DOCUMENTATION IN FOREIGN TRADE

Export documents play a vital role in international marketing as it facilitates the smooth flow of goods and payment there of across national frontiers. Cateora and Graham say that ‘the each export shipment involves many documents to satisfy government regulations controlling exporting as well as to meet requirements for international commercial payment transactions’. They further writes that ‘the paper work involved in successfully completing a transaction is considered by mean to be the greatest of all non-tariff trade barriers. There are 125 different documents in regular or special use in more then 1000 different forms. A single shipment may require over 50 document and involve as many as 28 different parties and government agencies, or requires as few as.’ It shows that the exporting activity involves several commercial and regulatory procedures. These procedures also involve considerable documentation requirements. Besides, the documentation pertaining to the commercial aspect of the export business, there are documentation requirements of a regularly nature like excise clearance, foreign exchange regulations etc.

The most frequently required documents are export declarations, consular invoices or certificate of origin, bills of lading, commercial invoices, and insurance certificates. Additional documents such as import licences, export licences, packing lists, and inspection certificates for agricultural products are often necessary.

Export documentation is, however, complex as the number of documents to be filled-in is large so able is the number of concerned authorities to whom the relevant documents are to be submitted. These documents must be properly and correctly filled. Cateora and Graham opine that ‘incomplete or improperly prepared documents leads to delay in shipment. In some countries, these are penalties, fines and even confiscation of goods as results of errors in some of these documents. Export documents are the result of requirements imposed by the exporting government, of requirements set by the commercial procedures established in foreign trade, and in some cases, of the supporting import documents required by the importing government. An exporter should have the complete knowledge of these documents and he should be well familiar with complete export procedure.

On the basis of above discussion, export documents may be divided on the following four categories:

(i) Commercial documents (ii) Regulatory documents

(iii) Export assistance documents(iv) Documentation required by importing countries.

Commercial documents are those documents by which physical transfer of good and its ownership is transfer to importer and the procedure of export sales is performed. The major commercial documents are as follows:

(a) Commercial invoices(b) Bill of exchange.(c) Bill of lading.(d) Marine insurance policy.

Regulatory documents are the documents which are required for complying with the rules and regulations governing export trade transactions. The major regulatory documents are as follows:

(a) Foreign exchange regulations.(b) Customs formalities.(c) Export inspections etc.

In export assistance documents, those documents are involved which are required for claming assistance under the various export assistance measures. Documentation required by importing countries are:

(a) Certificates of origin.(b) Consular invoice.(c) Quality control certificate etc.

Main documents used in export transactions: The main documents used in an export transaction are as follows:

1. Commercial Invoice: This is the basic document in an export transaction. According to Cateora and Graham, ‘every international transaction requires a commercial invoice, that is, a bill or statement for the goods sold. This documents often serves several purposes; some countries require a copy of customes clearance, and it is one of the financial document which contains all the information which are required for the preparation of all other documents. It is, thus, a document of contents. “A commercial invoice is a bill for the goods from the buyer to seller. It contains a description of goods, the address of buyer and seller, and delivery and payment terms. Many governments use this form to assess duties.”

There is no set format of this invoice. The exporter may design his own form. Some countries, however, prescribe their own forms. In such case, the exporter has necessarily to use the form prescribed by the importing country. The commercial invoice gives the description of following things:

• Invoice Number• date of dispatch.• goods description.• price charged.• the terms of shipments.

• the marks and numbers on the packages containing the merchandise.• date, name and address of both seller and buyer.• Name of the shipping vessel.• Port of debarkation.

Commercial invoice may be prepared according to mutual agreement between the buyer and seller. According the Price, the invoice may be of the following types.

(a) Free on board or F. O. B. : Free on board at a named inland point of origin, at a named port of exportation, or at a named vessel and port of export. The price includes the cost of goods and delivery. All other charges are the buyer’s concern. In simple words, under F.O.B. quotation, the exporter will deliver the goods free on board a ship as per contract as the port named; that is, to say he will pay all expenses and give delivery of goods on the board of the ship. The buyer must take responsibility from then on, and must pay for freight, insurance and all subsequent expenses.

(b) Cost, Insurance and Freight (C.I.F.): C.I.F. to a named overseas port of import. A.C.I.F. quote is more meaningful to the overseas buyer because it includes the costs of goods, insurance, and all transaction and miscellaneous charges to the named place of debarkation. The buyer responsible for loss or damage after the goods are delivered to the shipowner and must pay all expenses, custom duties etc., on arrival at the port of destination.

(c) Cost and Frieight (C&F): C & F to a named overseas port. The price includes the cost of goods and transportation costs to the named place of debarkation. The cost of insurance is borne by the buyer.

(d) Free Along Side (F.A.S.) F.A.S. to a named U S port of export. The price includes cost of goods and charges for delivery of the goods alongside the shipping vessel. The buyer is responsible for the cost of loading onto the vessel, transportation and insurance.

(e) Ex. (named point of Origin): The price quoted concerns costs only at the point of origin. All other charges the buyer’s concern.

Consular Invoice: Some countries require consular invoice. A consular invoice sometimes is required by countries as a means of monitoring imports. Government can use the consular invoice to monitor prices of imports and to generate revenue for the embassies that issue the consular invoice. In those countries where ad valorem duties are charged, it is in the interest of the importer to present to the custom authorities to the importing country, the document called ‘Consular invoice’, in order to save time and trouble while taking the delivery of the goods. This invoice has to sent by the exporter who fills in a special form and gets it duly certified by the counsal of the importing country stationed in the exporting country. The exporter is required to pay a prescribed fee for obtaining this invoice. The exporter has to submit four copies of the commercial invoice to the mission of the importing country with the requisite amount of fee.

Performa Invoice: ‘A proforma invoice is an invoice, like a letter of intent, from the exporter to the importer outlining the selling terms, price and delivery if the goods are actually shipped. If the importer like the terms and conditions, he will send purchase order and arrange for payment. At that point, the exporter can issue a commercial invoice is simply a temporary commercial invoice which is sent by the exporter to importer. This covers contemplated shipment which may or may not be made in future. An importer may require it for the following two reasons:

(a) It helps him to obtain an import license.(b) It helps in opening a letter to credit in the favour of exporter.

2. G.R.Form : This form has been prescribed by the Reserve Bank of India under FERA to ensure that the foreign exchange receipts in respect of exports are impatriated to India. It is prepared in duplicate and it submitted to the custom authorities at the port of shipment. This authority verifies if (value declared by the exporter) and send one copy of Reserve Bank of India and second copy of exporter.

3. Letter of Credit:- “A letter of credit is a document containing the guarantee of a bank to honour drafts drawn on its by an exporter, under certain conditions and upto certain amounts, provided that the beneficiary fulfills the stipulated conditions.” The letter of credit is an assurance that the bill will be paid by the bank if it is a sight bill or accepted by the bank if it is a time bill. Insurance of letter of credit by a bank in favour of an exporter substitutes the credit of the individual importer by its own credit and thereby gives the exporter guarantee assurance of payment. It is a popular method of securing payment and most important single document in international trade. It forms the basis of very large amount of world trade. Cateore and Graham. Opines that “letter of credit shift the buyer’s credit risk to the bank issuing the letter of credit. When a letter of credit is employed, the seller ordinarily can draw a draft against the bank issuing the credit and receive dollars by presenting proper shipping documents. Except for cash in advance, letters of credit afford the greatest degree for protection for the seller.

A letter of credit it of two types: irrevocable and revocable. An irrevocable letter or credit means that once that seller has accepted the credit, the buyer can not alter it in any way without permission of the seller. On the other, a revocable letter of credit may be cancelled at any time by banker without giving pre- intimation. The exporter does not favour this letter of credit as it is liable to bring him into trouble on any time. In other words, an irrevocable letter of credit can not be cancelled by the bank without giving prior notice and is, therefore, safer than the revocable letter from the point of view of exporter. The exporter should carefully examine the terms and conditions of the letter of credit to ensure should carefully examine the terms and conditions of the letter of credit to ensure:

(a) that he can meet them, and(b) That they confirm to the basic contract he has entered into with the

importer

If there are any differences, he should get in touch with the bank and the Importer to arrange for an amendment. Some of the discrepancies found in documents that can delay in honoring drafts or letter of credit including the following.(i) Insurance defects, such as inadequate coverage, no endorsement, or counter signature, and a dating other than the bill of lading.

(ii) Bill of lading defect, such as the bill lacking ‘on-board’ endorsement or signature of carrier, missing an endorsement, or failing to specify prepaid freight.

(iii) Letter of credit defects, such as an expired letter or one that is exceeded by the invoice figure.

(iv)Invoice defects, such as missing signatures or failure to designate terms of shipment as stipulated in the letter of credit.

4. Bill Of Exchange: When a draft is drawn on a foreign bank, it is known as a foreign draft or bill of exchange. A bill of exchange is, thus a means of collecting payment from the foreign buyer through the banking channel. It is also method of extending credit. Cateora and Graham say that ‘in letter or credit, the credit of one or more banks is involved, but in the use of bill of exchange, the seller assures all risks until the actual dollars are received. The typical procedure is for the seller to draw a draft on the buyer and present this with the necessary documents to the seller’s bank for collection. The documents required are principally the same as for letter of credit. On receipt of draft, the bank forwards it with the necessary documents to a correspondent bank in the buyer’s country; the buyer is then presented with the draft for acceptance and immediate or later payment with acceptance of the draft, the buyer receives the properly endorsed bill of lading that is used to acquire the goods from the carrier.

There are the following important types of bill of exchange:

(i) Sight Bill of Exchange: A sight bill is one which is required to be paid by the drawee immediately on presentation of the bill. In order words, a sight bill requires acceptance and payment on presentation of the bill and often before arrival of the goods. Here, the format of this bill is given below:1550 Park Street Stamp London July 15,2003 Sixty (60) days after sight of this First Bill of Exchange (Second and third of this same tenor and date unpaid), pay to the Punjab National Bank or order the sum of one thousand five hundred Pounds Sterling only, value received. To Messers Hiralal Motilal 81, Kalba Devi Road Martin & Co. Mumbai

(ii) Arrival Bill: An arrival bill requires payment be made on arrival of the goods.

(iii) Date Bill: A date bill has an exact date for payment and in no way is affected by the movement of the goods. Time designations may be placed on sight and arrival bills to stipulate a fixed number of days after acceptance when the obligation must be paid.

(iv) Documentary Bill of Exchange: Under this agreement, the exporter sends the documents through his bank to be delivered to the importer against the importer’s acceptance or payment of an accompanying bill of exchange. This bill may be a D/P or D/A bill of exchange. Here, the proforma of these bills are given below:

D/A or Document against Acceptance BillExchange for 1500 Park Street Stamp London July 15, 2003 Sixty(60) days after sight of this First Bill of Exchange (Second and third of this same tenor and date unpaid), pay to us or our order the sum of one thousand five hundred Pounds Sterling only shipping documents attached to be surrendered against acceptance. To Messers Ramlal Kishanlal Chandni Chowk Martin & Co. Delhi – 6

D/P Documents against Payment Bill1500 Park Street Stemp London July 15, 2003 On demand please pay to the First State Bank of India a sum of one thousand five hundred Pounds Sterling only against Invoice No. A. 15 and shipping document enclosed. To Messers Ramlal Kishanlal Chandni Chowk Martin & Co. Delhi - 6

5. Shipping Bill : This is a custom documents. In facet, it is the main documents on the basis of which the custom’s permission for export is given. The shipping bill contains particulars of the goods, the name of the vessel, master or agents, flag, the port at which goods are to be discharged, the country of final destination, the exporter’s name

and address etc. The exporter is required to fill in three copies of shipping bills, or the shipping bill must be prepared according to the category of the export goods.

The following three forms of the shipping bill are available with the customs authorities:

(a) Shipping bill for free goods, for which there is no export duty.(b) Dutiable shipping bill for gods for which there is export duty.(c) Duty drawback shipping bill which is required for claming the customes

drawback against goods exported. Here a format of shipping bill is given below:

SHIPPING BILLSHIPPING BILLNo………………. Date………….

Shipping Bill for dutiable goodsPort of Mumbai Exporter’s Name……………… Address………………….

Name of Vessel Master or Agent Colours Port at which goods to be discharged

Packages Details of goods to be given separatelyfor each class or description

Number&

Description

Mark&

Number

Quantity Descri-ption

Value Duty

Unit Amo-unt

Rate Amo-UntRs.np.

Rate Amo-UntRs.np.

CountryOf Desti-nation

Entered……..No……..2003 I/we hereby declare the particulars given above to the true.

Assistant Collector Mumbai……….2003 Of Custom Signature of Exporter or his Authorized Agent

6. Marine Insurance Policy: The goods that are exported may be subject to certain maritime perils. The risks of such perils may be covered under marine insurance policy. Cateora and Graham feel that ‘the risk of shipment due to political or economic unrest is some countries, and the possibility of damage from see and weather, make it absolutely necessary to have adequate insurance covering loss due to damage, war, or riots. Typically, the method of payment or term of sale require insurance of the goods, so few

export shipment are uninsured.’ A policy is a contract and a legal document. An exporter must put up the marine insurance policy as a collateral security when he gets an advance against his bank credit.

(7) Bill of Lading: It is a document which is issued by the shipping company acknowledging that the goods mentioned therein have been placed on board the ship and an undertaking that the goods in like order and conditions as received will be delivered to the consignee, provided that the freight specified therein has been duly paid. In other words, ‘a bill of lading is a receipt for goods delivered to the common carrier for transportation, a contract for the services rendered by the carrier, and a document of title.

Cateora and Graham Write that the ‘bill of lading is the most important document required for establishing legal ownership and facilitating financial transactions. It serves the following purposes:

(i) as a contract for shipment between the carrier and shipper,(ii) as a receipt from the carrier for shipment, and (iii) As certificate of ownership or title to the goods.

Bill of lading frequently are referred to as either clean or foul:

(a) Clean Bill of Lading : A clean bill of lading means the items presented to the carrier for shipment are properly packaged and clear of apparent damage when received. In other words, a clean bill of lading is one which bears no super-imposed clause or statement declaring a defective condition of goods or of the packaging or of some other aspect of consignment.

(b) Four Bill of Lading : A foul bill of lading means the shipment was received in damaged conditions and the damage is noted on the bill of lading.

Each shipping company has its own bill of lading. The exporter prepares the bill of lading in the forms obtained from the shipping company or from the agents of the shipping company. Bill of lading contains the following information:

• Date and place of shipment • The name of consigner.• Name and destination of the vessel.• The description, quality and destination of the goods.• The marks and numbers.• The invoice number and the date of esxport.• The gross weight and net weight.• The number of packages.• The amount of freight.

As said earlier that each shipping company has its own bill of lading; where there is no direct shipping link between the buyer’s port and the seller’s port, arrangement should be made for the goods to be transferred to a second ship at another

port. In such a case, it is necessary for the exporter to obtain a though bill of lading covering the whole voyage.

Unless specifically authorized in the credit, bill of lading of the following nature will be rejected:

(a) Bills of lading issued by forwarding agents.(b) Bills of lading which are issued under and are subjects to the conditions

of a charter party.(c) Bills of lading covering shipment by sailing vessels.

A bill of lading that has been held too long before it is passed on to a bank or the Consignee, is called a state bill of lading. Besides, when freight is paid at the time of shipment or in advance, the bill of lading is marked. ‘freight paid’; if the freight is not paid and is to be collected from the consignee on the arrival of the goods, the bill of lading is marked ‘ freight collect’.

Functions of bill of lading are as follows:

(i) It denotes the contract of carriage of goods entered in by the exporter and the importer

(ii) It entitles the importer to take the delivery of goods.(iii) It is a document of title to goods. A possessor of this documents becomes

the owner of goods.(iv) It is a semi-negotiable instrument.(v) It is transferable by endorsement and delivery.

Here, the format of Bill of Lading is given below:

BILL OF LADING

SHIPPED on good order and condition by M/s Rathore Brothers & Co. Ltd. In and upon the “STEAMSHIP JALUSHA” where of is Master for Present voyage Mr. Black and now riding at anchor in Mumbai and bound for London, 1000 Bales of Cotton Marks,

555 J.A London

being marked and numbered as stated to be delivered in the like good order and well conditioned at the aforesaid Port of London (the Act of God, the Enemies of the Country, Fire, Machinery, Boilers, Steam and all and every other Dangers and Accidents of the Seas, rivers and Steam Navigation of whatever nature and kind expected) into John Abbot & Sons; or to their Assigns, Lading Charges and Freight for the said goods paid

with Average as per York, Antewerp Rules, 1924 and charges as accustomed.

