FM – 405 Work Book (Chapter v)

Dr. Sujit Dutta

International Trade Procedures

Export is one of the major components of international trade. Exports facilitate international
trade and stimulate domestic economic activity by creating employment, production, and
revenues. Businesses export goods and services where they have a competitive advantage.

Governing Authorities

Exports are governed by Foreign Trade (Development & Regulation) Act, 1992 and Export-
Import (EXIM) Policy. Directorate General of Foreign Trade (DGFT) is the primary governing
body responsible for the export and import policies in the country. Since an export trade has to
follow a specific set of procedures from receiving inquiries to completion of the transaction,
exporters need to get themselves registered with these authorities for ensuring all the legal
formalities as required by them are met and also for receiving incentives which are allowed
under the export promotion schemes. The Reserve Bank of India (RBI) guidelines have to be met
by the exporter. An exporter also requires an Import-Export Code Number from the concerned
regional licensing authority.

Export Procedure

In general, an export procedure flows as stated below:

Step1. Receipt of an Order

The exporter of goods is required to register with various authorities such as the income tax
department and Reserve Bank of India (RBI). In addition to this, the exporter has to appoint
agents who can collect orders from foreign customers (importer). The Indian exporter receives
orders either directly from the importer or through indent houses.

Step 2. Obtaining License and Quota

After getting the order from the importer, the Indian exporter is required to secure an export
license from the Government of India, for which the exporter has to apply to the Export Trade
Control Authority and get a valid license. You can get a license from here too. The quota is
referred to as the permitted total quantity of goods that can be exported.

Step 3. Letter of Credit

The exporter of the goods generally ask the importer for the letter of credit, or sometimes the
importer himself sends the letter of credit along with the order.

Step 4. Fixing the Exchange Rate

Foreign exchange rate signifies the rate at which the home currency can be exchanged with the
foreign currency i.e. the rate of the Indian rupee against the American Dollar. The foreign
exchange rate fluctuates from time to time. Thus, the importer and exporter fix the exchange rate
mutually.

Step 5. Foreign Exchange Formalities

An Indian exporter has to comply with certain foreign exchange formalities under exchange
control regulations. As per the Foreign Exchange Regulation Act of India (FERA), every
exporter of the goods is required to furnish a declaration in the form prescribed in a manner.

The declaration states:-

I.The foreign exchange earned by the exporter on exports is required to be disposed of in the
manner specified by RBI and within the specified period.

II.Shipping documents and negotiations are required to be done through authorised dealers in
foreign exchange.

III.The payment against the goods exported will be collected through only approved methods.

Step 6. Preparation for Executing the Order

The exporter should make required arrangements for executing the order:

I.Marking and packing of the goods to be exported as per the importer’s specifications.
II.Getting the inspection certificate from the Export Inspection Agency by arranging the pre-
shipment inspection.

III.Obtaining insurance policy from the Export Credit Guarantee Corporation (ECGC) to get
protection against the credit risks.

IV.Obtaining a marine insurance policy as required.

V.Appointing a forwarding agent (also known as custom house agent) for handling the customs
and other related matters.

Step 7. Formalities by a Forwarding Agent

The formalities to be performed by the agent include –

I.For exporting the goods, the forwarding agent first obtains a permit from the customs
department.

II.He must disclose all the required details of the goods to be exported such as nature, quantity,
and weight to the shipping company.

III.The forwarding agent has to prepare a shipping bill/order.

IV.The forwarding agent is required to make two copies of the port challans and pays the dues.

V.The master of the ship is responsible for the loading of the goods on the ship. The loading is to
be done on the basis of the shipping order in the presence of customs officers.

VI.Once the goods are loaded on the ship, the master of the ship issues a receipt for the same.

Step 8. Bill of Lading

The Indian exporter of the goods approaches the shipping company and presents the receipt copy
issued by the master of the ship and in return gets the Bill of Lading. Bill of lading is an official
receipt which provides the full description of the goods loaded on the ship and the name of the
port of destination.

Step 9. Shipment Advise to the Importer

The Indian exporter sends shipment advice to the importer of the goods so that the importer gets
informed about the dispatch of the goods. The exporter sends a copy of the packing list, a non-
negotiable copy of the Bill of Lading, and commercial invoice along with the advice note.

Step 10. Presentation of Documents to the Bank

The Indian exporter confirms that he possesses all necessary shipping documents namely;

Marine Insurance Policy

The Consular Invoice

Certificate of Origin

The Commercial Invoice

The Bill of Lading

Then the exporter draws a Bill of Exchange on the basis of the commercial invoice. The Bill of
Exchange along with these documents is called Documentary Bill of Exchange. The exporter
then hands over the same to his bank.

Step 11. The Realisation of Export Proceeds

In order to realise the proceeds of the export, the exporter of the goods has to undergo specific
banking formalities. On submission of the bill of exchange, these formalities are initiated.
Generally, the exporter receives payment in foreign exchange.

What Is a Letter of Credit?

When you hear the phrase 'letter of credit,' it might be natural to think it refers to a document
verifying that you are creditworthy, but that isn't the case. A letter of credit is a document
issued by a third party that guarantees payment for goods or services when the seller provides
acceptable documentation. Letters of credit are usually issued by banks or other financial
institutions, but some creditworthy financial services companies, like insurance companies
or mutual funds, might issue letters of credit under certain circumstances.
A letter of credit generally has three participants.

First, there is the beneficiary, the person or company who will be paid.

Next, there is the buyer or applicant of the goods or services. This is the one who needs the
letter of credit.

Finally, there is the issuing bank, the institution issuing the letter of credit.

