SUMMER INTERNSHIP PROJECT REPORT

ON

“A study on Forex Market & Exim Documentation”

Submitted In Partial Fulfilment of BBA 2013-16

To

Amity Global Business School, Ahmedabad

Submitted To: Dr. Neha Parashar

Submitted By:
Associate Professor
Name: Rohan Patel

Enrollment Number: A30806413020

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Industry SIP Certificate

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 Faculty Guide Certificate

This is to certify that the project entitled “A study of Forex Market and Exim Documentation”
submitted by Rohan Patel (Enroll No. A30806413020) as a partial fulfilment for the requirement of
BBA course at Amity Global Business School- Ahmedabad is carried out under my supervision and
guidance. The facts are true to the best of my knowledge.

Dr. Neha Parashar

Associate Professor

Finance & Accounting

Amity Global Business School- Ahmedabad

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ACKNOWLEDGEMNENT

Perseverance, inspiration and motivation have played a great role in the success of any Venture.
It would be incomplete to submit this report without acknowledging the people behind this
endeavour and without whose support I wouldn’t have able to achieve this. I express great
thanks to our collage “Amity Global Business School” and i would like to thank my
Faculty Guide Dr. Neha parashar, Associate Professor who has been very helpful in the
completion of this Project & thanks to Director Mr. Harish Kothari for giving us the chance
to experience the real world.

I would like to heartly thanks Mr. Ajay Rajguru, (Assistant Manager) my mentor of the
project who has Continuously guided and encouraged me till the last word of this project
and provided Excellent knowledge. I would also like to thank Mr. Niranjan Jain (Associate
General Manager) for all his guidance and support.

I express my warm gratitude to all the staff members, who have been directly or indirectly involved in
this project and made it a memorable and meaningful experience. It gives me immense pleasure to
express my gratitude to everyone who shared with me their precious time and effort during the
project.

Rohan Patel

A30806413020

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 INDEX

Table of Content Page No.

Chapter Particular
No.

List of Table/Chart/Figure 6

Introduction

1 - About Company 7
- About Topic

Research Methodology

2 - Objective of the study 13

- Limitation’s

Data Analysis & Interpretation

3 - Raising Finance
- Working Capital Management 14
- Export/Import Documentation
- Forex Market

Conclusion & suggestion

4 - Conclusion regarding EXIM & Forex 60

- Take away from SIP
- References

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 LIST OF CHART PAGE NO.

Bill of Landing 23

Shipping Order 25

Commercial Invoice 27

Certificate of Weight & Quality 29

Phytosanitary Certificate 31

Fumigation Certificate 33

Certificate of Origin 35

LIST OF FIGURES PAGE NO.

Sales Mix. 10

Export Procedure 21

Foreign Exchange Transaction 45

LIST OF TABLES PAGE NO.

Company Profile/Directors 8-12

Financial Comparison 56-57

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 Chapter -1

INTRODUCTION

1 INTRODUCTION OF THE COMPANY

Adani Wilmar Ltd. (“AWL” or the “Company”), incorporated in January 1999, is a 50:50
Joint Venture between Adani Enterprises Limited (AEL) and Lence Pte. Ltd. (LPL).
AEL, the flagship company of Adani Group, is engaged in the business of coal trading
and is India’s largest importer of coal. The Adani Group is a diversified conglomerate
having business interests in Coal, Edible Oil, Gas Distribution, ITES, Logistics, Oil &
Gas Exploration, Ports, Power Generation, Real Estate and SEZ. LPL is an investment
Holding company and is engaged in the trading of edible oils. It is a wholly-owned
subsidiary of Wilmar International Ltd., the flagship company of Singapore based Wilmar
Group. Wilmar Group is one of Asia’s leading agro-business groups and is amongst the
largest processors, refiners & traders of edible oil in the world.

The company has crushing, solvent extraction and refining capacities of 5,290 TPD, 1,075TPD
and 8,040 TPD respectively and produces oil of numerous varieties viz. Cotton-seed, groundnut,
mustard, Palm, rice bran, soya bean, and sunflower. Further, the company has 1,395 TPD
hydrogenation capacities to manufacture vanaspati & specialty fats such as bakery shortening,
cocoa butter substitute etc. which have applications in food additives, confectionery, bakery
products etc. The company has recently ventured into the oleo chemicals segment, which are
preliminary chemicals derived from plant and animal fats. The most common applications of oleo
chemicals are in the production of biodiesel, detergents, lubricants, personal care products and
pharmaceuticals.

COMPANY’S PROFILE

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The key details of the Company are given below:

Company Adani Wilmar Limited

Constitution Public Limited Company
Group Adani Group
nd
Date of Incorporation 22 , January 1999
‘Fortune House’, Near Navrangpura Railway
Registered Office Crossing,
Ahmedabad - 380 009
Industry Edible Oil, Non-Edible Oil & Oleo chemicals
Chairman Mr. Rajesh S. Adani
Manufacturing of Edible Oil, Specialty Fats,
Existing Business Vanaspati & Oleo chemicals and Trading of
Non-Edible Oil

1.1 Brief History

AWL is engaged in the business of manufacturing edible oil, specialty fats, Vanaspati & oleo
chemicals and trading of non-edible oil. The Company has 12 manufacturing Facilities and 7
In-house packaging facilities across India. The facilities are strategically located to take
advantage of the import parity price and domestic crop season.

AWL also Exports its products to more than 19 countries across Middle-East, South East
Asia & East Africa. The Company has a strong portfolio of edible oil and specialty fats
brands. AWL’s Flagship brand, Fortune, has been rated as No.1 edible oil with 16.4%
market share in The India, according to Nielsen report 2011-12. The Company’s refined
oils meet the AOCS, FAO &WHO standards and AWL has further applied for HACCP &
ISO: 9001 certification.

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 Board of Directors

The Board of AWL comprises of seven Directors as given below:

Age
S. No. Name Designation Qualification ( Years)

1 Mr. Rajesh S. Adani Chairman B.Com. 49

2 Mr. Kuok Khoon Hong Executive B.B.A. 64

Vice-Chairman

3 Mr. Pranav V. Adani Managing Director B.B.A. 34

4 Mr. Atul Chaturvedi Whole Time Director M.A. 57

5 Mr. Angshu Mallick Whole Time Director PGDRM 52

6 Mr. T.K.Kannan Whole Time Director B.Com. 57

7 Mr. Teo Kim Yong Director B.B.A. 60

1.2 Existing Operations

The company is engaged in manufacturing of Edible Oil and associated products such as de-oiled
cakes, vanaspati, specialty fats & oleo chemicals and trading of Non- Edible Oil. The sales mix of
AWL‘s products is given below:

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 Figure-1

Sale's Mix FY2015

non edible oil

vanaspati
cakes
oleochemical
other by products
edible oil / solvent oil

1.3 Group Companies

AWL has various subsidiaries and joint ventures as part of its corporate structure.
The details of AWL’s major subsidiaries and joint ventures are given below:

Subsidiaries

1) Golden Valley Agrotech Pvt. Ltd.

Golden Valley Agrotech Pvt. Ltd. (GVAPL), incorporated on June 03, 2010, is a
Wholly owned subsidiary of AWL. The company is engaged in the business of
trading of packed edible oil. GVAPL purchases packed oil from AWL and sells
the oil to its distributors across the Country. Presently, the company has its
operations in 85 cities across 23 states in India.

The directors of the company are given below:

S.No. Name Designation

1. Mr. Satyendra Gour Chairman
2. Mr. Dhaval B. Shah Director
3. Mr. Satyendra Kumar Shukla Director

The key financials of the company for the past two financial years are given below :( ` Crore)

Particulars FY2014 FY2015

Total Income 127.17 824.10

EBITDA 0.33 (8.32)

PAT 0.33 (8.36)

Net Fixed Asset - 0.04

Net Worth 0.23 (8.08)

The company’s profitability has fallen during FY2015 on account of increase in raw material prices
and other operational expenses.

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 2) Krishnapatnam Oils & Fats Pvt. Ltd.

Krishnapatnam Oils &Fats Pvt. Ltd., incorporated on June 3, 2008, is a wholly owned
subsidiary of AWL. The company commenced commercial operations in January 2010
and is engaged in business of refining of crude vegetable oils. The company’s major
products include palm oil, sunflower oil, soya bean oil and vanaspati.