IN WITNESS where of the Master of the said ship hath affirmed to three bills of Lading jail of this Tenor and Date, the one of which three Bills being accomplished, the other two are to stand void. Dated at Mumbai 30th October, 2003 J. Black Value and Contents unknown Master This bill is issued subject to the contents of 14 and 15 Geo. V.C. 2

8. Mate’s Receipt: This document is got from the caption of the ship or the mate, who is his assistant, and who can not allow the shipping of the goods unless the shipper presents to either of them a copy of the shipping bill and the shipping order. The mate issues a receipt after examining a packing and counting of the packages. This receipt is called the ‘Male Receipt’.

If the mate is not satisfied with the packing of the goods, a remark to that affect is made on the receipt. A receipt with this remark thereon is regarded as dirty or foul receipt.

The exporter must take proper care in packing his goods so as to avoid this remark on the Mate’s receipt without any bad remark is termed as a claim Mate’s receipt. This remark is transferred to the bill of lading when the exporter gets it in exchange for the Mate’s receipt.

Here the format of Mate’s receipts is given below

MATE’S RECEIPTThe Indian Steamship Co. Ltd.

No……………… Port of MumbaiVoy………………. Date October 28, 2003Order NO……………. Ref. No…. ……. Received in apparent good order and condition on board the S.S. Jalusha for deliver at London the under mentioned goods from M/s :

Marks Quantity Goods areSaid to be

DetailsMeasurement

Remarks

555 J.A London

1000 Bales

Cotton

This receipt is to be exchanged for the company’s bill of lading and in the meantime the goods for which the receipt is issued are held, and will be carried by the company subject to the conditions set forth on the back hereof. Signature Caption the ship

9. Certificate of origin: A certificate of origin indicates where the products originate and usually is validated by an external source, such as the charter of commerce. It helps countries determine the specific tariff schedule for import. In other words, a certificate of origin is a certificate which specifies the country of the production of the goods. This certificate has also to be produced country may require this procedure. This certificate is necessity where a country offers a preferential tariff to India and the former is to ensure that only goods of Indian origin benefit from concession.

Here, a format of certificate of origin is given below:

Certificate of Origin The undersigned duly authorised by the London Chamber of Commerce hereby verifies the declaration, made below by………… of ………. In respect of the under mentioned goods, consigned to ………..at……….via………..and certifies.

that the goods specified in the schedule above are of British original production or manufacture.

No. Of Certificate……………..………………………………..Signature of Declarer Seal Secretary

10. Packing Note and List: An export packing list indicates that the type of package itemises the material in each individual package indicates the type of package, and it attached to the outside of the package.

Number of Packages

MarksNumbers

Gross Weight Net Weight Description of Goods

The shipper or freight forwarder, and sometimes custom officials, use the packing list to determine the nature of the cargo and whether the correct cargo is being shipped. The difference between a packing not and a packing list is that the packing note refers to the particulars of the contents of an individual pack, while the packing list is consolidated statement of the content of a number of cases of packs.

A packing note include the following things:• Packing not number.• the date of packing.• name and address of the exporter.• name and address of the importer.• Order number• Date. • Shipment for S/S• bill of lading number and date.• Marking numbers.• Case number to which the note relates.• Contents of the goods in terms of quantity and weight.

It should be noted here that no particular form has been prescribed for the packing Note and packing list. Normally, ten copies of the packing note/list is prepared in which the first is sent with the shipping documents, two copies in advance to the buyer, one to the shipping agent and the remaining are retained by the exporter.

11. Other documents:

(a) Certificate of inspection: It is a certificate issued by the Export inspection Agency. This agency certifies that the consignment has been inspected as require under the Export (quality control and inspection) Act, 1963, and satisfies the conditions relating to quality control and inspection as applicable to it, and is certified export worthy. Usually Export Promotion Council does the pre-shipment inspection. Emphasis is on quality control and not on inspection for export. EIC gives an inspection certificate in triplicate to the exporter.

(b) G.P.Forms: A GP form is a gatepass for the removal of excisable goods from a factory or warehouse. Form GP 1 is used for the removal of excisable goods or payment of duty and form GP 2 is used for the removal of excisable goods without payment of duty.

(c) Cart Ticket: A cart ticket is prepared by the exporter and includes details of the export cargo in terms of the shipper’s name, the number of packages, the shipping bill number, the port of destination, and the number of the vehicle, carrying the cargo.

(d) Custom formalities: Goods may be shipped out of India only after customs clearance has been obtained. For this purpose, the following documents should be presented by the exporter to the custom authorities:

(i) Shipping bill.(ii) Declaration regarding truth or statement made in the shipping bill.(iii) Invoice(iv) GR from.(v) Export license (wherever required).(vi) Quality control inspection certificate.(vii) Original contract, wherever available or correspondence leading to

contract.(viii) Contract registration certificate.(ix) Letter of credit.(x) Packing list.(xi) AR-4 from(xii) Any other documents.

(e) License: Export import licenses are additional documents frequently required in export trade. In those cases, where import licenses are required by the country of entry, a copy of license of license number is usually required to obtain a consular invoice. Wherever a commodity requires an export license, it must be obtained before an export.

(f) Shipper’s export declaration: A shipper’s export declaration is used by the exporter’s government to monitor exports and to compile trade statistics.

(g) Indent or order: An exporter gives a quotation or an offer for sale to the foreign buyer or importer. It may be in the form of a pro-forma invoice, and offer to sell but given in the form of an invoice.

The exporter, at first receives the order or indent from the importer or his agent. The indent contains all important particular of the transaction. Hence, a foreign order is called an indent.

When a proforma invoice is accepted by the buyer, it becomes a confirmed order. An exporter is usually treated as confirmed order when letter of credit is established if favour of the exporter. There may be a formal sale contract also.

(h) Principal export documents: There are eight principal export documents which the exporter is required to send to the importer. These documents are:

(i) Commercial invoice(ii) Packing list(iii) Bill of lading(iv) Combined Transport Document(v) Certificate of Inspection/Quality Control(vi) Insurance policy of certificate (vii) Certificate of Origin(viii) Bill of Exchange and Shipment Advice.

Lesson -24Quality Control and Pr-shipment Inspection

In today’s sophisticated would market a product can move with any measure of success only if it is competitive enough in price and quality. Our export can be sustained and improved only be raising the quality of our product as it would be very difficult to reduce the price in our present day high-cost economy, with a view to achieve this objective of raising the quality of our export products the Government of India enacted the legislation entitled “The Export (Quality Control and Inspection) Act” in the year 1963, and the Export Inspection Council was also set up with effect from 1st January, 1964.

The main function of the Export Inspection Council is to advise the government with regard to measures to be taken for quality control and pre-shipment inspection of exportable commodities.

No Consignment of any notified commodity can be exported unless it is accompanied by a certificate issued by a recognised inspection agency or the article carries a recognised mark indicting that it conforms to the standard specifications.

A number of existing agencies, both government as well as private have been recognised under the Act for carrying out pr-shipment inspection of various goods. To supplement the work of these agencies, the government also established five Export Inspection Agencies, one each at Bombay, Calcutta, Cochin, Madras and Delhi in 1966 exclusively for export inspection. These agencies work under the administrative and technical control of the Export Inspection Council.

Striking progress has been made in the field of compulsory pre-shipment inspection as about 85 per cent of exports from India have been covered under one or the other system of quality control. A large number of engineering items have been covered under compulsory pre-shipment inspection scheme. However, items like diesel engines, bicycles, small tools and hand tools, automobile spares, power driven pumps, sewing machines and electric fans known as panel items- are covered under a system of in- process quality control. In the case of these items, only manufacturing units exercising adequate in-process quality control and allowed to export, and the adequacy of otherwise is adjudged by export panels consisting of representatives of the Export Inspection Council, Indian Standards Institution, Directorate General of Supples and Disposals, State Departments of Industries and representatives from the trade and industry in large as well as small scale sectors.

Similar arrangements for pre-shipment inspection, grading and marking of agricultural goods and mill-made cotton textiles and yarn for export have been made under the Agricultural Produce (Grading & Marking) Act, 1925 and the Textiles Committee Act, 1996 respectively. Under the legislation, it is obligatory for the exporter to fulfill the conditions relating to pre-shipment inspection of export goods. Procedure and the details of pre-shipment inspection very according to the nature of export commodity, the basic procedure is outlined below:

As soon as the goods are ready, the exporter should make out an application* in the prescribed from giving details of the shipment to the inspection agency. Along with the application he should furnish the following documents.**

(i) Commercial invoice giving evidence of the F.O.B value of export consignment.

(ii) A crossed chaque/demand draft/I.P.O/ for the amount of inspection fee.

(iii) A copy of the export contract/order giving details of importers’ specifications and /or a sample approved by the importer.

The inspection agency will depute an Inspector to conduct the pre- shipment inspections at the exporter’s factory or were house. After the inspection is complete, and the consignment is passed, a certificate of inspection will be issued to the exporter. This certificate has to be presented by the exporter to the Export Department of the Custom House at the time of seeking customs clearance of export cargo.

Since independence, there has been a conscious effort to improve the quality of our agriculture and industrial production in the country. This has, however, now assumed greater importance because of:

(i) adverse balance of payments position; and (ii) Inadequate foreign aid.

Moreover, we should not expect our customers abroad to buy from us goods which are of substandard quality and are relatively expensive. We should undertake to orient our production pattern so as to be able to supply goods which may exactly met the requirements of foreign buyers. It is not only the quality of the products that is important but the way they are packed. Packaging is of paramount importance in consumer goods items. Packaging and display, together with reliability of quality and continuity of supply, determine to a large extent the continued acceptability of the Indian products abroad.

Export (Quality Control and Inspection) Act, 1963To ensure a high quality of Indian goods, the government enacted a legislation

known as the Export (Quality Control and Inspection) Act. 1963. Under this Act, the Government of India has been powers to:

(i) notify commodities which shall be subject to quality control or inspection or both prior to export;

(ii) specify the type of quality control or inspection which will be applied to the notified commodity;

(iii) establish, adopt or recognise one or more standard specifications for a notified commodity; and

(iv) Prohibit the export, in the course of international trade, of a notified commodity unless it is accompanied by a certificate that it satisfies the conditions relating to quality control or inspection or that it has affixed or applied to it a mark or seal recognised by the government indicating that it conforms to the standard specification applicable to it.

EXPORT INSPECTION COUNCILThe Export Inspection Council Of India was set up by the Government of India

under Section 3 of the Export (Quality Control and Inspection) Act, 1963, to provide for the sound development of export trade through quality control and pre-shipment inspection. The Council is an apex body for controlling the activities of the quality control and pre-shipment inspection of all the commodities meant for export. The main functions of the Council as assigned in the Act are (i) to advise the Central Government

regarding measures for enforcing quality control and inspection in respect of commodities intended for export and to draw programme therefore; (ii) to arrange pre-shipment inspection of notified commodities for export; and (iii) to perform such other activities as may be assigned under the Act for matters connected therein for quality control and inspection.

In order to make the Act more effective, keeping in view of the experience gained, a comprehensive amendment was enacted by the Parliament through the Export (Quality Control and Inspection) Amendment Act,1984 which came into force on 2.7.1984. The amended Act Interalia provides for power to search and seizure of commodities, initiate adjudication proceeding against the erring manufactures/ exporters, cancellations/ with holding of the certificate of inspection already issued by the Inspection Agencies etc.

The EIC is to advise the Indian Government on matters relating to pre-shipment inspection and quality control measures for export items. Considerable progress has been made by the EIC in:

(a) defining the technical specifications for various products;(b) providing testing /survey facilities; and(c) Working out appropriate procedures.EIC is a statutory body. Eminent technologists and representatives of industry and

trade, government departments and technical organisations are represented on it. As a result, the specialised knowledge, experience and technical knowledge of the various agencies in the country in the field of grading, standardisation and inspection have been pooled together under the overall coordinating role of the EIC to enable it to carry out its pre-shipment inspection programme in the most scientific manner. The secretarial of the Council is located in Calcutta, with regional offices at Bombay, Madras, Cochin and Delhi. In view of the existing inadequate testing facilities, it has been decided to set up “laboratory-cum test houses’ at important trade and industrial centres in India, Moreover, a number of existing agencies have been recoginsed for carrying out pre-shipment inspection

In working out procedural details, the representative of industry and trade are consulted, and where the existing trade practices so require, the scheme is introduced initially on a voluntary basis and thereafter made compulsory. Process quality control in the light engineering industry has been made obligatory on the part of the manufactures. The secretariat of the EIC at Calcutta and its regional offices are manned with experienced technical officers and staff, who deal with all aspects- both technical and organisational- of quality control and pre-shipment inspection of exportable commodities.

QUALTIY STANDARDS FOR EXPORTSIn almost all the products, for which the pre-shipment inspection scheme has been

introduced, great care has been taken to accept the buyer’s requirements, wherever known, as the basis of inspection. In many cases, where the buyer’s requirements are known through-an approved sample of, for example, footwear or handicrafts, inspection is carried out on the basis of the approved sample. However, for items involving safety, such as cables and conductors, only the national standards, either Indian or those of the importing country, have been adopted. In the case of commodities involving health hazard, such as fish and fishery products, statutory laws as applicable in the importing

country for these products, are adheard to. This particular approach has been found to be extremely practical and has helped the exporters to maintain the quality of their products. For adopting or establishing technical specifications, detailed discussions are held with the trade and industry and other organisations, such as the Indian Standards Institution and the Directorate of Marketing and Inspection. In certain cases, minimum specifications are laid down for a specific purpose only, as for example, n the case of de-oiled rice bran, fumigation has been made compulsory for pre-shipment inspection.

The procedural details of the pre-shipment inspection schemes, which have been introduced, have been worked in close collaboration and in consultation with the representative of trade and industry. While preparing these detailed procedures, the existing trade practices are taken into consideration, and the relevant Government departments, including the customs authorities, are consulted, The general procedures for inspection are thereafter notified in the form of inspection rules under the Export (Quality Control and Inspection) Act for comments form the public. These notifications, containing the proposals for pre-shipment inspection schemes, are also circulated among important foreign buyers through the Indian Embassies/Trade Missions to obtain their comments. Officers of the Export Inspection Council discuss the details of the schemes with the representatives of trade and industry in the light of the comments they receive. In many cases, where the existing trade practices so require, the scheme in the first instance is introduced on a voluntary basis for a period of about 3 to 6 months; and only thereafter it is made compulsory. All the pre-shipment inspection schemes are periodically reviewed to keep abreast of technological developments and to ensure continuous improvement in quality.Appellate penels have been set up for each commodity or group of commodities which have been brought under the compulsory pre-shipment inspection scheme so that any person. Who is aggrieved by the refusal of the inspection organisation to give a certificate of export-worthiness for his products, can appeal to the panel and get his grievance redressed.

At present, the Export Council of India, the Indian Standards Institution, the Indian Statistical Institute, Calcutta, the National Productivity Council, the Indian Society of Quality Control and the Indian Institute of Foreign Trade are, by and large, responsible for generating an awareness of the problem of quality control. These organisations hold seminars, etc., and are, by and large, responsible for improvements in quality and for the formulation and implementation of standards.

Certain legislative measures, which have helped in the production of quality goods, include the Prevention of Food Adulteration Act, the Drugs Act, and the Fruit Products Control Order promulgated under the Essential Commodities Act. Though these Acts do not have a direct bearing on exports, they do help in promoting quality consciousness among Indian manufactures.

The Acts which are directly concerned with exports are the Export (Quality Control and Inspection) Act, 1963, the Textile Committee Act, the Certification of Goods under ISI Certification Marks Act and the Agriculture Produce (Grading and Marketing). Act. Since the enforcement of the export (Quality Control and Inspection) Act, 1963 definite improvements have taken place in the field of compulsory quality control and

pre-shipment inspection. Within a period of 29 years of its coming into being, the Export Inspection Council has, completed the various tasks assigned to it.

EXPORTWORTHY CERTIFICATES

After carrying out the inspection, and if the consignment is found to conform to the prescribed specification, each package in the consignment is sealed by the inspecting officers. There types of seals are used, depending upon the mode of packing. For wooden packages, for which iron hoops are used, sealing is done with decorative codes sigmoid seals, For cardboard packages, paper stickers are used, and for gunny packing, lead seals are employed. For those items which do not involve any packing such as cast iron soil pipes, etc. each pipe is marked in paint with a rubber stamp.

For each consignment declared export worthy, a certificate of inspection is issued by the inspection agency, in which the details of the consignment are incorporated. The original copy of the certificate is valid for the use of the customs authorities, who ensure that only the consignment. Whose details are given on the certificate is permitted or shipment. Those notified commodities, the packages of which bear a recongnised certification mark indicating conformity to notified standards, need not be accompanied by a certificate of inspection.

FEE FOR INSPECTIONThe expenses incurred on carrying out pre-shipment inspection are realised from

the exporters by the levy of inspection fees. In working out the charges for inspection, it is endeavoured to prescribe the fees in such a manner that the scheme is self-supporting as far as possible and, at the same time, the competitiveness of the products is not affected in the international market. The initial non-recurring expenditure, such as the expenditure incurred on the establishment of an inspection office and laboratory facilities for running a new scheme, is met by the Government of India. Generally speaking, the inspection fee varies from 0.1 per cent to 0.5 per cent of the FOB value, depending upon the nature of the inspection work involved and, the testing to be carried out.

