Summer Internship Project

LOGISTICS AND INTERNATIONAL FINANCE PROCEDURES IN ORIENT CRAFT LIMITED

Submitted in Summer Internship of MFM program

2011-2013

Submitted by

RAVI KANT VERMA

M/MFM/22/11
Company Guide: Mr. Shatish Das GM (Logistics)
Orient Craft Ltd. National Institute of Fashion Management Kharghar, Mumbai

Faculty Guide: Miss Sonali Saldanha

July 2012

ACKNOWLEDGEMENT

I would like to express my sincere gratitude to all those, who helped me in completing this project. I want to thanks all the staff of ORIENT CRAFT LTD., 7D for guiding and helping me throughout. I would like to thanks Mr. Satish Das (GM, LOGISTICS), Mr. Jitin (AGM, FINANCE), Mr. Praveen (MANAGER, BANKING), Mr. Yogesh (AM, FINANCE), Mr. Ankaj (AM, PRE SHIPMENT DEPTT.), Mr. Rakesh (AM, POST SHIPMENT DEPTT.) for their guidance, continuous support and cooperation throughout the internship. I would also like to thank Miss Solani Saldana for guiding me in the project and helping in completing the project successfully and the faculty members.

CERTIFICATE

This is to certify that the project work done on LOGISTICS AND INTERNATIONAL FINANCE PROCEDURES Submitted to National Institute of Fashion Technology, Mumbai by RAVI KANT VERMA in partial fulfillment of the requirement for the award of Master of Fashion Management, is a bonafide work carried out by him under my supervision and guidance. This work has not been submitted anywhere else for any other degree/diploma. The original work was carried out during 1st June to 30th July in ORIENT CRAFT LIMITED.

Date:

Name of the faculty mentor: Miss Sonali Saldanha

TABLE OF CONTENTS

SL. NO.

CONTENTS
EXECUTIVE SUMMARY INTRODUCTION INDUSTRY PROFILE WORLD APPAREL INDUSTRY INDIAN APPAREL INDUSTRY COMPANY PROFILE INTRODUCTION ABOUT THE TOPIC EXPORT PORCESS EXPORT FINANCING IMPORT PROCESS IMPORT FINANCING CONCLUSIONS BIBLIOGRAPHY

PAGE NO.
6 8 11 10 12 20 20 35 35 57 65 68 73 77

CHAPTER 1 CHAPTER 2 2.1 2.2 CHAPTER 3 3.1 CHAPTER 4 4.1 4.1.i 4.2 4.2.i CHAPTER 5 CHAPTER 7

SL. NO. FIGURE NUMBER

1 1 2 3 4 Fig 1 Indias Foreign trade Fig 2 Composition of Sales Fig 3 Flow of documents against payment Fig 4 Flow of documents against acceptance Fig 5 Flow of letter of credit
4

PAGE NO.

EXECUTIVE SUMMARY

The purpose of this report is to literally act as a window to the project undertaken as a part of the internship with the organization ORIENT CRAFT LIMITED. The objective of the project is to understand that how EXIM logistic procedures and how the funds for them are generated. OCL being 100% export house is the No.1 Government recognized export

house. And there main objective is to provide their buyers a quality product as per their requirements. OCL has 16 export house units in Delhi and NCR. The company is engaged not only in manufacturing clothes but also owns home furnishing and accessories designing. Companys maximum revenue is generated from export of clothes. The well renowned names in the world are their customers; Espirit, levis, Mark & Spencer, GAP, D&G, Tommy Hilfiger, DKNY (Donna Karan Newyork) etc. The company has a production capacity of 50000 dz. Woven and equal number of Knit Garments every month. The major exports comprise dresses, skirts, knitted shirts/T-shirts, mens shirts, blouses, jacket, co-ordinates, kids wear, rompers, outerwear, duvet cover and pillow covers mostly to USA, Europe and Canada. The main objective of the project is to understand the management of funds for export import done by export houses for running their export import activities and logistics procedures. How all the activities in an export house take place? Orient craft being an export house, still does import. They import the trims/ accessories and fabrics as per buyers requirement. So, that the quality of the garment is same when received by all the exporters from across the world. The export procedure starts from merchandisers getting the orders and then confirming the order by sending the samples as per the requirements of the buyer. After the confirmation of the order, taking the purchase order, importing the fabrics and trims, then the documentation procedure starts. From pre shipment department to post shipment department and banking and finance department arranging funds to export the shipment. Each and every export and import procedures require finance to proceed further. Without it, export import activities are not possible.

CHAPTER 1 INTRODUCTION

The term export is derived from the conceptual meaning as to ship the goods and services out of the port of a country. The seller of such goods and services is referred to as an "exporter" who is based in the country of export whereas the overseas based buyer is referred to as an "importer". In International Trade, "exports" refers to selling goods and services produced in home country to other markets.

Any good or commodity, transported from one country to another country in a legitimate fashion, typically for use in trade. Export goods or services are provided to foreign consumers by domestic producers. Export of commercial quantities of goods normally requires involvement of the customs authorities in both the country of export and the country of import. The advent of small trades over the internet such as through Amazon and e-Bay has largely bypassed the involvement of Customs in many countries because of the low individual values of these trades. Nonetheless, these small exports are still subject to legal restrictions applied by the country of export. An export's counterpart is an import.

Table showing Indias Foreign Trade for the period of:2009-2010 Particulars Total Exports Total Imports Trade Balance for the period Fig 1 Amount in (Rupees crores) 845125.2 1356468.7 -511343.5

PROBLEMS There are few problems which need to be solved before India makes a mark for itself in the export sector. The Indian goods have to be of superior quality. The packaging and branding should be such that countries are interested to export from India. At the same time India must look for potential market to sell their goods. The government policies amendments can give a boost to the exports.

Though India has not been affected to the same extent as other economies of the world, yet our exports have suffered a decline in the last 10 months due to a contraction in demand in the traditional markets of our exports

ADVANTAGES OF EXPORT IMPORT Enhance your domestic competitiveness Increase sales and profits Gain your global market share Reduce dependence on existing markets Exploit international trade technology Reduce dependence on existing markets Extend sales potential of existing products Stabilize seasonal market fluctuations Enhance potential for expansion of your business Sell excess production capacity Maintain cost competitiveness in your domestic market

DISADVANTAGES OF EXPORT IMPORT

You may need to wait for long-term gains Hire staff to launch international trading Modify your product or packaging Develop new promotional material Incur added administrative costs Wait long for payments

CHAPTER 2 INDUSTRY PROFILE

2.1 WORLD APPAREL INDUSTRY

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 Global garment exports are valued at more than US$ 310 billion a year, of which the world's top 15 clothing exporters account for more than 80%. Developing countries in Asia continue expanding their Garment Industry due to their very-low-cost production. India is the second most preferred country after China for textile and apparel sourcing. Its Apparel industry is likely to achieve an export target of US$ 28 billion by 2012-13. Factors effecting like vast sources of raw materials, low labor costs, entrepreneurship and design skills of Indian traders, changes in the policies to open up Indian economy to the outside world etc. Bangladesh has emerged as a key player in RMG sector (Ready Made Garment Industry).

2.2 INDIAN APPAREL INDUSTRY

14% of total industrial Production and 30% of total exports (in India). Current share in world clothing export 3.5-4 %

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One of the largest foreign exchange earners. 2nd largest exporter and producer of Apparel Products. 30,000 manufacturing units and 35 million employed. Industry is dominated by sub-contractors and consists mainly of small units. 55% of investment in technology done for spinning. Supply base is medium quality with small volume. During 2008, exports of apparel and textile products to US declined by 0.43% in value terms though export volumes increased by 7.49% due value increase in Rupee

PRODUCTS
Garments and Clothing Home Decor and Furnishings:

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The majority of home textiles are produced in Asia. Lower prices and high volume products have contributed to the expansion of exports particularly from China and India. Handlooms: 30 lakh Weavers, 23% of total cloth produced, promoted through input support, publicity, market support, up gradation of technology, welfare measures. Textiles, Fabrics and Yarns: 8% of GDP, 30% of export earnings, 2nd highest mill area after china, facing competition on quality and value addition factors. Leather- Clothing and other Products: Comprises of jackets, footwear, etc. with 7% share in exports, major centers include Chennai, Kanpur, Agra, Jalandhar & Delhi employing 15 lakh people. 50% consumption within India. Top importers: Germany, USA and UK. Apparel Accessories- Industry and Products: One of the major manufacturers of accessories with low price and quality products.