The directors of the company are given below:

S.No. Name Designation

1. Mr. Rajneesh Bansal Chairman & Managing Director

2. Mr. K Vasudeva Rao Director

3. Mr. Harshal Trivedi Director

The key financials of the company for the past two financial years are given below :( ` Crore)

Particular FY14 FY15

Total Income 394.00 722.00

EBITDA 1.41 (17.09)

PAT (6.48) (26.11)

Net Fixed Asset 113.84 127.21

Net Worth 35.81 9.70

Total Debt 69.31 97.56

The company’s profitability has fallen during FY2014 on account of increase in

Operational Expenses and finance costs.

3) SatyaSaiAgroils Pvt. Ltd.

SatyaSaiAgroils Pvt. Ltd. (SSAPL), acquired in FY2013, is a wholly owned subsidiary of

AWL. SSAPL has 158 TPD soya bean solvent extraction & 175 TPD refining facilities at
Vidisha in Madhya Pradesh.

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The Director’s of the company are as below:

S.No. Name Designation

1. Mr. Bipra Buddha Chairman

Chatterjee

2. Mr. Kripakar Varshney Managing Director

3. Dr. Satbir Singh Sindhu Director

Particular FY14 FY15

Total Income 126.90 225.14

EBITDA (2.34) (30.48)

PAT (2.74) (31.06)

Net Fixed Asset 12.72 41.30

Net Worth (18.77) (26.13)

Total Debt - 20.00

The company’s profitability has fallen during FY2014 on account of increase in raw material
prices and other operational expenses.

1.4 Joint Ventures

1) K.T.V. Oils & Fats Pvt. Ltd.

K.T.V. Oils & Fats Pvt. Ltd. established in 2002, is a joint venture between AWL
& members of K.T.V. family, Mr. K.T.V. Narayanan and Mr. K.T.V. Kannan. Based
Out Of Chennai, the company is engaged in the business of trading& marketing of
Various types of edible oils& fats such as refined palm oil, refined sunflower oil,
refined palm Olein etc.

2) Vishakha Polyfab Pvt. Ltd.

Vishakha Polyfab Pvt. Ltd. (VPPL) established in 2000, is a joint venture between
AWL and Vishakha Group, engaged in business of flexible packaging, injection
Moulded products and irrigation systems. VVPL is an ISO certified flexible
packaging films manufacturer based out of Gujarat.

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 Chapter-2

RESEARCH METHODOLOGY

OBJECTIVE OF THE STUDY

2.1 MAIN OBJECTIVE

This project attempt to study the Exim Documentation and intricacies of the Foreign Exchange
Market. The main purpose of this study is to get a better idea and the comprehensive details of
foreign exchange risk management.

2 .2 SUB OBJECTIVES

→ To know about the Export and Import Documentation

→ To know about the various concept and technicalities in foreign exchange.

→ To know the various functions of forex market.

→ To get the knowledge about the hedging tools used in foreign exchange.

2 .3 LIMITATIONS OF THE STUDY

→ Time constraint

→ Resource constraint

2 .4 DATA COLLECTION

→ The secondary data was collected from company books, and with the help of Industry Guide.

2..5 DATA ANALYSIS

→ The data analysis was done on the basis of the information available from the company sources
and brainstorming.

2 .6 SCOPE

→ The scope of the study is to understand that if impact of ERD generated through increase and
decreases of Rupee vs. Dollar Rate. Impact of Current Asset and Current Liabilities on Working
Capital.

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 Chapter-3

DATA ANALYSIS & INTERPRETATION

3.1 Raising Finance

Means of Finance:

→ Cash credit Account

This account is the primary method in which Banks lend money against the security of
commodities and debt. It runs like a current account except that the money that can be
withdrawn from this account is not restricted to the amount deposited in the account.
Instead, the account holder is permitted to withdraw a certain sum called “limit” or
“credit facility” in excess of the amount deposited in the amount. account

→ Bill Discounting

Bill discounting is a major activity with some of the smaller Banks. Under this type of
lending, Bank takes the bill drawn by borrower on his (borrower's) customer and pay
him immediately deducting some amount as discount/commission. The Bank then
presents the Bill to the borrower's customer on the due date of the Bill and collects the
total amount. If the bill is delayed, the borrower or his customer pays the Bank a pre-
determined interest depending upon the terms of transaction.

→ Term Loan

Term Loans are the counter parts of Fixed Deposits in the Bank. Banks lend money in
this mode when the repayment is sought to be made in fixed, pre-determined
instalments. This type of loan is normally given to the borrowers for acquiring long term
assets i.e. assets which will benefit the borrower over a long period (exceeding at least
one year). Purchases of plant and machinery, constructing building for factory, setting
up new projects fall in this category. Financing for purchase of automobiles, consumer
durables, real estate and creation of infra structure also falls in this category.

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3.2 Working Capital Management

Working capital represents the difference between a firm’s current asset’s and current liabilities. The
challenge can be determining the proper category for the vast array of assets and liabilities on a firm’s
balance sheet and deciphering the overall health of a firm in meeting its short-term commitments.

Current Assets

Current assets represent assets that a firm expects to turn into cash within one year, or one business
cycle, whichever is less. More obvious categories include cash, cash and cash equivalents, accounts
receivables, inventory, and other shorter-term prepaid expenses. Other examples include current
assets of discontinued operations and interest payable.

Current Liabilities

In similar fashion, current liabilities are liabilities that a firm expects to pay within a year, or one
business cycle, whichever is less. Examples include accounts payable accrued liabilities, and accrued
income taxes. Other current liabilities include dividends payable, capital leases due within a year, and
long-term debt is now due within the year.

IMPORT
3.3 BUYERS CREDIT

DEFINITION:

Buyer’s credit is the credit availed by an importer (Buyer) from overseas Lenders i.e. Banks
and financial Institutions for payment of his imports on due date. The overseas Banks usually
lend the importer (Buyer) based on the letter of comfort/letter of undertaking (a type of a Bank
Guarantee) issued by the importer’s Bank.

Buyer’s credit helps local importers access to cheaper foreign funds on LIBOR rates (London Inter
Bank Offered Rates). The duration of Buyer’s credit may vary from country to country, as per the
local regulations. For example in India, Buyer’s credit can be availed for 1 year in case the Import is
for trade-able goods (Raw Material) and for 3 years if the Import is for Capital Goods (Machinery).
Every six months the interest on Buyer’s credit may get reset.

Benefits of Buyer's Credit to Importer

1. The exporter gets paid on due date; whereas importer gets extension for making an import
payment.

2. The importer can deal with exporter on sight basis, negotiate a better discount and use the
buyer’s credit route to avail finance.

3. The funding currency can be in any FCY (USD, GBP, EURO, JPY etc.) depending on the
choice of the customer.

4. The importer has the option to hedge the currency at the time of availing buyer’s credit to
cover its business from currency fluctuation.

5. The currency of imports can be different from the funding currency, which enables importers to
take a favourable view of a particular currency.

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Steps involved in Buyer's Credit

1. The customer will import the goods either under LC, DP / DA or open account

2. The customer requests the Buyer's Credit Arranger before the due date of the import
Payment to avail buyer’s credit.

3. Arranger will then request overseas banks for buyer’s credit offer letter in the name of
the importer. Best rate is quoted to importer.

4. Importer’s Bank sends SWIFT to overseas bank on the basis of the offer letter by
Blocking Non Fund Based limit (FLC Limit) of Importer

5. Overseas Bank to fund Importers Bank’s nostro account for the requested amount

6. Importers bank then makes the bill payment (if the borrowing currency is different
From the currency of Imports then a cross currency contract is utilized to effect the
Import payment)

7. On due date overseas bank recovers the principal and interest amount from the
Importer’s bank.

EXAMPLE OF BUYER’S CREDIT AT ADANI WILMAR LTD.