Commodities Covered under the Quality Control and Pre-shipment InspectionThe Export (Quality Control and Inspection) Act empowers the Government to

notify the commodities under the purview of compulsory quality control and pre-shipment inspection. The notified commodities cannot be exported unless it is accompanied by a certificate of export worthiness from the Inspection Agencies recognised under the Act.

For the purpose of making positive impact on the quality of the exportable goods and thereby generating the sense of confidence of the overseas market, more and more commodities are being brought under the purview of compulsory quality control and pre-shipment inspection. As many as 1055 items of exportable commodities under various product groups such as engineering products, chemicals and allied products, coir and coir products, food and agricultural products, mica, jute and jute products, footwear and footwear and footwear components etc. , have been brought under the purview of compulsory quality control and pre-shipment inspection schemes.

Export Inspection AgenciesIn addition to the main officers of Export Inspection Agencies at Bombay,

Caluctta, Cochin, Delhi and Madras, these agencies have a network of 62 sub-officers located at important manufacturing /processing centres, ports and export points. These agencies have well equipped laboratories at all important centres for inspection and testing of the products offered by exporters/ manufactures for inspection for inspection. The Export Inspection Agencies assure the quality of the products covered under the compulsory quality control and pre-shipment inspection scheme by conducting inspection and testing of the products intended for export.

The export Inspection Agencies also undertake voluntary inspections of those items which had not so far been brought under the ambit of the Act. These inspections are normally done at the instance of the overseas buyers or the Indian exporters.

In addition of these five Statutory Agencies, the government have recognised 39 private Inspection Agencies and 10 Government agencies to supplement the work of fumigation and quality control certification for certain specified commodities under the Act. The government is empowered to withdraw recognition from any agency if it is deemed to be necessary in the public interest.

Systems of InspectionThe following three inspection systems are in operation at present for the purpose

of ensuring quality of the product meant for exports.(i) Consignment inspection.(ii) In process Quality Control (IPQC)(iii) Self Certification.

(i) Consignmentwise Inspection: Under the first system, each consignment is subject to inspection and testing by the inspection agency on the basis of statistical sampling plan.

(ii) In-Process Quality Control (IPQC): Under the second system, the quality is built into the products by the manufacturing units themselves by exercising raw material and bought out component control and packaging control. The certification of inspection are issued by the inspection agency on the basis of adequacy of the above controls and after spot checks of consignment by the Agency where felt necessary. While the system of approving units under IPQC has been simplified, the export inspection agencies are also rendering necessary technical assistance to more and more units so s to qualify them under IPQC System.

(iii) Self Certification: Under self-certification system, the manufacturing units fulfilling the stringent norms prescribed for product quality, design and development, raw materials and bought out components, quality control laboratory, process control, meteorological control, independent quality audit, packaging, aftersales service, house keeping and maintenance are allowed to issue certificates of inspection themselves.

To encourage more units to adopt IPQC system and self-certification scheme, the units are now approved for a period of three years for non-food items and for two years in respect of food items as against earlier practice of one year.

The units approved under the IPQC system and Self-Certification Scheme are inspected periodically.

Pilot Test HouseA thrust has been made by shifting the regulatory function of the Exports

Inspection Agency to quality development activities. Keeping this in background, the Council has been entrusted with a project of providing technical assistance to the cross section of the various industries for upgradation of quality of the product to compete successfully in the International Market. For this propose a Pilot Test House has been set up in Bombay with necessary infrastructural facilities of testing the product to the requirement of the international standards.

To start with, the Pilot Test House should be in a position to meet the needs of the engineering products already brought under the purview of compulsory quality control, and pre-shipment inspection. The Pilot Test House supposed to have 17 laboratories condensed into 13 sections for carrying out testing of the engineering products. The scope of testing safety and health hazard items like domestic electric appliances, switch gears, etc, has already been taken care of in the proposed laboratories. The Test House has three major sectional laboratories namely (i) chemical laboratory, (ii) electric laboratory, and (iii) mechanical laboratory.

Training FacilitiesIn order to achieve the overall objectives of the Export Development through

quality control and inspection, the Export Inspection Council has set up a full-fledged training centre at Madras where training is imparted to the inspecting officers and the officers in the middle management. Through the curriculum of the training, the officers of the organisation are given training on the methodology and techniques of quality assurance including the latest techniques in standardistion, inspection and quality control prevalent in other countries. A part form training of officers of the organisation, the technical personnel involved in the production and quality control department in the trade at various levels are also given adequate training for maintenance of quality and periodic inspection of the product manufactured, maintain product quality or to utilise such information towards improvement of the quality of the product. The training centre at Madres has been approved by the Food and Agriculture Organisation (FAO) for food control training network in Asia. The FAO has agreed to finance to the tune of US $ 3.25 lakhs through UNDP assistance. FAO has also sanctioned a project at an estimated cost of US $ 1.34 lakhs for strengthening the training programme in quality control of food products in India. The project envisages the FAO would train master trainers in India who in turn will train supervisors, technologists and workers engaged in the field of food and agriculture products. The various international bodies like united nations, Industrial Development organisation, Food and Agricultural Organisation have deputed officers from different countries for training in the specialised field of quality control and inspection in different agricultural commodities in India.

Procedures for Handling Complaints

Apart form enforcing compulsory pre-shipment inspection and quality control, some procedures have also been evolved to assess and evaluate complaints on quality received from buyers, by the regional standing committees at Bombay, Caluctta, Cochin, Madras and Delhi. Complaints received on quality are investigated, evaluated and used as a feed back system to remove the loopholes in the system of inspection and to improve the quality of the products.

Voluntary Inspection

In addition to carrying out compulsory quality control and pre-shipment inspection of commodities notified by the government under the Export (Quality Control) Inspection Act, 1963, the Export Inspection Council undertakes voluntary pre-shipment inspection at the specific requests received of foreign buyers or Indian exporters. Such inspection is carried out on the basis of the specifications mutually agreed to between the buyer and the seller.

Latest Position of Quality Control as Per the New Exim Policy Announced on 31st March 1992

The Central government has launched in association with trade and industry, a major nation-wide campaign on quality awareness and is taking steps to bring Indian products to world standards.

Government though introduced a nation – wide programme on quality awareness in order to promote the concept of total quality management. However the response form trade and industry is not that encouraging on this score, so far government of India propose to encourage quality awareness programmes and assist state governments in kindling similar programmes in their respective states, particularly for the small scale and handicraft sectors.

The Central government have introduced a scheme to recognise and suitably reward manufacturers who have acquired the ISO 9000 (Series) or BIS 14000 (Series) or any other internationally recognised equivalent certification of quality. Such manufactures are eligible for grant of special import licences.

The Central government will assist in the modernisation and upgradation of test houses and laboratories in order to bring them at per with international standards so that certification by such test houses and laboratories is recognised within the country and abroad.

It may however, mentioned that quality control rigidities have been relased considerably as far as it goes to the established large scale units; however, rigid inspection is still there for the products of small scale units. Logically, they have to be quality wise more competitive if they wish to gain a foothold in international markets.

Export Assistance

In their efforts to diversity the export trade, manufactures are assisted

by import licensing to meet the requirements of imported raw materials for

production, the allocation of indigenous raw materials, fiscal rebates, railway

priorities and freight concessions, credit facilities, and so on.

Various Recent Assistance Programmes Announced by the Central

Government in July/August 1991 and in the Export Policy 1992-97 are –

1. The new policy eliminates licensing, quantitative restrictions and other

regulating discretionary controls. All goods may now be freely

imported and exported except for two small negative lists.

2. The number of canalized goods has been drastically reduced and

canalization is confined to certain petroleum products, fertilizers,

edible oils, cereals and a few other items.

3. The scope of the duty exception scheme has been enlarged by

introducing value based advanced licences besides the quantity based

advance licences. This will give greater flexibility to the exporter to

import and export goods within the overall value limits and without any

quantitative restrictions except in the case of sensitive goods.

4. Export house, trading houses and star trading houses and public sector

undertakings are eligible for the facility of self certification under the

Advance License Scheme against legal undertakings without any

monetary limits.

5. The Export Promotion Capital Goods (EPCG) Scheme has been

liberalized and two windows are now available for import of capital

goods at concessional rates of customs duty at 25% or 15% with

corresponding export obligations. Both new and second hand capital

goods could be imported under the Scheme. Domestic manufacturers

of capital goods who may require to import components may also avail

themselves of the EPCD Scheme at the concessional rate of customs

duty at 15% of CIF value. All licences under duty exemption scheme

are to be made transferable.

6. Export Oriented Units (EOUs) and units in the Export Processing Zones

(EPZs) have been given greater autonomy and flexibility. They are

allowed to install not only own machinery but also machinery taken on

lease. They could also export their production through export houses,

trading houses or star trading houses.

7. The Registration-cum-Membership Certificate (RCMC) issued by Export

Promotion Councils (EFCs) will be an essential requirement for any

importer/exporter to avail of the benefits or concessions or to apply for

any license.

8. Certain categories of exports and exporters will be eligible to receive

special import licences. These includes deemed exports, export

houses, trading houses and star trading houses and manufactures who

acquire ISO 9000 (series) or BIS 14,000 (series) certification of quality.

9. The export procedure and documentation have been simplifies and are

now easy to administer and save considerable time of the exporters.

Only one application form each has been prescribed for exports and

imports, as also for legal undertakings and bank guarantees as against

several set of application forms earlier. New export documentation

system would save 50% time and cost on documentation. Two master

documents in place of 25 earlier to be submitted to various agencies

earlier is an important feature of the new documentation system.

10. As per the new five year export import policy, no drawback is

admissible on the product exported under DEEC. Therefore, the

existing provision of providing the reduced rates of drawback for

exporters availing of the duty exemption schemes, have been

discontinued.

On July 1, 1992 the Government of India announced the duty drawback

schedule in which it has approved 161 items to boost exports and fixed

specific rates for seven new items. The new duty drawback rates

continue the existing rates for 127 items including drugs, leather

products, sports goods and electronic items. Upward revision of duty

drawback rates is mainly attributed to the increase in the international

prices for a number of imported inputs, partial convertibility of the

rupee and general increase in prices during the past one year.

The items on which drawback duty stands withdrawn include cotton

gloves, variable PVC gang condenser, spectacle frames made of

cellulose acetate sheets, ceramic cartridges, ceramic stylus, refills for

vacuum flask with plastic outer cover, ethamutor tablets 400 mg. in

addition there are some items for which the existing drawback rates

have been decreased.

11. Duty exemption schemes, duty drawback schemes and exemption

from terminal excise duty have been extended to deemed exports.

12. Import curbs on exporters have been relaxed on August 7, 1991.

Restriction of 200% margin money for getting letter of credit for OGL

(open general license) imports has been totally relaxed in specified

thrust areas identified by the Commerce Ministry (Government of

India).

13. Credit limits available to the export sector and banks have been

substantially increased.

14. The restriction on import of capital goods has been removed now.

15. If imports covered by suppliers credit accompanied arrangement, there

will be expeditious clearance.

16. To meet the import requirement particularly for raw material the Exim

Bank has been allowed to given medium-term revolving line of credit.

17. The new policy has scrapped the instrument of Exim Script introduced

in August 1991 in favour of the partial convertibility of the rupee (PCR)

in 1992 as a means for increasing export earnings. A currency is

convertible when it can be exchanged against any other currency. In

the case of Indian rupee, it can be exchanged only against US dollar,

and that too through the banks. This partial convertibility has led to

discrimination. Earlier atleast all exporters get the same amount for

the dollar. Now on some days dollar rules higher than on other days.

The new policy allows the import of gold by Indians after a six months

stay abroad. Henceforth, as per latest “Liberalised Exchange Rate

Management System” (LERMS) there would be two exchange rates for

foreign currency – the official rate fixed by the RBO at which 40% of

foreign exchange inflows would have to be converted and a ‘market

rate’, worked out in each transaction as the major foreign exchange

banks traded with each other or bought the remaining of 60% of

exchange inflows. The market rates being some 13% above the official

rate, and well below the 15% at which the RBO is expected to interview

by making purchases in the market. The partial convertibility of the

rupee has particularly affected those exporters who had to import a

substantial part of their material requirements.

It is expected that over a period of time Indian rupee will stabilize.

However, according to one estimate exporting companies with an

import requirement of over 10% could experience their margins

decreasing and for high tech exporting companies with an import

content 50%, the margines would fall by over 5%.

18. The facility of opening dollar accounts in India, hitherto granted to

exporters of gem and jewellery and Maruti vehicles, has been

extended to other exporters too. The account holders will also be

eligible for 80 HHC, for which a provision has already been made in the

Finance Bill. Dollar remittances credited in the account would be

utilized to repay the hard currency loan obtained by the exporter on

his own scheme for importing inputs and the surplus would be diverted

to RBI’s central pool.

19. The Commerce Ministry has decided to decentralize clearances of

advance licences, export oriented unit (EOUs) and export processing

zones (EPZs) and the function is now being handed over to the

commercial banks.

20. Another irritant of 15% tax as foreign travel stands withdrawn in May

1992 and the release of foreign exchange for travel has been made

easier and more liberal. For those traveling abroad, the ”blanket

permit” continues. The allowances of upto $300 per day during foreign

travel is sanctioned.

21. The government also released computer-compatible advance licences

(which allow duty free imports required for exports) on September 4,

1991. These licences will be available within 15 days of submission of

application. advance licences would be issued within 15 days in cases

where input-output norms had been fixed and 45 days in other cases.

Thus advance licensing has been strengthened.

22. Importers of capital goods who have a supplier’s credit of one year or

more and a buy back arrangement will henceforth get speedy

clearances.

23. The ceiling limit on OGL has been raised from Rs. 2.5 crore to Rs. 5

crore. It has been decided to extend the limit to 20% of last three

years performance subject to a maximum of Rs, 5 crore.

24. The scheme for grant of additional licences to export houses/ trading

houses/ star trading houses has been abolished and in lieu of such

additional licences these houses will be eligible for REP licences at

lower rates, 5% instead of 10% for export houses/ trading houses and

10% instead of 15% for start trading houses/ The advance licensing

route will remain open for exporters who wish to go through this route.

The REP rate for advance license exports is being increased from 10%

of NEF to 20% of NFE.

25. The level of inventory holdings of imported raw materials is restricted

to the levels of three months.

26. Small scale industries and producers of life-saving drugs and

equipment will continue to be eligible for supplement licences for

Appendix 3 items.

27. Private parties have been allowed to establish warehouses within

EOU/EPZ for stocking and sale of duty-free raw materials, components,

consumable and spares of EOU/EPZs units.

28. The recognised export houses whose turnover has crossed a certain

limit have been allowed to open accounts in select foreign banks and

avail themselves to finance their imports. Implicit in this innovation is a

daring start to the process of making the rupee a tradeable currency.

29. Marine products, certain agricultural goods, electronic and high

technology engineering equipment have been duly encouraged for

exports. This should lead to an increase in production and upgradiation

of technology. Sixteen export and 20 import items have been

decentralised. Several items from the monopoly of public trading

houses have been taken out. This has been done with a view to impart

competitive spirit. Two entries now thrown open to all exports are

interesting. One relates to railway passenger coaches and locomotives

and the other is coke and coal.

30 Import of capital goods has been made easy. If the equipment is

bought out of foreign equity, there is no ceiling of the amount involved.

An entrepreneur can bring in plant and equipment which are readily

available in India.

31 Export-import controls have been made easy. If the equipment is

bought out of foreign equity, there is no ceiling of the amount involved.

An entrepreneur can bring in plant and equipment which are readily

available in India.

32. Import of 3 items banned, 68 items restricted and 8 items canalised.

The pruned negative list of exports banned 7 items, restricted 62 items

and canalised 10 items, permitted 46 items’ export with minimum

regulations.

33. The deemed exports have been accorded favourable treatment. Except

for some petroleum products, edible oils, fertilizers and cereals etc., all

others items have now been decanalised. Benefits of duty exemption

scheme, duty drawback scheme and exemption from terminal excise

duty have been extended to deemed exports.

34. The scope of duty exemption schemes has been enlarged by

introducing value-based advance licensing besides. The quantity-based

advance license. This will give greater flexibility to the exporter to

export and import goods.

35. The multiplicity of controlling agencies have been considerably

reduced.

36. Pre-shipment inspection scheme has been abolished for export houses

and large scale units.

37. The office of the CCI & E is to be redesignated as Directorate General

of International Trade. The functions of CCI & E are being reoriented.

The role of CCI & E will be of promoter of exports instead of controller

of imports and exports. The Borad of trade has also been

reconstituted.

38. Now an exporter can borrow FOREX designated export credit at 6.5%

and medium term

deferred credit at 7.8%. Export credit in Indian rupees carries interest

as high as 15%.