PRODUCTION CENTRES
LUDHIANA TIRUPUR NEW DELHI

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 BANGALORE MUMBAI CHENNAI JAIPUR

COMPETITIVENESS
Caters basic requirement of people. Large skilled/ unskilled workforce with cheap rate. Sound Export Potential Comprises of effective Supply Chain( Diverse Fabrics to large market) Heavy Production Capacity India has a large fiber base Have a large and organized mill area Economic Upgraded Technology

DOMESTIC INDUSTRY
Domestic market has grown from US$ 23 billion to US$ 30 billion, exports has increased from around US$ 14 billion to US$ 19 billion (04-06 to 06-07 ) 14

 Current share in world export 3.5-4% Mens Apparel 46%, Women 17%, Kids 37% 50% of prod. need to be exported. 2,000 manufacturer-exporters export apparel, while the roughly 26,000 merchantexporters serve as export brokers. India has more than 6,000 knitting units registered as producers or exporters; the majority are SSI units

MAJOR EXPORTERS IN INDIA

Madura Garments (Indian Rayan) Arvind Mills Ltd Raymonds Ltd. Alok Industries Ltd. Welspun India Ltd. Bombay Dyeing JNS Fabrics & Exports. Primex Apparel Sourcing Services The Outlook Sourcing Services Pratibha Syntex Pvt. Ltd Provogue India Ltd. Wills Lifestyle Orient Craft Limited Gokaldas Exports Limited

COMPETITORS

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China Vietnam Bangladesh Indonesia Mexico Hong Kong Dominican Republic Korea Thailand Philippines

QUALITY STANDARDS
For textile and apparel industry product quality is calculated in terms of quality and standard of fibers, yarns, fabric construction, color fastness, surface designs and the final finished garment products. However quality expectations for export are related to the type of customer segments and the retail outlets. Only limited use of various chemicals like azo dyes, heavy metals, odour, etc should be permitted to prevent ecological requirements. Apparel Industry have ISO Certification Operation incurs heavy expenditure to the manufacturers. ISO standards are implemented to lower its operating costs and improve the quality of its output, ultimately increasing the level of customer satisfaction. ISO standards enable the industry to enhance the quality of raw material input, thereby strengthening the quality of the ultimate/final product, which leads to 16

performance improvement, factual approach towards the decision making process, and a mutually benefiting suppliers relationship. Right from yarn purchase to shipment every activity is governed by documented standard operating procedures and instructions, which complies with the requirements of ISO 9001. Each process is carried out with the PDCA process approach (i.e. Plan-Do-CheckAct), which gives better results in achieving better quality and on time shipments. Inspection and testing at each stage of manufacture assures quality requirements are met. Internal audit and external audit performed periodically ensures effective implementation of Quality Management System Periodical feedback from customers reveals their level of satisfaction Standards are specified on selection of Cotton Yarn.

FOREIGN TRADE POLICY

Clothing and accessories are classified under HS code 61 and 62. All the products listed under these codes are freely importable. Further more the manufacturers of these products are exempt from obtaining a license to manufacture though they are required to file an Industrial Entrepreneur Memoranda (IEM) in Part 'A' with the Secretariat of Industrial Assistance (SIA), and obtain an acknowledgement and part

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B after the commencement of commercial production. Certain items of clothing are reserved for small scale industries. Most of the articles falling under HS 61-62 carry an import duty of 56.83 per cent which includes 30 per cent basic duty, 16 per cent additional duty and 4 per cent special additional duty. India has reduced peak rate of customs duty to 20%, in view of the WTO Agreement. In the foreign trade policy, certain amendments and inclusions have been done pertaining to specific sectors of textiles and garment specially the handlooms.

Handlooms Specific funds would be earmarked under MAI/ MDA Scheme for promoting handloom exports. Duty free import entitlement of specified trimmings and embellishments shall be 5% of FOB value of exports during the previous financial year. Duty free import entitlement of hand knotted carpet samples shall be 1% of FOB value of exports during the previous financial year. Duty free import of old pieces of hand knotted carpets on consignment basis for re-export after repair shall be permitted. New towns of export excellence with a threshold limit of Rs 250 crore shall be notified. The textile and apparel industry is an important one to India, contributing 1.6% of industrial production and 30 % of total exports. Import duties on capital equipment are low (the majority of the capital equipment used by the apparel industry, like sewing machines, can be imported at 5% basic customs duty). Fabrics can be imported duty-free if made up into garments and re-exported

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 Import duties on fabrics and other raw materials are duty free for export production. The apparel industry can import duty free specified trimmings and embellishments like Fasteners, Rivets, Garment Stay, textile, Badges, Sewing Thread, Sequin, Tape & others for export production.

CHALLENGES TO INDIAN APPAREL INDUSTRY

Policies of the Government of India favoring small firms Small units use low levels of technology and produce mostly low value-added goods of low quality that are less competitive globally Indias Apparel industry depends heavily on domestically produced cotton Small Unit sector had restricted the entry of large-scale units and discouraged investment in new apparel manufacturing technologies India have high energy and capital costs, raw material costs, multiple taxation etc. Appreciation of Rupee Low Institutional Support

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CHAPTER 3 COMPANY PROFILE

3.1 INTRODUCTION
Orient craft limited was established in 1978 and is one of the largest Export House in India having a turnover of around 94350 crores. It is dealing with US and European buyers and is having 21 manufacturing units in and around Delhi. It is one of the largest manufacturers of womens, mens and childrens woven and knit garments in India. HISTORY The company was incorporated on February 28, 1978 under the Companies Act, 1956 as Orient Craft Private Limited. With effect from July 1, 1992, the word private was deleted from the name of the company under section 43A (1A) of the companies Act. Subsequently, the company became a public limited company on December 13, 2000. Initially, till 1986, the Company was exporting only to the European market. In 1987, it decided to shift its profile and explore the possibility of executing large orders of one style. In the late eighties it started exploring the American market which offered good scope for its value added products. The company started from a single manufacturing unit and has moved to multiple locations with the passage of time. From a modest manufacturing space of less than 6000 sq. ft. in 1987, the company now commands around 125 million sq. ft. covered area to manufacture garments at its different locations.

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OWNERSHIP PATTERN Orient Craft Limited, a public limited company incorporated under the Companies Act 1956. Initially OCL was incorporated in 1978 as a private limited company. Then the word private was deleted from the name and the company became a public limited company in 2000. OCL is not a listed company. The company is managed by the Board of directors. The board comprises of Mr. Sudhir Dhingra (CMD) Mr. K.K. Kohli (Joint MD) Mr. Anoop Thatai (Joint MD) Mr. Anoop Dhanda (Executive Director) Mr. Alok Narayan Pandey (Company Secretary) Mr. Lalgudi Vaidhyanathan Saptharishi (Director) Mr. Ashok Kumar Munjal (Director) Mr. Ajit kumar Sahay (Director)

VISION At Orient Craft Limited CUSTOMER DELIGHT is top most priority to be achieved through timely shipment of quality products. OCL team continuously strives for more value for money through COST REDUCTION drive in the organization. The challenges in terms of TARGETS TO BE MET at all levels through effective team work, continuous improvement and meaningful HR

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MISSION Companys milestones to achieve our vision are: KRAS Review and monitor progress daily, weekly, fortnightly and monthly. Focus on objectives to achieve and align corrective actions. Corrective actions to be implemented within 24 hours.

GOALS Develop production in Special Economic zones. Moving up the textile value chain by exploring retail opportunities. Grow business through strategic partnerships and acquisitions. Continue to seek cost efficiencies to improve competitiveness. Maintain Focus on innovative Value Added Design Elements. Grow our core garment manufacturing business

OBJECTIVES Growth Profitability Customer Focus People Orientation Image

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MAJOR BANKS The company conducts its business through multiple banking. Some of the major banks include: Corporation Bank Bank of Baroda State Bank of Travancore. State Bank of Mysore State Bank of Hyderabad Allahabad Bank Bank of India Central Bank of India Union Bank of India DBS Bank Ltd State Bank of Patiala Indian Bank

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Indian Overseas Bank

MAJOR BUYERS: Orient Craft prides itself in making quality products and execute orders for such customers only. However, no single customer constitutes more than 22.5% of the companys sales. The top customers contribute 90% of the companys turnover. Given below is the list of topmost buyers: DSK Industries/ Tommy Hilfiger Group The GAP Inc. /Banana Republic Inc. Ann Taylor Levis Straus Inc. Marks & Spencer Dillards Stores Monsoon Accessories Macys merchandising group Next retail ltd Debenhams retail plc Urban outfitters

MAJOR PROBLEMS
1. Inflexible Indian Labor laws are the biggest disadvantage that the company has. Garment business around the world but particularly in India is subject to highs and lows of seasonal overseas demands. While spring and summer production months have very high demand for garments, but winter and Christmas seasons, demand is considerably low. Hence all of 24

us in the Garment Manufacturing sector, setup factories to cater to the lower number as we do not have the ability to fire surplus labor during lean months. This way country is losing a lot of export business opportunity as well as employment potential, if piece rate contract or time bound contract labor was permitted, huge amounts of new employment would be created. Lack of discipline amongst work force in the Indian garment factories is the reason for very low productivity and high cost of Indian garments. The same Indian worker, working in overseas factories produces 3-4 times more, because of the fear of losing his job. Too much job security is no good for an industry whose performance greatly depends on the performance of its labor force. If we could allow productivity linked wage system and allow at least 25% flexibility, you would suddenly see hundreds of new factories being set up which will generate new employment for millions of people. 2. Simpler and liberal export policies should be formed to facilitate import of world class fabrics and trims from around the world, which may not be available in India, or may be more expensive in India. This would help even the small exporters who cannot afford to deal with the current bureaucratic maze of policies and procedures. 3. Another challenge is shorter lead-time; several of the competing countries have substantially shorter transit times to Europe and USA, which are our main markets. Non availability of direct sailing vessels and excessive government holidays (currently about 160 days a year including Saturday and Sunday's) also lead to a lot higher transit times from Indian ports. Most of Indian Garment exports being fashion garments, have very limited shelf life, hence it is important for us to device ways to deliver it to our customers in the quickest possible time.