AWL. Contracted to import Crude Sunflower Oil with Nobel Resources, Ukraine with
Following specification
Bank name: Axis
Contract No. : 518733
Contract date: 24/10/13
Basis: CIF krishnapatnam
Shipment: 10-30 November 2014
Vessel: andonesa
Product: CSFO
Quantity: 2000 tonnes
Price: $962.50 per tonne
Contract value: $1925000
B/L date: 24/02/2015
Payment terms: At Sight
Now having contracted at above terms the actual shipment took place on 27/11/2013. The
Limit for buyer’s credit for adani wilmar limited as per the agreed and sanctioned norms with
Bank on the basis of its business cycle is 90 days.

The documents by the seller i.e Nobel resources were received at our bank on 24/12/12013.
Thus the buyers credit would now be available for remaining 59 days only i.e. for the date of
24/02/2014 this is also called maturity date. In ANNEXURE LAST

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Procedure for Buyer’s Credit
Before knowing the procedure let us get aware about the banks involve in the process

1. Axis Bank : Bank where Adani Wilmar limit for Buyer’s Credit

2. Punjab National Bank Hong Kong: Foreign bank from which Company is taking Loan
Under L.O.U of axis bank.

Required Details for Buyers Credit Quote

We want the below details for arranging the quote.

1. Importer Name

2. Importer Bank and Branch

3. Exporter Name and country

4. Exporter Bank and Branch

5. Amount of the Transaction

6. LC Details / IBC Date

7. Date due for payment

8. Buyers credit required for: 90 / 120 / 180 days

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3.4 EXPORT PACKING CREDIT (E.P.C)

Export Packing Credit is of 2 forms:

1. Pre-shipment Credit (Packing Credit)

2. Post-Shipment Credit
these are available to the exporters, for financing purchase, processing, manufacturing or packing of
goods prior to shipment.

This would mean any loan or advance extended to you by the bank on the basis of:
a) Letter of Credit opened in your favor or in favor of some other person, by an overseas buyer;
b) a confirmed and irrevocable order for the export of goods from India;
c) any other evidence of an order or export from India having been placed on the exporter or some
other person, unless lodgment of export order or Letter of Credit with the bank has been waived.

Packing Credit

It is granted for a period depending upon the circumstances of the individual case, such as the time
required for procuring, manufacturing or processing (where necessary) and shipping the relative
goods. Packing credit is released in one lump sum or in stages, as per the requirement for executing
the orders/LC.

The pre-shipment / packing credit granted has to be liquidated out of the proceeds of the bill drawn for
the exported commodities, once the bill is purchased/discounted etc., thereby converting pre-
shipment credit into post-shipment credit.

Post Shipment Packing Credit

It runs from the date of extending credit, after shipment of goods to the date of realization of export
proceeds and includes any loan / advance granted on the security of any duty drawback allowed by
the Govt. from time to time. Post-shipment credit has to be liquidated by the proceeds of export bills
received from abroad in respect of goods exported.

The exporter has the following options at post-shipment stage:

i. To get export bills purchased /discounted / negotiated;

ii. To get advances against bills for collection;
iii. To receive advances against duty drawback receivable from Govt.

The exporter has the option to avail of pre-shipment and post-shipment credit either in rupee or in
foreign currency. However, if the pre-shipment credit has been availed in foreign currency, the post-
shipment credit has necessarily to be under EBR Scheme since foreign currency pre-shipment credit
has to be liquidated in foreign currency. The details of pre-shipment and post-shipment credit in
foreign currency are mentioned below. Where?

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 EXPORTS
3.5

3.5.1 INTRODUCTION

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

Export from India requires special document depending upon the type of product and destination to
be exported. Export Documents not only gives detail about the product and its destination port but are
also used for the purpose of taxation and quality control inspection certification.

Shipping Bill / Bill of Export :-

Shipping Bill/ Bill of Export is the main document required by the Customs Authority for allowing
shipment. A shipping bill is issued by the shipping agent and represents some kind of certificate for all
parties, included ship's owner, seller, buyer and some other parties. For each one represents a kind of
certificate document.

DOCUMENTS REQUIRED FOR POST PARCEL CUSTOMS CLEARANCE

In case of Post Parcel, no Shipping Bill is required. The relevant documents are mentioned below:

 Customs Declaration Form - It is prescribed by the Universal Postal Union (UPU) and
international apex body coordinating activities of national postal administration. It is known by
the code number CP2/ CP3 and to be prepared in quadruplicate, signed by the sender.

 Dispatch Note- It is filled by the exporter to specify the action to be taken by the postal
department at the destination in case the address is non-traceable or the parcel is refused to
be accepted.

 Commercial Invoice - Issued by the exporter for the full realizable amount of goods as per
trade term.

 Consular Invoice - Mainly needed for the countries like Kenya, Uganda, Tanzania, Mauritius,
New Zealand, Burma, Iraq, Australia, Fiji, Cyprus, Nigeria, Ghana, Zanzibar etc. It is prepared
in the prescribed format and is signed/ certified by the counsel of the importing country
located in the country of export.

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 Customs Invoice - Mainly needed for the countries like USA, Canada, etc. It is prepared on a
special form being presented by the Customs authorities of the importing country. It facilitates
entry of goods in the importing country at preferential tariff rate.

 Legalised / Visaed Invoice - This shows the seller's genuineness before the appropriate
consulate or chamber of commerce/ embassy.

 Certified Invoice - It is required when the exporter needs to certify on the invoice that the
goods are of a particular origin or manufactured/ packed at a particular place and in
accordance with specific contract. Sight Draft and Usance Draft are available for this. Sight
Draft is required when the exporter expects immediate payment and Usance Draft is required
for credit delivery.

 Packing List - It shows the details of goods contained in each parcel / shipment.

 Certificate of Inspection – It is a type of document describing the condition of goods and

confirming that they have been inspected.

 Black List Certificate - It is required for countries which have strained political relation. It
certifies that the ship or the aircraft carrying the goods has not touched those country(s).

 Manufacturer's Certificate - It is required in addition to the Certificate of Origin for few

countries to show that the goods shipped have actually been manufactured and is available.

 Certificate of Chemical Analysis - It is required to ensure the quality and grade of certain
items such as metallic ores, pigments, etc.

 Certificate of Shipment - It signifies that a certain lot of goods have been shipped.

 Health/ Veterinary/ Sanitary Certification - Required for export of foodstuffs, marine products,
hides, livestock etc.

 Certificate of Conditioning - It is issued by the competent office to certify compliance of

humidity factor, dry weight, etc.

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  Antiquity Measurement – It is issued by Archaeological Survey of India in case of antiques.

 Shipping Order - Issued by the Shipping (Conference) Line which intimates the exporter about
the reservation of space of shipment of cargo through the specific vessel from a specified port
and on a specified date.

 Cart/ Lorry Ticket - It is prepared for admittance of the cargo through the port gate and
includes the shipper's name, cart/ lorry No., marks on packages, quantity, etc.

 Shut Out Advice - It is a statement of packages which are shut out by a ship and is prepared
by the concerned shed and is sent to the exporter.

 Short Shipment Form - It is an application to the customs authorities at port which advises
short shipment of goods and required for claiming the return.

3.5.2 EXPORT PROCEDURE Figure-2

SOURCE: ADANI WILMAR BOOK’S

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 BILL OF LADING/landing?

Definition:

Bill of lading (BOL) is one of the most important documents in the shipping process. To ship
any goods, a bill of lading is required and acts as a receipt and a contract. A completed BOL
legally shows that the carrier has received the freight as described and is obligated to deliver
that freight in good condition to the consignee.

Description:

The information in the bill of lading is critical as it directs the actions of personnel all along the
route of the shipment - where it's going, the piece count, how it's billed, and how it's to be
handled on the dock and trailers. It could be on a prepaid or collect basis.

The consignee has to check whether the shipment is collect on delivery which means that the
driver will collect the cost of the merchandise on delivery of the freight.

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 Chart-1

BILL OF LANDING

SOURCE: ADANI WILMAR BOOK’S

23
 SHIPPING ORDER

Definition:

A document used by a business to specify what items are to be transferred from the storage location
or warehouse to what person and to what new location. A shipping order typically is sent along with a
shipment of goods so that the person receiving them can verify that the document correctly reflects
the items that they actually received.