Exporters should take advantage of the low rate of interest.

39. Fifteen per cent of receipts, exporters are permitted to retain in a

foreign currency with a bank in India under the new liberalised exchange

rate management system (LERMS).

The retention upto 15% of the receipts have to be out of the stipulated

60% convertible foreign exchange under free market rates. Funds in

such foreign currency accounts could be utilised for all purposes,

including remittance of commissions.

40. More then 90% of the trade regulations have been removed and the

remaining

regulations would be gradually done away with.

41. The RBI has modified the export credit refinance formula to provide

added incentives for

extending export credit. The banks would now be provided export

credit refinance to the extent of 60% or the increase in outstanding

export credit over the monthly average level of 1988-89 upto the

monthly average level of 1989-90 plus 125% (as against 100%

hitherto) of the increase over the monthly average level of outstanding

export credit in 1989-90.

This modified two tier formula has been implemented in two

stages. The second tier of export credit refinance was raised from

100% to 110% form November 1991 and from 110% to 125% from

December 28, 1991. This has been done to bring about increase in

exports. The increase in export credit interest rates together with the

liberalisation of the export credit refinance formula are major

incentives to banks to provide export credit.

42 The EXIM Bank’s Power for clearance of proposals for project exports

have been

enhanced from Rs. 20 crore to Rs. 30 crores.

43. As per the latest RBI directive banks may grant loans and overdrafts to

persons, firms

and companies, including banks outside India after fulfilling the

following conditions: There should not be any direct or indirect outgo

of foreign exchang; the loan should be fully secured by primary

security in the form of hypothecation/mortgage of asset by Indian

borrower; regulations relating to normal margin, interest rates etc. as

stipulated by the RBI from time to time should be complied with; the

guarantor should have assets in India, which are not less in value then

the amount of the guarantee.

Export Processing Zones (EPAs): The Government of India introduced

EPZs with an objective to increase production base of exportable

commodities and goods. There are six EPZs at KANDLA, Santacruz

(Bombay), Falta (west Bengal), Madras, Cochin and Noida (near new

oriented multiproduct industrial units. Santacruz (Bombay) EPZ is a

zone established for 100% EOUs manufacturing electronic equipments

and components.

Supplies can be obtained in these zones for further production

without payment of excise duty or import duty, importation is possible

without prior licensing. However, it is obligatory on the exporting units

to export 100% of their production.

All units in EPZs are eligible for a tax holiday for a period of 5

years. Tax holiday could be availed for any continuous block of 5 years

within 8 years of commencement of production. Besides foreign

investment is welcome and conditions for investment are more liberal

than in the domestic tariff area.

100% Export Oriented Units (EOUs)

This scheme was introduced on 31st December 1980 with the

objective of generating additional production capacity for exports. The

100% EOUs are required to undertake manufacture under bond and

export for a period of 10 years ordinarily and 5 years in the case of

products having high degree of technological change. Such units are

allowed import of machinery, components, spares, raw materials and

consumables free of duty. EOUs are expected to export their entire

production except.

(a) Rejects upto 5% or such percentages may be fixed by the

Board of approval. Rejects may be sold in the Domestic Tariff

Area (DTA), subject to payment of appropriate duties.

(b) 25% of the production in value terms may be sold in the DTA

when the use of indigenous input is more then 30% in value

terms. When the use of such inputs is less than 30%, DTA

sale entitlement shall not exceed 15% in value terms. Unlike

EPZs, EOUs can be located any where in India, be of any size,

or even MRTP/FERA, a new factory, a new branch of an

existing factory or an expansion of an existing factory.

Benefits for supplies from the DTA

Supplies form the DTA to EOUs/EPZs untis will be regarded as

“Deemed Exports” and will be eligible for the following benefits.

(a) Refund of terminal excise duty, central sales tax and duty draw

back;

(b) Exemptions from payment of central excise duty on capital goods,

components and raw materials supplied under this paragraph;

(c) Discharge of export obligation, if any, on the supplier.

The benefits stated above shall be available provided to goods

supplied are manufactured in the country and the supplies are against

a letter of authority issued by the Development Commissioner.

Benefits for EPZ/EOU Units

(i) Concessional Rent: The units set up in the EPZs will be eligible

for concessional rent for lease of industrial plots and standard

design factory (SDF) buildings/sheds allotted for the first there

years at the following rates:

(ii) For Plots: The concession will be 75% for the first year, 50% for

the second year and 25% for third year if production had

commenced in the first year or the second year. The concession

will not be available for the third year if production had not

commenced by the end of the second year.

(iii) For SDF buildings/sheds: The concession will be 50% for the first

year 40% for the second year if production had commenced in

the first year. The Concession will be 25% for the third year if

production had commenced in the first year. The concession will

not be available if production had not commenced by the end of

the first year;

(iv) Tax Holiday: EOUs and EPZ units will be exempted from

payment of corporate income tax for a block of five years in the

first eight years of operation;

(v) Clubbing of NFE: Net Foreign Exchange (NEF) earned by an

EOU/EPZ units can be clubbed with the NEF of its

parent/associate company in the DTA for the purpose of

according export house, trading house or star trading house

status for the latter;

(vi) IPRS: The International Price Reimbursement Scheme for supply

of iron and steel will be available to EOUs and EPZ units; and

(vii) 100% Foreign Equity: Foreign equity upto 100% is permissible in

the case of EOUs and EPZ units.

Inter-unit transfer

(viii) Transfer of manufactured goods may be permitted by the

Development Commissioner form one EPZ unit to another EPZ

unit, one EPZ unit to a EOU, one EOU to an EPZ unit or form one

EOU to another EOU.

(ix) Goods imported by an EOU/EPZ unit may be transferred or given

on loan to another EOU/EPZ unit with the permission of the

Development Commissioner.

Subcontracting

(x) The EOU/EPZ units may be permitted to sub-contract part of

their production for job work to units in the DTA on a case to

case basis Requests in this regard will be considered by the

concerned Customs authorities on the basis of factors such as

feasibility of bonding, fixation of input and output norms, and

furnishing of undertakings/bonds by the concerned units.

Sale of Imported Materials

(xi) In case an EOU/EPZ unit is unable, for valid reasons, to utilise

the imported goods, it may re-export them with the permission

of the Development Commissioner, subject to clearance from

Customers with reference to valuation etc. Such goods may also

be transferred to an Actual User in the DTA with the permission

of the Development Commissioner on payment of applicable

duties.

(xii) Imported machinery/ capital goods that have become obsolete

may be disposed of, subject to payment of customs duties on

the depreciated value thereof.

Disposal of scrap

(xiii) The Development Commissioner may, subject to guidelines laid

down by the BOA in this behalf, permit sale in the DTA of scrap/

waste/ remnants arising out of production process on payment

of applicable duties and taxes. Percentage of such scrap/waste/

remnants shall be fixed by the Board keeping in view the norms

specified by a public Notice issued in this behalf by the Chief

Controller of Imports and Exports.

Private bonded warehouses

(xiv) Private bonded warehouses may be permitted to be set up in

EPZs for stock and sale of duty-free raw materials, components

etc., to EOUs and EPZ untis subject to the following conditions:

(a) The private bonded warehouse shall be located within the

EPZ;

(b) Imports for such private bonded warehouses shall be made

only against specific licences. No license shall be given to

import items which are not required by the consuming untis;

and

(c) The items imported by the private bonded warehouses shall

not be permitted to be sold in the DTA.

Period of Bonding

(xv) The bonding period for units under the EOU Scheme shall be 10

years. The period may be reduced to 5 years by the BOA in case

of products liable to rapid technological change. On completion

of the bonding period, it shall be open to the unit to continue

under the scheme or opt out of the scheme. Such debonding

shall, however, be subject to the industrial policy in force at the

time the option is exercised.

(xvi) On the Satisfaction of the BOA, EOU/EPZ units may be depended

on their inability to achieve export obligation, value addition or

other requirements. Such debonding shall be subject to such

penalty as may be imposed and levy of the following duties:

(a) Customers duty on capital goods at depreciated value but at

rates prevalent on the dates of import;

(b) Customers duty on unused raw materials and components on

the value on the dates of import and at rates in force on the

dates of clearance.

Conversion

(xvii) Existing DTA units may also apply for conversion into an EOU

but no concession in duties and taxes would be available under

the scheme for plant, machinary and equipment already

installed.

Value addition

“Value Addition” shall be expressed as a percentage and shall be

calculated according to the following formula:

100,A B

VA WhereA

−= ×

VA is Value Addition,

A is the FOB value realised by the EOU/EPZ unit; and

B is the sum total of the CIF value of all imported inputs the value of

all payments made in foreign exchange by way of commission, royalty,

fees or any other charges, and the value of all indigenous inputs

purchased by the EOU/EPZ units. Inputs mean raw materials,

intermediates, Components, Consumables, parts and packing

materials.

Investment Policy for Non-Resident Indians and Overseas Corporate Bodies

Liberalised

The following are the highlights of the revised policy and procedure for

investment by Non-Resident Indians (NRIs) and Overseas Corporate Bodies

(OCBs):

1. NRIs and OCBs predominantly owned by them permitted to invest

upto 100 per cent foreign equity in high priority industries with full

benefits or repatriation of capital and income accrued.

2. Permission for NRIs and OCBs equity holding up to 100 per cent

granted in hotels, tourism-related industry, hospitals, diagnostics,

canters, shipping, export-oriented deep-sea fishing industry and oil

exploration services with full repatriation benefits.

3. Foreign equity covers the foreign exchange needs for import of

capital goods with the proviso that the plant and machinery to be

imported must be new and not second-hand.

4. The proposed NRI and OCB project must be located within 25 Km

form he periphery of the standard urban area limits of a city with a

population of a million.

5. Existing scheme of 100 per cent NRI investment in 100 per cent

EOUs (export-oriented units) as also the scheme for revival of sick

units by NRIs to continue.

6. The revised procedures demands the NRI and OCB proposal to be a

composite one including detailed information on the capital goods to

be imported for the project.

7. No indigenous clearance required for import of capital goods which

are fully financed by NRIs out of their own resources abroad, provided

the items of import not covered under Appendix I, Part A of the Exim

Policy (1990-93).

Conclusion: As regards export incentives there is no beginning and no

end in this in this matter. Incentives granted at one point cases to be

incentives at another. A true incentive would be to make rupee fully

convertible. When this is done the debate on incentives/assistance will

weaken.

Lesson 16- Physical Distribution Transportation,Packaging and Marine Insurance for

Exports

Having examined the nature of international trade channels, we now turn to the related function of physical distribution; i.e., the actual movement and storage of products until they reach the final consumer. This chapter includes discussions of

transportation, packing and warehousing needed for international movement of goods. This chapter also includes a description of marine insurance because of its close relationship to the physical distribution function. Since the contents of this chapter are drawn from complex and technical subjects. Our objective is to provide a sketch of the area’s main concepts. Anyone inspired to conduct international commerce should at least be aware of these major considerations.

PHYSICAL DISTRIBUTION DEFINED

Often physical distribution is seen merely as transpiration and the related area of storage. Actually the physical distribution function includes a broader array of activities needed to provide efficient movement of finished products and raw materials from the factory to the final user. The National Council of Physical Distribution Management, USA, a group devoted to the advancement and study of logistics, recognized the important components when it defined physical distribution as:

“…… the broad range of activities concerned with the efficient movement of finished products from the end of the production line to the consumer and in cases includes the movements of raw materials from the source of supply to the beginning of the production line. These activities include transportation, warehousing, materials, handling, protective pack- aging, inventory control, plant and warehouse site selection, order processing, market forecasting, and customer service.”

In this definition, physical distribution is viewed as an integrated system that determines what goods are needed in specific locations, performs the transportation and storage functions, processes orders, and maintains and effective information system. Bowersox offers a simplified definition stressing the business activities involved to satisfy customer needs for an assortment of goods. This is the definition we will use in this chapter. “Physical distribution consists of those business activities con- cerned with transporting finished inventory and/or raw material assortments that they arrive at the designated place, when needed, and in usable condition.”

The growth and development of exporters an their need for worldwide logistical support provide many opportunities for integrating the physical distribution function to improve service levels and reduce costs. Functions that traditionally ware delegated to freight forwarders and other third parties may be performed within the firm as it plans logistical support for its affiliates. The firm’s marketers and distribution specialists can work together to control distribution costs while still providing the level of customer service required to compete in the world market. Computerized communication systems facilitate document processing and enable the firm to maintain better control over the physical distribution system.

The export manger has two problems in working with the distribution system in an export market:

(a) Transportation for the movement of goods; and (b) Marketing channels to be used to reach the foreign buyers.

The price of the end product is heavily influenced by the way the physical product moved. The transport costs constitute a big proportion of the total cost of the merchandise. The cost of export distribution is greater then domestic distribution because involvement of additional packing and creating are often necessary and the intermediaries become necessary because the exporter does not have adequate export know-how. In addition, insurance for transportation may be necessary to reduce the quantum of risk, because increased profits can be generated directly either through reduced costs or increased sales. Transportation costs are lowered when technological improvements are made use of.

Any exporter can make a particular sale because the transportation system he uses is speedy and reliable and because he can get this product to the foreign consumer when and where it is wanted at comparatively reasonable cost.

Decision Areas of Physical Distribution

The exporter should take the decisions for physical distribution in the following areas:

1. Size of the Consignment(a) Minimum size of the pack;(b) Quantities to be shipped;(c) The type of the packing to the used;(d) Markings to be used on the container.

2. Transportation (a) The route of the shipment to be used;(b) Mode of transportation to be used;(c) Marine/air insurance.

3. Storage(a) Assembling;(b) Breaking bulk shipments into smaller sizes;(c) Preparing products for re-shipment.

4. Plant Location(a) Determining the number, size and geographic placement of the warehouse;(b) Number of plants and their locations.

5. Materials Handing Provisions for internal movement of products within the plant and warehouse

facilities.

6. Carrying InventoryProper level of inventory so that a balance is maintained between customer

service and inventory cost.

7. Order Processing and Documentation(a) Procedures must be established to process orders;(b) Correct documentation.

The physical distribution system of exports is two-phased, i.e, first, the products must be moved both between nations and within overseas market. The extent to which the export marketing manager must plan depends upon the terms of sales. The basic types of mode of transportation available to exporter are:

(i) Shipping;(ii) Air;(iii) Rail;(iv) Truck.

Shipping the most popular mode of exports. The importance of other types depends on many other factors. The export marketing main must know the relative advantages of all the modes of transportation available to him – particularly for the markets in which he is doing business or in which he is interested in doing business. Air transport offers the advantage of speed and dependability of delivery, insurances and warehousing, etc. However, the total cost by air turns out to be considerably high.

Factors Influencing Distribution Cost

The rise of fall in distribution costs in influenced to a very large extent by the following factors:

(i) Quality of customer service;(ii) Quality of the mode of transport; and(iii) Quality of purchasing.

The main factors which directly influence distribution costs include the following:

(i) The size of the consignment;(ii) The location of port of shipment and port of entry;(iii) Regularity of movement;(iv) Speed of delivery and lead time;(v) Nature of goods- perishable or not;(vi) Stock-holding requirements;(vii) Packaging requirements and dispatch facilities; and (viii) Methods of handling.

Part I

TRANSPORTAIONThe transportation industry is a complex of institution that includes not only the

carriers themselves (the ocean shipping companies, airlines, and truckers), but also the supporting terminal operators, freight forwarders, customhouse brokers, ship brokers, financial houses, insurance firms, and engineering and manufacturing concerns, There is also an array of governmental agencies, that oversee the operations of the industry and

control the rates charged and services provided. Changes in any of these institutions or their foreign counterparts have ramifications on the rest of the industry and affect the service provided to the shipper of goods in international trade.

ELEMENTS OF THE TRANSPORTATION SYSTEM

Physical distribution managers have an array of alternative methods or modes of transportation for the movement of goods across borders and within countries. Various forms of sea, air, and land transportation may be available for use singly or in combination. The manager’s choice is influenced by the specific product and market characteristics. Large, bulky, low-unit-value items and basic commodities may not be capable of economically using some forms, such as air transport, except for special shipments. On the other hand, fresh flowers and perishable foods may require either fast shipment or special storage facilities. High-value items such as jewellery may be shipped by a variety of methods, but their margins permit movement by high cost rapid transportation and at less risk of theft.

(1) Market Location

The market location affects the types of transportation that are available. Contiguous markets frequently can be efficiently serviced by truck or rail as might be the case for US manufactures shipping to Canada or Mexico, or for most European producers selling to other continental companies or Indian companies might sell to Pakistan, Bangladesh or Nepal. The location and size of the market and its physical facilities may limits its access by ocean freight. Air transportation is increasingly making markets such as Japan and Brezil quickly which are accessible for products that can economically employ that mode.