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SOME KEY EVENTS Feb 28, 1978 Company was incorporated under the name Orient Craft Private Limited 1978 July 1, 1992 1994 1996 1999 2002 2002 2003 2004 2005 2006 2007 2007 2008 2009 Established woven garments unit The word private was deleted from the name of the company pursuant to section 43A (1A) of the companies Act Established the manufacturing plant at Gurgaon which covers an area of over 87,000 square feet Established the companys knit garments unit Established the companys home furnishing unit Established the multi product manufacturing plant at Gurgaon, which Established the companys embroidery unit Incorporated the companys wholly owned subsidiary, Orient Craft USA Inc., in the state of Delaware in the US Established a design studio in New York Acquired a fully automatic denim stitching plant from Levis in Spain and reinstalled it in Manesar, Gurgaon Acquired 9.72 acres of land in Hyderabad in connection with a manufacturing facility. Established a retail venture in India with S.Oliver Entered the SEZ and started major capital projects in Bhiwadi and Hyderabad Opened various training centers in Rajasthan and Haryana Acquired land for SEZ & work expected to start in near future proposed covers an area of over 301,478 square feet that houses the woven and knits units

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The figure of export turnover of the company for the last ten year Year 1997-98 1998-99 1999-00 2000-01 2001-02 2002-03 2003-04 2004-05 2006-07 2007-08 2008-09 2009-2010 2010-2011 Export Sale (in Lacs) 12202.72 15486.60 22072.47 30545.70 36406.60 41787.13 48780.94 60499.90 71660.68 68618.88 80336.83 83285.59 91559.83 Fig 2

CAPACITY AND UTILIZATION The company has a production capacity of 50000 dz. Woven and equal number of Knit Garments every month. The major exports comprise dresses, skirts, knitted shirts/T-shirts, mens shirts, blouses, jacket, co-ordinates, kids wear, rompers, outerwear, duvet cover and pillow covers mostly to USA, Europe and Canada. The company has a 100% export oriented unit thereby having the advantage of importing all raw materials, trims free of duty from any part of the world. The company has in-house lab testing for garments, fabrics and trims. The company also has State of the art in-house computerized embroidery machines, washing plants and dry cleaning units. The company is rapidly growing year after year and has modern manufacturing facilities spread over around 125 million sq. ft. area in 21 factories in and around Delhi.

PRODUCT LINE

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The Company started off as a manufacturer of ladies garments made out of woven fabric only. From 1994, Orient Craft started executing orders in a small way for men's shirts. In early 1995, knitwear division was added and the Company started manufacturing men's and ladies wear made out of hosiery material. Orient Craft today manufactures ladies dresses, skirts, blouses, tops and men's shirts and sportswear. Woven garments today account for 60% of the Company's turnover and the balance is made out of knitwear products.

PRODUCT RANGE
APPAREL Shirts Skirts Pullovers T-Shirts Scarfs Jackets Trousers Jeans Pants Tops Track suits

HOME FURNISHING ITEMS Cushions Quilts 28

Window panels Curtains Pillow Covers

HANDICRAFT & JEWELLERY ITEMS

Composition of sales

5%

Woven 40% 55% Knit Home furnishing

Fig 3

SWOT ANALYSIS

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STRENGTHS own manufacturing units (international quality machines) experience in manufacturing accessibility to international designs high quality raw material (imported) Working capital can be released time to time without hazel due to bulk of orders. Dealing with prime banks only. Dealing with reputed buyers who pay on time. Bank providing high value of limits for it services. Having high tendency to negotiate with bank for purchase of foreign currency.(due to its high value business for banks) Bank perception for money lending is secured. Most of the export was done on sight basis. (As the payment was to be come with in seven days) To strengthen the financial conditions in needs of expansion and up gradation in operations time to time in short period they raise money from banks in the form of PC. The limits providing by the banks were interchangeable.

WEAKNESS

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No experience of the Indian market No branding initiative ever taken Uneconomical to produce small orders Absence of a distribution network (retail n/w) Risk of availability of liquidity on adhoc basis.

OPPORTUNITIES Negotiation rates can be more crystallize. Ability to have existence overseas. Dollar will become strong against rupee. Offers from other prime bank to deal large Indian market (Indian denim market is of the size of Rs.1250 crores. With a high proportion of economically independent younger population fashion and branded apparel industry is expected to grow). Few branded Indian ethnic wears like salwar-kameez. absence of some formal apparels for the Indian women (a mix between Indian and western wear. International brands have standard sizes. The Indian bodies are quite different than western bodies. This usually results in miss-fits.

THREATS

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Fluctuations in foreign currency. From other competitors. Plans of international players to enter India. More export duties to pay due to bulk of export. Presence of a no. of brands in the male apparel segment. plans of international players to enter India cost advantage of the unorganized apparel players short fashion cycles designer wear entering the market

MARKETING STRATEGIES
The companys strategy of making itself a one stop shop to enable its customers to source their entire requirements from a single source has worked well in our favor and we are today considered as a preferred vendor by most of our overseas buyers. Further, our strategy of giving away some share of our margins in terms of discounts offered to customers and partner them in their tough times has helped us to win their confidence and to grow our business with them. We are pleased to state that our buyers have recognized our initiatives and the company won laurels from buyers like Macys, Ann Taylor, Monsoon, to name a few. Our strengths with the customers have helped us to cement the bonds with them and we are proud to state that Orient Craft is the single largest producer of girls wear for Marks & Spencer and by a long measure, remains the undisputed king for this category of products bought by Marks & Spencer globally.

COMPETITORS

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The top competitors of Orient Craft are as follows: RICHA GLOBAL GOKALDAS EXPORTS LIMITED SHAHI EXPORTS MODELAMA

FUTURE PROSPECTS
According to CRISIL Research report, Apparel exports which had recorded a muted growth of only 0.6 percent in 2008 over 2007 are expected to revive and grow at a CAGR of 4.6 percent from $9 billion in 2009 to $11.3 billion in 2014. This will be mainly on account of revival of the US and EU economies in 2010 and expected to grow at 0.3 percent and 1.6 percent respectively. Further, Domestic apparel market is expected to grow at a CAGR of around 7.4 percent, from ` 1,155 billion in 2009 to around ` 1,649 billion by 2014. The main drivers for the growth being rising incomes and growing preference for ready made garments vis--vis tailored garments. Despite the slowdown faced in the last two years, the economic environment shows signs of revival. Indias exports to US, after a decline of further 6% in 2009, are expected to revive in 2010 to grow at CAGR of 4 percent from $2.9 billion in 2009 to $3.5 billion. Similarly, Indias exports to EU are expected to show growth from 3.8 euro billion in 2009 to 4.9 euro billion i.e. AA CAGR of 5 percent. Further, the industry is hopeful that a sizeable portion of the Chinese business is likely to shift to India on the backdrop of the conditions prevailing in China. The present Chinese economy is facing pressures on account of significant Yuan appreciation which is believed to be undervalued by nearly 50%, growing inflationary pressures, increased labor costs etc. which make China lose its competitive advantage resulting in a gain to various other low cost nations. Also, other issues such as increasing environmental pollution, compliance issues and violation of International Proprietary issues which are being looked at by both European and American buyers seriously, have also started effecting the competitiveness of

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China. With China gradually losing its sheen as a global leading player in the textile exports, we believe that even a 2-3% percent decline in share of China (which is nearly US$ 150 billion out of the total industry size of over US$ 400 billion) would provide increased business opportunities to other developing countries. India being a major player among the developing countries, it is expected that it would be able to capture majority of the lost market share of China. However, with price being the major competitive point, it is very critical for Indian players to maintain the low cost. Maintaining the cost advantage is becoming more challenging with high raw material and labor costs for the Indian players. Hence, it is imperative for the companies in India to invest in state-of-the-art machinery to realize higher productivity and to reduce its administrative costs, which will provide them with a strong competitive advantage.