24
 Chart-2

SHIPPING ORDER

SOURCE: ADANI WILMAR BOOK’S

25
 COMMERCIAL INVOICE

Definition:

A commercial invoice is a document used in foreign trade. It is used as a customs declaration

provided by the person or corporation that is exporting an item across international borders. Although
there is no standard format, the document must include a few specific pieces of information such as
the parties involved in the shipping transaction, the goods being transported, the country of
manufacture, and the Harmonized System codes for those goods. A commercial invoice must also
include a statement certifying that the invoice is true, and a signature.

26
 Chart-3

COMMERCIAL INVOICE

SOURCE: ADANI WILMAR BOOK’S

27
 PRODUCT CERTIFICATE

Product certification or product qualification is the process of certifying that a certain product has
passed performance tests and quality assurance tests, and meets qualification criteria stipulated in
contracts, regulations, or specifications (typically called "certification schemes" in the product
certification industry).

Most product certification bodies (or product certifiers) are accredited to ISO/IEC Guide 65:1996. An
international standard for ensuring competence in those organizations performing product
certifications. The organizations that perform this accreditation are called Accreditation Bodies, and
they themselves are assessed by international peers against the ISO 17011 standard. Accreditation
bodies that participate in the International Accreditation Forum (IAF) Multilateral Agreement (MLA)
also ensure that these accredited Product Certifiers meet additional requirements set forth in "IAF
GD5:2006 - IAF Guidance on the Application of ISO/IEC Guide 65:1996".

28
 Chart-4

CERTIFICATE OF WEIGHT & QUALITY

SOURCE: ADANI WILMAR BOOK’S

29
 PHYTOSANITARY CERTIFICATE

Definition:

A Phytosanitary Certificate is a certificate stating that a specific crop was inspected a

predetermined number of times and a specified disease was not found; or a certificate is based on
area surveillance stating that a specific disease, as far as known, does not occur in the area of
production.

30
 Chart-5

PHYTOSANITARY CERTIFICATE

SOURCE: ADANI WILMAR BOOK’S

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 FUMIGATION CERTIFICATE

Definition:

Fumigation is a method of pest control that completely fills an area with gaseous pesticides—or
fumigants—to suffocate or poison the pests within. It is used to control pests in buildings (structural
fumigation), soil, grain, and produce, and is also used during processing of goods to be imported or
exported to prevent transfer of exotic organisms. This method also affects the structure itself, affecting
pests that inhabit the physical structure, such as woodborers and dry wood termites.

Process:

Fumigation generally involves the following phases: First the area intended to be fumigated is usually
covered to create a sealed environment; next the fumigant is released into the space to be fumigated;
then, the space is held for a set period while the fumigant gas percolates through the space and acts
on and kills any infestation in the product, next the space is ventilated so that the poisonous gases
are allowed to escape from the space, and render it safe for humans to enter. If successful, the
fumigated area is now safe and pest free.

32
 Chart-6

FUMIGATION CERTIFICATE

SOURCE: ADANI WILMAR BOOK’S

33
 CERTIFICATE OF ORIGIN

Definition:

A Certificate of origin (often abbreviated to C/O, COO or CoO) is a document used in international
trade. In a printed form or as an electronic document, it is completed by the exporter and certified by
an recognized issuing body, attesting that the goods in a particular export shipment have been
produced, manufactured or processed in a particular country.

34
 Chart-7

CERTIFICATE OF ORIGIN

SOURCE: ADANI WILMAR BOOK’S

35
3.5.3 Export Licence:

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

 What are you exporting?

 Where are you exporting?
 Who will receive your item?
 What will your items will be used?

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

Application for an Export License

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

Exports Free unless regulated

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

3.5.4 EXPORT AT ADANI WILMAR LTD.

1) WHAT ARE WE EXPORTING? –OUR PRODUCTS

Castor oil, Soya, DOC, Olea Products are the major products exported by Adani
Wilmar Ltd.

2) WHERE ARE WE EXPORTING? –DEMOGRAPHIC SELECTION

Adani Wilmar Limited's Export division was started in 2004, and our exports
markets are the Middle East Countries, South-East Asian Countries, Africa,
Ukraine, etc. AWL has been awarded the status of Trading House, by the
Government of India.

Our refined oils meet the CODEX, WHO and FAO standards. We also meet
The standards set by AOCS, and have also applied for HACCP and ISO9001
Certification.

36
3.5.5 Foreign Exchange Market

The foreign exchange (currency or forex or FX) market exists wherever one currency is traded for
another. It is by far the largest financial market in the world, and includes trading between large
banks, central banks, currency speculators, multinational corporations, governments, and other
financial markets and institutions. The average daily trade in the global Forex Markets currently
around US$ 4.2 trillion. Retail traders (individuals) are a small fraction of this market and may only
participate indirectly through brokers or banks.

In its present condition FOREX was launched in the 1970s, when free exchange rates were
introduced, and only the participants of the market determine the price of one currency
against the other proceeding from supply and demand. As far as the freedom from any
external control and free competition are concerned, Forex is a perfect mark. There are
many reasons for the popularity of foreign exchange trading, but among the most
important is the available margin trading, the 24-hour a day 5 day a week liquidity,
and low if any commissions.

Of course many commercial organizations are participating purely due to the currency
exposures created by their financial institutions accounts on their import and export
activities. Investing in foreign exchange remains predominantly a domain of the big
professional players in the market such as hedge funds, banks and brokers.
Nevertheless, any investor with the necessary knowledge and complete
understanding of this market can benefit from this Exciting arena.

37
Definition

The foreign exchange (also known as "FOREX" or "FX") market is the place where
Currencies are traded. The overall FOREX market is the largest, most liquid market in the
World with an average traded value that exceeds $4.2 trillion per day and includes all of the
Currencies in the world.

a) All deposits, credit and balances payable in any foreign currency, and any drafts,
travellers’ cheques, letters of credit and bills of exchange, expressed or drawn in
Indian currency, but payable in foreign currency; and
b) Any instrument payable, at the option of the drawer or holder thereof or any other
party thereto, either in Indian currency or in foreign currency or partly in one and
Partly in the other.

Need For Foreign Exchange

Let us consider a case where Indian company exports cotton fabrics to USA and invoices the
Goods in US dollar. The American importer will pay the amount in US dollar, as the same is
his home currency. However the Indian exporter requires rupees means his home currency
for Procuring raw materials and for payment to the labour charges etc. Thus he would need
Exchanging US dollar for rupee. If the Indian exporters invoice their goods in rupees, Then
Importer in USA will get his dollar converted in rupee and pay the exporter.

From the above example we can infer that in case goods are bought or sold outside the
Country, exchange of currency is necessary.
Sometimes it also happens that the transactions between two countries will be settled in the
Currency of third country. In that case both the countries that are transacting will require
Converting their respective currencies in the currency of third country. For that also the
Foreign exchange is required.

38
3.5.6 FOREX RESERVE

Foreign exchange reserves are the foreign currency deposits held by central banks and
monetary authorities. These are assets of the central banks which are held in different reserve
currencies such as the dollar, euro and yen, and which are used to back its liabilities, e.g. the
local currency issued, and the various bank reserves deposited with the central bank, by the
government or financial institutions.

Reserves were formerly held only in gold, as official gold reserves. But under the Bretton
Woods system, the United States pegged the dollar to gold, and allowed convertibility of
dollars to gold. This effectively made dollars appear as good as gold. The U.S. later
abandoned the gold standard, but the dollar has remained stable as a fiat currency, and it is
still the most significant reserve currency. Central banks now typically hold large amounts of
multiple currencies in reserve.

Purpose:

In a non fixed exchange rate system, reserves allow a central bank to purchase the issued
currency, exchanging its assets to reduce its liability. The purpose of reserves is to allow
central banks an additional means to stabilize the issued currency from excessive volatility,
and protect the monetary system from shock, such as from currency traders engaged in
flipping. Large reserves are often seen as strength, as it indicates the backing of currency
has Low or falling reserves may be indicative of an imminent bank run on the currency
or default, such as in a currency crisis.

