4.

2 International Business Module 4 Exim Trade

Ashish J. Shah profajshah-bnsb@yahoo.com MBA - 2009 11

Module 4 Agenda
EXIM TRADE
Export trade, procedure, steps and documentation direction of India s trade. Export financing document related to export trade. Export marketing Import trade, procedure and steps documentations and problems, EXIM policy, Balance of payment. Institutions connected with EXIM trade.

Export trade, procedure, steps and documentation direction of Indias trade Export Trade? Export of goods/services? Classification of export trade
Merchandise exports Services exports Project exports Deemed exports: goods do not leave the country and payment is made within the country by the recipient of the goods e.g. Companies in duty-free zone, SEZs, EPCG scheme

Export trade, procedure, steps and documentation direction of Indias trade

Benefits from export trade Market diversification Additional revenues Excess production capacity utilised Leverage on purchasing power Business operation stability Product lifecycle extension Product improvement Lower unit costs Economies of scale Minimising the effect of seasonal fluctuations in sales Untapped markets

Export trade, procedure, steps and documentation direction of Indias trade Problems/Limitations from export trade
Financial management effort Customer demand Communication technologies improvement Management mistakes

Export trade, procedure, steps and documentation direction of Indias trade Export trade procedure/steps for export trade
Registration
1. Registration of the organisation e.g. Proprietor, partnership 2. Opening a bank account 3. Obtaining IEC 4. Obtaining PAN 5. Obtaining sales tax number: exporters exempt from sales tax on registering 6. Registration with EPC (Export Promotion Council)

Export trade, procedure, steps and documentation direction of Indias trade

7. Registration with ECGC (Export Credit and Guarantee Corporation of India) 8. Registration with Other Authorities:
Federation of Indian Export Organisation ITPO Chambers of Commerce Productivity Councils

Pre-shipment stage
1. 2. 3. 4. Approaching foreign buyers Inquiry and offer PI sent Confirmation of order importer signs PI and returns Opening LC with RBI approved bank

Export trade, procedure, steps and documentation direction of Indias trade

5. Arrangement of pre-shipment finance finance obtained by exporter to produce and ship goods 6. Production or procurement of goods 7. Packing and marking 8. Pre-shipment inspection Export Inspection Agency if quality certificate required 9. Central excise clearance exports exempt; but clearance to be obtained for:
Export under rebate Export under bond

10. Obtaining insurance cover 11. Appointment of C & F Agent

Export trade, procedure, steps and documentation direction of Indias trade

Shipment Stage
1. Reservation of shipping space 2. Arrangement of internal transportation upto port of shipment 3. Preparation and processing of shipping documents
a. b. c. d. e. f. g. h. LC with export order Commercial invoice (2 copies) Packing list Certificate of origin GR form (original and duplicate) - Export Declaration Form ARE-1 Form - Application for removal of excisable goods for export by (Air/Sea/Post/Land) Certificate of inspection, where necessary (original) Marine insurance policy

Export trade, procedure, steps and documentation direction of Indias trade

4. Customs clearance 5. Obtaining Carting order from Port Trust Authorities cargo moved into port area and into shed 6. Customs examination and issue of Let Export Order 7. Obtaining Let Ship Order from Customs Preventive Officer 8. Obtaining Mate s Receipt and Bill of Lading Mate (Captain) issues Mate s receipt and on clearance of port dues, port hands over MR to C & F agent who surrenders it to shipper for BoL (2 3 copies)

Export trade, procedure, steps and documentation direction of Indias trade

Post-Shipment Stage
1. Submission of documents by the C & F agent to the exporter
i. ii. iii. iv. v. vi. Copy of invoice duly attested by customs Drawback copy of shipping bill Export promotion copy of shipping bill Full set of negotiable and no n-negotiable copies of Bill of Lading Original L/C, export order or contract Duplicate copy of ARE-1 form

