limited to matters relating to the obligations of the parties with respect to the
delivery of the goods sold
• Incoterms deal only with the relation between the sellers and buyers under the
contract of sale
• Incoterms deal with a number of identified obligations imposed on the parties such
as
• Seller’s obligation to place the goods at the disposal of the buyer, or
• Hand them over for carriage, or
• Deliver them at a destination, and
• The distribution of risk between the parties
• Obligations to clear the goods for export and import

15
 • Packing of the goods
• Buyer’s obligation to take delivery

Why Incoterms?

• Incoterms are international rules accepted by governments, legal authorities and

practitioners worldwide
• Reduces or removes uncertainties arising from differing interpretations of shipping
terms in different countries.
• Reference to a proper Incoterm in a contract clearly defines each party’s
obligations, costs and risks in the international transaction and reduces the risk of
legal complications.
• They can assist in defining what costs the purchase price includes (e.g. prepaid
international freight, prepaid duties, insurance, etc.), and clarify the risks &
liabilities.
Main Functions

• Eliminate barriers caused by distance, language, and local business practices

• Eliminate uncertainties and different interpretations of trade terms on a world-wide
scale
• Provide universally accepted vocabulary
• Reduce risk of misunderstanding, disputes, and litigation
• Facilitate international commercial exchanges
• Define the importer’s and exporter’s costs, risk and obligations regarding delivery of
the goods

What Incoterms Does Not Cover

• How or when title to the goods transfers

• Protect a party from his/her own risk of loss for all segments of the shipment
• Cover the goods before or after delivery
• Define the remedies for breach of contract
• Terms of payment that dictate when you get paid
• Specify details of the transfer, transport, and delivery of goods
• Intangible goods like computer software
• Incoterms applies to the contract of sale and not the contract of carriage
(transportation)

Responsibilities Affected
• The terms allocate responsibilities and costs between the parties for:
– Licenses and government imposed formalities for import & export
– Packing and marking for international transport
– Documentation required for the transport, transfer and Customs clearance of
goods
– Proof of delivery
– Taxes, duties, consular fees, terminal charges, arrival & destination charges
– Insurance, when elected
– Loading and unloading
– International and inland transport

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 – Risk of loss or damage

Common Terms
• Pre-carriage:
✓ Initial transport of goods from the seller to the main carrier
✓ Usually by truck, rail, or inland waterway
• Main carriage:
✓ Primary transport of goods
✓ Longest part of the journey & from one country to another
✓ Usually by sea or air, but may be by truck, or rail
• On-carriage:
✓ Transportation from arrival point in the destination country to buyer,
which can be by any mode
• Carrier:
✓ Any party who arranges for the primary transportation by truck, plane, ship,
rail, etc
• Delivery:
The term delivery is used in two contexts in Incoterms:
✓ The seller bringing the goods to the named point
✓ Traditional sense of the buyer receiving the goods
• Customs clearance:
Clearing the goods for export or import means
✓ Paying the duties, taxes and administrative costs
✓ Performing administrative matters related to:
• Clearance and Customs formalities
• Import and/or export regulations
• Typically, the Shipper (exporter) clears the goods for export the
Buyer (importer) clears the goods for import

Organization of Incoterms 2000

Incoterms are divided into four (4) categories:

❖ “E” term – Seller makes the goods available to the buyer at the seller’s premises or
other place named by the seller.

(1) EXW: EX WORKS (named place)

EXW signifies a precise location where the product is made ready to the buyer.
a) When offering an EXW quotation: the price includes only those costs involved up to
an agreed point of origin, usually the shipper’s factory. The shipper/seller places the
product at the control of the buyer at a concurred place, date, time, etc.
b) EXW COSTS CAN INCLUDE:
• Raw or processed product
• Standard packaging
• Pallets, banding, shrink-wrap, slip sheets, slings, one-ton-big-
bags
• Special labeling
• Translation and printing

17
 • Inspection certificates (Phytosanitary, Health, Quality, or
Export License)
• Bracing or inspecting a container
• Export packaging

❖ “F” terms – Seller is responsible to deliver the goods to the export shipment point
and carrier designated by the buyer.

(2) FCA: FREE CARRIER (named place)

FCA signifies a precise location where the product is turned over to a carrier or person
who will ensure carriage, and the goods are cleared for export.
a) When offering a FCA quotation: the price includes those costs involved up to
that agreed point, including transportation and loading if required.
b) FCA COSTS CAN INCLUDE (IN ADDITION TO THE EXW COSTS):
• Loading on board carrier
• Transportation to the carrier
• Insurance coverage to carrier (optional)

(3) FAS: FREE ALONGSIDE SHIP (named port of shipment)

FAS signifies a precise ocean port location where the product is turned over to a carrier,
and the goods are cleared for export.
a) When offering an FAS quotation: the shipper/seller places the product alongside the
vessel
b) FAS COSTS CAN INCLUDE (IN ADDITION TO FCA COSTS):
• Inland transportation (from your plant to the port)
• Port charges (including Terminal Handling or Receiving
Charges, or stevedore, forklift, off-load, etc.)

(4) FOB: FREE ON BOARD (named port of shipment)

a) When offering an FOB quotation: the shipper/seller places the product over the
ship’s rail. FOB only applies to sea or water transportation.
b) The costs associated with FOB include:
i. loading on board ship
ii. heavy lift charges
c) These costs are correct in theory, but actually the loading and heavy lift charges
will be included in the shipping cost from the port to the final destination which the
buyer will pay.

❖ “C” terms – Seller is responsible for contracting carriage of goods to the place of
destination, but does not assume risk of loss or damage to goods, or additional costs
due to events occurring after shipment.

(5) CFR: COST AND FREIGHT (named port of destination)

CFR signifies that the seller loads the product on board a carrier, clears the goods for
export, arranges and pays the ocean freight and other charges.
a) The risk during carriage is transferred to the buyer, and the goods change hands
when they pass the ship’s rail at the port of shipment. (The final destination)
b) The charges associated with CFR include (in addition to the FOB costs):
i. Ocean Freight

18
 ii. Fuel Adjustment Factor
iii. Currency Adjustment Factor
iv. Destination Delivery Charges or Container Service Charges

(6) CIF: COST, INSURANCE AND FREIGHT (named port of destination)

CIF signifies that the seller loads the product on board a carrier, clears the goods for
export, arranges and pays the ocean freight and other charges.
a) The seller insures the shipment, and the goods change hands when they pass the ship’s
rail at the port of shipment.
b) COSTS ASSOCIATED WITH CIF INCLUDE (IN ADDITION TO CFR);
i. marine cargo insurance

(7) CPT: CARRIAGE PAID TO (named place of destination)

a) Seller delivers the goods, cleared for export, to the carrier.
b) The seller pays the costs of carriage necessary to bring goods to named destination, but
the buyer bears the risk of loss and additional costs occurring after delivery.
c) Term may be used irrespective of mode of transport.

(8) CIP: CARRIAGE AND INSURANCE PAID TO (named place of destination)

a) Seller delivers the goods, cleared for export, the carrier.
b) The seller pays the costs of carriage to named destination, but the buyer bears the risk
of loss and additional costs occurring after delivery.
c) The seller procures insurance against buyer’s risk of loss. Seller is required to obtain
insurance only on a minimum cover.
d) Term may be used irrespective of mode of transport

❖ “D” terms – Seller is responsible for all costs and risks associated with delivering
goods to the named place in the country of destination

(9) DAF: DELIVERED AT FRONTIER (named place)

a) Seller delivers goods, cleared for export, at disposal of buyer on arriving means of
transport.
b) Not unloaded, not cleared for import at point at frontier before customs border of
adjoining country.
c) Term may be used irrespective of the mode of transport when goods are delivered
at a land frontier.
d) If delivery is to take place in the port of destination, DES or DEQ should be used.

(10) DES: DELIVERED EX SHIP (named port of destination)

a) Seller delivers goods at disposal of buyer on
board the ship. Not cleared for import at the
named port of destination.
b) Seller bears all costs and risks to bring goods to the named port before
discharging. Term used only for delivery by sea.
c) If the seller is to bear the costs of discharging the goods, DEQ should be used.

(11) DEQ: DELIVERED EX QUAY (named port of destination)

a) Seller delivers goods, not cleared for import, at disposal of buyer on the quay at the
named port of destination.

19
 b) Seller bears all costs and risks to bring goods to the named port of destination and
discharging the goods on the quay.
c) Term used only for delivery by sea.

(12) DDU: DELIVERED DUTY UNPAID (named place of destination)

a) Seller delivers goods to the buyer, not cleared for import, and not unloaded, at the
named place of destination.
b) Seller bears all costs and risks (except duty) to bring goods to the named place
of destination. Term may be used irrespective of mode of transport.
c) If delivery is to take place at the port, quay or on board a vessel, DES or DEQ should
be used

(13) DDP: DELIVERED DUTY PAID (named place of destination)

a) Seller delivers goods to the buyer, cleared for import, and not unloaded, at the named
place of destination.
b) Seller bears all costs and risks, including import duty, to bring goods to the named place
of destination.
c) Term may be used irrespective of mode of transport. If delivery is to take place at the
port, quay or on board a vessel, DES or DEQ should be used.

The Thirteen Incoterms

All modes of transport including multi-modal

• EXW – Ex Works
• FCA – Free Carrier
• CPT – Carriage Paid To
• DAF – Delivered at Frontier
• DDU – Delivered Duty Unpaid
• DDP – Delivered Duty Paid

Sea and inland waterway transport only

• CIP – Carriage and Insurance Paid To
• DES – Delivered Ex Ship
• DEQ – Delivered Ex Quay
• FAS – Free Alongside Ship
• FOB – Free Onboard
• CFR – Cost and Freight
• CIF – Cost, Insurance, and Freight

Contents - INCOTERMS 2010

The International Chamber of Commerce (ICC) published the 8th and current version of its
International Commercial Terms, also known as INCOTERMS® on January 1, 2011.

The revised rules, originally designated "INCOTERMS 2010", contain a series of changes,
such as a reduction in the number of terms to 11 from 13. The DAF, DES, DEQ, and DDU
designations have been eliminated, while two new terms, Delivered at Terminal (DAT) and
Delivered at Place (DAP), have been added. INCOTERMS 2010 also attempt to better take

20
into account the roles cargo security and electronic data interchange now play in
international trade.

WHAT INCOTERMS ARE - INCOTERMS are a set of three-letter standard trade terms
most commonly used in international contracts for the sale of goods. First published in 1936,
INCOTERMS provide internationally accepted definitions and rules of interpretation for
most common commercial terms. In the US, INCOTERMS are increasingly

WHAT INCOTERMS DO - INCOTERMS inform the sales contract by defining the

respective obligations, costs and risks involved in the delivery of goods from the Seller to
the Buyer.
WHAT INCOTERMS DO NOT DO - INCOTERMS by themselves DO NOT:
• Constitute a contract;
• Supersede the law governing the contract;
• Define where title transfers; nor,
• Address the price payable, currency or credit terms.

These items are defined by the express terms in the sales contract and by the governing law.
INCOTERMS are grouped into two classes:

1.TERMS FOR ANY TRANSPORT MODE

• EXW - EX WORKS (... named place of delivery)

The Seller's only responsibility is to make the goods available at the Seller's premises.
The Buyer bears full costs and risks of moving the goods from there to destination.
• FCA - FREE CARRIER (... named place of delivery)
The Seller delivers the goods, cleared for export, to the carrier selected by the Buyer. The
Seller loads the goods if the carrier pickup is at the Seller's premises. From that point, the
Buyer bears the costs and risks of moving the goods to destination.
• CPT - CARRIAGE PAID TO (... named place of destination)
The Seller pays for moving the goods to destination. From the time the goods are transferred
to the first carrier, the Buyer bears the risks of loss or damage.
• CIP - CARRIAGE AND INSURANCE PAID TO (... named place of destination)
The Seller pays for moving the goods to destination. From the time the goods are transferred
to the first carrier, the Buyer bears the risks of loss or damage. The Seller, however,
purchases the cargo insurance.
• DAT - DELIVERED AT TERMINAL (... named terminal at port or place of
destination)
The Seller delivers when the goods, once unloaded from the arriving means of transport,
are placed at the Buyer's disposal at a named terminal at the named port or place of
destination. "Terminal" includes any place, whether covered or not, such as a quay,
warehouse, container yard or road, rail or air cargo terminal. The Seller bears all risks
involved in bringing the goods to and unloading them at the terminal at the named port or
place of destination.

21
 • DAP - DELIVERED AT PLACE (... named place of destination)
The Seller delivers when the goods are placed at the Buyer's disposal on the arriving means
of transport ready for unloading at the names place of destination. The Seller bears all risks
involved in bringing the goods to the named place.
• DDP - DELIVERED DUTY PAID (... named place)
The Seller delivers the goods -cleared for import - to the Buyer at destination. The Seller
bears all costs and risks of moving the goods to destination, including the payment of
Customs duties and taxes.
2. MARITIME-ONLY TERMS

• FAS - FREE ALONGSIDE SHIP (... named port of shipment)

The Seller delivers the goods to the origin port. From that point, the Buyer bears all costs
and risks of loss or damage.
• FOB - FREE ON BOARD (... named port of shipment)
The Seller delivers the goods on board the ship and clears the goods for export. From
that point, the Buyer bears all costs and risks of loss or damage.
• CFR - COST AND FREIGHT (... named port of destination)
The Seller clears the goods for export and pays the costs of moving the goods to
destination. The Buyer bears all risks of loss or damage.
• CIF - COST INSURANCE AND FREIGHT (... named port of destination)
The Seller clears the goods for export and pays the costs of moving the goods to the port of
destination. The Buyer bears all risks of loss or damage. The Seller, however, purchases the
cargo insurance.