In order to achieve efficient movement of goods at low cost, the manger of physical distribution needs to evaluate the viable alternatives. This analysis involves investigation of not only transportation rate structures, but also the effect of transportation on the other distribution costs: warehousing, inventory, packing, and communication. Frequently, trade-offs must be made among these various distribution functions in order to obtain the lowest total cost for the system as a whole. Some of the possible trade-offs within the physical distribution system itself will become apparent in subsequent sections; however, the trade-offs also involve broader marketing considerations. The performance of the distribution functions can affect a company’s sales. Buyers of industrial goods require assurance that supplies, component parts, and raw materials will be available to meet projected production schedules. Retailers also need assurance that products will be available in saleable condition in time to conform the scheduled promotions. For both retailers and industrial buyers, quick access to nearby inventories may be important in planning their own inventory levels and assortments.

Choice Criteria

Achievement of the firm’s physical distribution objectives requires knowledge of all available alternatives. When selecting an appropriate mode of transportation and the particular carrier to be used, managers evaluate the alternatives on several criteria in addition to the interaction noted above. Commonly used criteria include consideration of each method of transportation on the basis of speed, cost, dependability of performance, and services.

(a) Speed: Rapid transportation may be obvious factors for perishable products, but it is also significant for other products because of its effect on inventory. Rapid transportation enables a firm to maintain a minimum inventory. Rapid transportation enables a firm to maintain a minimum inventory in float, i.e., the movement process. Since inventory carrying charges are a significant cost factor, the reduction of float lowers the firm’s investment while still providing satisfactory service. Speed also tends to lesson the losses due to spoilage and theft. Rapid delivery shortens the period for which demand forecasts must be made. It makes possible rapid filling of customer orders, thereby lowering the inventory that a buyer must carry.

(b) Cost: Unfortunately, the use of rapid transportation modes results in a high transportation cost. The higher freight rates associated with rapid transportation lead to high transportation costs per ton per kilometer. This high transportation cost may be partially or wholly offset by savings in packing, inventory, or other costs. Air freight, for example, does not require the packing needed to protect ocean freight and also will reduce the time in transit. The rate structure for international movement is complex and cost comparisons need to be made for specific shipments based on applicable rates for the product and shipping and receiving points.

(c) Dependability: Dependability of delivery and safe carriage of goods can easily be as important as cost and speed in the transportation decision. Of prime importance to the buyer is the assurance that goods will be available when promised and in saleable or usable condition. The buyer who can depend on delivery schedules can plan promotions and production. Schedules to achieve maximum sales impact and coordination of production and marketing. Dependability of transportation aids the seller in making realistic delivery promises and aids the buyer by permitting close scheduling with attendant inventory and warehouse savings.

(d) Services: Each of the transportation modes has its own unique characteristics. In addition, each has developed a variety of service options to attract customers. Some arrange for pickup and delivery, permit diversion of freight to a second market, allow shipments to move, or provide other services to meet a customer’s requirements. A firm’s foreign freight forwarder can aid shippers in the selection of the most advantageous services.

MODERN DEVELOPMENTS IN TRANSPORTAION

International marketing managers must choose from a complex, often bewildering, array of transportation methods for distributing their products between and

within countries. Not only are there a larger number of alternatives that may be available at a given time, but the established patterns of transportation are continually being challenged and adjusted by new technology, by changes in the infrastructure of the countries, and by changing trade patterns to which the transportation agencies adapt. Modern technology has produced the huge supertankers, lighter abroad ship (LASH) vessels, and containerships; the wide-bellied jets for air freight service; and improved trucking facilities for land travel. In addition, governments have improved roads and port facilities as part of their economic development programmes. The institutional structure of the transportation industry itself changed to adapt to these environmental changes and the shifting economics of the industry.

Types of Transpirations.

(i) Sea Transpirations: The modern containership is a prime example of advances in ocean shipping. The containership is specially designed to transport shipments in relatively large boxes or containers. These containers permit the consolidation of items into standard-sized units for efficient handling and storage abroad ship. Furthermore, the container are designed for repeated use by several modes of transportation. The container may be filled at the shipping point, carried by truck to the railway line, placed on a railcar, and transported to the dock where it is loaded aboard ship, all without intermediate loading or unloading.

Containership are efficient carriers of large amounts of merchandise and have replaced smaller general cargo ships on many trade routes. They provide more efficient handling and faster turnaround times in the ports so that a smaller number of them can provide the same shipping capacity of the smaller vessels. This, in turn, has meant that many shipping firms have been forced to replace their older ships to remain competitive. Also some ports which ware formerly visited by the smaller ships are no longer able to provide the volume needed for efficient operation of the large containerships, and the routes have been adjusted so that the larger ports often serve new areas. The increasing concentration of activity in these ports often serve new areas. The increasing concentration of activity in these ports has been accompanied by improved rail and road linkages between the ports and interior areas previously served by other ports. The Scandinavian countries, for example, have found that only a few of their ports have been able to support frequent and regular containership service.

The containerships also effect the documentation and customs procedures as well as insurance risks and rate structures of the industry because the goods are consolidated in large containers and not readily available for inspection of individual items. The containers, in addition, have aided the development of intermodal transport system which integrate the use of trucks, ships, and /or planes. Thus, the new technology has influenced all segments of the industry.

Other developments in ocean freight which have provided more efficiency or better service include the gigantic super tankers, the largest of which, the ultra large crude carriers, are 400,000 deadweight tons or larger. Following the closing of the Suez Canal, the petroleum industry began using larger tankers as a means of reducing transportation

costs. The efficiency of the newer ships led to the development of extremely large carriers that ware several times the size of earlier ones. These ships required sophisticated equipment and port facilities. They also exposed the oil industry to criticism by environmentalist who feared the catastrophic effect of a gigantic oil spill in the event of a wreck. The high fixed costs of operating these ships require that they be in rather continuous usage. Slowdowns in the shipment of oil in 1975 and due to Iraq and allied forces war in 1991 led to inactivity of these vessels at great cost to the owners.

New bulk carriers and roll on/roll off (Ro-Ro) vessels allow the shipper to transport the entire trailer or other trucks and vehicles on their own wheels for easy loading and unloading. Roll on/roll off vessels have also been used for special transportation problems such as the carrying of helicopters from the United states to Europe and the shipment of entire fivecar trains for Amtrak from France to the United States. Lighter aboard ship vessels (LASH) are designed so that entire barge, and at the foreign port, sent the barge to another river location removed from the port area- all of this without multiple handling of the merchandise.The LASH vessels further aid in loading the unloading at ports where the formation of the costs and ports requires unloading by lighter equipment rather than through direct access to the piers and wharves. Special vessels have been designed for the requirements of products such as liquid natural gas, wine, and automobiles.

In 1980, several development impacted unfavorably on the international firm using ocean shipping. The carriers cut speed on their vessels to combat rising fuel costs, thereby extending delivery schedules for the shipper with higher inventories and accompanying interest costs. Also, since the large ships are cost efficient only when full y used, shippers could expect fewer sailings and calls at fewer ports.

(ii) Air Transportation: Although ocean freight accounts for the largest percentage of the tonnage of goods moved in international trade to and form India, the air-carriers have long provided a viable alternative for some producers; especially those shipping products with a high value relative to their weight, that are perishable or otherwise could profit form the great speed of aircraft. Because of the speed factor, air carriers have been strong proponents of the total cost approach of physical distribution. Analyses of company distribution systems have sometimes shown that the higher costs of air transportation may be partially or totally off set by savings in packing, handling, inventory, documentation, delivery, and related costs. Often, however, the decision to use air transportation may reflect the service features of air carriage rather than costs. The speed of delivery may, for example, enable the customer who purchases industrial equipment to get into production at a much earlier time than when slower forms for transportation are used, thereby producing income earlier.

The high-speed jet fleets of the Indian and foreign carriers have added to the industry’s capacity. The nose-loading feature of the 747 makes possible the use of efficient loading equipment and the loading of containers and oversized cargo that could not previously be handled. The ability of the planes to carry containers may increase the ability of the air carriers to compete in the intermodal system to further increase the value to shippers, by providing door-to-door service at lower costs and greater security to the merchandise.

Innovations in the air cargo industry have not only included advanced airplane technology, but also improved airport facilities. The carriers have also introduced more efficient ground handing equipment, added more fights to the schedules, and have sought to extend their services to a wider range of merchandise.

(iii) Land Transportation: While ocean and air transportation have provided some of the more glamorous applications of technology, land transportation has also undergone a transformation. New highways and the increased number of trucks available have improved the service of land carriers in many countries so that they now carry an increasing percentage of the inland freight volume. In Japan, for example, trucks carried almost 89 percent of the tonnage of inland traffic in 1970 compared to only 75 per cent in 1960. Several reasons account for this growth in Japan: an increased demand for freight service due to the growth of the economy, the strained capacity of the Japanese railways, emphasis on rapid and punctual delivery, improved roads, and the development of the Japanese automobile industry. Some of these reasons also figure in the development of land transpiration in India and elsewhere.

In Europe, even through faced with competition from the railways and inland shipping alternatives, trucking has been significant in the fast movement of non-bulky goods. The European trucking industry has provided shippers with flexibility that is often found when an industry is characterized by a large number of small firms. In Holland, for example, 58 per cent of the “for hire” firms own two or less vehicles. About 3.4 per cent of the companies own 15 or more vehicles and account for 28 per cent of all trucks. The picture may be changing, however, as the European trucking industry is now consolidating and forming larger companies to improve efficiency.

Among the problems faced by European truckers are the varying regulations on permitted weight and length of units among the countries, especially since it is economical to use trucks for cross-border hauling within the EEC. A related problem has been the inspections required to move goods across several country borders. A truck and its contents might be subject to several inspection and to the payment of duties or subjected to considerable paper work To cope with this, the TIR (Transport Internationals Routiers) Convention developed a system whereby vehicles that have met certain conditions and achieved prior approval can carry merchandise across borders without examination at each. This TIR carnet procedure has greatly simplified the movement of goods by truck.

Intermodal Development: Various types of transportation have been combined to provide either low costs or improved transit time. These combinations have sometimes reslueted in a different routing for trade between widely separated points. Among these have been both sea/land combinations and air/land combinations. The so- called land bridges provide an interesting example of such intermodal transportation.

Container shipments from Japan to Europe may leave Japan by sea, arrive at a U.S. West- coast Port, and be placed abroad a container unit train which carriers the goods to the East of cost port where they are again loaded aboard a ship for Europe.

Similarly, Japan-bound shipments form Europe may be landed at either the East or Gulf coast for movement to Japan. Use of the landbridge may result in a savings of six or seven days in travel time between Europe and Japan where it is said to undercut the all-water route rates by 10 to 50 per cent. In 1980, Britain’s Overseas Container Ltd. estimated that the TSR land bridge carried almost 30 per cent of the traffic bound east to Japan; up from 4.4 per cent in 1973.

SHIPPING COMPANIESShipment of general cargo move on the vessels of shipping companies. Shipments

of bulk cargo, both dry and liquid, more often move on chartered ships. In the first case, a shipper usually requires the use of only a portion of the hold of a vessel, which in the second case, the shipper usually engages the entire vessel and expects to fill it with shipment

Shipping companies often are divided between liner companies and tramps. The main difference between the two is that the liner company advertises a scheduled service between ports. Tramp ships operate on characters wherever they can get cargo. Often the ships of the liner companies are newer and operate through an extensive network of agents. They generally serve a large number of shippers than the tramp vessel and carry a wider range of higher value goods. Shipping companies are common cariers, while the charted vessels used by shippers are private carriers. However, shipping companies also charter ships and operate them in common carrier service.

The United Nations Conference on Trade and Development (UNCTAD) has proposed phasing out the flags of convenience, but this move has been resisted by the industrialized countries. Under a liner code adopted by UNCTED in 1947, a country is entitled to demand that 40 per cent of its exports that go by liner by carried in its own ships, and it may reserve up to 40 per cent additionally for vessels of the importing country. The two UNCTAD proposals attempt to secure a larger portion of the trade for lesser developed country shipping.

INTERNATIONAL FREIGHT FORWARDERSThe international freight forwarder is in business to facilitate export and import

shipments. The forwarder consolidates small shipment into larger ones and arranges for transportation from the exporter to the destination; follows the shipments to see that they move on the required routs; and arranges for switching, unloading at the port of export, repacking, and loading of the vessel or plane. The forwarder prepares the necessary government documents for shipment, including those consular invoices and other documents required by the importing country. Bills of lading and airway bills are prepared and arrangements made for marine insurance if the shipper does not have cargo policy. The forwarder also may furnish banks, shippers, and purchases with needed shipping notices. The forwarder’s export knowledge is available to assist the firm on general traffic management and export procedures. Both large and small firms find the forwarder useful. In practice the forwarder also may provide packing facility and act as a customhouse broker to facilitate the movement of goods through customs procedures.

Freight Rate Quotations

Freight rate quotations can be obtained from a freight forwarder or from office of a shipping company.

Shipping Documents Shipping documents in international marketing include:(a) Commercial documents employed by shipping forwarding and

insurance companies.(b) Those required by governments. The details may please be referred to

in the chapter “Documents for exports.”

Part – IIPACKING AND PACKAGING FOR EXPORT

The aim of every exporter must be to ensure that the goods arrive safely in the hands of the consumer. The fact that the goods are fully insured is in excuse for not bothering to check whether damage or pilferage occurs during the transit. Whilst the payment of the insurance claim may satisfy the buyer financially, it will not satisfy him mentally. The buyer orders the goods because he can sell them, before the vessel arrives. If he receives only a part of what he has handed in a saleable condition, he will probably lose the goodwill of his customers and, in consequences, will blame the exporter.

Distinction Between Packing and Packaging

There is distinction between the terms packing and packaging. Packaging refers to the job of providing specialised containers for the packing of goods. Packing is used for the general operation of putting goods into containers for shipment and storage,i.e., transportation. Often, the only criterion used is that goods shall be packed so that they can leave the works in a satisfactory condition, without regard to their condition on arrival. Packing and packaging require serious consideration where goods are to be transported or stored in a warehouse either for transshipment or distribution. The aim should be to deliver the goods to the customers as cheaply as possible and when he wants them, in a good and usable condition. The type of packaging is dependent to some extent upon the type and mode of transport used.

Only two classes of exporters do not know the precepts of goods export packing. They are:

(a) Beginners in export, and(b) Those who do not care to establish a permanent export business.

Bad or insufficient packing affects both the exporter and the buyer and probably, in the long run, the exporter more than the buyer. A part form the loss of customers, the exporter will suffer because the marine insurance company will increase its premium for him, if there is an undue number of claims: Moreover, the exporter will have difficulty in getting clean bills of lading; and if his packaging are very bad, he may find it difficult to persuabe the shipping company to accept his goods at all.

Objectives of Sound Export Packing

These are(i) To insure the safe arrival of goods at destination. The type of packing which will deliver the commodity in a good condition to the foreign customer will vary with:(a) The product;(b) The port of destination;(c) The length of journey;(d) The climate of the place of delivery;(e) Heat and moisture to which the goods are subjected during the voyage.

Only experience and experimentation will prove or enable the exporter to develop the type of container or packing that is best suited to the particular conditions.

(ii) To economise on the shipping space, Ocean shipping space is expensive and unless care is taken to ecnomise on this space, it can often be as costly to the exporter as the space actually occupied by the merchandise itself. Only ingenuity and engineering applied to that end will produce the most satisfactory results.

(iii) To save expense by use of economical packing materials. It sin not always necessary or even desirable to use heavy materials or to use first grade materials. As matter of fact, great advances have been made in the use of heavy paper cartons, and some exporters. Have found that certain products can be successfully shipped overseas in these carons.

(iv) To prevent pilferage. General safeguard against pilferage is to pack the goods secularly and to put on the case nothing that will announce the character of its contents to the intending pilferer.

(v) To insure the lowest possible customs duties. The basic rules to insure goods export packing are:

(a) He should ask from the customers for complete instructions: how to pack his order, what conditions it must withstand during the voyage, whether the packing will affect the duties to be levied on the shipment. He should then supplement this with advice form the shipping agents and from information gathered from official reports.

(b) He should institute test in the factory to determine the strength of the various styles of packing and should ask the customer to fill out a slip reporting the condition in which the goods are received by him. Such a system, with the results tabulated and kept on office record cards, will quickly and surely culminate and difficult that packing might present.

Factors to be Considered in Export PackingThese are:

(i) Strength. Container must be employed that will hold together during the entire journey.

(ii) Climate. Climate as a factor influences packing, and is specially important in the case of articles which are readily affected by heat and moisture. Not only is it essential of for the exporter to know the climate of the country for which the shipment is destined, but he must be informed as to the route which the carrier of the shipment will take.One of the common methods of protecting merchandise from adverse climatic conditions is by lining the case, box, or other container with waterproof paper. Additional protection may be obtained by placing the articles themselves in a waterproof wrapper, thus providing two layers of waterproofed paper. Such goods as biscuits and crackers destined for a tropical market call for a special care to be exercised for protection form moisture. An extreme example is the careful packing of tea, which must be packed not only against the usual climatic perils but must also be tightly sealed so as prevent if from absorbing odours and smells from the surrounding cargo. Hardware can be well protected by wrapping each unit individually in water proof paper. The pieces can then be enclosed in cartons and the cartons in cases lined with heavy water-resisting paper. Many items of hardware are shipped in individual boxes and packed in cases lined with waterproof paper. Highly polished metal surfaces are particularly subject to the dangers of rust and corrosion. In order to guard against this risk, it is customary to coat the surfaces thickly with the slushing oil.