CONCLUSIONS
The outlook for the Indian ready made garment exports industry has been improved from the previous year and big exporters like Orient Craft Limited have been witnessing a moderate growth in their order books. However the realization from the global economic crisis. Moreover the appreciating rupee may put a pressure on the margins for export oriented companies. Given this scenario, it would be critical for Orient Craft Ltd. to prudently manage its forex exposure as well as rationalize its capital structure going forward.

CHAPTER 4
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ABOUT THE TOPIC

4.1 EXPORT PROCESS

STEP 1 RECIEPT OF ENQUIRY It refers to the set of enquiries received by the exporter from the importer to serve his own purpose. For an exporter it may not be possible to respond to all enquiries, therefore an exporter checks the worthiness of importer by framing various questions like: For how long they have been in that business? Whether they intend to purchase goods on their own account or they intend to act as commission agent? The name and address of at least two firms which they already represent or have represented in the past? This process continues further only if the exporter is satisfied with the response.

STEP 2 ROLE OF MERCHANDISER The merchandiser is an important intermediate between the buyer and the exporter. He works under the supervision of the directors. He often accompanies the CMD or the head of department for getting the orders from the overseas buyer. The merchandiser forwards different styles of samples to the buyer through local buying house as every buyer or agent wants to assure that the goods manufactured at last should match up to their description and illustration. This is called ad samples. If these samples are approved by the buyer or some alterations has to be made say, in color or size, the merchandiser of the buyer informs the merchandiser of the exporter about the alterations. Accordingly, a new sample is prepared and forwarded. To send samples to an enquirer is a costly business, specially as samples should always be sent by air if possible, therefore the enquirer should be asked to pay for the samples plus

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the cost of dispatch (or at least be asked to pay half of the cost) & if he is really interested in that particular contract, he will do so. To serve this purpose, a DEBIT NOTE is prepared by the exporter. In this context, the firm has maintained a program which has the records of various buyers and the follow up of sample payments. The exporter after having satisfied himself that the enquirer abroad is capable of meeting his obligations provides him with the price list, details of terms of business and payment which he is expected to adhere to. Once the samples and the other details regarding the process are approved by the buyer, the process of Documentation starts

MERCHANDISER

SAMPLING

BULK

ORDER CONFIRMATION

PURCHASE ORDER

BULK SHIPMENTS

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FABRIC ORDERING

60 70 DAYS

TRIMS/ ACCESSORIES FABRIC IN HOUSE TRIM IN HOUSE TESTING WASHING CUTTING

30 40 DAYS

FINISHING

PACKING

INSPECTION

15 20 Days prior to ex factory of goods. Generate invoice (retail invoice) Booking with nominated forwarder Booking confirmed in two three days time. Ex factory vessel cargo cut off date H/O

STEP 3 DOCUMENTATION An exporter is required to deal with various documents both at the: 1. 2. Pre shipment and Post shipment stages

To complete the export transaction, these documents are important: As an evidence of shipment and title of goods For obtaining payments.

These documents are of vital interest to both the exporter and the importer. The importer needs them to claim peaceful and legal possession and delivery of the goods in his country. The exporter needs to hand them over to him to claim payment for the shipment. 37

1.

PURCHASE ORDER (P.O.)

Purchase order is the very first document which is being forwarded by the buyer to the exporters merchandiser. It covers all the information regarding the goods. Once the order is received, the first decision as to whether it will be filled is based upon the approval of credit. i.e., the shipment should be contingent upon the ability of the customer to secure foreign exchange in those countries where there are exchange restrictions. This also applies to merchandiser destined for those countries where there are import quotas and import license. The Contents of P.O. Are as follows: Year Division Company Group Shipping Group Purchase order No. Category Factory Proj. Issue Actual Issue Style Division Style No. Prototype No. Style Desc. No. Type Buying Office 38

Handling Buying Office LC Beneficiary Size- Scale Fabric Quality Pack Method Content Construct Finish Gauge Type Garment Weight LIC Colour Unit Cost Currency Terms Consignment_Date Ship Mode Quota category Duty(%) Ship To In Catalog Size Breakdown Issue By Signature Total Value

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Scrutinizing the Purchase Order

In particular, the purchase order should be scrutinized on the following basis: Terms of payments Documents

TERMS OF PAYMENTS
In international trade, the payment for the goods can be made by means of any of the following methods of payment. These payment methods are also known as payment terms. Advance payment Open account Documentary Collection (documents against payments(d/p), documents against acceptance(d/a) Documentary credit(letter of credit)

ADVANCE PAYMENT: Under this method the exporter receives payment from the overseas exporter in advance in the form of demand draft or cheque denominated in foreign currency or by way of direct telegraphic transfer against the supply of goods to be made later on. When an exporter receives the advance payment, then he must have an evidence of advance payment in the form of certificate of foreign inward remittance (FIRC).

OPEN ACCOUNT: Open account is an arrangement between the exporter and the importer, where by the goods are manufactured and delivered even before the payment is required. The importer does not accept any negotiable instrument and thus, does not provide any evidence to the

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exporter of his legal, commitment to make the payment. Importer makes the payment only when he has received the goods and expected them to be quality satisfaction. DOCUMENTARY COLLECTION: It involves collection of given sum of money due from the importer by a bank against delivery of certain documents at the instructions of the exporter. The parties involved in the documentary collection are as followsThe Exporter: The seller ships the goods and then hands over the document related

to the goods to their banks with the instruction on how and when the buyer would pay. The Remitting Bank/ Exporter's Bank: the bank which presents documents to the

importer for collection of payments/acceptance of drafts as per instructions of the collecting bank. Role of remitting bank: Check that the documents for consistency. Send the documents to a bank in the buyer's country with instructions on collecting payment. Pay the exporter when it receives payments from the collecting bank. The Collecting Bank: the bank which forwards the documents for collection or

obtaining acceptance of the draft from the importer as per instructions of the exporter. Role of the collecting banks are: Act as the remitting bank's agent Present the bill to the buyer for payment or acceptance. Release the documents to the buyer when the exporter's instructions have been followed. Remit the proceeds of the bill according to the Remitting Bank's schedule instructions.

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The Importer i.e., the party to whom the documents are handed over against

payment/acceptance. i. DOCUMENTS AGAINST PAYMENT: Under this method, the shipping documents concerning the shipment of goods are given to the importer against payment for the goods. The payment is made by the importer against the sight draft sent along with the shipping documents. If the importer does not honor the draft, he is not given the shipping documents.

Flow of documents against payment

1.

Exporter
(Fwd dox to) CREDIT THE A/C OF

Exporters bank
(Fwd dox to)

2.

Importers 3. bank
(Ask Payment)

Importer

MAKES
PAYMENT

SENDS THE REMITTANCE

HANDOVER DOX. Fig. 2

ii. DOCUMENTS AGAINST ACCEPTANCE: In this case the remitting bank hands over the shipping documents to the importer only upon the acceptance of accompanying draft. The acceptance implies that he agrees to pay the amount of the draft on the due date, under d/a terms, there is always a period of credit (usance period), on the expiry of which the importer is required to make payment. 42

Flow of documents against Acceptance

1.

Exporter
(Fwd dox to) CREDIT THE

Exporters bank
(Fwd dox to)

2.

Importers 3. bank
(Ask Payment)

Importer

REMITTANCE SENT TO

MAKES Fig. 3

LETTER OF CREDIT (DOCUMENTARY CREDIT)

Letter of credit refers to a written promise made by the importers bank to the exporter that the payment shall be made to him provided the shipment is sent by him in strict compliance with the terms and conditions to the export contract.

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The terms and conditions of the export contract form the part of letter of credit and are known as the terms and conditions of letter of credit. The essential characteristics of the letter of credit is that it relies on the doctrine of strict compliance for release of payment to the exporter against the draft (s) drawn by him. The banks do not deal in goods, they deal in documents. As such, the importer has to specify to the bank the documents which it should examine as the evidence to the effect that the exporter has sent the shipment in strict compliance with the terms and conditions of the export contract.

Flow of Letter Of Credit

Importer

Importers bank

Send the dox.

Send goods. I'll pay

Exporter

Exporters bank
Fig. 4

PARTIES OF LETTER OF CREDIT

Applicant (Opener): Applicant which is also referred to as account party is normally a buyer or customer of the goods, who has to make payment to

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beneficiary. LC is initiated and issued at his request and on the basis of his instructions.

Issuing Bank (Opening Bank) : The issuing bank is the one which create a letter of credit and takes the responsibility to make the payments on receipt of the documents from the beneficiary or through their banker. The payments has to be made to the beneficiary within seven working days from the date of receipt of documents at their end, provided the documents are in accordance with the terms and conditions of the letter of credit. If the documents are discrepant one, the rejection thereof to be communicated within seven working days from the date of receipt of documents at their end.