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 Export-Import Bank of India – Role, Functions and Facilities

Export-Import Bank of India (Exim Bank) was set up by an Act of the Parliament “THE
EXPORT-IMPORT BANK OF INDIA ACT, 1981” for providing financial assistance to exporters
and importers, and for functioning as the principal financial institution for co-ordinating the
working of institutions engaged in financing export and import of goods and services with a
view to promoting the country’s international trade and for matters connected therewith or
incidental thereto.

Exim Bank has two broad business streams: one, the traditional export finance typical of
export credit agencies around the world and two, financing of export oriented units (export
capability creation), which are non-traditional for export credit agencies. Since inception,
Exim Bank has been the principal financial institution in the country for financing project
exports and exports on deferred credit terms. As per Memorandum PEM (MEMORANDUM
OF INSTRUCTIONS ON PROJECTEXPORTS AND SERVICE EXPORTS) of Reserve
Bank of India, the following constitute project exports:

i. Supply of goods / equipment on deferred payment terms

ii. Civil construction contracts
iii. Industrial turnkey projects
iv. Consultancy / services contracts

Exim Bank extends funded and non-funded facilities for overseas turnkey projects, civil
construction contracts, technical and consultancy service contracts as well as supplies.
• Turnkey Projects are those which involve supply of equipment along with related
services, like design, detailed engineering, civil construction, erection and
commissioning of plants and power transmission & distribution
• Construction Projects involve civil works, steel structural works, as well as
associated supply of construction material and equipment for various infrastructure
projects.
• Technical and Consultancy Service contracts, involving provision of know-how,
skills, personnel and training are categorised as consultancy projects. Typical
examples of services contracts are: project implementation services, management
contracts, and supervision of erection of plants, CAD / CAM solutions in software
exports, finance and accounting systems.
• Supplies: Supply contracts involve primarily export of capital goods and industrial
manufactures. Typical examples of supply contracts are: supply of stainless steel
slabs and ferro-chrome manufacturing equipments, diesel generators, pumps and
compressors.
Exim Bank, under powers delegated vide the PEM, provides post-award clearance for
project export contracts valued up to USD 100 million. Project export contracts valued
above USD 100 million need to be provided post-award clearance by the inter-institutional
Working Group. The Working Group is a single-window clearance mechanism, comprising
Exim Bank as the convenor and nodal agency, RBI – Foreign Exchange Department and
Export Credit Guarantee Corporation of India Ltd. [ECGC]. In the case of very large value
projects, officials of Ministry of Finance, Ministry of Commerce and Industry and Ministry
of External Affairs, Government of India, are invited to participate in the Working Group
Meetings. In order to obtain immediate clarifications for speedy clearance of proposals by
the Working Group, the exporters concerned and their bankers are also associated with the

23
 meetings. With the same objective, participation of the main sub-suppliers, sub-contractors
or other associates and their bankers in such meetings is also encouraged, particularly in
respect of proposals for high value contracts. Exim Bank also plays the role of a financier
and provides funded and non-funded support for project export contracts of Indian Entities.

In addition to project exports, Exim Bank also extends fund-based and non-fund-based
facilities to deemed export contracts as defined in Foreign Trade Policy of GOI, e.g.,
- secured under funding from Multilateral Funding Agencies like the World
Bank, Asian Development Bank, etc.;
- contracts secured under International Competitive Bidding;
- contracts under which payments are received in foreign currency.

Exim Bank offers the following Export Credit facilities, which can be availed of by Indian
companies, commercial banks and overseas entities.

For Indian Companies executing contracts overseas

Pre-shipment credit

Exim Bank's Pre-shipment Credit facility, in Indian Rupees and foreign currency, provides
access to finance at the manufacturing stage - enabling exporters to purchase raw materials
and other inputs.

Pre-shipment credits are usually extended by exporters’ commercial banks for period upto 180
days. Exim Bank extends pre-shipment / post-shipment credit either directly or in
participation with commercial banks. In order to offer one-stop banking products to export
clients, the Bank has also been offering short-term pre / post shipment credit either directly or
through exporter’s bankers. Exim Bank may consider extending pre-shipment credit and post-
shipment credit for periods exceeding 180 days, on case-to-case basis and subject to the merits
of the case.

Supplier's Credit

This facility enables Indian exporters to extend term credit to importers (overseas) of
eligible goods at the post-shipment stage.

Post-shipment Supplier’s Credit can be extended to Indian exporters upto the extent of the
deferred credit portion of the export contract, either in Rupees or in Foreign currency. The
period of deferred credit and moratorium will generally depend on the nature of goods [List
A and List B of Memorandum PEM] or nature of projects, as per guidelines contained in the
Memorandum PEM of RBI.

For Project Exporters

Export Project Cash-Flow Deficit Financing Programme [EPCDF]

Indian project exporters (including those under Deemed Exports category) incur expenditure
in rupee or foreign currency while executing contracts i.e. costs of mobilisation/acquisition of
materials, personnel and equipment etc. Exim Bank's facility helps them meet these expenses

24
for -

a) Project Export Contracts;

b) Contracts in India categorized as Deemed Exports in Foreign Trade Policy of India.

Capital Equipment Finance Programme (CEFP)

Capital Equipment Finance Program [CEFP] has been conceived to cater to capital
expenditure for procurement of capital equipment to be utilized across multiple contracts.
CEFP provides direct access to Exim Bank’s finance for eligible Indian companies for
procurement of indigenous and imported capital equipment for executing overseas projects/
deemed export projects.

For Exporters of Consultancy and Technological Services

Exim Bank offers a special credit facility to Indian exporters of consultancy and technology
services, so that they can, in turn, extend term credit to overseas importers.

Guarantee Facilities

Indian companies can avail of guarantee facilities of different types to furnish requisite
guarantees to facilitate execution of export contracts (including deemed export contracts) and
import transactions.

Advance Payment Guarantee (APG): Issued to project exporters to secure a project

mobilization advance as a percentage (10-20%) of the contract value, which is generally
recovered on a pro-rata basis from the progress payment during project execution.

Performance Guarantee (PG): PG for up to 5-10% of contract value is issued valid until
completion of maintenance period and/or grant of Final Acceptance Certificate (FAC) by the
overseas employer/client.

Retention Money Guarantee (RMG): This enables the exporter to obtain the release of
retained payments from the client prior to issuance of Project Acceptance Certificate (PAC)/
Final Acceptance Certificate (FAC).

Other Guarantees: e.g. in lieu of customs duty or security deposit for expatriate labour,
equipment etc.

Eligibility: Indian project exporters securing overseas or deemed export contracts.

For Overseas Entities

Buyer's Credit

Overseas buyers can avail of Buyer's Credit from Exim Bank, for import of eligible goods
from India on deferred payment terms. As per Memorandum PEM guidelines, RBI has
authorised Exim Bank to extend overseas buyer’s credits upto USD 20 mn for project exports

25
without seeking approval of RBI.

The facility enables exporters/contractors to expand abroad and into non-traditional markets.
It also enables exporters/contractors to be competitive when bidding or negotiating for
overseas jobs.

Benefits to Foreign Customers

• Enables overseas buyers to obtain medium-and long-term financing
• Competitive interest rate against host country's high cost of borrowing.

Eligibility:

Buyer's Credit is extended to a foreign project company that intends to award the project
execution to an Indian project exporter. The financing will be available to all kinds of projects
and service exports from India.Facility is available for development, upgrading or expansion
of infrastructure facilities; financing of public or private projects such as plants and buildings;
professional services such as surveyors, architecture, consultations, etc.

Buyer’s Credit under NEIA

Buyer’s Credit – NEIA is a unique financing mechanism that provides a safe mode of non-
recourse financing option to Indian exporters and serves as an effective market entry tool to
traditional as well as new markets in developing countries, which need deferred credit on
medium or long-term basis.

Under this facility, Exim Bank facilitates project exports from India by way of extending
credit to overseas sovereign governments and government owned entities for import of Indian
goods and services from India on deferred credit terms. Exim Bank will obtain credit
insurance cover under NEIA through ECGC. NEIA is a trust set up by the Ministry of
Commerce and administered by Export Credit & Guarantee Corporation of India
(ECGC).Facility is available for project exports requiring medium or long term deferred
credit.

Eligibility:

Exim Bank extends the credit directly to overseas buyer of projects from India without
recourse to Indian exporter. Borrower should be overseas sovereign governments or
government owned entities. Amount of Loan should generally not be more than 85% of the
contract value. Sovereign guarantee is needed where the borrower is other than the foreign
government. Any other security may be stipulated on a case-to-case basis.

The Project Finance menu of funded and non-funded facilities to Indian exporters,
commercial banks in India and overseas entities is given below:

26
 For Indian Exporters For Commercial Banks in India
❖ Post-shipment Supplier’s Credit ❖ Risk participation in funded /
❖ Export Project Cash flow Deficit non-funded facilities extended
Financing Program to Indian exporters.
❖ Pre-shipment Credit in Rupee and Foreign ❖ Refinance of Export Credit
Currency
❖ Finance for Export of Consultancy and
For Overseas Entities
Technology Services
❖ Finance for Deemed Export contracts
❖ Capital Equipment Finance ❖ Buyer’s Credit
❖ Financing Deemed Export contracts ❖ Buyer’s Credit under NEIA
secured via structures including but not
restricted to BOT / BOO / BOOT / BOLT
❖ Letters of Credit / Guarantees

RBI’s Memorandum PEM has to be referred for Project and Service Exports.

Export Capability Creation loans extended by the Bank may be classified into three broad
categories viz. finance for overseas investment, finance for export oriented units and
finance for financial intermediaries. Besides loans, the Bank also extends non-fund based
assistance by way of guarantees and Letters of Credit (L/Cs). The three categories are
discussed as under:

1. Overseas ✓ Term Financing – to overseas Joint Ventures/ Wholly

Investment Owned Subsidiaries as well as to Indian companies
towards part financing their equity investment in
overseas JV/ WOS.
✓ Equity Investment – Participation in equity of overseas
ventures of Indian companies.
✓ Working Capital Loans to JVs/WOSs
✓ Guarantees to JVs/WOSs
2. Export- Oriented ✓ Asset Creation
Units o Equipment Finance
o Project Finance
✓ Working Capital
o Medium Term (LTWC, WCTL)
o Short Term Finance
✓ Special Products
o Export Marketing Finance
o Export Product Development Finance
o Export Vendor Development Finance
o Research & Development (R&D) Finance
o Finance for Indian Educational Institutions and
setting up institutions abroad
o Finance for Software Technology Parks
o Finance for Development of Minor Ports / Jetties
o Creative Industry Financing

27

3. Financial
Intermediaries (banks)
o Project-related non-fund based guarantees
o Guarantees and stand-by LCs (SBLCs)
o Letters of Credit (LCs)
✓ Refinance to Commercial Banks
✓ Export Bills Rediscounting for commercial banks.

The primary objective of providing Export Capability Creation loans is to facilitate export
production and international competitiveness of borrower companies. Exim Bank provides a
comprehensive range of products and services covering financial needs of the borrower
companies at all stages of their business cycle. The Bank’s vision is to develop commercially viable
relationships with a target set of externally oriented companies by offering them a
comprehensive range of products and services aimed at enhancing their internationalisation
efforts.

Overseas Investment Finance Programme

Exim Bank encourages Indian companies to invest abroad for, inter alia, setting up
manufacturing units and for acquiring overseas companies to get access to the foreign market,
technology, raw material, brand, IPR etc. For financing such overseas investments, Exim
Bank provides:

a) Term loans to Indian companies upto 80% of their equity investment in overseas JV/
WOS.
b) Term loans to Indian companies towards upto 80% of loan extended by them to the
overseas JV/ WOS.
c) Term loans to overseas JV/ WOS towards part financing
i. capital expenditure towards acquisition of assets,
ii. working capital,
iii. equity investment in another company,
iv. acquisition of brands/ patents/ rights/ other IPR,
v. acquisition of another company,
vi. any other activity that would otherwise be eligible for finance from Exim
Bank had it been an Indian entity.
d) Guarantee facility to the overseas JV/ WOS for raising term loan/ working capital.
Eligibility to avail finance or services:

Exim Bank's funded/ non-funded assistance is generally with recourse to the Indian promoter
Company. Exim Bank financing is available in Indian Rupees (to the Indian borrower) and in
foreign currency [as per extant RBI guidelines]. The tenor range is usually 5-7 years with a
suitable moratorium, and repayments in suitable monthly/ quarterly instalments. Promoter
margin is minimum 20% and security will include inter alia appropriate charge on the assets
of the overseas entity, Corporate Guarantee of the Indian promoter backed by appropriate
charge on its assets, Political and/ or commercial risk cover, Pledge of shares held by the
Indian promoter in the overseas venture etc.

28
Export- Oriented Units, Corporate Banking

The Bank offers a number of financing programmes for Export Oriented Units (EOUs),
importers and for companies making overseas investments. The financing programmes cater
to the term loan requirements of Indian exporters for financing their new project, expansion,
modernization, purchase of equipment, R&D, overseas investments and also the working
capital requirements.

Finance for Corporates

Research & Development Finance for Export Oriented Units:

Exim Bank encourages Indian exporters to invest more in their R&D spending in order to
develop new products/processes/ IPRs for enhancing export capabilities. Considering the need
to bridge the funding gap of Indian exporters in R&D space, the Bank has a dedicated R&D
Financing Programme. Under the said Programme, financing for R&D can be extended to any
export oriented company/ SPV promoted by companies, irrespective of the nature of industry.
The financing covers both capital and revenue expenditure including inter alia:

➢ Land and building, civil works for housing eligible R&D activities;
➢ Equipments, tools, computer hardware/ software, miscellaneous fixed assets used in
eligible R&D activities;
➢ Acquisition of technology from India or overseas at the “proof of concept” or design
stage, which will be used to develop new product/ process.
➢ Salaries of R&D personnel, support staff during the R&D project phase including
training costs;
➢ Cost of regulatory approvals, filing and maintenance of patent registration;
➢ Product documentation and allied costs during the R&D project phase.
➢ Costs of materials, surveys, technology demonstration studies and field trial
➢ Any other costs to enhance R&D capability.