Transport and Export Packing

The exporter who wishes to keep transportation charges to the minimum must consider both the weight of his shipment and the space it occupies. Ocean freight rate are usually quoted for “weight or measurement, at the ship’s option”, and the basis which yields the higher revenue is applied. Since in any vessel only a fixed amount of space is available for cargo, many ocean shipment are is fact charged on the basis of the space occupied by them.

Shipments of large and irregularly shaped articles, such as machines of various types, may be reduced in bulk by disassembly. Articles of uniform shape may sometimes be nested, resulting in savings in the cost of crating materials as well as of shipping charges. Many types of merchandise may be compressed into bales.

Custom Duties and Packing

The manner in which merchandise is packed may materially affect the customs duties levied on it. Before preparing his goods for shipment, the exporter should inform himself of the customs regulations applicable in the country of destination. Generally speaking the weight of the unit is of major importance. If the “gross weight” is applied as the basis for import duties, excessive weight becomes unnecessarily costly. When “net weight” is the basis, heavy outside packing does not affect the import duty.

Marine Insurance and Export Packing

Marine insurance companies are naturally interested in export packing methods since it is to their advantage to reduce to the minimum the damage which goods may suffer in transit. These companies are usually glad to extend advice based on their long experience. One of the most fundamental factors taken into consideration by marine insurance companies when quoting rates for specific shipper is the latter’s record of loss and damage on his export shipments. If an export concern, in consequence of faculty packing or other causes, experiences a consistently high degree of breakage, pilferage, nondelivery because of improper marking and other losses resulting in insurance claims, there is little question that it will be obliged to pay higher premiums for its marine insurance. If damage is heavy and can be prevented but no steps taken to terminate the cause of loss, the insurance company may well refuse to extend further protection. On the other hand, if a company packs its export goods properly and thus creates a good record with its marine insurance company, the latter will quote the most favorable rates for it.

Some Solutions for Packing Problems

There are a few practical suggestions which may be profitably offered to Indian exporters at this point.

(i) Goods can be packed in a way which is the best from the safety transit angle. Only in the case of highly dangerous materials do the shipping companies lay down specifications for packages. The choice of package is largely in the hands of the exporter himself; and when making this choice, he should bear in mind the conditions which the goods will have to stand up to, and remember that, in loading and unloading, goods and packages may be handled somewhat wrongly in the exporter’s own ware house.

(ii) Consider that much of the loading and unloading will be done by cranes which lift the package by means of hooks. It is doubtful whether there is any benefit in printing on the packages the words: “use no hooks.” Especially when it is more than likely that the stevedores at the other end of the journey cannot read even if they would bother to try to do so. It is, therefore, foolish to trust to luck, and use, for instance, jute bales for packing goods which can be irrevocably damaged by crane hook. Nor is it worthwhile to use a thin wooden case, which can be similarly damaged. On the other hand, the use of heavy wooden cases for packing such materials as raw cotton, cereals and other commodities which are well suited for packing in bales or sacks would be unduly wasteful.

(iii) Liquids in bulk will normally be shipped in drums of the gallonage specified by the customer. Drums of 5-gallon capacity and over can be shipped “naked” (that is, without, any surrounding case or crate provided that they are of sufficient thickness). If the drums which the manufacture normally uses for his internal trade are too thin for safe export shipment, it will be necessary to calculate whether it will cost more to buy heavier gauge drums or to pack the existing containers into a wooden case. It is

not recommended that a manufacture should try to ship goods in 4 gallon square kerosene type tins without the protection of a wooden case encased not only for protection but also because some dock charges are levied at so much per package and these charges would be 24 times as much on 24 separate tins s they would be one case containing 24. A drum containing 5 gallons of liquid will weight between 50 ibs and 65 ibs, according to the contents; and, for the safe carriage of this weight, drums made of 20/22 gauge plate are recommended. Ten-gallon drums should be made of not less than 16/8 gauge material; 40/45/50- gallon drums are shipment. Quite a lot of commodities are shipped in second- hand drums; but this is a practice which is not recommended. When, however, it is adopted, care must be taken to ensure that the buyer is in agreement with the practice.

Wooden crates may be used when the goods that are shipped cannot be damaged by water and when a small number of fairly larger-sized items are to be packed together. It may, however, be remembered that crates have sizable openings and fragile goods should not be packed in crates owing to the possibility of the gods being pierced through one of the openings in them.

Wooden cases are probably the most common form of packing and will do good service if proper attention is given to their construction. In the packing of small items and consumer goods, the manufacture should consider how he is going to pack his goods before he even starts to offer them for export; and he can then include details of the method of packing in his price list, in his quotations, and on his proforma invoices. According to the usage of the trade and the total weight and the convenience of packing, he should decide on standard cases for his products. If the buyer knows about these standard cases, he can order accordingly; otherwise the manufacture may be faced with an order for a quantity which is difficult to pack safely and wasteful shipping space. The buyer is much more satisfied when he receives the consignment with an equal number of items in each case, for it facilitates his checking, warehousing and dispatch. There are no firm rules about how this should be done; common sense is the real guide. However, wherever possible, the gross weight of any package for shipment to main would ports should not exceed around 200/220 Ibs, whilst smaller packages are preferable if the cost is not prohibitive. The size of the case should be the absolute minimum into which the required goods can be packed. The goods should fit snugly and tightly into the case; there should be no room for them to shake around. Also, as marine freight is charged on the basis of the space which the cases occupy, there is obviously no sense in paying marine freight on empty space or on excess packing materials. It is, of course, important to see to it that good quality, straight grained, knot free, timber is used for the manufacturer of cases. It is quite definitely a false economy to accept below standard timber.

The thickness of the timber must also be considered. Again, while there is no definite rule, it sis suggested that, for cases which will have contents weighting between 50 Ibs and 100 Ibs the thickness of the timber should be not less than 1/2”; for cases containing 100 Ibs to 150 Ibs, a thickness of 5/8” is recommended as the minimum; for 150 Ibs /200 Ibs, 3/4 “and for 200-250 Ibs 7/8”, and so on, the thickness to be increased by 1/8” for each 50 Ibs addition in the weight of the contents. The design of the case should increases its protective capacity, the safest shape of all is a cube. Case with one

measurement much longer than the other should be avoided, as far as possible. When it is possible to arrange for cube shaped cases, the tow opposite ends of the case should be battened. This would mean that there would be a double thickness of timber around the edges of the two ends, and that these battens give the case extra rigidity, makes it possible for the lid to be nailed down securely, and give the case extra protection against any impact. When a case with a much longer measurement cannot be avoided, it should be battened around. In other words, all around the case are fixed pieces of the same thickness of timber and approximately two inches wide; and for all except the very heavy cases, two such battens are required. These give the case extra strength on its weakest side. Battened round cases are also used when the contents are likely to be affected by moisture seeping up from the floor on which the cases are standing. The measurements of cases for the calculation of marine freight are taken between the two points which protrude furthest, so that a case with a battens around it will be considerably more expensive to ship than the one without the battens. For protection against pilferage, wooden cases should be hoped. This means that a thin steel band about 1/2" to 3/4" wide is nailed all around the case at each end. Instead of the case being hopped in this way, protection against pilferage can also be achieved by strapping the case with steel banding of the thickness, but applied with a special strapping machine which not only pulls the banding tightly but also applies a special seal which a pilferer cannot replace. For extra security, flat metal seals with points at the base can be applied by hammering over the joints in the case thus making it impossible for a pilferer to open the case without breaking the seals.

The sort of internal packing material required depends upon the type of goods contained in the cases. If the goods are not fragile, it is preferable to pack them tightly in the case without any protective packaging materials. This is especially necessary when such non-fragile goods are themselves wrapped into cartons before being packed into the case. Over-packing is a fault, although it is fault on the right side, and is wasteful both of packing materials and of shipping freight costs. However, even with such non-fragile goods, the case should be lined inside with bituminous paper to provide waterproof and moisture-proof protection and prevent rust and corrosion. One warning here- if the goods are liquid goods or if a mineral oil is used, the use of bituminous paper should be avoided, for any seepage of the liquid will tend to dissolve the bitumen coating and result in a stickly black mess. When the goods are fragile, extra precautions must be taken, and it is not enough to put all the contents together and just surround the lot with protective material. Each item of bottled goods, china and glassware should be encased in a sleeve (i.e., in an individual wrapper of corrugated paper). In addition, a layer of at least1/2” all round the inside of the case. Whilst straw can give good protection, there some countries which either ban or impose heavy penalties on the import of goods packed in straw an similar untreated vegetable materials because of the risk that such materials may carry infection germs. Waste paper is often used for such packing, and it does give quite a good protection; but its appearance does not recommend it for general usage. Of all the available materials, wood wool is the best for general purposes, for it is clean and has a good resistance to shock. Many non-fragile goods can be shipped abroad in fibre board or corrugated board packages. Such packages, however, are only generally suitable for contents with a weight not exceeding 56 Ibs; and even then it is necessary to use the

appropriate thickness of material for the manufacture of cartons. But before adopting this form of outer packing, it is as well to give a sample of the shipping companies upon whose vessels it is expected that shipments would be carried and obtain an assurance that such packages will be accepted for shipment without an endorsement about insufficient packing on the bills of lading.

Selection of Containers

The choice of a proper outer container is the first step in good packing. The following factors should be considered in designing containers for use in a given instance:

(i) Suitability for articles to be packed;(ii) Availability;(iii) Tare weight;(iv) Cubic displacement;(v) Ease in handling and storing; and(vi) Cost.The cost of containers would be a prime consideration:

(a) A container may be low-priced and disposable by the customer; or(c) It may be high priced and re-usable.

The high degree of disposability of old containers may entail their return to sender; may be re-used; or burned or otherwise destroyed.

EfficiencyTo ensure efficiency and safety;(i) Goods must be packed easily(ii) Packages must be designed for easy handling;(iii) Containers must comply with regulations.(iv) The designs adopted must meet the customer’s needs; and (v) The container should be capable of being easily unpacked.

User The following points should be considered in so far as the needs of the user are

concerned. (i) Requirements for storage.(ii) Handling facilities. (iii) How does the user recover the contents?(iv) Is packaging either permanent or for intermittent use, or will it be

discarded immediately after opening?(v) Can customer convenience be improved?(vi) Are he goods to be used individually, or to be dispensed and sold from the

containers?

Principles Governing Packaging for TransportationThese are:(i) Protection from corrosion;(ii) Protection from damage during loading, unlading and transit;(iii) Economy in the use of packing material;(iv) Facilities for handling at the suppliers’ and customers’ end; and (v) Observance of railway and shipping rules.

Case Marking and Labelling(i) Case markings facilitate identification of packages.(ii) Shipping companies generally insist on such markings.(iii) The markings to be given are at times specified by the buyers when

placing orders.(iv) Where these are not given, the suppliers give their own markings.

To ensure that the goods, are cleared at the buyers’ end, the packages must be quite clearly marked. There must be some identification so that all the packages in the same consignment can be related to each other and identified when the buyer comes to take delivery.

Moreover, the vessel will carry cargo for a number of ports. Therefore, there should be an indication as to where the goods have to be transhipped.

These markings must be simple and easily readable so that the cases can be identified by dock workers and others.

It is usual to have, as part of the markings, a simple design, such as a circle, a diamond, a square, a star or a triangle or any other pattern which can be easily reproduced by stenciling.

A A

G HKS M G HKS M 421 421

ADEN 2/7 Baghdad via Basrah 4/4

Inside the pattern will be one, two, or three letters (probably the customer’s initials), and underneath the buyer’s order number.

On the top or at the sides outside the pattern, there may be two or three other letters, representing the exporter’s initials.

Below the pattern will be the name of the port at which the buyer will receive the goods.

If the goods are to be transhipped en route, the name of the final port of destination will be followed by the words “via….” The Name of the transshipment port will be filled in the blank space. Some shipping companies demand that the cases should

be marked with bands of different colours for different ports so that these cases may be identified for off loading purposes at the right port by workers who cannot read the name of the port. Gross net weight must be shown for import duty purposes.

All these markings should be stenciled prominently shown in letters and/or figures of about 1/2" to 1”/ Waterproof ink or paint should be used for this purpose.

After the shipment has been properly packed, it must be marked and labeled to meet the requirements of three interested parties:

(a) Shipping agencies;(b) Customs officers; and(c) Consignee, who maybe either an importer, or his representative or his

customer.(a) Shipping Agency

The steamship company will not accept the cargo offered to it, for transportation unless it is legibly marked. An identifying symbol or number must be shown on the cases. In marking a package, care must be taken to efface all the old consignment marks, if any exist. This may be expensive or tiring process; but failure to do so often results in shipments going astray.

The actual marking may be made with a brush, stencil, crayon (not chalk), rubber type, metal type, pasted label, tag or other method so that the marks may be durable and legible. The most satisfactory marking results have been obtained by the adoption of the stencil. This is particularly true where the packages are destined to the same consignee time after time. The lampblack brush or free-hand marking is rapid and efficient where the destinations are diversified; but care must always be taken to make all marks legible.Stencil marks cannot always be placed effectively upon bales, bages, bundles, steel rods, and certain other pieces of freight. In such cases, tags made of cloth, metal, leather, sulphite fibreboard or other material which is strong enough to withstand the wear and tear incidental to shipment may be used. They must be securely attached with a reinforced eyelet to the bag, bale or bundle. Furniture is often marked by tying identification tags securely with a length of wire or strong cord. On lumber pieces, all the four corners of the tag in use must be tackled.

(b) Customs Requirements

The customs regulations of foreign countries pertanng to the labelling of various kinds of imported goods are detailed, definite, and strictly enforced. Generally speaking, merchandise must be marked with the name of the country of origin. Frequently, customs regulations also require that the measurements of the packages be marked on the outside. Markings, of course, must not injure the merchandise. When marking or labelling is required, the words must appear in a conspicuous place and be of a permanent nature — that is they should not be capable of erosion under the ordinary conditions of the voyage.

Not only are heavy fines and penalties imposed, for any violation of such provisions but they are especially heavy if the violation is suspected of being fraudulent. Delay and extra costs, which are imposed upon the importer, make this a matter of considerable

importance to both the exporter ‘and the importer. Customs regulations of foreign countries are also frequently strict in so far as the labelling of individual packages is concerned. The regulations of each country should be carefully observed with a view to avoiding unnecessary difficulties, delays and expense.

Importer’s Requirements

For the purpose of aiding the importer and his agents in handling packages in accordance with best commercial practices, a scientific marking policy to cover all shipments must be adopted. The object of placing additional marks on each package, other than those for transportation and customs purposes is:

(1) To enable the particular shipment to the readily recognised and picked out from the many others arriving at a busy dock;

(ii) To facilitate the singling out of a particular package of shipment for such purposes as sampling, repacking, expediting by express, or warehousing;

(iii)To make known the contents of a package without removing the outer packing case and unpacking the goods;

(iv) To facilitate the obtaining of information about the ultimate consignee through the symbols so as to reduce the number of marks on the case and keep the trade information secret;

(v) To further aid in forwarding and distribution.

Among the rules to be followed in marking the consignment are:(i) Remove all the old marks;

(ii) Use only the necessary marks;(iii) Use no advertising;(iv) Keep the contents of the package secret;(v) Keep the names of the shipper and consignee secret;

(vi) Mark plainly to avoid error;(vii) Place marks in several prominent places;

(viii) Place the markings in a permanent manner; (ix) Use a distinguishing symbol embracing a code to indicate

(a) The shipper;(b) The consignee;(c) The order number;(d) The name of the destination; and(e) The serial number.

(x) Mark, showing the weight and measurement.The leading requirements of a good symbol are:

(i) That it be easily distinguished;(ii) That it has originality;

(iii) That it be easily stamped on the package; (iv) That it shows by an initial or a number, the name of the shipper or manufacturer;

(v) That it contains a letter, number or a combination of both to represent the ultimate consignee, who may be the importer or his customer;

(vi) That the lot or order numbers indicate the contents of the package;(vii) That the name of the city or town of final delivery be given; and(viii) That a serial number be given.

Reconciling the Packing Factors: With such an array, of problems the export packer has no easy task. The most difficult considerations to reconcile are safety and economy. In endeavoring to guarantee, safety, weights may be increased and economy sacrificed or the pursuit of economy may sacrifice safety. The task is to find a method that is both efficient and safe. Safety is the fixed factor and is of primary importance. Freight rates and customs duties should be reduced to the detriment of security from damage or pilferage.