Export trade, procedure, steps and documentation direction of Indias trade

2. Shipment advice to importer: also sends non-negotiable bill of lading copy to importer 3. Presentation of document (negotiable) to bank for negotiation (getting payment from bank) a. Bill of exchange, sight draft or usance draft b. Full set of bill of lading or airway bill c. Original L/C d. Customs invoice e. Commercial invoice including one copy duly certified by customs f. Packing list g. Foreign exchange declaration forms, GR/SOFTEX/PP forms in duplicate

Export trade, procedure, steps and documentation direction of Indias trade

h. Exchange control copy of shipping bill i. Certificate of origin, GSP (Generalized System of Preferences) or APR (Annual Performance Report (APR) on the functioning of Indian Joint Venture (JV)/Wholly Owned) certificate j. Marine Insurance Policy, in duplicate 4. Dispatch of documents: bank negotiates docs submitted with importer s bank after thorough scrutiny Bank sends bank certificate and attested copies of commercial invoice to exporter 5. Acceptance of Bill of Exchange: BoE accompanied by documents is called documentary BoE

Export trade, procedure, steps and documentation direction of Indias trade

Types of documentary BoE collections and options for payment by buyers:
a. Documents against payment b. Documents against acceptance (of a BoE/time draft) c. Letter of Indemnity by exporter to bank assuring bank of payment if importer fails to pay up d. Realisation of export proceeds payment by buyer on receiving BoE or accepts usance/time draft e. Processing of GR form export transaction deemed complete if GR form received from exporter and that certified by RBI match, export considered to be complete f. Realisation of export incentives: to be submitted for redemption to concerned authority with bank docs

Export trade, procedure, steps and documentation direction of Indias trade

Export documentation/documents related to export trade
Commercial invoice countries prescribe types of invoices:

Combined certificate: commonwealth nations Consular invoice: Philippines Legalised invoice: Mexico Customs invoice: US, Canada

GR Form:
prescribed by RBI under FERA to ensure forex proceeds from exports repatriated to India GR-3 to be submitted to seek exemption and retain funds abroad PP form for parcel post

Export trade, procedure, steps and documentation direction of Indias trade

L/C Bill of Exchange:
draft on a foreign bank Either on sight or future date

Shipping bill customs document

1. Shipping bill for free goods 2. Dutiable shipping bill 3. Duty drawback shipping bill

Marine Insurance Policy

Export trade, procedure, steps and documentation direction of Indias trade

Bill of Lading: issued by shipping company to C & F certifying that goods accepted on board
Is a document of title to goods shipped Is a receipt for goods Is an evidence of contract of affreightment (CIF, FOB)

Airway Bill: applicable to air transport, but not-negotiable Combined transport document: applicable to multimodal transport Commercial invoice Consular invoice Certificate of origin Inspection certificate

Export trade, procedure, steps and documentation direction of Indias trade

Dock receipt and warehouse receipt: at port of export Destination control statement: export only to specified destinations Insurance certificate Export packing list

Export trade, procedure, steps and documentation direction of Indias trade Direction of India s Trade
Indian exports (Apr 09 Sep 10)
UAE: 60 % USA: 14% China: 11% Hong Kong: 5 % Singapore: 5 % Rest of World: 5 %

Export trade, procedure, steps and documentation direction of Indias trade

Indian imports (Apr 09 Sep 10) UAE: 6 % USA: 6 % China: 12 % Saudi Arabia: 5.5 % Iran: 4.5 % Rest of World: 66 %

Gross imports = 790644 cr.

Export Financing
Export financing? General guidelines to banks for export financing
Applications to be process in short period so that exporters can get credit on time Credit requirement should consider totality of export Past performance of companies to be kept in mind when giving credit Funds lent should be used for export purposes. Banks can:

Discount export receivables Waive portion of contribution required from exporter Calculate production requirements of firm to fulfil export order Grant additional credit based on L/Cs though this might cross assigned limits

Export Financing
Methods of payment in exporting
Advance payment Open account Documentary Bills L/Cs Shipment on consignment basis

Significance of export financing

Significance for exporter
Gain competitive edge by offering financing to prospective buyers Receive cash payment on shipment Do not tie-up assets Avoid credit, currency and interest-rate risks ins settlement period Do not need admin recourses to collect payments