Eligibility:
• Export oriented firms with exports (actual/projected) of at least `5 crores or 10% of
annual turnover.
• R&D finance is generally extended upto 7 years. However, longer tenors with suitable
interest resets would be permissible. Structured repayment can be considered to match
the cash flow.
• Upto 80% of the total project cost can be funded.
• Security to include, inter alia, appropriate charge on the assets, Corporate Guarantee,
charge/ assignment on the regulatory approval/ IPR, personal guarantee etc.

Pre-shipment/Post-shipment Credit Programme:

Exim Bank extends export credit to Indian exporters to meet a wide range of trade financing
requirements for execution of an export transaction. The Bank provides working capital
finance by way pre-shipment credit and post-shipment credit. Bank also extends as part of
export credit assistance, non-fund based limits inter alia including issuance of Letters of Credit
(both Foreign & inland) and Bank Guarantees (both Foreign & inland) for its clients. The
credit limits are generally extended as part of Borrower’s consortium limit and are operated as

29
a running account facility. The limits may be renewed for further period subject to satisfactory
review of account and depending on the Borrower’s export credit requirement. The facilities
can be drawn in either Indian Rupee or Foreign Currency.

Eligibility:
• Indian exporters with a track record.
• The limit should be within the MPBF of Borrower’s assessed bank finance.
• Margin of 15-20% under pre-shipment and 0-10% under post-shipment.
• Adequate security to be provided. Typical security includes appropriate charge on the
current assets including export receivables, ECGC cover etc.

Lending Programme for Export Oriented Units:

Exim Bank provides term loans to export oriented Indian companies to finance various capital
expenditures including certain soft expenditures in order to improve their export capability
and to enhance their international competitiveness. Loans/Guarantees are extended for the
following purposes: Expansion, modernization, upgradation or diversification projects
including acquisition of equipment, technology etc.; export marketing; export product
development; setting up of Software Technology Parks;

Eligibility:

Manufacturing/trading/services companies with a minimum export orientation

(actual/projected) of 10% of their annual turnover, or exports of `5 crore p.a., whichever is
lower [inclusive of exports through Export/Trading Houses], are eligible to avail finance from
Exim Bank. Exim Bank financing is available in Indian Rupees and in foreign currency [as
per extant RBI guidelines]. The tenor range is usually 7-10 years with a suitable moratorium,
and repayments in suitable monthly/ quarterly instalments. Promoter margin is minimum 20%
and appropriate charge on the fixed assets of the company/project plus any other acceptable
security including personal guarantees may be stipulated.
Finance for MSMEs

Apart from the Corporate Banking facilities, there are additional services that Exim Bank
offers to support Small and Medium Enterprises.

SME-ADB Line:

Exim Bank has arranged for a credit line from the Asian Development Bank (ADB) for
providing foreign currency term loans to the MSME borrowers in certain specific lagging
states of India, viz. Assam, Madhya Pradesh, Orissa, Uttar Pradesh, Chhattisgarh, Jharkhand,
Rajasthan and Uttarakhand. These foreign currency term loans can also finance domestic
capital expenditure of the borrowers in Indian Rupees, besides meeting their foreign currency
capital expenditure requirements. The assistance to these MSMEs will help in increasing
competitiveness in the relatively backward states and help in integrating them into the
mainstream economy.

30
Eligibility:

Export oriented MSMEs (as defined in MSMED Act, 2006) incorporated in the above
mentioned lagging states

Purpose: To meet long term foreign currency loan requirements of Indian exporting entities in
the MSME sector for financing their eligible capital expenditure. pertaining to inter alia
setting up of new facilities, expansion/modernization of existing facilities, acquisition of
equipment and plant & machinery, setting up of testing/R&D facilities, setting up of captive
power plants/co-generation plant, setting up of infrastructure facilities like effluent treatment
plants, storages/warehouses, etc. The Tenor of the loan will be upto 7 years including suitable
moratorium.

For cluster of Indian MSME EOUs

Exim Bank, besides providing financial assistance to individual MSME EOUs, also provides
financial assistance to Special Purpose Vehicles (SPVs) of a cluster of MSMEs. Term loans
are provided to such clusters of MSME units for the following activities:

• Development of new geographically contiguous cluster/industrial park, involving

creation & maintenance of common infrastructure and common facilities, including
inter alia construction of buildings and civil works, acquisition of assets/technology,
for the benefit of industrial units within the cluster/industrial park.
• Development of an industrial estate, by industrial users, industry associations and/or
Government bodies.
• Up-gradation of an existing industrial cluster or industrial estate.
• Development of specific infrastructure, including common effluent treatment plant,
captive power plant, transportation linkages, hazardous waste disposal.
• Development of Common Facilities Centers like testing centers, cold storages, for
industrial clusters, industrial estates, or a group of industries with common interests.

Technology & Innovation Enhancement and Infrastructure Development Fund (TIEID):

With a view to facilitate credit flow to the MSME sector at competitive rates, Exim Bank has
set up a Technology and Innovation Enhancement and Infrastructure Development (TIEID)
fund of USD 500 mn exclusively for MSMEs, to augment their export competitiveness and
internationalisation efforts, by partnering with banks / FIs. TIEID seeks to meet long term
foreign currency loan requirements of Indian exporting entities in the MSME sector for
meeting capital expenditure, through refinancing of Banks / FIs against their eligible SME
financing portfolio.

Eligibility:

Scheduled Commercial Banks / Financial institutions in India having acceptable credit risk
for on-lending to MSME units.

Eligible Beneficiary:

Ultimate Beneficiary of the Foreign Currency funds provided to eligible Banks/FIs shall be

31
MSME units in India having a minimum export orientation of 10% of annual turnover or
exports of ` 5 crores p.a in absolute terms, whichever is lower. The loan should be used to
meet long term foreign currency loan requirements of Indian exporting entities in the MSME
sector for meeting eligible capital expenditure. Eligible capital expenditure include
technology upgradation, capacity creation, common infrastructure development like captive
power plant, common effluent treatment plant, hazardous waste disposal facility, testing
facilities etc.

Lending Programme for Financing Creative Economy:

The Creative Industries are those industries which have their origin in individual creativity,
skill and talent and which have a potential for wealth and Job creation through the generation
and exploitation of intellectual property viz., Advertising, Architecture, Art and Antiques
Market, Crafts, Design, Designer Fashion, Film and Video, Interactive Leisure Software,
Music, Performing Arts, Publishing, Software and Computer Services, Television and Radio
etc. In view of the large untapped potential for increasing exports by the creative industries
and in order to provide a strategic focus to this sector and enhance Exim Bank’s presence in the
creative economy space, and as a corollary, in the MSME segment, Exim Bank has introduced
a Programme specifically for financing the Creative Economy.

Eligibility:

The illustrative list of industry sectors include Heritage {Traditional Cultural Expressions (Art
& Crafts, Festivals, Celebrations etc), Cultural Sites (Historical Monuments, Museums,
Libraries, Archives etc)}; Arts {Visual Arts (Painting, Sculpture, Antique, Photography etc),
Performing Arts (Live Music, Theatre, Dance, Opera, Puppetry etc)}; Media { Publishing &
Printed Media (Books, Newspapers, Press & other Publications), Audio Visuals (Film, TV &
Radio, Broadcasting etc), New Media (Digitised Content, Software, Video Games,
Animations etc); Functional Creations { Design (Interior, Graphic, Fashion, Jewellery, Toys
etc.), Creative Services (Architecture, Advertising, Creative R & D, Cultural Services, Digital
Services etc.)}

Finance for Grassroots Enterprises

The Bank supports globalisation of enterprises based out of rural areas of the country through
its GRID programme. Through this initiative, the Bank extends financial support to promote
grassroots initiatives/technologies, particularly those having export potential. The objective
of the programme is to help artisans/producer groups/clusters/small enterprises across the
country realize remunerative return on their produce essentially through facilitating exports
from these units. The group handles credit proposals from such organizations working at the
rural /grassroots level and offers tailor-made financial products to cater to their needs. The
group is mandated to work towards developing a robust, vibrant and holistic approach in its
intervention by providing assistance at various stages of product development / business cycle
including capacity building, export capability creation, expansion/diversification and finally
exports. The broad areas of support extended by the Bank through its grassroots initiatives
inter alia, include capacity building, development of common facility centres, construction of
raw material bank, technology upgradation and creation of export capability.

32
ELIGIBILITY:

The organisations eligible for support should meet various criteria including, but not limited
to the following:

• Should be a legal entity registered under respective State/Central Govt. Act as a

Society, Trust, Co-operative, Private Limited Company, Producer Company, or NGO
etc;
• Should be working with communities at grassroots level for promoting income
generating activities (IGAs) based on the traditional skills using indigenous or locally
available materials in the areas of product development & design, capacity building,
market development etc.;
• Should have proven track record of creating /adopting sustainable livelihood model
which could be upscaled and replicated across the geographies sharing similar
characteristics (demographic, cultural, socio-economic similarities, etc
• Should be exporting, directly or indirectly

A Line of Credit (LOC) is a financing mechanism through which Exim Bank extends support
for export of projects, equipment, goods and services from India. Exim Bank extends LOCs
on its own and also at the behest and with the support of Government of India. Exim Bank
extends Lines of Credit to:

a) Foreign Governments or their nominated agencies such as central banks, state owned
commercial banks and para-statal organizations;
b) National or regional development banks;
c) Overseas financial institutions;
d) Commercial banks abroad;
e) Other suitable overseas entities.

The above mentioned recipients of LOCs act as intermediaries and on lend to overseas buyers
for import of Indian equipment, goods and services. LOC is a financing mechanism that
provides a safe mode of non-recourse financing option to Indian exporters to enter new export
markets or expand business in existing export markets without any payment risk from the
overseas importers.

BROAD GUIDELINES AND PROCEDURE FOR GOVT. OF INDIA SUPPORTED LINES OF CREDIT

The Government of India (GOI), in 2003-04, formulated the Indian Development Initiative
(IDI), now known as Indian Development and Economic Assistance Scheme [IDEAS] – with
the objective of sharing India’s development experience through

(a) Capacity building and skills transfer,

(b) trade, and
(c) infrastructure development,

by extending concessional Lines of Credit (LOCs) routed through Exim Bank, to developing
partner countries, towards creating socio-economic benefits in the partner country. Recently,
the Ministry of External Affairs (MEA) has set up the Development Partnership
Administration (DPA) Division to deal with India’s development assistance programmes

33
abroad, including LOCs routed through Exim Bank. These LOCs are now increasingly being
extended to partner countries for large-scale and complex projects (project exports from
India).

Bilateral or multilateral assistance, through lines of credit, typically follows a sequence of

standard procedures, viz.

a) project identification and preparation,

b) review and approval of the project proposal,
c) offer of the loan, acceptance and execution of loan agreement,
d) project implementation, monitoring and supervision, and
e) socio-economic impact assessment after project completion.

The lessons learned from the impact assessment / evaluation act as a feedback to the
preparation, review and implementation of future projects. This process forms the 'project
cycle.'

BROAD GUIDELINES AND PROCEDURE EXIM BANK’S OWN COMMERCIAL LINES OF

CREDIT.

Exim Bank, since its inception, has been extending LOCs to various countries to promote
export of Indian projects, products and services. Under the LOCs extended by Exim Bank to
overseas financial institutions, foreign governments, regional and national development banks
and commercial banks, Exim Bank finances all items eligible for being exported under the
'Foreign Trade Policy' of Government of India. The credit periods for these LOCs are
generally upto 7 years and the LOCs typically carry LIBOR-linked interest rates.

Research & Analysis

Exim Bank’s Research & Analysis Group (RAG) offers a vast range of research products. The Bank’s
team of experienced economists and strategists provide insights on aspects of international
economics, trade and investment through qualitative and quantitative research techniques.
RAG monitors the global trends in the world and domestic economies and the impact of these
trends, especially on India and other developing economies. RAG caters to the constituents
within the Bank, as well as to those external to the Bank such as Government, RBI,
exporters/importers, trade & industry associations, external credit agencies, academic
institutions and researchers.

The research work carried out in the Group under the broad classification of regional, sectoral
and policy related studies, are published in the form of Occasional Papers, Working Papers,
Books, etc. These research studies primarily envisage identifying avenues for enhancing
India's international engagement.

The group also undertakes country profiles, which assess the economic, political, currency
and credit risks involved, along with the export opportunities in the country concerned.
Further the profiles provide short-to-medium term economic outlook of a country, indicating
the economic risk involved in doing business with country.

As a part of the support services and with an objective to provide contemporary information

34
to Indian traders and investors, the group disseminates information on export opportunities
and highlights developments that have a bearing on Indian exports, through its quarterly
bulletin, Eximius: Export Advantage. The newsletter comprises of regional and industry
outlooks, Bank’s activities, opportunities in multilateral funded projects and contract awards,
review on select traded currencies and countries, and a section on the happenings during the
quarter. The newsletter is a free publication, effectively distributed to a wide network of
scholars, economists, institutions, Government of India offices, and export promoting
organisations.