Central banks sometimes claim that holding large reserves is a security measure. This is true to
the extent that a central bank can prop up its own currency by spending reserves. (This practice is
essentially large-scale manipulation of the global currency market. Central banks have sometimes
attempted this in the years since the 1971 collapse of Bretton Woods. A few times, multiple
central banks have cooperated to attempt to manipulate exchange rates. It is unclear just how
effective the practice is.) But often, very large reserves are not a hedge against inflation but rather
a direct consequence of the opposite policy: the bank has
purchased large amounts of foreign currency in order to keep its own currency relatively cheap.

39
3.5.7 MAJOR PARTICIPANTS IN FOREX

An investor in forex market plays three types of role. They are hedgers, arbitragers,
Speculators. Moving from one to another will increase the risk speculators have the
Highest Risk. Let’s understand all in brief:

TYPES OF ROLES PLAYED

I) Arbitragers:

Arbitrage describes the simultaneous purchase of a security in one market and the sale of it or a
derivative product in another market to profit from price differentials between the two markets. The
one who do arbitrage is arbitragers. Arbitrage by definition is a financial transaction that makes an
immediate profit without involving any risk. Technically it consists of purchasing a commodity or
Security in one market for immediate sale in another market. However popular usage has expanded
the meaning of the term to include any activity which attempts to buy a relatively under priced item
and sell a similar, relatively overpriced item, expecting to profit when the prices resume a more
appropriate theoretical or historical relationship. Thus here there is very less risk compared to hedging
and speculation.

ii) Hedgers:

A hedge is an investment that is taken out specifically to reduce or cancel out the risk
in another investment.
Hedging is a strategy designed to minimize exposure to an unwanted business risk,
while still allowing the business to profit from an investment activity. A person doing
hedge is a hedger. Hedgers are individuals and firms that make purchases and sales
in the futures market solely for the purpose of establishing a known price level—weeks
or months in advance--for something they later intend to buy or sell in the cash market
(Such as at a grain elevator or in the bond market).

In this way they attempt to protect themselves against the risk of an unfavourable price
Change in the interim. Or hedgers may use futures to lock in an acceptable margin
between their purchase cost and their selling price. Thus in hedging activity Undertaken
is to reduce the risk. Amongst the players hedgers have less risk.

iii) Speculators:

Financial speculation, involves the buying, holding, selling, and short-selling of

Stocks, bonds, commodities, currencies, collectables, real estate, derivatives, or
Any Valuable financial instrument to profit from fluctuations in its price as opposed
to buying it for use or for income via methods such as dividends or interest. The
one who Speculate is a speculator.

Taking large risks, especially with respect to trying to predict the future, gambling, in
the hopes of making quick, large gains. An individual who does not hedge, but who
trades with the objective of achieving profits through the successful anticipation of
price movements are called a speculator.

Thus while moving from hedging to speculation risk involved increases.

Now these roles of arbitrage, speculation and hedging are played by different Participants.

40
3.5.8 FOREX TRANSACTIONS

FOREIGN EXCHANGE MARKET OVERVIEW

In today’s world no economy is self sufficient, so there is need forex change of goods and services
amongst the different countries. So in this global village, unlike in the primitive age the exchange of
goods and services is no longer carried out on barter basis. Every sovereign country in the world has
a currency that is legal tender in its territory and this currency does not act as money outside its
boundaries. So whenever a country buys or sells goods and services from or to another country, the
residents of two countries have to exchange currencies. So we can imagine that if all countries have
the same currency then there is no need for foreign exchange.

Need for Foreign Exchange

Let us consider a case where Indian company exports cotton fabrics to USA and invoices the
goods in US dollar. The American importer will pay the amount in US dollar, as the same is his home
currency. However the Indian exporter requires rupees means his home currency for procuring raw
materials and for payment to the labour charges etc. Thus he would need exchanging US dollar for
rupee. If the Indian exporters invoice their goods in rupees, then importer in USA will get his dollar
converted in rupee and pay the exporter.

From the above example we can infer that in case goods are bought or sold outside the country,
exchange of currency is necessary.

Sometimes it also happens that the transactions between two countries will be settled in the currency
of third country. In that case both the countries that are transacting will require converting the
irrespective currencies in the currency of third country. For that also the foreign exchange is required.

About foreign exchange market. Particularly for foreign exchange market there is no market place
called the foreign exchange market. It is mechanism through which one country’s currency can be
exchange i.e. bought or sold for the currency of another country. The foreign exchange market does
not have any geographic location.

Foreign exchange market is describe as an OTC (over the counter)market as there is no physical
place where the participant meet to execute the deals, as we see in the case of stock exchange. The
largest foreign exchange market is in London, followed by the new york, Tokyo, Zurich and Frankfurt.
The markets are situated throughout the different time zone of the globe in such a way that one
market is closing the other is beginning its operation. Therefore it is stated that foreign exchange
market is functioning throughout 24 hours a day.

41
In most market US dollar is the vehicle currency, viz., the currency used to dominate international
transaction. In India, foreign exchange has been given a statutory definition. Section 2 (b) of foreign
exchange regulation ACT, 1973 states: Foreign exchange means foreign currency and includes:

→ All deposits, credits and balance payable in any foreign currency and any draft, traveler’s cheques,
letter of credit and bills of exchange. Expressed or drawn in India currency but payable in any foreign
currency.

→ Any instrument payable, at the option of drawer or holder thereof or any other party thereto, either
in Indian currency or in foreign currency or partly in one and partly in the other.

In order to provide facilities to members of the public and foreigners visiting India, for exchange
of foreign currency into Indian currency and vice-versa. RBI has granted to various firms and
individuals, license to undertake money-changing business at seas/airport and tourism place of tourist
interest in India. Besides certain authorized dealers in foreign exchange (banks) have also been
permitted to open exchange bureaus. Following are the major bifurcations:

→ Full fledge moneychangers – they are the firms and individuals who have been authorized to take
both, purchase and sale transaction with the public.

→ Restricted moneychanger – they are shops, emporia and hotels etc. that have been authorized
only to purchase foreign currency towards cost of goods supplied or services rendered by them or for
conversion into rupees.

→ Authorized dealers – they are one who can undertake all types of foreign exchange transaction.
Banks are only the authorized dealers. The only exceptions are Thomas cook, western union ,UAE
exchange which though, and not a bank is an AD.

Even among the banks RBI has categorized them as follows:

→ Branch A – They are the branches that have nostro and vostro account.

→ Branch B – The branch that can deal in all other transaction but do not maintain nostro and vostro
a/c’s fall under this category.

For Indian we can conclude that foreign exchange refers to foreign money, which includes notes,
cheques, bills of exchange, bank balance and deposits in foreign currencies.

Participants in foreign exchange market. The main players in foreign exchange market are as follows:

42
 1. CUSTOMERS

The customers who are engaged in foreign trade participate in foreign exchange market by availing of
the services of banks. Exporters require converting the dollars in to rupee and importers require
converting rupee in to the dollars, as they have to pay in dollars for the goods/services they have
imported.

2. COMMERCIAL BANK

They are most active players in the forex market. Commercial bank dealing with international
transaction offer services for conversion of one currency in to another. They have wide network
of branches. Typically banks buy foreign exchange from exporters and sells foreign exchange to the
importers of goods. As every time the foreign exchange bought or oversold position. The balance
amount is sold or bought from the market.

3. CENTRAL BANK

In all countries Central bank have been charged with there sponsibility of maintaining the external
value of the domestic currency. Generally this is achieved by the intervention of the bank.

4. EXCHANGE BROKERS

Forex brokers play very important role in the foreign exchange market. However the extent to which
services of foreign brokers are utilized depends on the tradition and practice prevailing at a particular
forex market center. In India as per FEDAI guideline the Ads are free to deal directly among
themselves without going through brokers. The brokers are not among to allowed to deal in their own
account all over the world and also in India.

5. OVERSEAS FOREX MARKET

Today the daily global turnover is estimated to be more than US$ 1.5 trillion a day. The international
trade however constitutes hardly5 to 7 % of this total turnover. The rest of trading in world forex
market is constituted of financial transaction and speculation. As weknow that the forex market is 24-
hour market, the day begins with Tokyo and thereafter Singapore opens, thereafter India, followed by
Bahrain, Frankfurt, paris, London, new york, Sydney, and back to Tokyo.

43
 6. SPECULATORS

The speculators are the major players in the forex market.