Export Financing
Significance for importer
Can use long-term financing to match expected revenues with expenditures, making cash flow more efficient Obtain financing that is less expensive Additional savings where exporters use better insurance schemes Can obtain fixed-rate financing and protect against future escalations

Classification of Export Finance

Pre-shipment finance Post-shipment finance

Export Financing
Pre-shipment financing
Importance:
Purchase raw material and other inputs Assemble goods Store goods Pay for packaging Pay for inspection charges Import or purchase heavy machinery Pay for consultancy services Pay for export documentation expenses

Export Financing
Classification of pre-shipment finance
Packing credit Packing credit against incentives receivables Advance against cheques/drafts received as advance payment Packing credit
Aspects of packing credit Persons eligible for packing credit Export company/firm having an export order or L/C Business that does not have an L/C but is exporting through merchant houses

Export Financing
Criteria for grant of packing credit Granted by banks on basis of confirmed export order or irrevocable L/C in favour of exporter Purpose of finance Procure raw materials Purchase of goods for export Packaging, transport, warehousing Form of finance Fund-based: packing loans Non-fund based: guarantees, help in opening L/Cs Security Packing credit loan is unsecured when exporter procures raw materials When goods processed, goods hypothecated and subsequently pledged to bank called Packing Credit Hypothecation Loan and Packing Credit Pledge Loan respectively.

Export Financing
Quantum of Finance No fixed formula Margin requirement Banks ask exporters to contribute partly to cost of export when handing out finance called margin money Margins are required so as: To make exporter have stake in the business To take care of erosion in value of goods pledged to the bank To ensure bank finance is not extended to cover exporter s profit margin Periods of finance: Pre-shipment finance: max 270 days, generally short periods Packing credit: max. 180 days, extended by max of 90 days

Export Financing
Rates of interest: defined in relation to PLR and within a ceiling decided by RBI Running account facility: depends on bank s satisfaction and confidence in the customer

Applications for packing credit limit

Exporter to submit application in following manner: Formal application for grant/lease of packing credit Export order/L/C If no L/C commitment in terms of suitable document to prove future intent to submit L/C/order Export license, quota certificate, IEC Undertaking that shipment will be despatched by due date and documents will be submitted to bank

Export Financing
Documentation for Packing Credit
Export credit agreement Hypothecation/pledge agreement Corporate/individual guarantees from company/firm/directors Insurance policy cover Necessary undertakings for payment of insurance premium, non-encumbrance certificates, payment of premiums, waiver of interest......... Registration of charges documents Others as in sanction letter from bank

Export Financing
ECGC Formalities
Export Credit Guarantee Corporation Banks must seek PCGs or WTPCGs (Whole Turnover PCG) from ECGC PCG limit fixed by ECGC ECGC grants discretion to banks in case of WTPCG

Scrutiny of Packing Credit Applications by banks Disbursal of the loan amount Repayment of packing credit Pre-shipment export credit in foreign currency: generally granted for import of inputs for export production

Export Financing
Packing credit against incentives receivable from GoI Advance against cheques/drafts received as advance payment

Export Financing
Post-shipment finance
Need for post shipment finance/credit? Features of post-shipment finance
Available after goods shipped Facility is extended to exporters in whose name goods shipped Short or long term finance Essentially working capital finance Extended only against shipping documents Credit extended to finance export receivables from date of document submission to date o realisation of export proceeds Essentially a form of fund-based financing Concessional rate of interest charged upto max 6 months from shipment of goods

Export Financing
Aspects of post-shipment finance
Eligibility Basis: goods shipped! Purpose; working capital finance Form of finance: liquidating finance Quantum of finance: upto 100 % of value of invoice; can be extended if domestic value of goods exceeds export value Period of finance:
max 180 days at concessional interest rates If on DA (Documents against acceptance) basis transit + usance + grace period) upto 180 days

Export Financing
Rates of interest
Post-shipment credit: not exceeding PLR minus 2.5 percentage points Deferred credit and export credit not otherwise specified: banks free to decide