In studying this problem the exporter is not left entirely to individual resources. The services of expert packers and international freight forwarders may be employed, along with securing advice from several other sources. Advice can be obtained from associations of container manufacturers, from packing engineers, and from marine insurance or Indian Institute of Packaging.

Unitization

In order to facilitate efficient handling and to protect merchandise during shipment and storage, shippers have combined the individual cans, boxes, or units of their products into larger cartons. These cartons, in turn, have been combined into larger containers or stacked on pallets and banded together to form a single package. This unitization process permits the handling of one large package, rather than many small ones, and reduces the number of times that individual items must be handled. The larger lots-pallets or containers — can often be moved by mechanical handling equipment. Unitization strives for the reduction of handling costs as well as reduced losses from damage and pilferage.

Palletizing

Palletizing is one method of unitization that has been practised for many years in handling freight. It is the process of stacking packages on a platform, usually of heavy lumber, elevated at the bottom to permit the use of forklift trucks. The cartons, or items to be palletized, are banded together in a manner that assures safe handling as a unit. Packages of all kinds can be palletized and stacked in the hold of a vessel, truck or airplane.

Containerization

Containerization has become an important factor in physical distribution. While a container can be any box, bottle, bag or similar device for holding a product, the term used in this section is in a more technical sense. By container we mean a relatively large box suitable for repeated use by several modes of transportation without intermediate loading and unloading. Shipping containers usually are made of steel or aluminum, but plywood or fiberglass may be used. The containers replace packing crates, although individual items must still be properly protected.

If the container is to achieve maximum utility, it must be designed to accommodate the requirements of intermodal transportation since most international shipments involve the use of more than one mode of transportation. Goods are often placed on rail cars or trucks at the manufacturer’s plant and forwarded to the port or airport where they are put on planes or ships for movement to the foreign port. At the port they are again transferred to trucks or rail for carnage to the customers’ location. If the container is to minimize the

handling of individual items, it must be usable on all these modes.

For the international marketer the container holds several potential advantages. The greater strength of the container reduces the possibility of damage occurring during the transportation and handling phases of distribution. Reduced pilferage results from the greater security provided by a metal container and the possibility of door-to-door service in the original container. Packaging costs are lower with containers for many items. The container revolution also promises the possibility of simplified documentation. In the case of air freight, shippers pay a standard unit load device rate for shipping in approved containers. Ocean freight, however, continues to move on commodity rates, and the use of a container may or may not result in a discount.

Marketers should also be concerned with containers because of their potential for expanding the market for products and because they may provide opportunities for alternate routings. A United Kingdom manufacturer furnished one example of containers as a tool for market penetration. The company made a cost analysis which showed a marginally higher cost for sending shipments from the United Kingdom to the Middle East-using overland routes with containers rather than its previous system of ocean freight and conventional packing. However, the company reported that demand increased due to improved quality of the product. Some of the improvement was due to reduced transit times, as these were more than fifty per cent lower on the overland route. Furthermore, the containers with their driver — accompanied units enabled the company to maintain reliable transit schedules. Damage and pilferage were lower, and the reduced transit time aided the company’s cash flow.

The Points to Consider for a Container and Package Design(i) Maintain the stock in good condition. Ensure quality control;

(ii) Ensure that the full quantity reaches its destination;

(iii) Facilitate counting;

(iv) Facilitate removal from container for use;

(v) Container should have clear labels;

(v) Container should have clear labels;

(vi)Container may incorporate pre-printed data instructions, booking-out records;

(vii) Provision may be made for stacking;(viii) A recessed base, etc., may be required for pellet trucks;(ix) Weight limitations for manual handling may be indicated;(x) Container should resist tough handling;(xi) Speed in handling and loading may demand that light weight materials be used in

the construction of containers;(xii) Security against hazards, fire, containerisation, corrosion, etc., should be attended

to;(xiii) Security against pilferage should be ensured;(xiv) Empty containers may need to be returned from the work centre or customer and

for storage when empty;(xv) When dispatching loose articles in bundles, make sure that they are securely tied

and, in the case of rods, etc., the ends of the bundles should be sufficiently packed to prevent slipping;

(xvi) Humper lids should be fastened with wire and sealed with your seal or padlocked; (xvii) Avoid making valuable goods too conspicuous. Slogans or trade marks easily

identify vulnerable goods. Enclose a packing note in the package but never list the contents on the outside;

(xviii) Parcels are best sealed with a gummed paper strip or self-adhesive tape. Packing paper or cartons should be of a stout quality;

(xix) Wooden cases and crates should be made of sound undamaged timber, closed with will-driven nails of the right length. For added safety, use steel banding or wire;

(xx) Canvas bales should be stitched tightly. Close coloured string to facilitate opening.(xx,) Cardboard containers and cartons must be rigid and undamaged; they should be

closed with gum and secured by steel banding; second-hand cartons with soft seams and damaged compartments are liable to burst easily;

(xxii) Lids, stoppers and caps on bottles, jars, etc., should be firmly secured;(xxiii) Where cases are returnable, provision should be made for opening. Cases are

sometimes received which are so cleverly nailed and battened that they must be completely destroyed when opening. One simple instruction, “Open here”, may save a case from being destroyed, and the contents from possible damage;

(xxiv) Where fork-lift trucks are used, the batten centres may be important. If so, the purchaser should state the measurements for forks’ entry(xxv) If cases are to be stacked where the public have access to them, it may be necessary to specify that all sharp corners be removed.

Packing List

The packing list, which may be shown on the commercial invoice or separately, should contain item by item, the contents of cases or containers or of a shipment’s cases, with each item listed separately and with its weight and description set forth in such a manner as to permit a check of the contents by the customs on arrival at the port of destination as well as by the importer. The packing list must be made in accordance with the instructions of the customer. Great care should be exercised to make certain that the contents of the packages are exactly as indicated in the packing list. Any variation from what is shown in the packing list, commercial invoice, or consular invoice may, and usually does, render the consignee liable to heavy fines.

In short, in the matter of packing for overseas markets, the exporter should take into account not merely the preference of the foreign buyers and users but also the original purpose of packaging, namely, the preservation, protection and proper presentation of the goods. The preservation of the quality of the contents is the most important aspect of packing, which the exporter should always bear in mind. Different types of goods require different types of packing to preserve the quality of the contents; for instance in order to preserve the quality of pepper and cashew nuts, it may be necessary to pack them in moisture-proof polythene bags or tin containers. Similarly, food articles have to be packed very carefully and in sanitary cans.

It should be borne in mind that goods meant for export have to undergo severe hazards in transit, for they are loaded and unloaded at various stages. The size of the

packing has also to be taken into consideration. At certain points~ for instance, at some ports, packages only of a certain maximum size can be conveniently loaded and unloaded.

The exporter should also give due thought to the presentation of the contents. The packing layers, next to the contents, have to be attractive; and it is here that the exporter should take into account the preference of the buyers in a particular country. The contents of the different packages should be uniform as far as possible, in order to facilitate the assessment of the quantum of the goods with reference to the number of packages.

The main object behind making export packages is to identify the cargo. Normally, ships carry a large number of consignments belonging to various exporters. If adequate identification marks are not placed on goods, it would be really difficult to identify the consignments of each exporter. In order to facilitate the inspection of the goods by the customs authorities and their quick and effective delivery at the destination by the railway and shipping authorities, it is essential that the exporter should avoid a multiplicity of markings and, at the same time, put legible markings, preferably printed and of adequate size on the packages. The marks should correspond with these on the shipping documents and invoices. Marking should be in an international language, say, English; in addition, such other markings as are required under the regulations of the country of destination may also be placed on cases and/or packages.

In the case of goods which require to be specially handled, such instructions should be given on the packages as: “Stow away from boiler”, or “This side up”, etc. These instructions apply to markings on the Outer cover of the packages. Markings on the inside packages containing the goods are essential partly from the advertisement joint of view (since they indicate the name of the country and possibly that of the manufacturer or exporter) and partly under regulations under the Merchandise Marks Act. In marking the goods, the exporter should ensure that their appearance is enhanced and that no part of the goods is wasted.

Generally speaking, the standards fixed under the various quality control schemes provide for standardised packing and marking. This should be adhered to by the trade. An important point to remember here is that arrangements for obtaining the delivery of the goods from the manufacturers, their transportation to the port and loading on to the ship require to be dovetailed into the procedure for preshipment inspection, for any dislocation at the inspection and is likely to throw out of gear the other arrangements of the exporter.

DISTRIBUTION CENTERS

The distribution center is an integral part of the international physical distribution system. The center is a warehouse that provides a merchandise assortment to meet customer requirements. Products are shipped in large lots to the warehouse where they are sorted into individual customer orders. The warehouse assembles assortments, stores merchandise, and prepares and arranges delivery of customer orders. Products are stored in the distribution center to replenish customer assortments, to adjust seasonal production to demand, to prepare for erratic peak demands, and to take advantage of quantity

purchases or freight rates. The emphasis, however, is on maintaining a supply to meet customer requirements rather than emphasizing long-term storage.

The term “distribution center” is used in this chapter rather than warehouse because the centre frequently serves as more than a storage and bulk point. It also serves as a control center to assure that customers’ orders receive prompt attention, that adequate but not excessive inventories are available, and the necessary data are gathered to facilitate control and documentation requirements.

The multinational firm with several production points may find it advantageous to use distribution centers that are oriented toward production points as well as centers that are market positioned.

The Public Warehousing Alternative

In the previous discussion, there has been a tacit assumption that the owner of the merchandise operates the warehouse or distribution center. This concept is known as private warehousing. It is a viable approach when the demand for the firm’s products is substantial and steady; however, private warehouses entail a high level of fixed expense and can be costly when demand fluctuates widely. The warehouse facility must be built, bought, or leased and personnel must be hired and trained; furthermore, the company must establish a transportation network for servicing distributors and dealers.

One alternative for the firm is to use public warehouses. These are owned and operated by professional warehouse personnel and furnish not only space and break-bulk facilities, but also a wide variety of services related to physical distribution. The user of a public warehouse pays only for the space that is used plus the fees for services that are requested. Public warehouses will receive merchandise, store it, and assemble and deliver products as they are ordered by the customer. Public warehouses also aid the producer by issuing warehouse receipts that can be used as collateral for bank loans. Some warehouses also provide space for a firm’s branch office.

Some public warehousing firms have expanded their services beyond those normally associated with physical distribution in order to provide customers with a more integrated distribution system. One firm, for example, in addition to warehousing offers customers brokerage, freight forwarding, packaging, insurance, and transportation service to all of Europe and the Middle East. In summary, the public warehouse provides the shipper with the flexibility to adapt to local conditions, provide rapid service to customers, and capitalize on local expertise regarding freight rates, tariff systems, tax and licensing laws, and business customs, as well as storing merchandise

Part - III

MARINE INSURANCE

What is Marine Insurance?

Marine insurance is a contract of indemnity whereby the assurer or underwriter agrees, for a stated consideration, known as the premium, to protect and indemnify the shipper and/or owner of the goods against loss, damage, or expense in connection with

the goods at risk, if the damage is caused by perils specified in the contract known as the policy of insurance.

When the goods have left the shipper’s plant or warehouse and are in the course of transportation, shipper has no physical means for the protection of these goods and must rely upon the ability of the transportation company to which he entrusts them for safe delivery at their intended destination. In addition, there are perils and hazards which the goods may encounter and which are beyond control of the carrier. Hence the importance of marine insurance can well be appreciated.

The carrier in export trade is not an insurer of merchandise. He is exempted by law from certain causes of loss as well as from the conditions and stipulations which may be entered in the contract of carriage between the shipper and the carrier. For these reasons, the merchant must have some means of protecting himself against losses which he may not be able to recover from the carrier under his bill of lading. He, therefore, insures himself against loss or damage.

Despite the fact that they are covered by.~c1ean bills of lading indicating that they were apparently in good order and condition when received on board, the damage to the goods might occur in transit, especially if it encounters hazardous conditions during the journey. The buyer may have to pay for the goods before he sees them; or even after lie sees them in the customs shed at his end, the goods may be damaged or pilfered before reaching his warehouse. Another point to be considered is the fact that where no letter of credit has been established, the goods most probably remain the property of the exporter until the buyer takes up the documents; and if that buyer gets to know that the goods have been damaged in transit, he may refuse to retire the draft.

Although a bill of lading are the title to the goods, that title is only worth as much as the goods themselves; and if the goods are worthless because of the damage caused to them, the title to them, too, is worthless. But if the goods are properly insured, then, irrespective of whether they suffer damage or not, the worth of the title remains; and, for this reason, goods cannot be shipped abroad unless they have full insurance cover. In most cases, the insurance is the responsibility of the exporter; and he must arrange to insure the goods on C.LF. transactions.

Subject Matter of Marine Insurance

There are three classes of properties which are the subject matter of marine insurance:

(1) Cargo insurance;

(ii) Freight insurance; and

(iii) Hull insurance (insurance of the ship).

In the C.I.F. price quotation, it is only the cargo which is insured because the freight has already been paid. However, freight insurance may be taken out either by the cargo-owner or by the shipping company if freight has not been paid.

The exporter, who only makes occasional shipments, advises the insurance broker or company of the full details of the goods to be shipped, giving the number of cases, a brief description of the goods themselves, the markings on the cases, the name of the ship, the port of shipment and the place of destination to which he is sending the goods, and the value for which he wants the goods covered. At the same time, he has to state the risks which are to be covered. The insurance broker, or company, then issues the appropriate policy of insurance to cover the shipment; and this policy is required in duplicate. As this policy is issued in the name of the shipper, it must be endorsed by the shipper before it is handed over to the bank so that, whoever has the benefit of the bills of lading, may also have the benefit of the insurance cover and can claim reimbursement for any damage or shortage.

It may occasionally happen that a letter of credit asks for insurance policies in favour of the bank which originally opened the credit; and this can be arranged either by asking the insurance company to make out the policy in favour of the required party or by the exporter endorsing the policy is follows: “Pay any claims arising under this policy of insurance to the order of—” and then signing the endorsement.

When the exporter has done a fair amount of export trade with several shipments per month, arrangements for an insurance cover can be speeded up and simplified by the exporter having an “open cover” with the insurance broker or insurance company. The exporter tells the insurance broker what his estimate of the total value of his export shipments for the next twelve months and also what he anticipates will be the value of the largest single consignment which he is likely to ship.

The insurance brokers for insurance company then agree to give the exporter an insurance cover for any shipments made within the limits estimated without the necessity of the exporter having to advise them in advance. The exporter is issued a pad of certificates and he himself fills in the details of each shipment, which is to be covered for insurance — the details being the same as those of which he would advise the insurance brokers if he wanted a policy as described earlier. These certificates are in sets of four — the first two are the originals and the other two are non-negotiable copies. The originals valid as part of the thipping documents, whilst one of the copies is sent to the brokers or insurance companies that they are advised of the risk that has been covered and can make the appropriate charge for premium. The other copy is retained in the exporter’s file for reference and for checking the insurance broker’s bill for premiums. These certificates of insurance have to be endorsed in the same way as insurance policies are endorsed.

Care to be Exercised

Care must, however, be taken to see to it that insurance policies or certificates are properly initialed because they are legal documents. If, with an open cover, the exporter has an order which is larger than the one he originally estimated, care must be taken to see to it that the limit amount for any one shipment, which is shown on the certificates, is altered and it is necessary to send all the four copies of the certificates to the insurance company or brokers for an official approval of the alteration.

If the exporter has underestimated the total yearly value of his shipments, he

would ask, before the total value has been reached, for the total cover to be extended, and the insurance company or brokers will be glad to agree, provided that there has not been any excessive number of claims against the earlier shipments.

10 PER CENT EXTRA OF THE ACTUAL C.LF. PRICES

It is usual to cover 110 per cent of the actual CJ.F. prices of the goods. The reason for this is that, in addition to having paid for the C.I.F. cost of the actual goods when he retires the drafts (or makes payment, or has accepted to make payment in any other way), the buyer has probably also paid for the customs clearance and for the unloading and transit of the goods to his warehouse. There are a few instances when these charges have been exceptionally heavy or when the customs duty cannot be reclaimed even though paid on worthless goods, in consequence, the shipper will be asked to cover the goods for up to 150 percent of their C.I.F. value. The exporter must bear in mind that, where such heavier than normal cover is requested, the premium for insurance is considerably higher, and the buyer should be asked to confirm that he will pay the cost of the excess premium.

The exporter should also remember that it is as well to cover for 110 per cent for his own sake, especially when the shipment is not covered by a letter of credit because it may so happen that the buyer, instead of himself collecting the insurance payment for damaged or missing goods, may send the certificate or the policy back to the exporter, asking the latter to replace the damaged or missing goods and reimburse himself by collecting the insurance money. Such a procedure will mean a higher transit cost to the exporter; and this is covered by the extra 10 per cent cover.