→ Bank dealing are the major speculators in the forex market with a view to make profit on account of
favourable movement in exchange rate, take position i.e. if they feel that rate of particular currency is
likely to go up in short term. They buy that currency and sell it as soon as they are able to make quick
profit.

→ Corporation’s particularly multinational corporation and transnational corporation having business

operation beyond their national frontiers and on account of their cash flows being large and in multi
currencies get in to foreign exchange exposures. With a view to make advantage of exchange rate
movement in their favor they either delay covering exposures or do not cover until cash flow
materialize.

→ Individual like share dealing also undertake the activity of buying and selling of foreign
exchange for booking short term profits. They also buy foreign currency stocks, bondsand other
assets without covering the foreign exchange exposure risk. This also result in speculations.

Forex dealing is a business in which foreign currency is the commodity. It was seen earlier that
foreign currency is not a legal tender. The US dollar cannot be used for settlement of debts in India;
nevertheless, it has value. The value of US dollar is like the
value of any other commodity. Therefore, the foreign
currency can be considered as the commodity in forex
dealings.

PURCHASE & SALE TRANSACTIONS:

Any trading has two aspects –

i. Purchase and
ii. Sale.

A trader has to purchase goods from his supplier, which he sells to his customers. Likewise, the bank
(which is authorized to deal in forex) purchases as well as sells its commodity – the foreign currency.
Two points need be constantly kept in mind while talking of a forex transaction:
i. The transaction is always talked of from the banks point of view and
ii. The item referred to is the foreign currency.

44
 Therefore, when we say a purchase, we imply that

i. The bank has purchased; and

ii. It has purchased foreign currency.

Similarly, when we say a sale, we imply that

i. The bank has sold; and

ii. It has sold foreign currency.

In a purchase transaction the bank acquires foreign currency and parts with home currency. While in
a sale transaction the bank parts with foreign currency and acquires home currency.

Figure- 3

Foreign Exchange Transactions

Purchase Sale

Bank Bank

Acquires foreign Parts with home Acquires home Parts with

currency currency currency foreign currency
currency

Fig. summarizes the explanation given above.

SOURCE: ADANI WILMAR BOOK’S

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3.5.9 CLASSIFICATION OF EXPOSURE

DEFINATION

Exposure of a firm to a risk factor is the sensitivity of the real value of a firm’s assets,
liabilities or operating income, expressed in its functional currency, to unanticipated changes
in the risk factor.

A recognized objective of financial and corporate management is to maximize shareholder

value. The increasing economic integration and development of global markets means
that few companies, if any, are unaffected by currency movements. Unexpected changes in
exchange rate affect firms’ ability to sell abroad, increase the cost of foreign-sourced inputs
and reduce their domestic and international competitiveness. Firms involved in international
trade are subject to transaction risk arising from payables and receivables in foreign currencies.
In addition, multinational firms with operations in several countries will have translation risks from
having assets and liabilities denominated in foreign currencies.
Economic exposure includes these accounting effects but also incorporates the competitive
situation of the firm. Even firms not subject to accounting exposure, by only sourcing in and
servicing in their domestic markets, face economic currency exposure.

When there is a condition prevalent where the exchange rates become extremely volatile
The exchange rate movements destabilize the cash flows of a business significantly.
Such Destabilization of cash flows that affects the profitability of the business is the risk
From Foreign currency exposure.

Financial economists distinguish between three types of currency exposure – transaction

exposure, translation exposure and economic exposure. All three affect the bottom-line of the
business.

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 1) Transaction exposure:

Transaction exposure deals with changes in cash flows that result from existing
contractual obligations. It refers to the risk associated with the changes in the
exchange rate between the time and enterprise initiates and settles it.

For example,

An exporter may quote a price of US$ 1,00,000 based on the exchange rate of Rs.63
per dollar. He hopes to receive Rs. 6,300,000 on executing order. If the contract is
executed successfully, he will receive the said amount. Suppose, the order is executed
after six months and is liable to receive the due payment of US$ 100,000. If, however,
the exchange rate between US$ and INR falls to Rs. 60, he will get Rs. 6,000,000 and
he will bear the loose of Rs. 3,00,000. it is true that the exchange rate may turn
favourable and the exporter may gain also. However the fact remains that the amount
that will be received may not be the same as the amount originally anticipated. It is this
uncertainty about the amount to be received on conversion that leads to the Transaction
exposure. The gain or lose that arises on account of exchange rate fluctuations when the
foreign currency denominated transaction in settled and converted into the domestic
currency is known as the transaction exposure. The transaction exposure may arise in
the following three ways:

• A currency has to be converted in order to make or receive payment for goods

and services.

• A currency has to be converted to repay a loan or to make an interest payment

or conversely, receive a repayment or an interest payment.

• A currency has to be converted to make a dividend payment.

2) Translation exposure (Accounting exposure):

Translation exposure arises when an enterprise has assets or liabilities denominated in

foreign currency and these have to be shown in the books of accounts in the domestic
currency. Actual conversion of currencies does not take place. For the purpose of
accounting, the value of the assets and liabilities denominated in foreign currency
have to be translated to that of the domestic currency and hence, this exposure.
Translation exposure is also known as accounting exposure as it relates only to book
value and does not involve cash flows.
Translation exposure is defined as the likely increase or decrease in the parent
company’s net worth caused by a change in exchange rates since last translation. This
arises when as asset or liability is valued at the current rate. No exposure arises in
respect of assets or liability is valued at historical rates as they do not affected by the
change in the exchange rate.

For example,

One particular company has a subsidiary in USA. At the beginning of the parent
company’s financial year, the subsidiary company has assets, inventories and
cash valued at US$ 1,000,000, US$ 2,000,000 and US$ 150,000respectively.
The spot rate for buying dollar Rs. 63. By the close of the financial year, due to
change in the exchange rate between dollar and INR, these figures have changed
to US$ 1,200,000, US$ 205,000 and US$ 160,000 respectively. In this case, the
company has gained as the INR has appreciated against dollar. On the other hand,
it may also possible that the fall in the value of INR may lead to the book loss for the
company.

47
3) Economic exposure:

Economic exposure is more a managerial concept than a accounting concept.

Economic exposure, also known as competitive exposure, is the impact of
Currency fluctuations on a firm’s future operating cash flows. A company can
have an economic exposure to say YEN/INR rates even if it does not have any
transaction or translation exposure in the Japanese currency. This would be the
case for example, when the company’s competitors are using Japanese imports.
If the yen weekends the company loses its competitiveness and vice-versa. The
company’s competitor uses the cheap imports and can have competitive advantage
over the company in terms of his cost cutting. Therefore the company’s exposed to
Japanese yen in an indirect way.

In simple words, economic exposure to an exchange rate is the risk that a change in
the rate affects the company’s competitive position in the market and hence, indirectly
the bottom-line. Broadly speaking, economic exposure affects the profitability over a
longer time span than transaction and even translation exposure. Under the Indian
exchange control, while translation and transaction exposures can be hedged,
economic exposure cannot be hedged.

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 USE OF FOREX MANAGEMENT AT AWL

The steps followed by the AWL Of Forex and Risk Management are as follows:

→ First of all contract is signed between AWL Ltd. and the Buyer party, as soon as
contract is signed Forex is booked at the same time for the contract.

→ Then shipment is done from AWL Ltd. and after shipment export document is lodge
with the bank of AWL.

→ After lodging export document payment comes as per the contract details and the
date finalized by the parties.

→ After payment received and amount realized from the buyer it is converted at the
exchange rate as per the Forex booked.

→ For the Forex purpose the Dollar rate is already been Hedged by the company so that
in future it doesn’t have to face any loss or profit due to the fluctuation in the money
market.

→ If the buyer is not able to pay the amount as per the due date then as per RBI
contract can be rolled over by the bank.

→ Forward contracts are negotiated between the firm and commercial bank and specify
the currency, the exchange rate and the date of the forward transaction.

→ The balance amount of the contract is rolled over till the date for the next instalment.

→ Some kind of premium is also given by the government to the party at the time of
hedging the Forex rate and it is decided as per the duration the rate is been hedged by the
party.