Classification of Post-Shipment Finance

1. Negotiation of export documents drawn under L/C: about 11 documents to be submitted to banks (as listed earlier)
Scrutiny of shipping docs General discrepancies: dates, clauses, requests exceeding value of invoice, Bill of exchange drawn on wrong party

Export Financing
2. Purchase/discount of export documents drawn under export order
Bank financing totally dependent on credit-worthiness of importer and exporter Documents passed on to foreign bank only on payment (DP)

Advances against export bills sent for collection Advances against goods sent on consignment basis Advance against undrawn balance (margin money value 10 %) Advance against retention money Advances against claims of duty drawback

Export Financing
Process of post-shipment finance
Sanction of limits Documentation formalities ECGC formalities Receipt of export documents Scrutiny of documents
Export policy regulations Exchange control regulations Commercial requirements Bank's requirements

Dispatch of documents and disbursal of funds

Importance of post-shipment finance?

Export Marketing
Occurs when a business takes advantage of opportunities outside home country while continuing business in home country International Marketing vs. Export Marketing
Scope: vast vs. limited Approach: exploratory vs. Ethnocentric

Stages of export marketing

Basic data collection Planning the marketing strategy Implementing marketing strategy

Export Marketing
Modes of Operation
1. 2. 3. 4. 5. Agents Importers Tenders Through industrial houses Tie-up with a marketing organisation abroad

Export Marketing
Processing an export inquiry in export marketing
When making an offer, following information to be included:
Unit price and currency Terms of delivery (FOB/CIF) Payment terms L/C, cash against documents D/A docs on acceptance Advance payment Mode of shipment Packing Validity Delivery

Export Marketing
Export policy decisions/export marketing plan of a firm
Factors affecting export policy
Objectives of the firm Resources available Methods to be used Strategy Targets Determining marketing costs involves:
Estimation of marketing costs in specific export market Investment of exporting company in installing a new plant for export production Responsibility of intermediaries in determining the cost

Export Marketing
Knowledge of export market environment Marketing environment of specified host countries Exim policy Other factors

Steps involved in preparing export policy

Ascertaining market facts

Product Total market Distribution and distribution channels Consumers Competitors Import rules and regulations

Export Marketing
Assessment of market problems and opportunities
Distinguishing between long-term and short-term objectives

Marketing objectives Plan of action Budget to cover necessary expenditure to carry out plan of action - rules for budget formulation:
Reference to objectives Specifications and cost details Value analysis

Control procedure

Export Marketing
Export costing and pricing
Export costing
Ex-work price manufacturer-exporter Purchase price Export price (includes various charges during export procedure)

Export pricing Objectives:

Survival Maximum sales growth Maximum current profit To establish leadership

Export Marketing
Importance of export pricing?

Methods of export pricing

Cost-plus method Marginal cost method
only those costs directly relevant to exports are taken into account Applicable more when unit not EOU, surplus stocks available, scope for price manoeuvrability in local market

Dual/differential pricing method products priced variably in same market; maybe less/more than marginal cost; these are exceptions, more than routine

Export Marketing
Export promotion Benefits of export promotion to the economy? Export incentives

Duty exemption/drawback Income-tax concession Awards Others:

Cash compensatory support (CCS):
Related to FOB exports to meet subsidised product costs in other countries was abolished in 91 with devaluation of rupee

Export Marketing
Import replenishment licenses (REP):
allowed import of inputs to price export goods where local goods were not satisfactory for production Converted to Exim Scrip and subsequently abolished in 92 when rupee became partially convertible

International price reimbursement scheme (IPRS):

Designed to make available specified inputs at international prices Designed for steel, Al and now extended as Engineering Products Exports Scheme

Export Marketing
Export Promotion Measures
Export production assistance
Infrastructure Manufacture-in-bond Machinery and equipments Production inputs Technology up gradation Packing credit Back-to-back L/C: makes supplier of raw materials to exporter eligible for packing credit

Export marketing assistance

Marketing development fund ( 63) / Marketing development assistance ( 75)