Or

 Applicant (importer) requests the bank to issue the LC

 Issuing bank (importer’s bank which issues the LC [also known as the Opening banker of
LC])
 Beneficiary (exporter)


Documentation Requirements

In order to receive payment, the beneficiary must present documentation of completion of their
part in the transaction to the issuing bank. The documents that the issuing bank will accept are
specified in the letter of credit, but may often include:

 Bills of exchange
 Invoices
 Government documents, such as licenses, certificates of origin, inspection certificates,
embassy legalizations
 Shipping and transport documents, such as bills of lading and airway bills
 Insurance policies or certificates, except cover notes

Types of Letter of Credit

Revocable and Irrevocable Credit

A revocable LC is a credit, the terms and conditions of which can be amended/ cancelled by the
Issuing Bank. This cancellation can be done without prior notice to the beneficiaries.
An irrevocable credit is a credit, the terms and conditions of which can neither be amended nor
cancelled. Hence, the opening bank is bound by the commitments given in the LC.

Confirmed Credit

Only Irrevocable LC can be confirmed. A confirmed LC is one when a banker other than the
Issuing bank, adds its own confirmation to the credit. In case of confirmed LCs, the beneficiary’s
bank would submit the documents to the confirming banker.

Back-to-Back credit

In a back to back credit, the exporter (the beneficiary) requests his banker to issue an LC in
favour of his supplier to procure raw materials, goods on the basis of the export LC received by
him. This type of LC is known as Back-to-Back credit. Example: An Indian exporter receives an
export LC from his overseas client in the Netherlands. The Indian exporter approaches his
banker with a request to issue an LC in favour of his local supplier of raw materials. The bank
issues an LC backed by the export LC.

Transferable Credit

While an LC is not a negotiable instrument, the Bills of Exchange drawn under it are negotiable.
A Transferable Credit is one in which a beneficiary can transfer his rights to third parties. Such
LC should clearly indicate that it is a ‘Transferable’ LC

Bank Guarantee

What is the Meaning of Bank Guarantee?

A guarantee means giving something as security. A bank guarantee is when a bank offers surety
and guarantees for different business obligation on behalf of their customers within certain
regulations. It is generally a promise made by the bank to any third person to undertake the
payment risk on behalf of its customers.
Bank guarantee is given on a contractual obligation between the bank and its customers. Such
guarantees are widely used in business and personal transactions to protect the third party from
financial losses.

What are the Uses of Bank Guarantee?

When large companies purchases from small vendors, they generally require the vendors to
provide guarantee certificate from banks before providing such business opportunities.

Predominantly used in the purchase and sale of goods on credit basis, where the seller is assured
of payment from the bank in case of default by the buyer.

Helps in certifying the credibility of individuals, which in turn, enables them in obtaining loans
and also assists in business activities.

Though there are lots of uses from a bank guarantee for the applicant, the bank should process
the same only after ensuring the financial stability of the applicant/business. The risk involved in
providing such a guarantee must be analysed thoroughly by the bank.

What are the Types of Bank Guarantee?

There are two major types of bank guarantee used in businesses, which are as follows:

Financial Guarantee – These guarantees are generally issued in lieu of security deposits. Some
contracts may require a financial commitment from the buyer such as a security deposit. In such
cases, instead of depositing the money, the buyer can provide the seller with a financial bank
guarantee using which the seller can be compensated in case of any loss.

Performance Guarantee – These guarantees are issued for the performance of a contract or an
obligation. In case, there is a default in the performance, non-performance or short performance
of a contract, the beneficiary’s loss will be made good by the bank. For example, A enters into a
contract with B for completion of a certain project and the contract is supported by a bank
guarantee. If A does not complete the project on time and does not compensate B for the loss, B
can claim the loss from the bank with the bank guarantee provided.

BG Charges

Generally, BG charges are based on the risk assumed by the bank in each transaction. For
example, a financial BG is considered to assume more risk than a performance BG. Hence, the
fee for financial BG will be higher than the fee charged for performance BG.
Based on the type of the BG, fees are generally charged on a quarterly basis on the BG value of
0.75% or 0.50% during the BG validity period. Apart from this, the bank may also charge the
application processing fee, documentation fee, and handling fee.
In some cases, security is required by the bank from its applicant, which is generally 100% of the
BG value. In certain cases, collateral security or cash margin may also be accepted by the issuing
bank.

Major differences between Letter of Credit (LOC) and Bank Guarantee (BG)

Particulars LOC BG

Nature LOC is an obligation BG is an assurance given

accepted by a bank to by the bank to the
make payment to a beneficiary to make the
beneficiary if certain specified payment in
services are performed. case of default by the
applicant.

Primary Bank retains the The bank assumes to

liability primary liability to make the payment only
make the payment and when the customer
later collects the same defaults to make
from the customer. payment.

Payment Bank makes the Only when the customer

payment to the defaults the payment to
beneficiary as and when the beneficiary, the bank
it is due. It need not
Particulars LOC BG

wait for a default to be makes the payment.

made by the customer.

Way of LOC ensures that the BG assures to

working amount will be paid as compensate for the loss
long as the services are if the applicant does not
performed as per the satisfy the specified
agreed terms. conditions.

Number of There are multiple There are only three

parties parties involved here - parties involved -
involved LOC Issuing bank, its banker, its customer,
customer, the and the beneficiary (third
beneficiary (third party).
party), and advising
bank.

Suitability Generally, this is more Suits any business or

appropriate during the personal transactions.
import and export of
goods and services.

Risk Bank assumes more risk Customer assumes the

than the customer. primary risk.