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3.6.1 FOREIGN CURRENCY HEDGING TECHNIQUES

FORWARD CONTRACTS

Forward contracts deal with arrangements that fix the rates at which future exchanges of currencies
will occur. Forward contracts can be used to lock in the future exchange rate at which a MNE can buy
or sell currency. They are used to offset exchange risk on short-term commitments whose amounts
are known in advance. Forward contracts are negotiated between the firm and commercial bank and
specify the currency, the exchange rate and the

Date of the forward transaction. They are the main external methods for managing contractual
exposure. Forward contracts are commonly used for large transactions and exact number of units. A
major portion of forward contracts arises from risk management operation of banks and inter-bank
transactions. In forward market, 90% of all contracts result in the short making delivery of the
underlying asset to the long.

Traders and investors rely on forward contracts. But the speculative rise of forward contracts is quite
limited because of the large commitment of more than a million dollars are required. Banks regard
forward speculation highly risky and set tight limits on the unhedged forward positions that their
traders can accept.

Forward contracts are entered into for arbitrage and market intervention. The operation of currency
arbitrage is more or less similar in spot and forward markets. Interest arbitrage has, however, great
influence on the forward market. Central banks intervene with forward contracts to influence not only
forward rates but also spot rates.

Forward rates are available for US dollar, Euros, British Pounds, Canadian Dollar and Japanese Yen
for 1 month, 3 month, 6 month and 12 month maturity. Those forward rates indicate the exchange
rates at which exposure in these currencies can be hedge for specific time periods.

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3.6.2 RISK MANAGEMENT

Whether it is investing, driving, flying, swimming, or just walking down the street, everyone
exposes themselves to risk. Ones personality and lifestyle play a big role on how much risk
one is comfortable with. For most investors, risk simply means "losing money". But if ones
investment choices leave them having troubles sleeping at night they are probably taking on
too much risk.

"The variability of returns from an investment or the chance that an investment's actual return
will be different than expected. This includes the possibility of losing some or all of the
original investment. It is usually measured using the historical returns or average returns for a
specific investment. The greater the variability of an investment (i.e. fluctuation in price or
interest), the greater the risk."

Risk in FOREX:

The enhanced daily price movements and the leverage available in the Forex market
compared to other financial instruments like stocks is the reason the Forex market is
Categorized as a "high risk investment vehicle".

As investors are generally averse to risk, investments with greater inherent risk must
Promise Higher expected yields to warrant taking on the risk. Others add that higher
risk means a Greater opportunity for high returns or a higher potential for loss.
However a higher potential for return doesn’t always mean that it must have a higher
degree of risk. This is why Identifying and adhering to a strict trading strategy is so
important to the overall performance.

Foreign exchange dealing is a business that one get involved in, primarily to obtain protection
against adverse rate movements on their core international business. Foreign exchange
Dealing is essentially a risk-reward business where profit potential is substantial but it is
extremely risky too.

In simple words, FOREX risk is the variability in the profit due to change in foreign
Exchange rate.

For example,
Suppose the company is exporting goods to foreign company, says at Rs. 63 per dollar,
Then it gets the payment after month or so on then change in exchange rate may effect
in the Inflows of the fund. If rupee value depreciated, says at Rs. 65, than he may lose
some money. Similarly if rupee value appreciated against foreign currency, says at Rs. 61,
then he may gain more rupees. Hence there is risk involved in it.
So, it is common to hear the term “Foreign exchange exposure” used interchangeable with
the term “Foreign exchange risk” when in fact they are conceptually completely different.
Foreign exchange risk is related to the variability of domestic currency values of assets,
liabilities or operating incomes due to unanticipated changes in exchange rates, whereas
Foreign exchange exposure is what is at risk.

51
3.6.3 THE DIFFERENT TYPES OF RISK

There are two basic classifications of risk:

→ Systematic Risk

- A risk that influences a large number of currency pairs is called systematic risk.
- Examples of systematic risk are global political events, natural disasters, or war.

→ Unsystematic Risk

- Sometimes, it is referred to as "specific risk".

- It’s risk that affects a very small number of currencies and currency pairs.
- An example is economic news that affects a specific country or region, such as a
Sudden strike by employees or a change in the Canadian interest rate.
- Diversification across multiple non-related currency pairs is the only way to truly
protect from unsystematic risk.

3.6.4 FOREIGN EXCHNAGE RISK MANAGEMENT

As a business engaged in the buying and selling of goods overseas, a company is exposed to
foreign exchange risks. These risks arise from fluctuations in the currency market, which will
impact outgoing payments for importers or incoming funds from exports. Changes in the
exchange rate between two currencies will translate into additional profits or losses to your
Payables or Receivables.

Risk is not just limited to imports and exports. It can exist for any area of a business that
Has an international component and requires foreign funds. These might include goods
And services for imports/export, company assets that are purchased from a supplier
abroad, operational costs for overseas offices or factories (such as rent, equipment and
pay roll), Staff’s global travel expenses.

Each company will have a different approach to foreign exchange that is based upon their
industry, trade volumes, geographical markets, etc. To develop own company’s strategy, it
is important to understand whether or not a company is risk-adverse, the levels of risks for
the currencies a company deals with and how sophisticated its knowledge is regarding
financial Services.

3.6.5 FOREIGN EXCHANGE ACT

The Foreign Exchange Regulation Act of 1973 (FERA) was repealed on 1st June, 2000. It
was replaced by the Foreign Exchange Management Act (FEMA), which was passed in the
Winter session of Parliament in 1999. Any offense under FERA was a criminal offense liable
to imprisonment, whereas FEMA seeks to make offenses relating to foreign exchange civil
Offenses.

FEMA, which has replaced FERA, had become the need of the hour since FERA had become
incompatible with the pro-liberalization policies of the Government of India. FEMA has
brought a new management regime of Foreign Exchange consistent with the emerging frame
work of the World Trade Organization (WTO).

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CHARACTERISTICS OF FEMA

1) CURRENT ACCOUNT AND CAPITAL ACCOUNT TRANSACTION

→ Any person may sell or draw foreign exchange to or from an authorized person if
such sale or drawl is a current account transaction. However, the Central
Government may, in public interest and in consultation with the Reserve Bank,
Impose such reasonable restrictions for current account transaction as may be prescribed.

→ Any person may sell or draw foreign exchange to or from an authorized person for
a capital account transaction.

2) REALISATION AND REPATRIATION OF FOREIGN EXCHANGE

→ If any amount of foreign exchange is due or has accrued to any person resident in
India, such person shall take all reasonable steps to realize and repatriate to India
such foreign exchange within such period and in such manner as may be specified
by the Reserve Bank.

3) CONTRAVENTION AND PENALTIES

→ If any person contravenes any provisions of this Act he shall, upon adjudication,
be liable to a penalty up to thrice the sum involved in such contravention where
such amount is quantifiable, or up to two lacks rupees where the amount is not
Quantifiable and such contravention is a continuing one.

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3.6.6 HEDGING TOOLS

INTRODUCTION

Consider a hypothetical situation in which ABC trading co. has to import a raw material for
manufacturing goods. But this raw material is required only after three months. However, in
three months the price of raw material may go up or go down due to foreign exchange fluctuations
and at this point of time it cannot be predicted whether the price would go up or come down. Thus he
is exposed to risks with fluctuations in forex rate. If he buys the goods in advance then he will incur
heavy interest and storage charges. However, the availability of derivatives solves the problem
of importer. He can buy currency derivatives. Now any loss due to rise in raw material price would be
offset by profits on the futures contract and vice versa. Hence, the derivatives are the hedging tools
that are available to companies to cover the foreign exchange exposure faced by them.

Definition of Derivatives

Derivatives are financial contracts of predetermined fixed duration, whose values are derived from the
value of an underlying primary financial instrument, commodity or index, such as : interest rate,
exchange rates, commodities, and equities.

Derivatives are risk shifting instruments. Initially, they were used to reduce exposure to changes in
foreign exchange rates, interest rates, or stock indexes or commonly known as risk hedging. Hedging
is the most important aspect of derivatives and also its basic economic purpose. There has to be
counter party to hedgers and they are speculators.

Derivatives have come into existence because of the prevalence of risk in every business. This risk
could be physical, operating, investment and credit risk.