Export Marketing
Cash Compensatory Support (CCS)
Provided alternative where other forms of concession could not be availed e.g. Under duty drawback Provided support in international markets on pricing of goods Provided support to exporters against subsidised products from other countries

Forex Trade fairs and expos Export risk insurance (ECGC) Finance: pre and post-shipment finance Quality control and pre-shipment inspection Institutional assistance: ITPO, APEDA, IIFT

Export Marketing
Dollar denominated credit for exporters:
complaint by exporters of high interest rates in India govt. argues that bringing down interest rates will cause excess money supply and lead to inflation

Import Trade
Import trade? Goods, services Classification of Import trade:
Import of consumer and industrial goods
Consumer goods:
Convenience goods Staple convenience goods Impulse items Shopping goods Specialty goods

Import Trade
Industrial goods Installations: major capital assets/equipment Accessory equipment Raw materials Fabricated parts and materials Industrial supplies

Import of intermediate goods and services

Intermediate goods e.g. sugar, steel Intermediate services Intangibility and importing Perishability and importing Inseparability and importing Variability and importing

Import Trade
Benefits from Import Trade

Help in development of the economy Meet shortages Imports for better standard of living Improving quality of production Comparative advantage means lower-price goods Many governments actively support trade relations and aim to make importing easy for business Importing grants access to regionally exclusive resources Various benefits that stem from trade agreements

Import Trade
Problems arising out of import trade
Financial risk Political risk Operational risk Regulatory risk Cultural risk

Steps for import trade

1. Making trade enquiry and receiving proforma invoice/quotation offer

Import Trade
2. Obtaining import license 3. Obtaining forex 4. Placing indent or order 5. Arranging L/C 6. Getting shipping docs 7. Appointing clearing agent
Functions performed by the clearing agent:

Getting bill of lading enclosed for delivery Filling-up bill of entry Payment of dock charges

Import Trade

Getting customs clearance Taking delivery from dock Dispatching goods to importer by railroad Sending advice to importer

8. Taking delivery of goods from carrier 9. Making payment: BoE, L/C

Import documentation
Import license Bill of entry Bill of sight: in the absence of bill of entry, importer allowed to inspect goods and make list of goods and also take delivery on payment of duty Dock challan; proof of payment of dock charges Indent to exporter

Import Trade
Insurance policy Letter of advice: sent by clearing agent to importer stating completion of all formalities

Exim Policy of India

Objectives of exim policy? EPCG Scheme Export Promotion Capital Goods
Import of capital goods at 5 % customs duty with export obligation of 8 times of duty saved to be fulfilled over 8 years under EPCG license Where duty saved is > 100 crore, same export obligation to be fulfilled over 12 years Cars, vehicles may be imported under this scheme by tour operators with 1.5 crores forex earnings in current and previous three years

Exim Policy of India

Re-fixation of annual average export obligation
Extended for five years to 2014 from 2009 Support for green products and products from north east extended

Announcements for FPS, FMS, MLFPS

26 new markets added to scheme Incentives under FMS (Focused Market Scheme) increased from 2.5 % to 3.5 % Incentive available under Focus Product Scheme from 1.25 % to 2 %

Exim Policy of India

Extra products included in the scope of benefits under FPS Market Linked FPS expanded by product range and regions covered FPS benefited to green products and products from north east Common application form for all schemes

Exim Policy of India

Announcements for market development assistance and market access initiative
1. Towns of export excellence (TEE)
a. b. c. a. Handicrafts: Jaipur... Leather products: Kanpur Horticultural products: Malihabad Additional duty credit equal to 1 % of FOB of past exports (expired Mar 31, 2011)

2. Scheme for Star status holders 3. Extension of IT exemption to EOUs and STPIs 4. Extension of ECGC to adversely affected sectors

Exim Policy of India

5. Announcements of exemptions for marine sector 6. Announcements for Gem and Jewellery sector- duty drawback 7. Announcements for agro exports
Single window export system Nodal agencies to help APEDA