The Bank also brings out a bi-monthly publication titled ‘Agri Export Advantage’ in English,
Hindi and 10 regional languages (Assamese, Bengali, Gujarati, Kannada, Marathi,
Malayalam, Oriya, Punjabi, Tamil, and Telugu). The newsletter provides stakeholders of
Indian agribusiness with updates on global agri-environment and markets, research reports on
agri-commodities, international issues related to agri-business, prospective areas of
agribusiness, agricultural trade and trade policies, regulatory issues in international trade,
WTO Government schemes and assistance, latest international news brief and Bank's
activities to promote agri-export from India.

The Bank Brings out a bilingual ‘Indo-China Newsletter’ featuring areas of cooperation
between India and China.

Marketing Advisory Services

Exim Bank plays a promotional role and seeks to create and enhance export capabilities and
international competitiveness of Indian companies. Exim Bank through its Marketing
Advisory Services helps Indian exporting firms in their globalisation efforts by proactively
assisting in locating overseas distributor(s)/buyer(s)/ partner(s) for their products and services.
The Bank assists in identification of opportunities overseas for setting up plants or projects or
for acquisition of companies overseas. MAS Group leverages the Bank's high international
standing, indepth knowledge and understanding of the international markets and well
established institutional linkages, coupled with its physical presence, to support Indian
companies in their overseas marketing initiatives on a success fee basis. Exim Bank has been
able to successfully place a range of products in overseas as well as domestic markets.

Eligibility:

Any company/firm wanting to export its quality products/services is eligible to avail this
benefit as long as it does not fall in the negative list of India's Foreign Trade Policy and
International Conventions. Marketing Advisory Services are provided across all the sectors.
Information required from the company is as under:-
• Company profile
• Product Brochures
• Printed material
• Prices
• Existing export markets & target markets
• Minimum order quantity
• Quality certifications
• Samples, as and when required

35
EXPORT ADVISORY SERVICES GROUP (EAS)

The Export Advisory Services Group [EAS] offers a diverse range of information, advisory
and support services, which enable exporters to evaluate international risks, exploit export
opportunities and improve competitiveness. Value added information and support services are
provided to Indian projects exporters on the projects funded by multilateral agencies.

The Group undertakes customised research on behalf of interested companies in the areas
such as establishing market potential, defining marketing arrangements, and specifying
market distribution channels. Developing export market entry plans, facilitating
accomplishment of international quality certification and display of products in trade fairs and
exhibitions are other services provided.

The Bank provides a wide range of information, advisory and support services, which
complement its financing programmes. These services are provided on a fee basis to Indian
companies and overseas entities. The scope of services includes market-related information,
sector and feasibility studies, technology supplier identification, partner search, investment
facilitation and development of joint ventures both in India and abroad.

Multilateral Funded Projects Overseas (MFPO)

The Bank provides a package of information and support services to Indian companies to help
improve their prospects for securing business in projects funded by the World Bank, Asian
Development Bank, African Development Bank, and European Bank for Reconstruction and
Development.

Exim Bank as a Consultant

The Bank’s experience in evolving as an institution supporting international trade and

investment, in addition to functioning as an export credit agency in a developing country
context, is of particular relevance in other developing countries. The Bank has been sharing
its experience and expertise by undertaking consultancy assignments. Exim Bank also shares
its experience and expertise through provision of on-site exchange of personnel programmes
aimed at providing a first-hands experience to the employees of its institutional partners.

Institutional Linkages

The Bank has fostered a network of alliances and institutional linkages with multilateral
agencies, export credit agencies, banks and financial institutions, trade promotion bodies, and
investment promotion boards to help create an enabling environment for supporting trade and
investment. The Global Network of Exim Banks and Development Finance Institutions (G-
NEXID) was set up in Geneva in March 2006 through the Bank’s initiative, under the auspices
of UNCTAD. With the active support of a number of other Exim Banks and Development
Finance Institutions from various developing countries, the network has endeavoured to foster
enhanced South-South trade and investment cooperation. ‘Observer Status’ in UNCTAD
underscores support for the Forum.

36
Award for Excellence

The Bank, in association with CII, has instituted an Annual Award for Business Excellence
for best Total Quality Management (TQM) practices adopted by an Indian company. The
Award is based on the European Foundation for Quality Management (EFQM) model.

Financing Foreign Trade

I. PAYMENT TERMS

Five Principal Means:

• Cash in advance
• Letter of Credit
• Drafts
• Consignment
• Open Account

1. Cash in Advance
• Minimal risk to exporter
• Used where there is
a. Political unrest
b. Goods made to order
c. New unfamiliar customer

2. Letter of Credit (L/C)

A letter addressed to seller
• written and signed by buyer’s bank
• promising to honor seller’s drafts.
• Bank substitutes its own commitment
• Seller must conform to terms

Advantages of an L/C to Exporter Advantages of L/C to Importer

✓ eliminates credit risk ✓ shipment assured
✓ reduces default risk ✓ documents inspected
✓ payment certainty ✓ may allow better sales terms
✓ prepayment risk protection ✓ relatively low-cost financing
✓ financing source ✓ easy cash recovery if discrepancies

Types of L/Cs
a) documentary
b) non-documentary
c) revocable
d) irrevocable
e) confirmed
f) transferable

37
 3. Drafts

Drafts are:
- Unconditional order in writing
- Exporter’s order for importer to pay
- At once (sight draft) or in future (time draft)

Three Functions of Drafts

a. clear evidence of financial obligation
b. reduced financing costs
c. provides negotiable and unconditional financial
instrument (i.e. May be converted to a
banker’s acceptance)

Types of Drafts
a. Sight
b. Time
c. Clean (no documents needed)
d. Documentary

4. Consignment

1. Exporter = the consignor

2. Importer = the consignee
3. Consignee attempts to sell goods to a third party; keeps some profit, remits rest to
consignor.
4. Use: Between affiliates

5. Open Account

1. Creates a credit sale

2. To importer’s advantage
3. More popular lately because
a. major surge in global trade
b. credit information improved
c. more global familiarity with exporting.
4. Benefits of Open Accounts:
a. greater flexibility in making a trade
b. lower transactions costs
5. Major disadvantage:
Highly vulnerable to government currency controls
II. DOCUMENTS USED IN IN T’L TRADE
Four most used documents
1. Bill of Lading (most important)
2. Commercial Invoice
3. Insurance Certificate
4. Consular Invoice

38
 1. Bill of Lading Three functions:
• Acts as a contract to carry the goods.
• Acts as a shipper’s receipt
• Establishes ownership over goods if negotiable type.

Type of Bill of Lading

a. Straight
b. Order
c. On-board
d. Received-for-shipment
e. Clean
f. Foul

2. Commercial Invoice
Purpose:
• Lists full details of goods shipped
• Names of importer/exporter given
• Identifies payment terms
• List charges for transport and insurance.

3. Insurance
• Two Categories:
a. Marine: transport by sea
b. Air: transport by air
• Insurance Certificate issued to show proof of insurance
• All shipments insured today.

4. Consular Invoice
Local consulate in host country issues:
• A visa for the exporter’s invoice.
• Requires fee to be paid to consulate.

III. FINANCING TECHNIQUES

1. Bankers’ Acceptances
• Creation: drafts accepted
• Terms: Payable at maturity to holder

2. Discounting
• Converts exporters’ drafts to cash minus interest to maturity and commissions.
• Low cost financing with few fees
• May be with (exporter still liable) or without recourse (bank takes liability for
nonpayment).

3. Factoring
-firms sell accounts receivable to another firm known as the factor.
• Discount charged by factor

39
 • Non-recourse basis: Factor assumes all payment risk.
• When used:
1.) Occasional exporting
2.) Clients geographically dispersed.
4. Forfaiting
• Definition: discounting at a fixed rate without recourse of medium-term
accounts receivable denominated in a fully convertible currency.
• Use: Large capital purchases
• Most popular in W. Europe

IV. GOVERNMENT SOURCES OF EXPORT FINANCING AND CREDIT

INSURANCE

A. Export-Import Bank of the U.S.

- Known as Ex-Im Bank
- finances and facilitates U.S. exports only.
Ex-Im Bank Programs:
a. Direct loans to exporters
b. Intermediate loans to exporters
c. Loan guarantees
d. Preliminary commitments
e. Political and commercial insurance

B. Private Export Funding Corporation (PEFCO)

1. Finances large sales from private sources
2. May purchase loans of U.S. importers
3. Exim Bank provides loan guarantees.

C. Foreign Credit Insurance Association (FCIA)

1. Offers commercial and political risk insurance
2. When insured, exporter often able to obtain financing faster.

V. COUNTERTRADE

A. Three Specific Forms:

1. Barter - direct exchange in kind
2. Counter-purchase - sale/purchase of unrelated goods but with currencies
3. Buyback - repayment of original purchase through sale of a related product.

B. When to Use Countertrade

1. With “soft-currency” developing countries
2. When foreign contractor must perform.

Export Incentives

The Government of India has framed several schemes to promote exports and to obtain foreign
exchange. These schemes grant incentive and other benefits. The few important export
incentives, from the point of view of indirect taxes are briefed below:

40
Free Trade Zones (FTZ)
Several FTZs have been established at various places in India like Kandla, Noida, Cochin,
etc. No excise duties are payable on goods manufactured in these zones provided they are
made for export purpose. Goods being brought in these zones from different parts of the
country are brought without the payment of any excise duty. Moreover, no customs duties are
payable on imported raw material and components used in the manufacture of such goods
being exported. If entire production is not sold outside the country, the unit has the provision
of selling 25% of their production in India. On such sale, the excise duty is payable at 50% of
basic plus additional customs or normal excise duty payable if the goods were produced
elsewhere in India, whichever is higher.

Electronic Hardware Technology Park / Software Technology Parks

This scheme is just like FTZ scheme, but it is restricted to units in the electronics and computer
hardware and software sector.

Advance License / Duty Exemption Entitlement Scheme (DEEC)

In this scheme advance license, either quantity based (Qbal) or value based (Vabal), is given
to an exporter against which the raw materials and other components may be imported without
payment of customs duty provided the manufactured goods are exported. These licenses are
transferable in the open market at a price.

Export Promotion Capital Goods Scheme (EPCG)

According to this scheme, a domestic manufacturer can import machinery and plant without
paying customs duty or settling at a concessional rate of customs duty. But his undertakings
should be as mentioned below:

• Customs Duty Rate

• Export Obligation
• Time
• 10%
• 4 times exports (on FOB basis) of CIF value of machinery.
• 5 years
• Nil in case CIF value is Rs. 200 mn or more.
• 6 times exports (on FOB basis) of CIF value of machinery or 5 times exports on
(NFE) basis of CIF value of machinery.
• Nil in case CIF value is Rs50 mn or more for agriculture, aquaculture, animal
husbandry, floriculture, horticulture, poultry and sericulture.

Note:

• NFE stands for net foreign earnings.

• CIF stands for cost plus insurance plus freight cost of the machinery.
• FOB stands for Free on Board i.e. export value excluding cost of freight and insurance.

41
Deemed Exports
The Indian suppliers are entitled for the following benefits in respect of deemed exports:

• Refund of excise duty paid on final products

• Duty drawback
• Imports under DEEC scheme
• Special import licenses based on value of deemed exports

The following categories are treated as deemed exports for seller if the goods are manufactured
in India:

• Supply of goods against duty free licenses under DEEC scheme

• Supply of goods to a 100 % EOU or a unit in a free trade zone or a unit in a software
technology park or a unit in a hardware technology park
• Supply of goods to holders of license under the EPCG scheme
• Supply of goods to projects financed by multilateral or bilateral agencies or funds
notified by the Finance Ministry under international competitive bidding or under
limited tender systems in accordance with the procedures of those agencies or funds
where legal agreements provide for tender evaluation without including customs duty
• Supply of capital goods and spares upto 10% of the FOR value to fertilizer plants
under international competitive bidding
• Supply of goods to any project or purpose in respect of which the Ministry of Finance
permits by notification the import of goods at zero customs duty along with benefits
of deemed exports to domestic supplies
• Supply of goods to power, oil and gas sectors in respect of which the Ministry of
Finance permits by notification benefits of deemed exports to domestic supplies

Manufacture under Bond

This scheme furnishes a bond with the manufacturer of adequate amount to undertake the
export of his production. Against this the manufacturer is allowed to import goods without
paying any customs duty, even if he obtains it from the domestic market without excise duty.
The production is made under the supervision of customs or excise authority.

Duty Drawback
It means the rebate of duty chargeable on imported material or excisable material used in the
manufacturing of goods in and is exported. The exporter may claim drawback or refund of
excise and customs duties being paid by his suppliers. The final exporter can claim the
drawback on material used for the manufacture of export products. In case of re-import of
goods the drawback can be claimed.

The following are Drawbacks:

• Customs paid on imported inputs plus excise duty paid on indigenous imports.
• Duty paid on packing material.

Drawback is not allowed on inputs obtained without payment of customs or excise duty. In
part payment of customs and excise duty, rebate or refund can be claimed only on the paid

42
part.

In case of re-export of goods, it should be done within 2 years from the date of payment of duty
when they were imported. 98% of the duty is allowable as drawback, only after inspection. If
the goods imported are used before its re-export, the drawback will be allowed as at reduced
percent.
Export Procedures - Documents

Documents Required
Export procedure describes the documents required for exporting from India. Special documents may
be required depending on the type of product or destination. Certain export products may
require a quality control inspection certificate from the Export Inspection Agency. Some food
and pharmaceutical product may require a health or sanitary certificate for export.

Shipping Bill/ Bill of Export is the main document required by the Customs Authority for
allowing shipment. Usually the Shipping Bill is of four types and the major distinction lies
with regard to the goods being subject to certain conditions which are mentioned below:

• Export duty/ Cess

• Free of duty/ Cess
• Entitlement of duty drawback
• Entitlement of credit of duty under DEPB Scheme
• Re-export of imported goods

The following are the export documents required for the processing of the Shipping
Bill:

• GR forms (in duplicate) for shipment to all the countries.