Derivatives provide a means of managing such a risk. The need to manage external risk is thus one
pillar of the derivative market. Parties wishing to manage their risk are called hedgers.

The common derivative products are forwards, options, swaps and futures.

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1. FORWARD CONTRACTS

Forward exchange contract is a firm and binding contract, entered into by the bank and its customers,
for purchase of specified amount of foreign currency at an agreed rate of exchange for delivery and
payment at a future date or period agreed upon at the time of entering into forward deal.

The bank on its part will cover itself either in the interbank market or by matching a contract to
sell with a contract to buy. The contract between customer and bank is essentially written agreement
and bank generally stands to make a loss if the customer defaults in fulfilling his commitment to sell
foreign currency.

A foreign exchange forward contract is a contract under which the bank agrees to sell or buy a fixed
amount of currency to or from the company on an agreed future date in exchange for a fixed amount
of another currency. No money is exchanged until the future date.

A company will usually enter into forward contract when it knows there will be a need to buy or sell for
an currency on a certain date in the future. It may believe that today’s forward rate will prove to be
more favourable than the spot rate prevailing on that future date. Alternatively, the company may just
want to eliminate the uncertainty associated with foreign exchange rate movements.

The forward contract commits both parties to carrying out the exchange of currencies at the agreed
rate, irrespective of whatever happens to the exchange rate.

The rate quoted for a forward contract is not an estimate of what the exchange rate will be on the
agreed future date. It reflects the interest rate differential between the two currencies involved. The
forward rate may be higher or lower than the market exchange rate on the day the contract is entered
into.

Forward rate has two components.

Spot rate

Forward points

Forward points, also called as forward differentials, reflect the interest differential between the pair of
currencies provided capital flows are freely allowed. This is not true in case of US $ / rupee rate as
there is exchange control regulations prohibiting free movement of capital from / into India. In case of
US $ / rupee it is pure demand and supply which determines forward differential.

Forward rates are quoted by indicating spot rate and premium /discount.

In direct rate,

Forward rate = spot rate + premium / - discount.

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3.6.7 FINANCIAL COMPARISION

ROCP ALL INDIA TOP LINE-MAY 2015

Source : A C Nielsen Retail Index Report Volume Share in %

Mar-14 Apr-14 May-14 Mar-15 Apr-15 May-15

ALL REFINED OIL CONS PK 100 100 100 100 100 100

RUCHI SOYA INDS 17.80% 17.70% 17.90% 18.60% 18.70% 18.90%

AWL GROUP 19.70% 19.00% 18.50% 19.20% 18.40% 18.20%

KALEESUWARI REFINERY 5.80% 5.90% 6.10% 5.70% 5.60% 5.70%

CARGILL FOODS 4.60% 4.70% 4.40% 4.00% 3.90% 4.20%

GEMINI EDIBLES & FATS INDIA 2.20% 2.20% 2.40% 2.90% 3.30% 3.20%

BUNGE INDIA PRIVATE LIMITED 2.40% 2.30% 2.40% 2.60% 2.50% 2.30%

M K AGROTECH 2.30% 2.40% 2.50% 2.20% 2.20% 2.20%

JVL AGRO INDS LTD 1.30% 1.10% 1.10% 1.90% 1.60% 1.70%

EMAMI BIOTECH LTD 1.60% 1.50% 1.30% 1.60% 1.50% 1.40%

OTHERS 60.30% 60.90% 61.20% 59.90% 61.10% 61.20%

SOURCE: A C Nielsen Retail Index Report

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3.6.8

SOURCE: A C Nielsen Retail Index Report

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3.6.9 SWOT ANALYSIS

STRENGTHS

→ AWL has been in the edible oil business for over 10 years and is one of the largest
organized players in the business. Its edible oil brand ‘Fortune the No. 1 edible oil
brand in India. AWL has also established itself in the international market & exports
‘Fortune’ oil to Middle-East, South East Asia & African countries. The Company has
a diversified product portfolio thereby reducing risk and increasing its business growth
potential.

→ One of the promoter groups viz. the Wilmar Group, is the world’s second largest trader in
edible oil market and its expertise in sourcing crude edible oils at optimum prices & time
helps AWL considerably.

→ AWL’s raw materials are mostly supplied through its existing operations which abate the
risk of fluctuations in raw material prices.

→ AWL has existing infrastructure at the Project facilities which would enable AWL to reap
the synergies for both existing & the Project facilities.

→ The Company already has an established brand name and a large distribution network
comprising of 85 stock points and 5,000 distributors.

WEAKNESSES

→ AWL faces the risk of price fluctuations, due to the nature of its products portfolio.
AWL has the flexibility in the operations of changing its product mix as per the market
demand and price situation. This would enable the Company manufacture a wide range
of its products.

→ Margins in Edible Oil industry are very thin and therefore AWL’s profitability is
comparatively low.

The scale of operations of AWL is large. Also, AWL has a large distribution network
which helps it to have a deep market penetration. The large scale of the Company and
its optimum raw material linkages help it to do well in spite of thin margins in the industry.

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OPPORTUNITIES

→ The Edible Oil market in India is growing rapidly. India, though one of the largest
consumers of Edible Oils in the world, still has very low per capita consumption.
Thus, substantial potential exists for increase in demand of Edible Oils in the future.

→ The domestic output of oil seeds, though increasing, has not been able to keep pace with
rising demand for Edible Oils and hence the quantum and percentage of imports shows
an increasing trend. Considering the expected demand-supply gap, the opportunities
for additional imports are expected to increase over time.

→ Due to the changing habits of the people, more and more consumers in India are shifting to
refined oils. Due to issues like adulteration and contamination, consumers in the middle and
lower middle classes, which hitherto patronized the unorganized sector, have started shifting
their preferences to packaged branded oils thus, increasing demand in this segment of the
industry.

→ The Government is in the process of making it mandatory for retailers to sell Edible Oils
in packaged form only. While the full implementation of this has not yet been carried out,
in future, this may benefit the organized sector and in turn AWL.

THREATS

→ Competition from existing trading houses/new entrants.

AWL already has strong, established brands. Also, the wide range of its product basket
provides it a competitive edge over other players. The Company may also develop more
brands at a later stage to leverage its brand value.

→ Fluctuations in foreign exchange rates affect the profitability as majority of purchases are
through imports. The Company employs suitable hedging strategies to counter the risk of
foreign currency fluctuations.

→ Any change in import policies and other related government policies may have an adverse
effect on the profitability of the project.

The Company has diversified its sourcing of raw materials. Apart from sourcing the crude oils
through imports the Company also sources seeds locally which are available in abundance.

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 Chapter-4

Conclusion & Learning from SIP

4.1 Conclusion regarding Exim & Forex

 In this report, it is analyzed the procedure of the Import and Export Documentation.

 We analysed the Impact of Exchange Rate Difference (E.R.D).

 We analysed the Working capital management and the impact of Current Asset and Current
Liabilities on D.P.

 We analysed the cost saving in Bank Credit Limits.

 We also analysed the procedure of Export Packing Credit (E.P.C).

 We also did the PEER comparison ( on basis of Abstract Financials) and ROCP

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4.2 Learning from Summer Internship

 Firstly, i learnt from this Summer Internship is the corporate experience and understood
where theoretical knowledge is used in practical scenario.

 Through the knowledge of Import/Export Documentation and Forex Market.

 Benefits of Forex Booking.

 It helped me in developing good communication skills and it also helped in learning formal
and professional ways for communicating.

 In India, Forex capital markets, being still a relatively young and mostly under developed
compared to other segments of the financial markets, and given their intrinsic volatility,
Represents a Remarkable opportunity to the educated currency trader.

 Thus i as a Summer Trainee got across with the Forex transaction and got a great insight into
its risk management.

 I came across to how foreign market works. Even i came across how to reduce risk by
hedging Forex transaction.

 Thus to summarize all i got great insight into Forex market. And i also got the knowledge of
import and export that what all Documents’ are needed for it and the terms of the Foreign
Payment.

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4.3 References

www.ozforex.com

www.forhex.com

www.forextrading.com

www.forex.glossary.com

www.rbi.org.in

www.advfn.com

www.imf.com

www.x-rates.com

www.forextheory.com

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