Beneficiary: Beneficiary is normally stands for a seller of the goods, who has to receive payment from the applicant. A credit is issued in his favor to enable him or his agent to obtain payment on surrender of stipulated document and comply with the term and conditions of the L/c. If L/c is a transferable one and he transfers the credit to another party, then he is referred to as the first or original beneficiary.

Advising Bank: An Advising Bank provides advice to the beneficiary and takes the responsibility for sending the documents to the issuing bank and is normally located in the country of the beneficiary.

Second Beneficiary: Second Beneficiary is the person who represent the first or original Beneficiary of credit in his absence. In this case, the credits belonging to the original beneficiary is transferable. The rights of the transferee are subject to terms of transfer.

TYPES OF LETTER OF CREDIT

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1. Revocable Letter of Credit L/C: A revocable letter of credit may be revoked or modified for any reason, at any time by the issuing bank without notification. It is rarely used in international trade and not considered satisfactory for the exporters but has an advantage over that of the importers and the issuing bank. There is no provision for confirming revocable credits as per terms of UCPDC, hence they cannot be confirmed. It should be indicated in LC that the credit is revocable. If there is no such indication the credit will be deemed as irrevocable. 2. Irrevocable Letter of Credit L/C: In this case it is not possible to revoke or amended a credit without the agreement of the issuing bank, the confirming bank, and the beneficiary. Form an exporters point of view it is believed to be more beneficial. An irrevocable letter of credit from the issuing bank insures the beneficiary that if the required documents are presented and the terms and conditions are complied with, payment will be made. 3. Sight Credit and Usance Credit L/C: Sight credit states that the payments would be made by the issuing bank at sight, on demand or on presentation. In case of usance credit, draft is drawn on the issuing bank or the correspondent bank at specified usance period. The credit will indicate whether the usance draft is to be drawn on the issuing bank or in the case of confirmed credit on the confirming bank.

DOCUMENTS

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The main purpose of the documents accompanying a shipment is to provide a specific and complete description of the goods so that they can be assessed correctly for Duty purpose and meet the Import Licensing requirements or Import Quota Restrictions imposed on the goods for clearance purpose. If there are any discrepancies in the documents and or if the required documents are not produced, the shipment may not be allowed for import or may even be confiscated by the Customs of the importing country. There is a plethora of documents in export trade - different forms, applications and documents are required to be filled in for obtaining Export Licenses, completing Preshipment Inspection, for Customs Clearance and shipping, for obtaining payment and export finance and for claiming export benefits like Duty Drawback, etc. The experienced exporter, because of the complexity of documentation, will find it a good idea to have the various documents prepared for him by a Shipping and Forwarding Agent. The documentation department can be divided into two parts; i. Pre shipment documentation ii. Post shipment documentation

PRE SHIPMENT DOCUMENTATION

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As any large export firm, the orient craft export house also has separate documentation department, which is further bifurcated into pre-shipment and the post-shipment department. Activities Insurance Policy Quota Endorsement Generation of documents. Custom clearance. QUOTA ENDORSEMENT The items in respect of which annual levels of quantities are fixed are known as quota items and other items are known as non-quota items, each bearing distinctive category number. The textile committee provides facilities for the pre-shipment inspection items. This inspection is not from the point of view of quality of goods. There is no judgment on the quality of the garment or other textile products rather, the inspection is conducted to determine whether the materials used in the ready made garment or the textile product is in conformity with the requirement of the quota categories. This verification is known as authentication of ready made garments, thus an exporter dealing in ready made garments made of cotton, rayon or blended fabrics or other textile products is required to apply for the same.

GENERATION OF DOCUMENTS The pre-shipment documents are divided into two broad categories namely commercial documents and regulatory documents:1. Commercial Documents: are the documents used by the exporter and the importer in discharge of their respective legal and other incidental responsibilities under sales contracts. These documents are in use because of the custom of trade in international trade. 2. Regulatory Documents: are those documents that are prescribed in different government departments /bodies for compliance of formalities under relevant laws , rules

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and regulations covering export trade viz. foreign exchange management act , foreign trade (development and regulation ) act , central excise rules , exports (quality control and exception ) act , customs act and major port trusts act.

1. COMMERCIAL DOCUMENTS It is a document showing the value of goods exported. It may take the form of:

Customs invoice Legalized invoice Consular invoice

A general commercial invoice contains the following:

Invoice number and date Buyers order number Exporter Consigning Country of origin of goods Country of final destination Vessels /flight number Port of discharge Port of loading Final destination Description of goods Quantity Rates Amount Number and kinds of package Total quantity

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 L.C. terms Currency Category

Customs invoice: When the commercial invoice is prepared on the format prescribed by customs authorities of importers countries, it is called customs invoice. This is the required in USA, Canada, Australia. Consular Invoice: It is a commercial invoice duly verified by the embassy /consulate of the importers country based in the country of exportation. .embassy/ consulate attested invoice becomes legalized/ consular invoice. This is the requirement of countries like Mexico and Middle East countries Legalized Invoice: It is the same as consular invoice this term is in use in countries like Turkey, Taiwan, Latin America, Libya, etc Packing List: This document describes the various boxes in which the goods have been exported, it is a vital document, it informs the buyer regarding the content of various item A packing list contains Exporter Consignee Invoice number Purchase order number L.C number 50

 Color Style Total quantity Fabric Number of cartons

Certification of inspection: The export inspection agency conducts pre shipment inspection of the goods notified for compulsory pre shipment inspection of exports goods. Certificate of insurance: This is the document indicating insurance of the cargo. It is issued by the insurance company. The difference between the two is that the certificate is just an evidence of insurance. It does not state the terms and conditions of the insurance, on the other hand the policy states the terms and conditions of the goods. Bill of lading/airway bill: This document is a transport document issued by the shipping line indicating the following: Title of goods shipped Receipt for the goods shipped and an admission to their apparent condition and quality at the time of shipment. Bill of lading is issued by the shipping line against mates receipt. Airway bill is the same as bill of lading, but is issued by the airlines carrying the cargo.

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Certificate of origin: In most countries, importers are required to submit a certificate of origin in respect of import consignment for obtaining their custom clearance. This can be issued by any chamber of commerce. The application should be accompanied by two copies of the commercial invoice and draft for the prescribed fee. Combined Transport Document: Combined Transport Document is also known as Multi modal Transport Document, and is used when goods are transported using more than one mode of transportation. In the case of multi modal transport document, the contract of carriage is meant for a combined transport from the place of shipping to the place of delivery. It also evidence receipt of goods but it does not evidence on board shipment, if it complies with ICC 500, Art. 26(a). The liability of the combined transport operator starts from the place of shipment and ends at the place of delivery. This documents need to be signed with appropriate number of originals in the full set and proper evidence which indicates that transport charges have been paid or will be paid at destination port. G.S.P certificate of origin : The G.S.P certificate of origin is different from the CO. This is required under the scheme of generalized system of preferences introduced by the developed countries in pursuance to unclad resolution of 1971 the scheme enables the importer in developed countries to import goods from developing countries like India at concessional rates of import duty or without payment of duty. This is issued by textile committee {ready made garments} Bill of exchange It is an unconditional written order requesting the buyer {drawee} to pay a specified sum of money to a specified person at a specified time. One who prepares this order is called drawer {seller}. This is also known as draft in international trade. When the buyer has to pay for the amount at time of its presentation it is known as sight draft. If a credit time is allowed by exporter it is called usance draft. It is important to note that bill of exchange

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should be drawn to the order of the exporters bank i.e. the bank which would negotiate the documents/ collect the proceeds. Shipment advice: This document is used to inform the exporter the details of the shipment in advance. The required set of the documents are sent separately to the buyer through the bank. The various auxiliary commercial documents are as follows: Performa invoice

This document indicates the details of the goods to be exported. It is an offer to sell made by an exporter to the importer. Once the offer is accepted by the importer, the Performa invoice becomes an export order. It is prepared after negotiation with the buyer has been concluded. Shipping instructions

This document provides a check list of various instructions an exporter may like to give to the shipping agent. Insurance declaration

This is prescribed by the insurance companies where in the exporter seeking insurance of the goods make the declaration with regard to the insurance policy desired and the nature of the goods.

Shipping order: This is a reservation slip issued by shipping line at the time of reservation of shipping space for a particular export shipment. In case the shipment is being sent by air then the reservation slip is known as carting order

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Mates receipt: It is a receipt issued by the mate (chief officer) of the ship acknowledging the loading of cargo on the ship. It is used when goods are sent by sea only.