8. Announcements for leather exports: re-export allowed on payment of 50 % export duty 9. Announcements for tea exports
Minimum value addition reduced from 100 % to 50 % DTA (Domestic Tariff Area) of instant tea by EOU increased to 50 % from 30 % Included under VKGUY scheme (Vishesh Krishi and Gram Udyog Scheme)

Exim Policy of India

10. Announcements for pharmacy exports 11. Announcements for Handloom exports 12. Scheme for EOUs: allowance to sell manufactured goods in DTA (Domestic Tariff Area) increased 13. Announcements for Value Added Manufacturing: min. 15 % value addition on imported inputs done to encourage export 14. Announcements for Project Exports 15. Fuel included in DEPB Scheme 16. Easy Import of Samples 17. Convertibility of shipping bills 18. Reduction in transaction costs

Exim Policy of India

19. Disposal of manufacturing wastes 20. Announcements for sports weapons 21. Announcements for medical devices 22. Announcements for automobile industry 23. Announcements for EDI Initiatives 24. Set-up of Directorate of Trade Remedy Measures announced 25. Duty credit scrips: customs duty shortfall payments to EPCG can now be made by debit of duty-credit scrips and not in cash alone
Import of restricted items Dollar credits

Institutions Connected with Foreign Trade

IIFT
Deemed university estd. 1963

ITPO National Center for Trade Information (1995) ECGC (Export Credit Guarantee Corporation) Export Import Bank (Exim Bank) Export Inspection Council (EIA) Indian Council of Arbitration Federation of Indian Export

Institutions Connected with Foreign Trade

Organisations conducting international business MNCs Department of Commercial Intelligence and Statistics Directorate General of Shipping Freight Investigation Bureau Export Promotion Councils

Balance of Payments
Kindleberger: a systematic record of all economic transactions between the residents of the exporting country and residents of foreign countries during a given period Characteristics of BoP?
Systematic account of transactions amongst countries Follows DEBK A way of listing receipts and payments in international transactions Contains current and capital accounts for short and long term transactions

Balance of Payments
Fundamentals of BoP accounting
Three main elements of process of measuring international economic activity:
Identifying an international economic transaction Understanding flow of goods, services assets and money
Two types of business transactions generally involved: Exchange of real assets Exchange of financial assets

Understanding bookkeeping procedures for BoP accounting (DEBK)

Balance of Payments
Components of BoP
Current account
Merchandise: balance of merchandise trade Invisibles: Services Unilateral transfers: gifts and grants by private parties and governments

Capital account:
Direct investment: stocks, M & As Portfolio investment: stocks, does not involve transfer of management control Capital flows: bank deposits, short-term loans

Official Reserve Account

Government owned assets representing purchases and sales by the government

Balance of Payments
BoP accounting
Debits and Credits
Credit transactions: receipts of payment from foreign nations Debit transactions: payment of foreign exchange

Capital inflows and outflows

Balance of Payments
Factors affecting BoP
Cost of production Demand and supply Cost and availability Exchange rate movements Domestic business Trade agreements External pressures Price

Balance of Payments
BoP disequilibrium
Types of BoP disequilibrium:
Cyclical disequilibrium: occurs on account of business cycles Secular disequilibrium: caused due to excessive tech changes and population changes Structural disequilibrium: due to structural changes of economy at home or overseas Temporary disequilibrium Fundamental disequilibrium: persistent, long-term disequilibrium

Balance of Payments
Causes of BoP disequilibrium:
Natural factors Economic factors
Cyclical fluctuations Inflationary spiral at home Capital movements Changes in exchange rates Miscellaneous factors

Political factors

Balance of Payments
Methods of adjustment in BoP
Monetary policy: policy designed to correct deficit Exchange depreciation: depreciation of one currency against another Devaluation Exchange control Fiscal policy: e.g. Imposition of tariffs to balance BoP Import quotas Export promotion

Balance of Payments
Implication of BoP for a finance manager:
Finance managers must take into account various aspects of fiscal policies and other government policies. They are:
Trade policy changes Exchange rate policy Monetary policy Fiscal policy