• 4 copies of the packing list mentioning the contents, quantity, gross and net weight of
each package.
• 4 copies of invoices which contains all relevant particulars like number of packages,
quantity, unit rate, total FOB / CIF value, correct & full description of goods etc.
• Contract, L/ C, Purchase Order of the overseas buyer.
• AR4 (both original and duplicate) and invoice.
• Inspection/ Examination Certificate.

The formats presented for the Shipping Bill are as given below

• White Shipping Bill in triplicate for export of duty free of goods.

• Green Shipping Bill in quadruplicate for the export of goods which are under claim
for duty drawback.
• Yellow Shipping Bill in triplicate for the export of dutiable goods.
• Blue Shipping Bill in 7 copies for exports under the DEPB scheme

Note: - For the goods which are cleared by Land Customs, Bill of Export (also of 4 types - white,
green, yellow & pink) is required instead of Shipping Bill.

43
Documents Required for Post Parcel Customs Clearance
In case of Post Parcel, no Shipping Bill is required. The relevant documents are mentioned below:
• Customs Declaration Form - It is prescribed by the Universal Postal Union (UPU)
and international apex body coordinating activities of national postal administration. It
is known by the code number CP2/ CP3 and to be prepared in quadruplicate, signed by
the sender.
• Dispatch Note, also known as CP2. It is filled by the sender to specify the action to be
taken by the postal department at the destination in case the address is non-traceable or
the parcel is refused to be accepted.
• Prescriptions regarding the minimum and maximum sizes of parcel with its maximum
weight: Minimum size: Total surface area not less than 140 mm X 90
mm. Maximum size: Lengthwise not over 1.05 m. Measurement of any other side of
circumference 0.9 m./ 2.00 m. Maximum weight: 10 kg usually, 20 kg for some
destinations.
• Commercial invoice - Issued by the seller for the full realizable amount of goods as
per trade term.
• Consular Invoice - Mainly needed for the countries like Kenya, Uganda, Tanzania,
Mauritius, New Zealand, Burma, Iraq, Australia, Fiji, Cyprus, Nigeria, Ghana, Zanzibar
etc. It is prepared in the prescribed format and is signed/ certified by the counsel of the
importing country located in the country of export.
• Customs Invoice - Mainly needed for the countries like USA, Canada, etc. It is
prepared on a special form being presented by the Customs authorities of the importing
country. It facilitates entry of goods in the importing country at preferential tariff rate.
• Legalized/Visaed Invoice - This shows the seller's genuineness before the
appropriate consulate/ chamber of commerce/ embassy. It does not have any prescribed
form.
• Certified Invoice - It is required when the exporter needs to certify on the invoice that the
goods are of a particular origin or manufactured/ packed at a particular place and in
accordance with specific contract. Sight Draft and Usance Draft are available for this. Sight
Draft is required when the exporter expects immediate payment and Usance Draft is
required for credit delivery.
• Packing List - It shows the details of goods contained in each parcel/ shipment.
• Certificate of Inspection - It shows that goods have been inspected before shipment.
• Black List Certificate - It is required for countries which have strained political
relation. It certifies that the ship or the aircraft carrying the goods has not touched those
country(s).
• Weight Note - Required to confirm the packets or bales or other form are of a stipulated
weight.
• Manufacturer’s/ Supplier's Quality/ Inspection Certificate.
• Manufacturer's Certificate - It is required in addition to the Certificate of Origin
for few countries to show that the goods shipped have actually been manufactured and
are available.
• Certificate of Chemical Analysis - It is required to ensure the quality and grade of
certain items such as metallic ores, pigments, etc.
• Certificate of Shipment - It signifies that a certain lot of goods have been shipped.
• Health/ Veterinary/ Sanitary Certification - Required for export of foodstuffs,
marine products, hides, livestock etc.
• Certificate of Conditioning - It is issued by the competent office to certify

44
 compliance of humidity factor, dry weight, etc.
• Antiquity Measurement - Issued by Archaeological Survey of India in case of
antiques.
• Transshipment Bill - It is used for goods imported into a customs port/ airport
intended for transshipment.
• Shipping Order - Issued by the Shipping (Conference) Line which intimates the
exporter about the reservation of space of shipment of cargo through the specific vessel
from a specified port and on a specified date.
• Cart/ Lorry Ticket - It is prepared for admittance of the cargo through the port gate and
includes the shipper's name, cart/ lorry No., marks on packages, quantity, etc.
• Shut Out Advice - It is a statement of packages which are shut out by a ship and is
prepared by the concerned shed and is sent to the exporter.
• Short Shipment Form - It is an application to the customs authorities at port which
advises short shipment of goods and required for claiming the return.
• Shipping Advice - It is prepared in aligned document to be used to inform the
overseas customer about the shipment of goods.

Export Credits

Export credits are providing pre-shipment and post-shipment credit either in Indian rupees or
in foreign currency to an exporter. The credit is given for short term i.e. upto 6 months,
medium/ long term which extends more than 6 months according to the eligibility of the
products and projects. Usually medium/long term export credit is given after inspecting the
supplier's credits.

To promote the export promotion drive, the Government of India established Export Credit
Guarantee Corporation of India Limited (ECGC) in 1957 to cover the risk of exporting on
credit. This organization offers a range of services to exporters. They are as mentioned below:

• It provides credit risk insurance covers to the exporters against their loss in export
of goods and services.
• It offers guarantees to the banks and financial institutions in order to enable the
exporters to obtain better facilities from them.
• It provides Overseas Investment Insurance to the Indian companies investing in
joint ventures abroad as equity of loan.

Export Credit Insurance

Export credit insurance protects the exporter from the consequences of the payment risks due
to the far-reaching political and economic changes. Outbreak of war or civil war might block
or delay the payment for goods already exported. Coup or an insurrection in the importing
country may also bring the same result. Export credit insurance is obtained from the ECGC
with the following issued covers:

• Standard policies to protect the exporter against the risk of not receiving the
payment while trading with overseas buyers on short-term credit.
• Specific policies which is designed to protect the exporter against the risk of not
receiving the payment in respect of:

45
 o Exports on deferred payment terms
o Services rendered to the foreign parties
o Construction work which also includes the turnkey projects undertaken
abroad.

The policies are one of the following:

• Whole Turnover Policies in the form of 'Open Cover' in respect of shipments made
during 24 months period DP, DA and open delivery terms. Shipment details have to
be declared on monthly basis.
• Specific policies for exports of capital goods on medium or long-term credit, turnkey
projects, civil construction works and technical services.

Special Economic Zone Incentives

Apart from facilitating with state-of-the-art infrastructure and access to a large well-trained
and skilled work force, Special Economic Zone also offers enterprises and developers with a
favourable and attractive framework of incentives. They are as follows:

• 100% exemption of income tax for a block of 5 years and an additional 50% tax
exemption for two years thereafter.
• 100% Foreign Direct Investment (FDI) in the manufacturing sector permitted
through automatic route, barring a few sectors.
• External commercial borrowings by SEZ units upto US$500 million a year without
any maturity restrictions through a recognized banking channels.
• Facility to retain 100% foreign exchange receipts in Exchange Earners' Foreign
Currency Account.
• 100% FDI permitted to SEZ franchisee in providing basic telephone services in
SEZs.
• No cap on foreign investment for small scale sector reserved items.
• Exemption from industrial licensing requirements for items reserved for the SSI
sector.
• No import license requirements.
• Exemption from customs duties on import of capital goods, raw materials,
consumables, spares etc.
• Exemption from Central Excise duties on procurement of capital goods, raw
materials, consumable spares etc., from the domestic market.
• No routine examinations by Customs for export and import cargo.
• Facility to realize and repatriate export proceeds within 12 months.
• Profits allowed to be repatriated without any dividend-balancing requirement.
• Job work on behalf of domestic exporters for direct export allowed.
• Subcontracting both domestic and international is permitted; this facility is
available to jewellery units as well.
• Exemption from Central Sales Tax and Service Tax.
• Facilities to set up off-shore banking units in SEZs.

46
Incentives to Developers

• Exemption from duties on import/ procurement of goods for the development,

operation and maintenance of SEZ.
• Income tax exemption for a block of 10 years in 15 years.
• Exemption from Service Tax
• FDI for the development of townships within SEZs with residential, educational,
health care and recreational facilities permitted on a case-to-case basis.

Concept of Export Management

Export business is prevalent around the globe and in recent times it has grown at much faster
rate due to globalization process. Export means transaction of products and services from one
nation to other following legal rules for trade purposes. Export goods are given to international
end users by domestic producers. Export management is the use of managerial process to the
serviceable area of exports. It is basically associated with export activities and type of
management that brings harmonization and incorporation of an export business. Export
management is concerned with export orders and accomplish objectives to successfully
complete in time as per the requirements given by the overseas buyers. The main purpose of
export management is to secure export orders and to make certain for timely delivery of goods
as per agreed norms of quality and other specifications including terms and conditions agreed
to between the exporter and the importer.

The nature of export management

Export management can be appraised with reference to functional area of export and the
administrative process involved in export management.
Categorization of Export

The export can be grouped into many sections such as Merchandise Exports, Services Exports,
Project Exports, and Deemed Exports.

A merchandise export is related with the export of physical goods, for example, readymade
garments, engineering goods, furniture, and works of art. Service Exports denotes to the export
of goods that don't exist in physical form, that is, professional, technical or general services.
Examples of the exports would include export of computer software, architectural,
entertainment or technical consultancy services. Project export means to develop a project by
a business firm in a different nation. It is viewed as systematically evolved work plan devised
to achieve a specific objective within a specific period of time. Deemed Exports refer to those
transactions by the recipient of the goods in which the goods are made in India. The necessary
condition is that such goods are manufactured in India. This category of export has been
introduced by the Export Import Policy of the Government of India. Some of the examples of
goods that are considered as Deemed Exports, as given in Export-Import Policy (2002-07) are
supply of goods against duty free licenses, Supply of goods to projects financed by multilateral
or bilateral agencies/Funds notified by the Department of Economic Affairs, Ministry of
Finance, Government of India and supply of goods to the power, oil and gas including
refineries.

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Function of Export Manager

Export manager has important role in managing business for international orders. They must
be competent to perform export business. The conventional management structures with
functional classification such as purchases, marketing, finance, accounts, administration,
cannot make certain efficiency in export management through all stages in the export phases.
Therefore, export manager is needed to successfully conduct export business operation. The
basic role of an export manager is to bring about synchronization and integration of the export
transaction from within the established management structures and concerned external
agencies to guarantee timely delivery of goods as per the specifications of purchaser. The
export manager is accountable for the successful completing of the order in terms of time,
cost and technical performance. He must provide the guidance necessary to connect the people
and groups from dissimilar departments working on the export order, into one team in a
managerial organisation and provide the drive necessary to complete the task on time and
within cost. He must have good understanding of the techniques applied in export planning,
financial management, inventory management, merchandising, risk management, foreign
exchange operations, exchange control, negotiation with banks information systems,
communication, personnel management and industrial relations, co-ordination and control.
The efficiency of export manager will depend upon the extent of authority delegated to him
by the senior management.

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Process of Export Management

When it is decides to develop export business, the primary function is to make good plan to
secure an export order. After confirming the order to the consumer, it is necessary to develop
an organization structure for it and form competent team of personnel for its implementation.
Export Manager has great responsibility to manage all operation in timely manner. The success
of the export order depends, on his efficient management and handling of export orders. He
must maintain liaison with the importer, prepare plans for its implementation and issue
necessary executive instructions to the export employees. He has also to develop an
information system so that there is continuous flow of information on the progress of the order.
In case, if progress is not satisfactory and some tasks are not performed as per prescribed
schedules, export manager has duty to evaluate the variances and tasks suitable corrective
measures, if necessary, for the purpose and ultimately submit report on the progress of work to
the top management. The major functions of the export manager in managing orders are:
procurement of export order, planning for export order execution, direction for exports, export
order execution, importer liaison, export order evaluation, reprogramming, reporting on export
order execution.