2. REGULATORY DOCUMENTS Exchange control declaration form (GR Form) Every exporter is required to declare to the reserve bank of India. The full export value of the shipment and also submit an undertaking that the full export proceeds shall be realized by him within a period of six months or due date of payment which ever is earlier. This declaration is made in the prescribed exchange control declaration form. These forms are known as gr/ softex/ pp/ sdf form. Freight payment certificate This indicates that the freight has been paid. Insurance premium payment certificate This is like a receipt for the payment of the freight. Application for removal of excisable goods for exports This is used for obtaining approval of the central excise authority to remove the goods from the factory for sending export shipment. Shipping bill/bill of export This is the most important document required by the customs authorities for allowing exports. It contains all the details of the goods shipped. The clearing and forwarding agent (C.H.A.) or the exporter himself fills up the shipping bill. It is used when shipment is sent by sea/air and the bill of export is used when the shipment is sent by road. Various types of bills are as under

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Claim for duty drawback (green bill) For duty free goods(white bill) For duty entitlement pass book scheme(blue bill)

SETS OF DOCUMENTS There are three set of documents prepared in the pre shipment department: 1. Office set The term itself specifies that this set is maintained by the pre shipment department for the office purpose to be used further by post shipment department. 2. Consignee set It is same as the office set. It is forwarded to the buyer for the purpose of getting the delivery order for the release of goods. The set is received by the buyer before the opening bank receives the original documents forwarded by the negotiating bank of the exporter. The set contains: Invoice Packing list Airway bill/ bill of lading Export certificate (Canada and European countries.) Special custom invoice ( Canada) G.S. P.( E. U. Countries) Visa (U.S.A.) Single country declaration (U.S.A.) Multiple country declaration (if 100% E.O.U. for U.S.A) Certificate of origin (E.U.)

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Canada custom invoice

3. Custom clearance set This set of document is forwarded to the agent when the goods are ex. Factory for getting custom clearance. It contains: Invoice Packing list Duplicate visa{U.S.A.} Draw back declaration form Export certificate {Canada & E.U.} S.d.f. {E.U., Canada, non quota} Certificate of origin{E.U.} S.d.f (Canada, U.S.A, non quota countries) Certificate from PhD. Chamber of Commerce( non quota countries) The above mentioned documents are handed over to the custom house agent (C.H.A.) by the agent. The C.H.A. in lieu of the same forwards a set of documents to the agent after getting custom clearance who in turn forwards the same to pre- shipment department. The set contains:

Custom attested invoice Custom attested S.d.f Exchange control copy ( signed by S.P) Export performance copy Airway bill/ bill of lading Drawback / E.D.I.

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4.1.i EXPORT FINANCING

Financial assistance extended by the banks to the exporters pre-shipment and postshipment stages. Financial assistance extended to the exporter prior to shipment of goods from India falls within the scope of pre-shipment finance while that extended after shipment of the goods falls under post-shipment finance. While the pre-shipment finance is provided for working capital for the purchase of raw material, processing & finishing of the goods meant for export, post-shipment finance is generally provided in order to bridge the gap between shipment of goods & realization of money.

RBI GUIDELINES TO LIBERAL EXPORT FINANCE The Reserve Bank of India is learnt to be looking at reviewing the interest rate structure on foreign currency denominated packing credit available to exporters. PCFC provides an additional window for pre-shipment credit to exporters at internationally competitive interest rates. It is applicable to both domestic and imported inputs for export goods, in any convertible currency, for a maximum of 180 days. Pre-shipment credit is provided as a loan or advance by a bank to an exporter for financing the purchase, processing, manufacturing or packing of goods prior to shipment. The RBI has already deregulated post-shipment credit beyond 90 days till 180 days, with effect from May 1, 2003. The RBI is understood to be examining a proposal from exporters who were facing difficulty in availing concessional foreign currency packing credit. This is because with demand for dollar loans surpassing supply, banks could manage a better margin by lending it to corporate, out of the purview of export credit.

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Banking sources said by removing the cap on PCFC, which is acting as a major disincentive for banks, there will be some pressure on outflow of dollars in addition to meeting the genuine dollar demand of exporters. According to banking sources, while the RBI wants to deregulate interest rates and leave it to the discretion of banks, there is a concern that small exporters might be hit if rates turn too high. Hence, there is also a possibility of putting a cap as well. Exporters do not want rates to be deregulated as post deregulation; they will no longer remain concessional. At present, the spread charged by banks for pre-shipment credit in foreign currency is related to the international reference rate such as London inter-bank offered rate Euro Libor/Euribor (6 months). The lending rate to the exporters should not exceed 75 basis point over Libor/Euribor, excluding withholding tax. In fact, excess dollar inflows are increasingly becoming a problem to manage as with each dollar sucked out of the market, additional rupee funds is being added to the liquidity-flush system. In addition to PCFC, under the existing norm, banks may arrange for 'lines of credit' from abroad and also negotiate lines of credit with overseas banks for granting PCFC to exporters without the prior approval of RBI, provided the rate of interest on the line of credit does not exceed 75 basis point over six months Libor/Euro.

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1. PRE SHIPMENT FINANCE Pre Shipment Finance is issued by a financial institution when the seller wants the payment of the goods before shipment. The main objectives behind pre shipment finance or pre export finance is to enable exporter to: Procure raw materials. Carry out manufacturing process. Provide a secure warehouse for goods and raw materials. Process and pack the goods. Ship the goods to the buyers. Meet other financial cost of the business. Export Duty or any other tax. Freight and insurance charges

TYPES OF PRE SHIPMENT FINANCE: Packing Credit Advance against Cheques/Draft etc. representing Advance Payments.

Pre shipment finance is extended in the following forms: Packing Credit in Indian Rupee Packing Credit in Foreign Currency (PCFC)

Pre-shipment Credit in Foreign Currency (PCFC) Authorized dealers are permitted to extend Pre shipment Credit in Foreign Currency (PCFC) with an objective of making the credit available to the exporters at internationally competitive price. This is considered as an added advantage under which credit is provided in foreign currency in order to facilitate the purchase of raw material after fulfilling the basic export orders. The rate of interest on PCFC is linked to London Interbank Offered

59

Rate (LIBOR). According to guidelines, the final cost of exporter must not exceed 200 bps over 6 month LIBOR, excluding the tax. The exporter has freedom to avail PCFC in convertible currencies like USD, Pound Sterling, Euro, Yen etc. However, the risk associated with the cross currency transaction is that of the exporter. The sources of funds for the banks for extending PCFC facility include the Foreign Currency balances available with the bank are Exchange, Earner Foreign Currency Account (EEFC), Resident Foreign Currency Accounts (RFC) Foreign Currency (Non-Resident) Accounts.

Banks are also permitted to utilize the foreign currency balances available under Escrow account and Exporters Foreign Currency accounts. It ensures that the requirement of funds by the account holders for permissible transactions is met. But the limit prescribed for maintaining maximum balance in the account is not exceeded. In addition, banks may arrange for borrowings from abroad. Banks may negotiate terms of credit with overseas bank for the purpose of grant of PCFC to exporters, without the prior approval of RBI, provided the rate of interest on borrowing does not exceed 0.75% over 6 month LIBOR.

STAGES OF PRE SHIPMENT FINANCE Appraisal and Sanction of Limits Before making any allowance for Credit facilities banks need to check the different aspects like product profile, political and economic details about country. Apart from these things, the bank also looks in to the status report of the prospective buyer, with whom the exporter proposes to do the business. To check all these information, banks can seek the help of institution like ECGC or International consulting agencies like Dun and Brad street etc. The Bank extended the packing credit facilities after ensuring the following:

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The exporter is a regular customer, a bona fide exporter and has a goods standing in the market. Whether the exporter has the necessary license and quota permit (as mentioned earlier) or not. Whether the country with which the exporter wants to deal is under the list of Restricted Cover Countries (RCC) or not.

Disbursement of Packing Credit Advance Once the proper sanctioning of the documents is done, bank ensures whether exporter has executed the list of documents mentioned earlier or not. Disbursement is normally allowed when all the documents are properly executed. Sometimes an exporter is not able to produce the export order at time of availing packing credit. So, in these cases, the bank provides a special packing credit facility and is known as Running Account Packing. Before disbursing the bank specifically check for the following particulars in the submitted documents: a. Name of buyer b. Commodity to be exported c. Quantity d. Value (either CIF or FOB) e. Last date of shipment / negotiation. f. Any other terms to be complied with Follow up of Packing Credit Advance Exporter needs to submit stock statement giving all the necessary information about the stocks. It is then used by the banks as a guarantee for securing the packing credit in advance. Bank also decides the rate of submission of this stock. Apart from this, authorized dealers (banks) also physically inspect the stock at regular intervals.