Development of Export Strategies

Once a detailed market analysis has been completed, company should develop a method of
market entry. The indirect methods of market entry usually need less marketing investment,
but company could lose considerable control over the marketing process. Direct exporting
may require huge capital investment in marketing, but there is more control over export
strategies. Corporate presence is a choice for companies with successful test marketing. In
Direct Exporting, Company or individual can access directly to customers and sell them
products in foreign markets by establishing an export department within your organization.
Selling through company's sales department creates a chance to establish healthy relationship
with the abroad market and buyer. In addition to selling directly to the market, company can
penetrate and may also choose to use an export manager to handle other parts of the world.
In fact, in some countries, it is not necessary to sell directly to the end-user; company must
use a local agent or representative. Other direct exporting options are Manufacturer's
Representative or Sales Agents. They are the persons who are responsible for closing the sale
and taking orders on a commission basis. They do not take financial responsibility or collect
payment for the goods sold, and they assume no risk or responsibility for the product. Foreign
Distributor/Importer is another option for exporting who buys the product and is always
responsible for payment of the export item. They presume financial risk and generally provide
support and service for the product. Distributors often buy to fill their own inventories and
typically carry a range of non- competitive, but complementary products. Overseas Retailers
are also involved in exporting products.
Indirect Exporting is preferable for complex task and also cover the risk of direct exporting.
An Export Management Company functions as an "off-site" export sales department,
representing company's product along with a variety of non-competitive manufacturers. The
Export Management Company searches for business for company and usually provides the
array of services like it performs market research and develops a marketing strategy, locates
new and utilizes existing foreign distributors or sales representatives, to put your product into
the foreign market, functions as an overseas distribution channel or wholesaler, takes title to
the goods and operates on a commission basis. Another indirect exporting option is through
Export Trading Company which is analogous to Export Management Companies. The ETC

49
is more likely to take title to the product and pay directly, but like an EMC, they can also act
as an export department. Usually, there is less responsibility on the part of the ETC towards
the supplier and they tend to be demand driven and transaction oriented. Licensing offers a
small business the advantages of rapid entry into foreign markets as well as reducing the
capital requirements to establish manufacturing facilities overseas. Other option is Franchise
agreements that tend to give the franchiser more control over marketing, since it is the
company's reputation and existing market relationship that adds value to the product.
Agreements with foreign manufacturers to produce company product, as opposed to exporting
to the overseas region is known as contract manufacturing. It is an easy foreign market entry
method when your manufacturer is already producing company product for the domestic
market.
Benefits of Exporting

Main benefit of export is the possession which is specific to the firms' international
experience, asset and capacity of the exporter to offer distinct product or low cost product
with in the values chain. An assortment of investment risk and market potential is recognized
as the site benefit of the particular market combination. Some companies have lower level of
ownership advantage therefore they may not enter into the foreign markets. In case a
company's products and company's ownership equipped with the international advantage and
ownership advantage, the entry can be made through low risk model. Another benefit is that
low investment is needed in exporting of goods than the other modes of international trade
and development. In export of products, the managers perform the various operational control
however it does not have the option over the control of marketing activities of the company.
The consumer of exported goods is far away from the exporter though the different
intermediaries can manage the risk.
Problems and issues in Export Management

Major barriers of export management include language, high risk, government control,
difference in laws, difficulty in payment, custom duty, and lack of information. Other
problems of export management are evil effects of foreign trade, economic dependence,
disadvantage of agriculture country, international rivalry. Researchers said that there is high
risk in foreign trade instead of internal business because goods are transported to other
countries through sea, air in which there is environmental threat and products may be damaged
from poor climate, rocks etc. Usually, international trade is under governmental control and
licence is must for doing international trade. In export, management, there are differing law in
each country therefore traders have to face many problems in conducting business. Export
management become difficult when information flow is not smooth. It is very difficult to
assess the financial position of businessman located in other country. It is observed that
developed nations get advantage through export business but developing countries may suffer
loss as they cannot manufacture goods at rapid rate and managerial process is also not very
smooth. Another problem is dependency on other country for raw material and if imports are
stopped due to some reasons, country has to suffer a lot in terms of finance. Export
management is not smooth due to low labour productivity, less technological advancement
and laziness.

50
In order to reduce issues of export trade, it is suggested that traders must know various
language for good conversation. Export managers must have knowledge of exchange rates.
They must modernize the process of foreign trade and standardize the products. In addition
to this there are some major disadvantages highlighted in the export of goods such as financial
management, communication technology improvements, and customer demand and
management mistakes. To reduce the risk of transaction process of exporting the goods and
exchange rate fluctuation, it is necessary to have more capacity for managing the financials
for coping up the efforts. Presently, customers can directly communicate with the suppliers
with the aid of communication technology which has improved the way of purchasing goods.
It leads more clearness in transaction and purchasing of goods and vendors are responsible
for following the real time demand for submitting the transaction details.
It is summarized that exporting is common way for manufacturers to do business in foreign
market. Success of export management requires the enthusiastic, honest and positive support
of all the functional managers in the organisations. Good export management gets the export
order completed within the time and as per the budget allocated for particular project.
Why Do Exports Matter?

Countries all over the world try to promote exports. Almost every country offers financial
incentives to exporters. Countries like China have Special Economic Zones wherein
exporters are not charged any tax. Similarly, other countries have special banks and
insurance agencies promoted by the government to facilitate export growth.

This brings us to the importance of exports. If the government is spending so many resources
and providing so many incentives to exporters, then they must be important for a country.

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Utilization of Comparative Advantage

The fundamental principle driving international trade is that of comparative advantage. Some
countries are blessed with some natural resources whereas others have different resources at
their disposal. Consider the case of a country like Saudi Arabia. It has much more oil than it
could possibly use. However, there are very few other resources that can be used internally.
It is exports which allow Saudi Arabia to lead a prosperous life. They export the excess oil
and import all the other goods. Similarly, countries like India and China which have the
highest working populations export their labor services. Hence, it is important for any country
to recognize their core competency and start focusing on exporting them.

Contribution to GDP

Net exports are the difference between imports and exports. If the net exports number is
positive it adds to the GDP of the nation. On the other hand, if the net exports number is
negative, it subtracts from the GDP of the nation. This is because goods which are sent abroad
are also manufactured locally. Since GDP counts only local production, exports definitely
lead to an increased GDP.

Of late, countries have started using GDP as a proxy measure to determine the rate of
economic growth. Hence exports have become even more important because they appear to
be directly linked to economic growth.

Increase in Employment

Exports lead to domestic production. Domestic production requires domestic labor. Hence,
exports lead to an increase in employment in the nation. Apart from direct employment
provided by exports, there is also a spill over effect.

This means that once export workers get paid, they also spend their money to consume goods
and services. This leads to even more job creation. As a result, the entire economy develops.
Economists often cite the example of China while explaining this point. The unemployment
rate in China has been drastically cut down after the export-oriented policies were brought
into place.
Also, economists often cite the United States example to prove their point. After World War-
2, the United States was a dominant exporter of goods to the world. This period saw a massive
rise in employment in the United States. However, soon America became dependent on cheap
imports from nations such as China, Japan, and Korea. Now, the unemployment rate has
skyrocketed in America. Since the production of goods is not happening in America, the
American worker is unemployed!

It is for this reason that countries are now wary of decreasing exports. A fall in exports is
treated as an early indicator of impending economic recession.

Recovery from Recession

Exports are a very important tool to spur economic growth in a country. This means that
exports can also be used to recover from recessions. The logic behind this is simple. During
the recession, there is a negative sentiment in the entire economy. Factories and offices stop

52
giving wage increments. As a result, consumers start deferring their purchases. The result is
that a vicious cycle ensues and production comes to a halt.

During the same time, other countries around the world are not suffering from a recession.
Hence the consumers in these countries are willing to spend. It is here that exports come into
play. Exporters from recession prone countries can send their goods to nations with favorable
economic climate. This will increase the local GDP and reduce unemployment. This puts the
economy

Increasing exports is one of the most effective ways to beat the recession.

Earning Foreign Exchange

The dollar is the most important currency in the world today. It is a reserve currency. This
means that international trades happen either in dollar or gold. Essential commodities like oil
and gold are priced only in terms of dollar or gold. Hence all countries need dollars for their
survival.

Exports are the only way to earn dollars. It is for this reason that exports are considered to be
vital to the solvency of a nation. A thriving economy can suddenly implode in the absence of
dollars. This is because they will not be able to import essential commodities. Hence, exports
are considered to be the lifeline of ant economy. This is why governments all over the world
create special schemes to spur exports.

It must also be noted that exports need to be done at a profit. Some countries are subsidizing
their products so that they become cheaper on the international market and spur exports. This
will not benefit the economy. This is because at the end, this amounts to giving away stuff for
free! Subsidies do not spur exports. They simply give away money that was earned by other
industries in the nation. Subsidies are more political in nature. They are meant to benefit some
people at the expense of the majority.

Importing and Exporting

Importing and Exporting are means of Foreign Trade. Foreign trade is carried out in goods
and services – which include imports, exports, and the balance of foreign trade – is presented
separately for goods and for services.. The total imports, exports, and balance of foreign trade
are presented as summaries of goods and services.

Exporting refers to the selling of goods and services from the home country to a foreign
nation. Whereas, importing refers to the purchase of foreign products and bringing them into
one’s home country. Further, it is divided in two ways, which are,

i. Direct
ii. Indirect

Every nation is blessed with certain resources, assets, and abilities. For instance, a few nations
are rich in natural reserves, for example, petroleum products, timber, fertile soil or valuable
metals and minerals, while different nations have deficiencies of these resources..

53
Advantages of Import and Export

• It is one of the simplest routes of entering into the global trade and import and export
generate huge employment opportunities.
• Requires less investment in terms of time and money when contrasted with other
methods of entering into the global trade.
• Is comparatively less risky when compared with different routes of entering in
international business.
• As no nation can be 100% self-sufficient, import and export are very crucial for the
functioning and growth of that nation.
• Can help Countries to access the best technologies available and best products and
services in the world.
• It gives better control over the trade than setting up a market and the risk is
considerably low.

Limitations of Import and Export

• It includes extra packaging, transportation and protection and insurance costs which
build up the total cost of items.
• Exporting isn’t doable in the event that the foreign nation prohibits imports.
• Domestic organizations which are closer to the client could serve them better than
firms outside their national borders.
• Merchandises are subject to quality standards any low-grade merchandise which is
exported will result in Country reputation and remarks on countries.
• Obtaining licenses and documentation for foreign trade is a difficult and frustrating
task.
• If you are not careful, you can lose grip on the domestic market and existing
customers.

Increasing Exports through Free

Trade Zones (FTZ)

Countries have long since realized the importance of furthering their interest by supporting
the International Trade and Exports from in house and actively supporting the industries to
become globally competitive. Besides this objective, many governments also aim to promote
Foreign Direct Investment into the country and encourage Multi-National Companies to set
shop and manufacture goods for home consumption as well as Exports. In order to support
such initiatives most countries set up Special Economic Zones in their country.

Governments develop certain underdeveloped or rural regions as industrial parks,

provide international standard amenities and designate such zones as Special Economic
Zones. These areas are normally exempt from most of the normal trade barriers, tariffs and
national laws and seek to promote free market export oriented manufacturing activities.
There are several sub categories of Special Economic Zones (SEZ) namely Free Trade
Zones (FTZ), Export Processing Zones (EPZ), Free Zones (FZ), Industrial Parks, Free
Ports etc.

54
The Governments give preference to large scale manufacturing or assembly units to be set up
by Multi-National Companies of repute and provide tax holidays as well as waiver of many
of the formalities required to be followed by the Companies in the said Zone. Typically the
Companies import Raw Materials and manufacture goods locally thus using local cheaper
labor and Export the goods outside the Country. Both the Imports and Exports are exempt
from Customs Duties and other levies. Only the goods that enter the local market as domestic
sale product are taxed. Such manufacturing intensive zones help generate a lot of employment
in the rural sector and lead to the overall development of the area and in turn stimulate
economic growth in the area. Besides local growth of the area, it helps country earn huge
foreign exchange as well.

Ireland was the first country to set up Shannon Free Zone which was followed up quickly by
most of the developing countries like Philippines, Malaysia, China, India, Mexico, Costa
Rica, Honduras, and Guatemala etc. The list of countries now having adopted EPZ has cross
over 100 numbers.

While Jabil Ali FTZ made a huge impact on Dubai and its growth, China has benefited from
its most successful SEZ - Shenzhen which helped employ over 10 million people. India has
become one of the Asia’s largest outsourcing hubs thanks to establishment of SEZs
throughout the Country.

Though in many countries the SEZs are implemented by the Governments, quite a few SEZs
have been implemented by private parties too as private operator, private developers. Quite a
few countries have adopted a mid path of setting up public sector quasi-government agencies
with a pseudo corporate institutional structure and autonomy in operations. In some other
cases SEZs have also developed on the basis of public-private partnership arrangements.

SEZs can be said to be the precursor for establishing liberal market economy and free trade.
Today world over more than 3000 FTZs in over 116 countries are employing appx. 43 million
people engaged in manufacturing of various consumer items such as clothes, shoes, electronic
gadgets, computers and toys etc.

Foreign Trade: Definition, Types of

Foreign Trade

Foreign trade is the exchange of capital, goods, and services across international borders
or territories.

In most countries, it represents a significant share of gross domestic product (GDP).

Industrialization, advanced transportation, globalization, multinational corporations, and
outsourcing are all having a major impact on the international trade system.

Increasing international trade is crucial to the continuance of globalization. International

trade is a major source of economic revenue for any nation that is considered a world
power.

Without international trade, nations would be limited to the goods and services produced within
their borders.

55
What is Foreign Trade?

Foreign trade is the exchange of goods across national boundaries. Prof. J.L. Hanson said,
“An exchange of various specialized commodities and services rendered among the
corresponding countries is known as foreign trade.”

Foreign trade is, in principle, not different from domestic trade as the motivation and the
behaviour of parties involved in a trade does not change fundamentally depending on
whether a trade is across a border or not.

The main difference is that international trade is typically more costly than domestic trade.
The reason is that a border typically imposes additional costs such as tariffs, time costs due
to border delays, and costs associated with country differences such as language, the legal
system, or a different culture..

Foreign trade is all about imports and exports. The backbone of any foreign trade between
nations is those products and services which are being traded to some other location outside a
particular country’s borders.

Some nations are adept at producing certain products at a cost-effective price.

Perhaps it is because they have the labor supply or abundant natural resources which make
up the raw materials needed. No matter what the reason, the ability of some nations to
produce what other nations want is what makes foreign trade work.

Types of Foreign Trade

1. Import
Importing is the purchasing of goods or services made in another country. For example,
importing edible oil from Chinese producers to sell in Africa.

2. Export
Exporting is selling domestic-made goods in another country. For example, Hameem
Garments exports Readymade Garments (RMG) products to Western Countries.

3. Re-export
When goods are imported from a foreign country and are re-exported to buyers in some other
foreign countries, it is called re-export.

For example, Firm/ Readymade Garments located at EPZs imports raw materials
(cotton) from Korea and produces Readymade Garments products by Thai cotton and
then those products to Canada.

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Reasons / Need / Importance / Advantages of Foreign Trade

The following points explain the need and importance of foreign trade to a nation.