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Liquidation of Packing Credit Advance This

Packing Credit Advance needs be liquidated out of as the export proceeds of the relevant shipment, thereby converting pre shipment credit into post shipment credit. liquidation can also be done by the payment receivable from the Government of India and includes the duty drawback, payment from the Market Development Fund (MDF) of the Central Government or from any other relevant source. In case if the export does not take place then the entire advance can also be recovered at a certain interest rate. RBI has allowed some flexibility in to this regulation under which substitution of commodity or buyer can be allowed by a bank without any reference to RBI. Hence in effect the packing credit advance may be repaid by proceeds from export of the same or another commodity to the same or another buyer. However, bank need to ensure that the substitution is commercially necessary and unavoidable. Overdue Packing Bank considers a packing credit as an overdue, if the borrower fails to liquidate the packing credit on the due date. And, if the condition persists then the bank takes the necessary step to recover its dues as per normal recovery procedure.

Document to be submitted to the bank for sanction of limits: Credit Monitoring Arrangement (CMA) Monthly stock statement Half yearly statement Audited balance sheet Funds flow statement Credit Monetary Arrangement: It is nothing but the bank financing for working capital. It was earlier known as Credit Authorization Scheme. RBI prescribed certain forms to be filled for applying that is called as CMA Data Base. It is done for arranging working capital finance information about 62

income, expenses, assets and liabilities. 2. POST SHIPMENT FINANCE: Post Shipment Finance is a kind of loan provided by a financial institution to an exporter or seller against a shipment that has already been made. This type of export finance is granted from the date of extending the credit after shipment of the goods to the realization date of the exporter proceeds. Exporters dont wait for the importer to deposit the funds. TYPES OF POST SHIPMENT FINANCE: Export Bills purchased/discounted. Export Bills negotiated

Export Bills Purchased/ Discounted (DP & DA Bills): Export bills (Non L/C Bills) is used in terms of sale contract/ order may be discounted or purchased by the banks. It is used in indisputable international trade transactions and the proper limit has to be sanctioned to the exporter for purchase of export bill facility. Export Bills Negotiated (Bill under L/C): The risk of payment is less under the LC, as the issuing bank makes sure the payment. The risk is further reduced, if a bank guarantees the payments by confirming the LC. Because of the inborn security available in this method, banks often become ready to extend the finance against bills under LC. However, this arises two major risk factors for the banks: The risk of non performance by the exporter, when he is unable to meet his terms and conditions. In this case, the issuing banks do not honor the letter of credit. The bank also faces the documentary risk where the issuing bank refuses to honor its commitment. So, it is important for the negotiating bank, and the lending bank to properly check all the necessary documents before submission. POST SHIPMENT CREDIT

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Post shipment credit is required to bridge the gap between the time of shipment of goods and the actual payment received. Post shipment credit is provided against the security of approved shipping documents submitted against letter of credit or otherwise. Post shipment loans normally are of three types: Short term: short term period is normally for six months and is provided by commercial banks. Medium Term: medium term period is up to five years, loan is provided by the Commercial banks in collaboration with export import banks. Long Term: loans are provided for the purchase of capital goods or turnkey projects. Period of credit is normally more than five years.

Banks enjoy certain benefits for advancing loans to the exporter: Refinance by export and import bank or by RBI at a given rate of interest. Guarantee provided by the ECGC or a substantial part of risk is covered by ECGC.

4.2 IMPORT

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Basic concepts relating to foreign trade in India: As already mentioned, Orient Craft Ltd. is in the business of manufacturing garments for exports. We manufacture a wide assortment of garments to suit all customer profiles, viz., men, women and children. We also make garments to suit all usage types like sportswear, casual wear, and formal wear and so on. Understanding the garment manufacture process: The first step is the order procurement. OCL has earned for itself an extremely respectable reputation in the international market. This means that even in a highly competitive industry, OCL is in a commanding position as regards the procurement of orders. Because of its strong bargaining position, OCL never has to go out and hunt for orders; rather they are in the enviable position of being overbooked. Thus, the manufacturing process kicks off once the order has been accepted by OCL.

IMPORT PROCESS
The first step in the process is the import of raw material from the suppliers. To ensure the highest level of customer satisfaction, OCL has a unique policy of buyer specified supplier. This means that every buyer has the discretion of specifying the name of the supplier from whom the raw material is to be sourced. This ensures that the specifications of the final product exactly meet customers requirement. From the buyers perspective the main advantage is that the products sourced from all the different manufacturers all over the world will be identical if the supplier is the same. For example, suppose GAP USA, needs 1, 00,000 T-shirts. Now consider that they place the order for this with 4 different manufacturers from different corners of the world. If the discretion of selecting the supplier is left to manufacturers like OCL, then the products coming from different manufacturers will have different attributes. To

65

standardize the final products, the buyers specify the supplier from whom the material is to be procured. Now OCL will need to import the raw material for processing the order from the supplier as specified by the buyer. This raw material comprises broadly of: Fabric this comprises the major chunk of the imports. Trims these include zippers, buttons, lining material etc.

Step 1: Placing the order with the supplier: OCL sends its requirements to the supplier giving him the exact specifications of the product required. Then the supplier replies to OCL giving the details of the material he can supply along with the shipment dates of each of these. Step 2: Raising a Letter of Credit (L/C): To safeguard his interests, the supplier would require some sort of payment guarantee from OCL. This guarantee is given in the form of a L/C. A L/C is simply a proof of the credit-worthiness of the importer. It is issued by the importers bank on the strength of the amount deposited by the importer with the bank or on the basis of the accounts of the importer with the bank. The following figure shows how the flow of funds moves from the importer (OCL) to the supplier: XYZ Bank, New Delhi Branch Bank, Italy branch

OCL, New Delhi

Supplier, in say, Italy

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Requesting the bank to issue

The first step here is to send a request to the bank asking them to issue a L/C in favor of the specified supplier. This would typically include: a. Amount of the L/C b. Name and address of the beneficiary. c. Import covered under [the sections or acts of the Import Export Policy pertaining to the transaction. In addition to the above specified items, OCL will also at this stage, undertake to submit the relevant Bill of Entry to the bank upon successful completion of the transaction. Step 3: Bank issues L/C The bank with which the L/C has been raised next sends this L/C across to the beneficiary bank. The most popular means of this transfer is SWIFT, a method similar in function to the TELEX of old days. At this stage, the commercial department of OCL raises what is known as L-Number Step 4: Arrival of goods When the goods finally reach the destination port as given in the L/C, a cargo collection receipt is sent to the bank with which the L/C was raised. At the same time, OCL also receives a Cargo Arrival Notice, which is an intimation of the arrival of the goods. It must be noted here that this notice is merely intimation and no collection of goods can take place against this. The commercial department at OCL raises an R-Number against this notice. R-Number is the requisition for release order and attestation of documents. A representative of OCL goes to the bank with this requisition, and signs the declaration that the payment due is made. The most common method of this payment is to deduct the amount from the current account of OCL with that bank. 67

Once the payment order has been released, the bank endorses the cargo receipt and the commercial department of OCL can then take delivery of the goods from the warehouse. Step 5: Transfer of payments The bank then sends the amount to the beneficiarys bank through via transfer or any other method as mutually decided, from where it is sent on to the beneficiary. Step 6: Submitting the Bill Of Entry Since imports involve an outflow of foreign currency, the RBI guidelines in this regard have to be met. Thus OCL needs to submit, within 90 days, a Bill of Entry, which is a documentary proof of the receipt and delivery of goods.

4.2.i IMPORT FINANCING:

Import financing provides importers who have orders from customers backed by a letter of credit, with the necessary financial backing to provide their overseas Supplier with a letter of credit to guarantee payment of goods, it is the loan given to the importer to provide liquidity for buying with sight payment to the exporter. Each loan must be related to one specific import transaction and the term of the financing can vary depending on the type of products imported and the requirements of the importer. ADVANTAGES Financing can be arranged for 100% of the transaction. This provides the importer with sufficient financial strength to sell larger orders than they would be able to on their own financial strength, below are some advantages: Obtain liquidity to pay for imports. The importer can receive better conditions for the purchase based on sight payment. Bank can offer the structure, currency and terms that the business or transaction requires. Depending on the case, it is possible to create a "tailor made" structure.

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Depending on the strength of the buyer, this may be done on open account with the domestic buyer, allowing the buyer to increase their buying power.

Import Trade Finance International trade continues to grow every year as nations expand their global sales and new nations join in. Today, over 225 nations are active in trade resulting in over nine Trillion dollars in global business every year. Trade related financial services have developed and expanded in depth, complexity and effectiveness to support the expansion of world trade. Many trade finance options are now available. However, in North America the Small to Mid- sized Enterprises (SME) trading community is relatively unaware of many of the more sophisticated and/or the sources of the more effective trade finance services. Traders commonly believe that the major international banks are the primary providers of these services. For the SME community this is no longer the case. A fragmented market of trade finance organizations has grown over the last 20 years to fill the void left by the major international banks which retreated from trade finance service in the 1980's. Settlement of Import Trade Transactions Various trade terms are available to balance the trade transaction risks for both the importer and exporter. As an importer/distributor you will wish to negotiate the most favorable terms of purchase with your overseas supplier. You will negotiate terms of purchase to ensure that you receive your import purchase in the right quantity, right quality, at the right price and on time. At the same time you can expect your overseas supplier to negotiate terms that will minimize potential risks - particularly the risk of nonpayment. Import trade transactions can be structured in a number of ways. The structure used in a specific transaction reflects how well the participants know each other, the countries involved, and the competition in the market.