1. Division of Labor and Specialization

• Foreign trade leads to the division of labor and specialization at the world level. Some
countries have abundant natural resources.
• They should export raw materials and import finished goods from countries which
are advanced in skilled manpower. This gives benefits to all the countries and thereby
leading to the division of labour and specialization..

2. Optimum Allocation and Utilization of Resources

• Due to specialization, unproductive lines can be eliminated, and wastage of
resources avoided. In other words, resources are canalized for the production of
only those goods, which would give the highest returns.
• Thus there is rational allocation and utilization of resources at the international level
due to foreign trade.

3. Equality of Prices
• Prices can be stabilized by foreign trade. It helps to keep the demand and supply
position stable, which in turn stabilizes the prices, making allowances for transport
and other marketing expenses.

4. Availability of Multiple Choices

• Foreign trade helps in providing a better choice to the consumers. It helps in making
available new varieties to consumers all over the world.

5. Ensures Quality and Standard Goods

• Foreign trade is highly competitive. To maintain and increase the demand for goods,
the exporting countries have to keep up the quality of goods.
• Thus quality and standardized goods are produced.

6. Raises Standard of Living of the People

• Imports can facilitate the standard of living of the people. This is because people
can have a choice of new and better varieties of goods and services.
• By consuming new and better varieties of goods, people can improve their standard of
living.

7. Generate Employment Opportunities

• Foreign trade helps in generating employment opportunities by increasing the
mobility of labor and resources. It generates direct employment in the import sector
and indirect employment in other sectors of the economy.
• Such as Industry, Service Sector (insurance, banking, transport, communication), etc.

8. Facilitate Economic Development

• Imports facilitate the economic development of a nation. This is because, with the
import of capital goods and technology, a country can generate growth in all sectors of

57
 the economy, agriculture, industry, and service sector.

9. Assistance during Natural Calamities

• During natural calamities such as earthquakes, floods, famines, etc., the affected
countries face the problem of shortage of essential goods.
• Foreign trade enables a country to import food grains and medicines from other
countries to help the affected people.

10. Balance of Payment Position

• Every country has to maintain its balance of payment position.
• Since every country has to import, which results in an outflow of foreign exchange, it
also deals in export for the inflow of foreign exchange.

11. Brings Reputation and Helps Earning Goodwill

• A country which is involved in exports earns goodwill in the international market.
• For example, Japan has earned a lot of goodwill in foreign markets due to its
exports of quality electronic goods.

12. Promotes World Peace

• Foreign trade brings countries closer. It facilitates the transfer of technology and
other assistance from developed countries to developing countries. It brings
different countries closer due to economic relations arising out of trade
agreements.
• Thus, foreign trade creates a friendly atmosphere for avoiding wars and conflicts. It
promotes world peace as such countries try to maintain friendly relations among
themselves.

Features of Foreign Trade (Export/ Import)

1. Import dependency (our country foreign trade depends on import because of

high demand and low supply),
2. Import capital goods and industrial goods,
3. Export of readymade garments (RMG), RMG and Knitwear 74% export,
4. Export of agricultural raw materials and products,
5. Unfavorable balance of payment (More import but less export),
6. Operate most business by sea/ocean,
7. More import from Asia (China, Singapore, India) and export in Western countries
(USA, England),
8. Government initiation and control (By TCB and EPB govt control foreign trade
and operate helpful initiative),
9. Export of jute and jute goods,
10. Export of manpower,
11. Private initiative,
12. Diversity of import goods (necessary goods and unnecessary luxurious goods).
13. Effect of free trade economy (for open market economy unnecessary luxurious goods
are imported in our country, and our country’s money went to another country)
14. Business with all countries.

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 Special Schemes for Export
Promotion in India
(SEZs/EOUs/STPs/EHTPs/BTPs)

Various schemes have been introduced by the Government from time to time to encourage
exports, viz, Special Economic Zones (SEZs), Export-oriented Units (EOUs), Software
Technology Parks (STPs), Electronics Hardware Technology Parks (EHTPs), Biotechnology
Parks (BTPs), etc.

Special Economic Zones

With a view to providing an internationally competitive environment for exports, the

Government of India announced the SEZ Policy in April 2000. The objectives of the SEZ
Policy include making available goods and services free of taxes and duties supported by
integrated infrastructure for export production, expeditious and single-window approval
mechanism and a package of incentives to attract foreign and domestic investments for
promoting export-led growth.

Initially, SEZs in India functioned from 1 November 2000 to 9 February 2006 under the
provisions of the Exim Policy/Foreign Trade Policy and fiscal incentives were made available
through the provisions of relevant statutes. This system did not lend enough confidence to the
investors to commit substantial investment for development of infrastructure and for the
setting up of units for export of goods and services.

In order to provide a long-term and stable policy framework with minimum regulatory regime
and to provide expeditious and single-window clearance mechanism in line with the
international best business practices, a Central Act for Special Economic Zones was therefore
found to be necessary. The Special Economic Zones Act, 2005 (SEZ Act) was enacted by the
Government in 2005. Subsequently, the Special Economic Zones Rules, 2006 (SEZ Rules)
were notified on 10 February 2006. Consequently, the SEZ Act came into operation w.e.f. 10
February 2006.

The SEZ Policy provides for simplified procedures and single-window clearance mechanism
to deal with matters under Central/State enactments. For SEZ developers, there are different
minimum- land requirements for different classes of SEZs. Every SEZ is divided into a
processing area, within which only the SEZ units would come up, and the non-processing
area, where the supporting infrastructure is to be created.

The salient features of the SEZ Policy are as follows:

• Simplified procedures for development, operation, and maintenance of the

SEZs and for setting up units and conducting business in SEZs;
• Single-window clearance for setting up of SEZ;
• Single-window clearance for setting up units in SEZ;
• Single-window clearance on matters relating to Central as well as State Governments;
• Simplified compliance procedures and documentation with an emphasis on self-
certification

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 Administrative Set-up

• The administrative set-up for functioning of SEZs is as under:

Board of Approval
↓
Zonal Development Commissioner(s)
↓
Unit Approval Committee(s)
↓
Development Commissioner(s)

• The Board of Approval (BoA) is the apex body and is headed by the Secretary,
Department of Commerce, Ministry of Commerce and Industry, Government of India.
• The Unit Approval Committee (UAC) at the Zonal level deals with approval of units
in the SEZs and other related issues.
• Each SEZ is headed by a Development Commissioner, who is ex officio chairperson of
the UAC.
• Once an SEZ has been approved by the BOA and Central Government has notified the
area of the SEZ, units are allowed to be set up in that SEZ. All the proposals for setting
up of units in the SEZ are approved at the Zonal level by the UAC consisting of
Development Commissioner, Customs Authorities and representatives of the State
Government.

Ease of Doing Business in India' initiative-Online Filing Facility for SEZ Proposals

Ministry of Commerce and Industry provides for digitization of application/ permissions by

SEZ Units/Developers.

The Department of Commerce, Ministry of Commerce and Industry (MoCI), had announced
the online filing of SEZ proposals. The following online services were being offered through
the SEZ online link on the website http://www.sezindia.nic.in/:

• Filing of application (Form A) for setting up SEZ.

• Filing of other requests, viz, Application for authorised operations, addition of co-
developer, application for conversion of in-principle approval to formal approval,
application for validity extension of approvals, change in developing entity, change in
sector, change in area/location, land details.
• Inbuilt e-mail box for each developer/co-developer to communicate with Department.
• Online status of requests.

Minimum Investment/Net-Worth Criteria for setting up SEZ

The minimum investment or net-worth of the promoters, all group companies, and flagship
companies, should be as under:

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 • Multi-Product SEZs - Minimum investment of Rs 1,000 crore (Rs 10 billion) or net-
worth of Rs 250 crore (Rs 2.5 billion)
• Sector-specific SEZs - Minimum investment of Rs 250 crore (Rs 2.5 billion) or net-
worth of Rs 50 crore (Rs 0.5 billion)

Process of Setting up of SEZ

Setting up of a Special Economic Zone
(a)

(b)

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Incentives to the SEZs

SEZs are deemed to be a foreign territory within the country. The SEZs are specifically treated
as duty-free enclaves for the purposes of trade operations, duties and tariffs. SEZs enjoy a
host of exemptions from income tax, customs duties, excise duties, central sales tax (CST),
service tax and state levies.

Major incentives to SEZ developers

The major incentives and facilities available to SEZ Developers include:

(i) Direct taxes

• 100% income tax deduction, allowed to the Developer under any consecutive 10 years
out of the first 15 years from the date of notification of the SEZ.
• Exemption from minimum alternate tax (MAT). However, with effect from the
assessment year 2012-2013, MAT at the rate of18.5% has been imposed on SEZ
Developers.
• Exemption from dividend distribution tax (DDT). However, with effect from 1 June
2011, DDT has been imposed at the rate of 15% on the dividend distributed by the SEZ
Developers.

(ii) Indirect Taxes

• Duty-free import/domestic procurement of goods for development,
operation and maintenance of SEZs
• Exemption from Central Sales Tax (CST)
• Exemption from Service Tax

(iii) FEMA/ FDI/ECB

• 100% Foreign Direct Investment permitted for setting up SEZ with approval of BOA.
• SEZ developers can avail of External Commercial Borrowings (ECBs) for providing
infrastructure facilities within SEZ.

(iv) Miscellaneous
• Full freedom in allocation of space and built-up area to approved SEZ units
commercially..
• Authorisation to provide utilities and maintenance services, viz, water, electricity,
security, restaurants and recreation centres on a commercial basis.
• Generation, transmission and distribution of power in SEZ.

Major incentives to SEZ units

The major incentives and facilities available to SEZ Units include:

(i) Direct taxes

15 years tax holiday in a phased manner, subject to certain conditions. 100% income tax
exemption for the first 5 years, 50% for the next 5 years and thereafter 50% of the ploughed
back export profits for the next 5 years. Exemption from minimum alternate tax (MAT) was
earlier available to the SEZ Units. However, with effect from the assessment year 2012-2013,

62
MAT at the rate 18.5% has been imposed on SEZ units.

(ii) Indirect taxes

• Duty-free import/procurement from domestic sources for all their requirement of
capital goods, raw materials, office equipment, DG sets, etc. for implementation of their
project in the SEZ, without any license
• Exemption from CST
• Exemption/refund from Service Tax

(iii) FEMA/FDI related

• 100% FDI allowed through automatic route for all manufacturing activities in the
Special Economic Zone, except for the following activities:

• Arms and ammunition, explosive and allied items of defence equipment,

defence aircraft and warship,
• Automatic substances,
• Narcotics and psychotropic substances and hazardous chemicals,
• Distillation and brewing of alcoholic drinks, and
• Cigarettes/cigars and manufactured tobacco substitutes.
• Sectoral norms, as notified by the Government, apply to foreign investment in
services. The cases not covered by automatic route to be considered and approved
by the BOA.
• Units in SEZs are permitted to issue equity shares to non-residents against import of
capital goods subject to valuation done by a Committee consisting of Development
Commissioner and appropriate Customs officials.
• Units in Special Economic Zones (SEZs) are allowed to raise ECB for their own
requirement. However, they cannot transfer or on-lend ECB funds to sister concerns
or any unit in the Domestic Tariff Area (DTA).
• The period of realisation and repatriation of export proceeds shall be nine months
from the date of export for SEZ units.
• SEZ Units are permitted to undertake job work abroad and export goods from that
country itself subject to the conditions that:

a. Processing/manufacturing charges are suitably loaded in the export price

and are borne by the ultimate buyer.
b. The exporter has made satisfactory arrangements for realization of full
export proceeds.

Obligations of SEZ Units

• To achieve positive Net Foreign Exchange (NFE).

• To execute Bond-cum-Legal undertaking and submit to the Development
Commissioner.
• To submit Annual Performance Report to the Development Commissioner.
• To abide by local laws, rules, regulations or bye-laws with regard to the area
planning, sewerage disposal, pollution control and the like.
• To comply with Industrial and Labour Laws, as are applicable locally. It may be
noted that the labour laws will apply to all the units inside the SEZs. However, the
respective State Government may declare units within the SEZ as public utilities and

63
 may delegate the powers of Labour Commissioner to the Development
Commissioner of the SEZs.

Conclusion

The SEZ scheme has generated tremendous response amongst investors, both in India and
abroad. As on July 9, 2015, there were 416 SEZs which have been formally approved, out of
which 330 SEZs have been notified. Further, out of 330 notified SEZs, 202 SEZs were
operational as on March 31, 2015. Nearly 3,900 units/ companies have set up their operations
in these operational SEZs by making cumulative investment of Rs 2,88,477 crore. During the
financial year 2013-2014, the exports from the operational SEZs stood at Rs 4,94,077 crore,
which constituted nearly 30% of India's total exports.

The facts suggest that the SEZ scheme has generated a large flow of foreign and domestic
investment in the development of SEZs.

Export-oriented units

The export-oriented unit (EOU) Scheme was introduced in 1980. Establishment of units and
their performance is monitored by the Jurisdictional Development Commissioner under the
Foreign Trade Policy provisions.

The purpose of the scheme was to boost exports by creating additional production capacity.
Under this scheme, units undertaking to export their entire production of goods are allowed
to be set up as an EOU. These units may be engaged in manufacturing, services, development
of software, trading, repairing, remaking, reconditioning, re-engineering including making of
gold/silver/platinum jewellery and articles thereof, agriculture including agro-processing,
aquaculture, animal husbandry, bio-technology, floriculture, horticulture, pisciculture,
viticulture, poultry, sericulture and granites. EOUs can export all products except prohibited
items of exports in ITC (HS) without payment of duty. However, permissions required for
import under other laws shall be applicable.

A minimum investment of Rs 10 million in plant and machinery is required before

commencement of commercial production in an EOU. Applications for setting up of units
under EOU scheme, other than proposals for setting up of units in the services sector (except
R&D, software and IT-enabled services or any other service activity, as may be delegated by
the BOA), is approved or rejected by the Unit Approval Committee.