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MOST COMMON TERMS USED FOR PURCHASE Consignment Purchase

In a consignment purchase arrangement, the importer/distributor makes payment to the overseas supplier only after sales to end user is made and payment received. Consignment purchase terms can be the most advantageous to an importer/distributor. It is also considered the most risky term for the overseas supplier. Cash-in-Advance (Advance Payment)

Under these terms of purchase, the importer must send payment to the supplier prior to shipment of goods. The importer must trust that the supplier will ship the product on time and that the goods will be as advertised. Basically, Cash-in- advance terms place all of the risk with the importer/buyer. An Importer may find his seller requiring prepayment in the following circumstances: The Importer has not been long established. The Importer's credit status is doubtful, unsatisfactory and/or the country political and economic risks are very high. The product is in heavy demand and the seller does not have to accommodate an importer's financing request in order to sell the merchandise. Down Payment

The Buyer pays the Seller a portion of the cost of the goods "in advance" when the contract is signed or shortly thereafter. There are advantages and disadvantages of down payment terms. The down payment method induces the Seller to begin performance without the Buyer paying the full agreed price in advance. The disadvantage is that there is a possibility the Seller may never deliver the goods even though it has the Buyer's down payment. This option must be combined with one of the other options to cover the full cost of goods.

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Open Account Payment

Unsecured Open Account terms allows the importer to make payments at some specific date in the future and without the buyer issuing any negotiable instrument evidencing his legal commitment to pay at the appointed time. These terms are most common when the importer/buyer has a strong credit history and is well-known to the seller. The buyer may also be able to demand open account sales when there are several sources from which to obtain the seller's product or when open account is the norm in the buyer's market. This mechanism offers the seller no protection in case of non-payment. However, an exporter can structure his open account sale transaction to minimize the risk of non-payment. Documentary Collections

Collections terms offer an important bank payment mechanism that can serve the needs of both the exporter and importer. Under this arrangement, the sale transaction is settled by the bank through an exchange of documents, thus enabling simultaneous payment and transfer of title. The importer is not obliged to pay for goods prior to shipment and the exporter retains title to the goods until the importer either pays for the value of the draft upon presentation (sight draft) or accept to pay at a later date and time (term draft).

Risks in Documentary Collections

For the Exporter

If it is a sight draft, the exporter will reduce the risk of non-payment but will not eliminate it totally since the importer may not be in a position to pay for the goods or may not be able to procure sufficient foreign exchange to make the payment. In this case the exporter may be forced to either call back the goods or negotiate sale to some other interested party, which may be at a reduced rate. In the case of term draft, the risk to the exporter is higher since the foreign buyer will take

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possession of the goods and may not pay at due date, forcing therefore the exporter to try and collect payment from the foreign buyer in the foreign buyer's home country. The Importer The importer faces the risk of paying for goods of sub-standard quality or even with shortages. In such a circumstance, it would take some time to get refunds from the exporter. It could also happen that the exporter refuses to make refunds, leading the importer to lengthy legal proceedings.

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CHAPTER 5 CONCLUSIONS

My internship was in Orient Craft Limited, Unit 7-D, Udyog Vihar, Gurgaon. I worked in the Logistics & Finance department and Documentation department of the company. Orient Craft has many manufacturing units spread across the Delhi and NCR. The unit where I worked has a manufacturing plant and the corporate office. Unit 7-D manufactures garments for women, kids and men. In this plant non denim items are manufactured. Denim clothes are manufactured in other plant which is in Manesar.

BUSINESS UNIT & ITS CONCENTRATION Orient Craft Ltd a Government recognized golden trading house was promoted by Mr. Sudhir Dhingra, who has been the Managing Director of the company since inception. It was floated as a private limited in 1978. The company was renamed in 1992 as Orient Craft Ltd on being the deemed public limited company. The company has a production capacity of 50000 dozen woven and equal number of Knit Garments every month. The major exports comprise dresses, skirts, knitted shirts/ T-shirts, men's shirts, blouses, kids wear, rompers, outerwear, duvet cover and pillow covers. The export is mostly done to USA, Europe and Canada. The company initially worked in the European Market. However, in the late Eighties, it started exploring the American market which offers possibility of large lots of single style of production. The company started from single manufacturing unit and has moved on to multiple locations with the passage of time. The company has 100% export oriented unit, thereby having the advantage of importing

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raw materials, trims, free of duty from any part of the world. The company also has an inhouse lab testing for garments, fabrics and trims. The company also has state of art inhouse computerized embroidery machines, washing plants and dry cleaning units. The company is rapidly growing year after year and has a modern manufacturing facilities spread over 800000 sq. ft. area in 17 factories in and around Delhi. The present factories are now running beyond the rated capacity to adhere to the customer's delivery schedule.

OJECTIVES OF THE COMPANY Growth Profitability Customer focus People orientation Image

DEVELOPMENT AND EXPANSION PLANS OF THE COMAPNAY The company plans to invest INR 1250 million to 1750 million for its expansion plans over the next three years period. The company plans to spend amount for expanding capacity, getting into some ancillary business like printing and retailing. The finance will be raised through internal accruals and debts. The company is planning to sell 25% stake through an Initial Public Offering (IPO) by the next fiscal year, 2011-2012. The company feels that there is a huge upswing in the textiles industry right time has come for the company to go for an IPO. OCL is planning to sell 334 acre land that it holds at a Special Economic Zone (SEZ) in Gurgaon. The company is also planning to set up units in SEZ in Gurgaon.

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PURPOSE OF THE INTERNSHIP I wanted to do internship in an Export House. The purpose of my internship was to get experience in export import logistics procedures and finance and how actually the export house work. Business. I worked in logistics and finance department and documentation department and managed to get experience. I was able to put my theoretical knowledge into practical. From the very first day to the internship, I was clear about the purpose of working here. Though the two months are short to learn each and everything. But still I was given theoretical as well as practical knowledge by the employees of the department I worked in.

RESPONSIBILITIES GIVEN DURING THE INTERNSHIP This project has provided a practical learning experience to me. I have studied about the export import procedures and how the working capital is used during pre shipment finance and how the various costs are covered. But was not aware of the fact that how it is important for the organization. This project gave me the practical approach of the industry and got to know the various new things. The first and second week of the internship was given in Import procedures and finance. Got to know that orient craft being 100% export house, why it import, what does it import and how does import payment is made. I made the advance payment, payment after receipt letters and letter of credit given to banks and how various documents are made. The third and fourth week of the internship went in the documentation department i.e. Pre shipment and Post shipment department respectively. What all documents required in the pre shipment of the consignment, what is the process of doing the pre shipment, how the shipment is booked to the forwarding agent and what all formalities are there. In the post shipment department. The documents which the pre shipment department gives to the bank and other agencies, the post shipment department prepare the documents after

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the shipment is done. They see to it that all the documents are place id the proper order as per the conditions given in the L/C. They even check that are all the payment has been made by the buyer. And waits for the notification given by the bank regarding the payment made by the buyer to the bank. The next four weeks were done in the banking and finance department. I was told to study the balance sheet of the company and compare the balance sheets of last three years and take out the various ratios and financial position of the company. I was also asked to review the problems in logistics work flow and major problems related to its applications in garment industry of India.

CHALLENGES FACED The biggest challenge which I felt was analyzing the balance sheet of the company, which is not at all easy. It was all new things. In college what we learnt was basics. But after dealing with balance sheet, logistics and documentation, I got the real experience of industry. EXPERIENCE It was great learning experience. Got the theoretical as well as practical knowledge, each and everything was taught in detail and was explained very clearly. How the things are done, how the various procedures during export import takes place, what all documents are required in the pre shipment and post shipment stages, why an exporter needs finance and credit for the export, where the investment is done.

CHAPTER 6
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BIBLIOGRAPHY
INTERNET:
http://www.eximguru.com/exim/guides/export-finance/ch_8_bank_guarantees.aspx http://apparel.indiamart.com/lib/garments/indian07251998.html http://www.teonline.com/apparel-garments/industry-overview.html http://apparel.indiamart.com/

http://www.india-exports.com/apparel.html http://apparel.indiamart.com/lib/garments/indian07251998.html http://www.cygnusindia.com/Industry%20InsightApparel%20Retailing%20 n %20India-Executive%20Summary%20&%20TOC-March%202004_.pdf http://hotdocs.usitc.gov/docs/pubs/research_working_papers/PUB3401.PDF www.google.com

BANK MANUALS

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