EOUs may import, without payment of duty, all types of goods, including capital goods, as
defined in the Policy, required by it for its activities or in connection therewith, provided they
are not prohibited items of imports in the ITC (HS). The units are also permitted to import
goods required for the approved activity, including capital goods, free of cost or on loan from
clients.

EOU units are exempted from central excise duty in procurement of goods manufactured in
India, procured from Domestic Tariff Area (DTA) and from customs duty on import of capital
goods, raw materials, consumables, spares, etc. Supplies from Domestic Tariff Area (DTA)
to EOUs are considered deemed exports and Indian suppliers can claim benefits of deemed
exports. In addition, foreign investment up to 100% is allowed, subject to sectoral norms.

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Software technology parks

The Software Technology Parks (STP) Scheme is covered under the Foreign Trade Policy.
The STP Scheme is a 100% export-oriented scheme for the development and export of
computer software and services using data communication links or in the form of physical
media including the export of professional services. The major attraction of this scheme is a
single-point contact service to the STP units.

For implementing the STP scheme, the Ministry of Communications and Information
Technology formed the Software Technology Park of India (STPI) in 1991. STPI is an
autonomous body for the management and regulation of IT Parks or STPs in India. The main
aim of STPI is to develop India into an IT giant and one of the leading generators and exporters
of IT and software within the coming few years. STP scheme approvals are given under a
single-window clearance mechanism.

An STP unit can be located in areas designated as STP complexes or at any place where EOUs
can be set up. Such a unit is a duty-free custom bonded area and is entitled to refund of CST
paid on purchases. STP units are allowed to import all types of goods (except prohibited
goods, namely capital goods, raw materials, consumables, office equipment, etc.) for the
purpose of manufacture/production of export products and export thereof, without payment
of duties. Units can export software through data communication channel or through physical
transport.

Further, foreign investment up to 100% is allowed, subject to sectoral norms.

Electronics hardware technology parks

The Electronics Hardware Technology Parks (EHTPs) Scheme is covered under the Foreign
Trade Policy. The EHTP Scheme is administered by the Ministry of Communications and
Information Technology. Under the EHTP Scheme, an EHTP can be set up by the Central
Government, State Government, public or private sector undertaking or any combination of
them.

An EHTP unit can be located in areas designated as EHTP complex or at any place where
EOUs can be set up. Such a unit is a duty-free custom-bonded area and is entitled to refund
of CST paid on purchases. EHTP units are allowed to import all types of goods (except
prohibited goods, namely capital goods, raw materials, consumables, office equipment, etc.)
for the purpose of manufacture/production of export products and export thereof, without
payment of duty. Units can export software through data communication channel or through
physical transport.

For EHTP units, the period of realisation and repatriation of export proceeds shall be nine
months from the date of export. Further, foreign investment up to 100% is allowed, subject
to sectoral norms.
Biotechnology parks

➢ The Biotechnology Parks (BTPs) Scheme is covered under the Foreign Trade Policy.
The BTP units can export all products, except prohibited items of exports in ITC (HS)
without payment of duty. Units may import, without payment of duty, all types of

65
 goods, including capital goods, as defined in the Foreign Trade Policy, required by it
for its activities or in connection therewith, provided they are not prohibited items of
imports in the ITC (HS).

➢ BTP units are entitled to refund of CST paid on purchases and exempted from payment
of Central Excise Duty on goods manufactured in India procured from DTA.

➢ For BTP units, the period of realisation and repatriation of export proceeds shall be
nine months from the date of export.

Setting Up an International Trading

Company

The structure, role and functions of the department of commerce

Role of the Department

Regulation, development and promotion of India’s international trade and commerce by formulating
appropriate international trade and commercial policy, and implementing various provisions thereof.

Organizational Set-Up of the Department

(A) Attached Offices

(i) Directorate General Of Foreign Trade (DGFT)
(ii) Directorate General of Supplies and Disposals (DGS&D)
(iii) Directorate General of Anti-Dumping and Allied Duties (DGAD)

(B) Subordinate Offices

(i) Directorate General of Commercial Intelligence and Statistics (DGCI&S)
(ii) Office of Development Commissioner of Special Economic Zones (SEZs)
(iii) Pay and Accounts Office (Supply)
(iv) Pay and Accounts Office (Commerce & Textiles)

(C) Autonomous Bodies

(i) Coffee Board
(ii) Rubber Board
(iii) Tea Board
(iv) Tobacco Board
(v) Spices Board
(vi) The Marine Products Export Development Authority (MPEDA
(viii) Export Inspection Council (EIC)
(ix) Indian Institute of Foreign Trade (IIFT)
(x) Indian Institute of Packaging (IIP)

(D) Public Sector Undertakings (PSUs)

(i) State Trading Corporation of India Limited (STC)
(ii) MMTC Limited
(iii) Project and Equipment Corporation of India (PEC Limited)
(iv) Export Credit Guarantee Corporation of India Limited (ECGC)
(v) India Trade Promotion Organization (ITPO)

66
 (E) Export Promotion Councils (EPCs)
(F) Advisory Bodies
(i) Board of Trade (BOT)
(ii) Inter-State Trade Council

(G) Other Organizations

(i) Federation of Indian Export Organizations (FIEO)
(ii) Indian Council of Arbitration (ICA)
(iii) Indian Diamond Institute (IDI)
(iv) Footwear Design & Development Institute (FDDI)
(v) National Centre for Trade Information (NCTI)
(vi) Price Stabilization Fund Trust (PSF)

Procedure for setting up an international trading company

➢ Step One - Registering a Company in India

➢ Step Two - Registering with the Director General of Foreign Trade
➢ Step Three - Registering the Firm with the Export Promotion Council (EPC) and Relevant
Tax Authorities
➢ Step Four - Obtaining Export/Import License and Certificate of Origin

1. Registering a Company in India

• Memorandum of Association
• Articles of Association
• Company agreement, if any, which includes all individual appointments (i.e., director,
manager, etc.)
• A copy of the letter of the Registrar of Companies documents certifying payment of
prescribed registration and filing fees
• All documents evidencing directorship and company structure and
• Registered Office Forms and Declaration of Compliance with the Requirements of the
Companies Act.

2. Registering with the Director General of Foreign Trade

• The Department of Commerce (DoC)
• The Department of Industrial Policy & Promotion (DIPP)

3. Registering the Firm with the Export Promotion Council (EPC) and Relevant Tax
Authorities
• Registering with the Export Promotional Council
• Registration with Tax Authorities

4. Obtaining Export/Import License and Certificate of Origin

• Obtaining an Export License
• ITC (HS) Import Schedule I
• Export Policy Schedule II
• Obtaining an Import License
• Obtaining Certificates of Origin from Indian Chamber of Commerce

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IMPORTER EXPORTER CODE (IEC) CODE

IEC not required

Import/Export of goods for personal use, which is not connected with trade, manufacture or agriculture.
Import/Export by government ministries and departments, and certain notified charitable organizations.

Documents Required for Applying the IEC Code

• Covering Letter
• Application
• Declaration
• Bank Receipt
• Banker’s Certificate
• PAN (Personal Account Number)
• Photographs of the applicant
• Self-addressed envelope

PROCEDURE TO APPLY FOR IEC

Process
• Submission of application
• Generation of File Number
• Application forwarded to IEC section
• IEC generated
• IEC allotment letter

Online Application for IEC Code

IMPORTANT PROVISIONS
• No export or import is allowed to be made by any person without an Importer-Exporter Code
(IEC)
Number unless specifically exempted.
• IEC is dispatched through Speed Post to verify the address of the Firm/ Entity which intends to
carry on the Import Export business.
• An IEC Number allotted to an applicant remains valid for all its
branches/divisions/units/factories as indicated on the IEC number.
• If an IEC Number is lost or misplaced, the business firm has to apply for the issue of duplicate
copy of the IEC number.
• If an IEC holder does not wish to operate the allotted IEC number, he can surrender the same by
informing the issuing authority.
• In case of change in the name/address or constitution of IEC holder/licensee, the Actual User
eligible for import without a license/recognized status holder, as the case may be, ceases to be
eligible to import or export against the license /IEC Number

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 Modes of Exporting
➢ EXPORTING

Exporting is the easiest mode of entry into international business. Therefore most firms begin
their international expansion using this model of entry. Exporting is the sale of products and
services in foreign countries that are sourced from the home country.
ADVANTAGES OF EXPORTING
• It involves very little risk and low allocation of resources for the exporter.
• It increase sales and reduce inventories.
• Exporting also provides an easy way to identify market potential
• It establishes recognition of a name brand.
• If the enterprise proves unprofitable, the company can simply stop the practice with no
diminution of operations in other spheres and no long-term losses of capital
investments.

DISADVANTAGES OF EXPORTING
• Exporting can be more expensive because of the costs of fees, commissions, export
duties, taxes, and transportation.
• Exporting could lead to less-than-optimal market penetration because of inappropriate
packaging or promotion.
• Exported goods could also be lacking features appropriate to specific overseas markets.
• Additional market share could be lost if local competition copies the products or
services offered by the exporter.
• The exporting firm also could face restrictions against its products from the host
country.

➢ LICENSING

In this mode of entry, the manufacturer of the home country leases the right of intellectual
properties, i.e., technology, copyrights, brand name, etc., to a manufacturer of a foreign
country. The license is granted for a predetermined fee. The manufacturer that leases is known
as the licensor and the manufacturer of the country that gets the license is known as
the licensee. In essence, the licensee is buying the assets of another firm in the form of know-
how or R & D. The licensor can grant these rights exclusively to one licensee or nonexclusively
to several licensees.

ADVANTAGES OF LICENSING
• Low investment of licensor.
• Low financial risk of licensor.
• Licensor can investigate the foreign market.
• Licensee’s investment in R&D is low.
• Licensee does not bear the risk of product failure.
• Any international location can be chosen to enjoy the advantages.
• No obligations of ownership, managerial decisions, investment etc.

DISADVANTAGES OF LICENSING
• It limits future profit opportunities associated with the property by tying up its rights
for an extended period of time.

69
 • By licensing these rights to another, the firm loses control over the quality of its
products and processes, the use or misuse of the assets, and even the protection of its
corporate reputation.
• Both parties have to manage product quality and promotion
• One party’s dishonesty can affect the other.
• Chances of misunderstanding.
• Chances of trade secrets leakage of the licensor.

➢ FRANCHISING

In this mode, an independent firm called the franchisee does the business using the name of
another company called the franchisor. Franchising is mode in which the franchisee is granted
permission to use a name, process, method, or trademark. And also the franchisor firm assists
the franchisee with the operations of the franchise or supplies raw materials, or both.

EXAMPLES: The prime examples of U.S. franchising companies are service industries and
restaurants, particularly fast-food concerns, soft-drink bottlers, and home and auto maintenance
companies i.e. McDonald’s, KFC, Holiday Inn, Hilton etc.

ADVANTAGES OF FRANCHISING
• Low investment.
• Low risk.
• Franchisor understands market culture, customs and environment of the host country.
• Franchisor learns more from the experience of the franchisees.
• Franchisee gets the R&D and brand name with low cost.
• Franchisee has no risk of product failure.

DISADVANTAGES OF FRANCHISING
• Franchising can be complicated at times.
• Difficult to control.
• Reduced market opportunities for both franchisee and franchisor.
• Responsibilities of managing product quality and product promotion for both.
• Leakage of trade secrets.

➢ TURNKEY PROJECTS

It is a special mode of carrying out international business. It is a contract under which a firm
agrees to fully carry out the design, create, and equip the production facility and shift the project
over to the purchaser when the facility is operational. The amount of relevant remuneration is
charged for the same

ADVANTAGES OF TURNKEY PROJECTS

• These projects are suitable for the large scale production.
• These projects are undertaken in collaboration with management contracts to achieve
the highest level of efficiency.

DISADVANTAGES OF TURNKEY PROJECTS

• The project completion time is lengthy hence there are higher chances of currency risks.
• Due to lengthy project duration, the returns are not available in short time.
• Turnkey operations also face all the problems of operating in remote locations.

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 ➢ JOINT VENTURES

A joint venture is one of the preferred modes of entry into international business for businesses
who do not mind sharing their brand, knowledge, and expertise. Companies wishing to expand
into overseas markets can form joint ventures with local businesses in the overseas location,
wherein both joint venture partners share the rewards and risks associated with the business.

For instance, foreign companies cannot have a 100 hundred per cent stake in broadcast content
services, print media, multi-brand retailing, insurance, power exchange sectors and require to
opt for a joint-venture route to enter the Indian market.

ADVANTAGES OF JOINT VENTURE

• Both partners can leverage their respective expertise to grow and expand within a
chosen market
• The political risks involved in joint-venture is lower due to the presence of the local
partner, having knowledge of the local market and its business environment
• Enables transfer of technology, intellectual properties and assets, knowledge of the
overseas market etc. between the partnering firms

DISADVANTAGES OF JOINT VENTURE

• Joint ventures can face the possibility of cultural clashes within the organisation due to
the difference in organisation culture in both partnering firms
• In the event of a dispute, dissolution of a joint venture is subject to lengthy and
complicated legal process.

➢ WHOLLY OWNED SUBISIDIARY OR GREEN FIELD VENTURING

Wholly Owned Subsidiary is a company whose common stock is fully owned by another
company, known as the parent company. A wholly owned subsidiary may arise through
acquisition or by a spin-off from the parent company.

ADVANTAGES
• Gain local market knowledge
• It can be seen as insider who employs locals
• Maximum control

DISADVANTAGES
• High cost.
• High risk due to unknowns
• Slow entry due to setup time

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