Types of Risks Insured

There are many possible risks for goods that are shipped abroad, apart from the possibility of the sinking of the ship itself. She may run into a heavy storm, and the cargo may be damaged by rain or sea-water. There is always the risk of fire or of some of the goods being stolen. Some letters of credit specify the risks which must be insured against. The usual procedure, therefore, is to have an “all risks policy”. It is not worthwhile for an exporter to try to save on premium payments and hence a less comprehensive policy because a few banks, negotiating letters of credit, accept such a policy. A reputable insurance company or a reputable firm of insurance brokers will give the “standard all risks cover” and issue polices and certificates to that effect which will be acceptable by any bank.

The standard “all risks” cover, however, is not quite sufficient for this policy which covers only normal civil happenings. Cover will also be invariably required against “war risk” even in peace time. The exporter should, therefore, instruct the insurance brokers or the insurance company to include a war risk cover, which they will do by endorsing the policy and/ or certificates.

As already indicated, damage or pilferage may occur while the goods are on board. In fact, much of the damage and pilferage occurs during loading or unloading or in transit to the docks in the country of shipment or in transit from the docks at the destination. The exporting manufacturers see to it that the goods are packed safely and in good order at his warehouse; and in normal circumstances, the goods are not seen again until the cases are unsacked in the buyer’s warehouses. The exporter cannot reasonably have all the cases examined immediately before the goods are loaded on board; and the buyer cannot open all the cases for a thorough examination at the docks at his end. Yet goods are damaged by being left out in the rain on the dock, or by being loaded with

hooks when they should not be so loaded, or by pilferage by dock workers and dock-side thieves. To cover these risks, it is advisable to have a “warehouse-to-warehouse” cover, which is quite normal and which covers all the risks from the time the goods leave the exporter’s warehouse up to the time they arrive at the buyer’s warehouse. This is usually modified slightly by limiting the period of cover after the arrival of the ship at destination to 30 days irrespective of whether the goods have reached the buyer’s warehouse or not.

Marine Insurance Claim

Under an ordinary marine insurance cover, if the goods have been damaged or pilfered or lost, the buyer report the fact immediately to his local agents or the local branch of the insurance company or to the firm of insurance assessors. They examine the goods and certify the extent of the loss. The buyer then works out his claim on the basis of the proportion which the damaged goods bear to the whole consignment. For instance, if the exporter’s invoice value for the goods which are damaged is Rs. 400 and the total of the exporter’s invoice Rs. 40,000 (i.e., 110 per cent of invoice value), the amount to be claimed will be:

.400 .44,000.440

.40,000

RS RsRs

Rs

× =

If the goods have been invoiced on F.O.B. value plus the cost of marine freight, insurance, and shipping charges, the buyer is entitled to claim a proportion of such charges. For instance, the total F.O.B. Value of goods shipped is Rs. 2,000; Rs. 400 has been added for the charges mentioned, making the invoice total Rs. 2,400. The insurance cover would normally be for Rs. 1,640. If Rs. 200 worth of goods are damaged or lost, the claim will be for Rs. 264, which is represented by:

.200 .2,640.264

.2,000

RS RsRs

Rs

× =

The buyer would send the original insurance certificate or policy to the broker or company which issued it, with a statement of the claim and the latter would send him the money. Alternatively, the buyer may send these paper to the exporter and ask him to make the claim on his behalf, and either credit the amount to the buyer’s account or remit the money to him.

This claim procedure may be quite a nuisance; and a certain proportion of the claim is lost in the costs of transmission and exchange into buyer’s currency. To avoid this nuisance and expense, therefore, it is usual to have a C.P.A. policy for marine insurance. The letter of C.P.A. is referred to claims payable abroad. This facility costs a little extra but it is well worth paying for it. On a certificate or a policy of insurance, when the C.P.A. arrangements have been made, there will be words to the effect that insurance agent — is authorized to settle any claims arising under this certificate or policy of insurance; and, in the empty space, will be filled in the name of the town or city at which the insurance agent nearest to the buyer is located (usually the port to which the goods are consigned). Under these arrangements, the buyer can set his claim paid in his own currency on the spot.

It might be advisable even in some cases of cost and freight (C & F) shipments that the exporter should also get an insurance cover. This should be done when the exporter ships goods without being covered by a letter of credit. The goods are still the exporter’s liability until buyer has taken up the documents; and if he (the exporter) fails to do so and damage or loss occurs, the exporter will suffer, for he will find it difficult to make a claim under the buyer’s insurance agreements.

The cost of marine insurance premium is quite low, and reliable exporters, doing a fair amount of business, can probably get all the risks covered by paying 1/2 per cent and 1 per cent of the value insured, depending on the type of goods that are insured and the type of containers in which they are shipped. For instance, the insurance premium on goods packed in glass bottles is considerably higher than on the same goods packed in tin cans. It is quite possible to get a standard rate, irrespective of the destination of the goods. In addition, there may be an extra premium on war risks cover, which varies considerably according to the country of destination and in the light of the political conditions prevailing in the country of destination or in countries en route at the time of shipment. A small extra fee is payable for C.P.A. facilities. On normal goods to normal destinations, it should be possible to secure an insurance cover for all the risks including war risks under C.P.A. at an average cost of about one per cent to 1¼ per cent.

Some Practical Suggestions

The following suggestions are likely to be helpful to the exporter who wants to protect himself against marine and related risks:

(1) Employ the most experienced and most reputable marine insurance broker who can be found.

(ii) Take out an open or floating marine insurance policy.

(iii)Insist that the terms of the policy be made as broad as possible1 not only from the point of view of the types of merchandise to be shipped but also in respect of the areas covered, the elapsed time and other provisions.

(iv) In the case of 1oss~

(a) Notify your broker;(b) Do it immediately; and

(c) Move without delay. The collection of an insurance loss may be vitiated by postponement.

(v) Marine insurance never covers what is known as “inherent vice”, which means deterioration such as spoilage due to the character of the merchandise.

(vi) See to it that all the insured goods are moved promptly. They must not be allowed to remain on docks, in trucks, or in unprotected places.

(vii) Invariably add at least 10 per to the invoice price of the merchandise — sometimes more.

(vii) If the total risk exceeds the amount of insurance named in the policy, the limit should be immediately increased

Marine insurance companies and underwriting organizations are keenly interested

in export packing methods and make recommendations based on their experience. One of the basic factors considered by an underwriter in quoting a marine insurance premium is the loss experience of the shipper. This is a tangible measure of the packing problems of every shipper and offers a reward to effect improvements in the loss and damage record.

Marine insurance to cover cargo risks is commonly place On all shipments moving in international seaborne trade. The insurance may be placed for the exporter’s account or for the account of the buyer, or it may be placed by the importer who has selected a particular underwriter. This is not as simple as it may sound. For example, the importer may agree to take care of the insurance. In this case, let us say that the purchase is made under a letter of credit. The letter calls for furnishing an on-board bill of lading in order to collect under the credit. if a loss should occur between the time the goods leave the exporter’s warehouse and before the on-board bill of lading is issued, the credit could not be used and the insurance taken out by the importer probably would not cover the loss.

There are certain advantages to the exporter who takes marine insurance. For example, when the sale is FOB vessel Bombay, the importer’s insurance may become effective only when the goods are loaded aboard ship; hence, any loss to the shipment between the exporter’s warehouse and the vessel may not be covered. To protect against such a risk, the exporter would need to purchase an inland marine policy or a special endorsement for an open cargo policy.

Types of Risk

Marine insurance differs from many other forms of insurance in that the insured has a choice of a. vast variety of risks against which insurance can be effected. In broad categories, the risks that are commonly insured against are:

(1) Free of damage insurance. This is a very limited form of insurance and covers only total loss of the goods; partial losses are not covered.

(2) Fire and sea perils. Under this coverage, FPA (Free of Particular Average) insurance, claims are paid only in case the vessel is standard, sulik, burned, on fire, or in collision.

(3) Named perils. This includes the fire and sea perils as explained directly above, and a number of additional perils may be added, such as fresh water damage, hook damage, fuel oil damage, theft, pilferage, nondelivery, or breakage.

(4) All risk insurance. This is the most complete coverage commonly written, but it is confined to losses from physical loss or damage from any external cause, exclusive of war, strikes, and riots. This coverage does not include loss due to the inherent nature of the goods, nor does it cover market losses due to delays in shipment, for example, missing the Diwali sales season. If insurance is desired to cover excluded perils, under certain very limited circumstances they can be included in the insurance policy by endorsement, except for war risk insurance, which requires a separate policy.

All of these coverages include general average and salvage charges. Marine

insurance is one of the few kinds of insurance where it is permissible, in addition to insuring the value of the goods themselves, to insure profit. While the sales price of goods usually includes the exporter’s profit, it does not include import duties or the importer’s anticipated profit. In practice a common rule is to insure for an amount equal to all known costs plus 10 percent.

Loss Covered Under Marine Policies

Basically, there are two types of losses under marine insurance policies: (1) particular average and (2) general average.

Particular Average. Damage to the goods themselves is known as particular average and may be classified as follows:

(1) Total loss. The amount stated in the insurance policy is paid.

(2) Total loss of part of a shipment, for example, by theft or pilferage. The policy pays the insured value of the past lost.

(3) Repairable loss. The fender of an automobile is crumpled; it is repaired in the country of importation. Loss paid is the amount of the repair bill.

(4) Replaceable loss. The fender must be replaced by a new one which must be shipped by the exporter. Loss paid is the total Cost of a new fender, packing, freight, etc.

In all of these situations, the limit of liability, of course, is the face amount of the insurance policy.

General Average. Loss or damage common to the entire venture is known as general average. If a voluntary sacrifice is made in face of impending disaster, and that sacrifice is successful in preserving at least a part of the common venture, then all who survive (ship and cargo) contribute pro rata in accordance with the value saved in order to make up the value of whatever was sacrificed.

A classic example of general average loss is by jettison, or throwing overboard certain cargo to save the ship. If 10 percent of the combined value of ship and cargo is thus sacrificed, all owners, including the owner of the jettisoned cargo, contribute 10 percent of their respective values to reimburse for the loss of the cargo that was jettisoned.

More common today is the case of water being used to extinguish fire. The common sacrifice here is damage to cargo by water; carg damaged by fire or smoke is not damaged as a result of a voluntary sacrifice and therefore is not subject to general average adjustment.

Insurance Policies and Certificates

There are two ways that a risk can be declared to an insurance company. The first is to send the company a copy of a certificate or a special policy, and the second is to use a short declaration insurance form.

The certificate or special policy is prepared in the exporter’s office, in the office of an insurance broker, in the office of the freight forwarder, or in one of the offices of the insurance company. This certificate or special policy is necessary only when the exporter is required to furnish evidence of insurance to some third party, such as the

bank, a customer, or a third party to whom claims, if any, are to be paid. The certificates and special policies are both negotiable instruments and hence facilitate the settlements of claims in the country of the consignee.

In this situation, the exporter often takes out an open insurance policy that sets forth the risks for which there is insurance, and the special policy completely reflects the open policy coverage. Every shipment that is made by the exporter under this open policy is certified to the insurance company with complete descriptions, values, and all necessary details. With this information, the insurance company is in a position to calculate a rate. By use of an open policy, the exporter is protected on all shipments to the extent that the exporter advises the insurance company of every transaction.

In the second way to declare risk to an insurance company, if there is not a necessity to evidence insurance to a third party and if claims are to be paid to the exporter only, a short declaration insurance form can be used.

If terms of sale or letters of credit call for an insurance policy, a policy must be provided; a ‘certificate, which looks very much like, a policy, will not do. Provision can be made to accept certificates.

Insurance Agents and Brokers

Marine insurance may be obtained from an insurance agent or insurance broker. The agent or broker will help to select reliable marine underwriters and arrange the amount and kind of protection that is required. Brokers and agents represent the policy holder and help in the presentation of losses. They often use their experience, to make suggestions that lower a firm’s losses. Since marine insurance rates are not standardized, but are determine4j by the risk experience and judgement of the underwriter, the reduction in losses could help justify reduced rates.

There is no proposal form for marine insurance. But for the insurance underwriter to assess the risk, a form known as “Declaration Form” is generally used. Full particulars should be given in the standard form suppled by the company. It is designed to include the following essential details, and be signed by the proponent.

1. The name of the party who effects insurance or on whose behalf insurance is effected.

2. If the payment on account of claims is desired in any foreign currency, it should be stated accordingly.

3. Name of the steamer and voyage. For cargo normally shipped via Suez Canal but not via Cape of Good Hope, a surcharge of premium is added by the insurance company. Rates are applied for the vessels of less than 2000 G.R.T. Vessels under “Flags of Convenience” like Librarian, Panamanian, Greek, etc., yield highloss ratio, hence recovery of claim is difficult. Therefore, the insurance underwriter charges extra premium for shipments to Greece, Panama, China, Poland, Bulgaria and East European countries.

4. Strike, riots and civil commotion risks should be included wherever necessary. War/SRCC rates are charged extra in accordance with the rules framed by the

Institute of London Underwriters.5. Description of goods and their packing details should be furnished. Sound

packing attracts lower rates.6. Details of risks to be covered should be given-F.P.A., W.A., W.A.

Comprehensive. All Risks, and Inland Transit.

All the above types of insurance cover loss or damage, to the cargo caused by marine perils, i.e., perils of seas, fire acts of thieves and pirates, jettison barratry, etc. Inland transit risks are not covered, unless specifically provided for.

F.P.A.Covers(Free of Particular Average)

The following losses are covered:1. If the ship is stranded, sunk or burnt.2. If packages are totally lost during loading, unloading or transhipment.3. If the goods are damaged due to fire, collision, explosion or due to ship’s

contact with any fixed object and/or if the ship is damaged at the port of refuge.

W.A. Policy Covers

(With Particular Average)

In addition to the losses under F.P.A. policies, loss or damage to the cargo caused by heavy weather or sea water, is also covered provided the damage reaches the percentage of franchise specified in the policy. Percentage clause could be deleted at the request of the insured on payment of extra charges. There are numerous non-marine perils also which could be covered under W.A. Comprehensive or All Risks policies.

Extraneous Risks

Due to rapid growth of the international trade and as a result of progressive curtailment of their liability by shipping companies under the terms and conditions of bill of lading, a demand has gradually arisen for cover against many extraneous risks like:

1. T.P.N.D. (Theft, Pilferage and Non-Delivery)2. Fresh Water or Rain Water Damage3. Hook Damage4. Oil Damage5. Damage by Mud or Acid6. Heating7. Sweating8. Damage by other Cargo9. Leakage10.Breakage

All Risks Cover

This is an all embracing cover and includes all the extraneous risks as mentioned above, but does not include War or SRCC Risks. Loss or damage due to inherent vice, or losses proximately caused by delay are not covered.

War and SRCC Risks

Cover is given for capture, seizure; arrest, restraint, detainment, hostilities, civil war, revolution, civil strike or war like operations.

War risks are covered only when the cargo is water borne and for fifteen days on land at a port of transhipment from the date of arrival of the steamer.

Inland Transit Cover

Cover is granted for rail as well as road risks against fire, collision, breakages of bridges, derailment or accident of like nature. According to the rail tariff clause, insurance commences with the loading of each package into the railway wagon and terminates three days after arrival of the train at the destination or on delivery of the goods by Railways, whichever is earlier.

Warehouse to Warehouse Cover

This cover is granted on payment of extra premium. No liability is attached to the company in respect of goods damaged or lost while in custody of the transport carrier unless a provisional claim is lodged with the carriers.

Tariff Rates

Some of the voyages are governed by the Tariff, i.e., (1)India to Japan ton); (2) India to Burma; (3) Coastal Ports of India, Ceylon and Pakistan; (4) India to Persian Gulf, Red Sea ports, Egypt, East and West Africa, Ports like Alexandria, Colombo, Free Town, Indonesia, Pakistan, Red China, or Israel will attract more rate of premium because of the difficult and insecure port conditions. Similarly, commodities like cement, sugar, household goods, second hand machinery, vegetables, bricks, tiles, crockery and bullion or jewellery attract a higher rate of premium.

Types of Policies/Covers

There are three types of policies/covers. These are discussed below:

Specific Policy

Marine insurance policy in respect of individual shipments is issued by the insurance underwriter on application from the exporter giving details of the consignment to be insured, risks to be covered, value for which the cover is required and the name of the country and the currency in which claims are payable. On receipt of these details the insurance company issues a stamped insurance policy in duplicate.

Open Cover

At the outset it should be emphasised that open cover is not a policy. It is a contract for a period of time (usually twelve months) whereby the insurance underwriter agrees to grant insurance during that period not exceeding the agreed limit per vessel with

a view to avoiding accumulation of liability in any one vessel or location.

Open PolicyIt is cargo policy expressed in general term and effected for an amount sufficient

to cover the number of shipments. It covers all shipments of the insured until the sum insured is exhausted. The names of the steamers may not be available when the open policy is-effected. Therefore, the company stipulates that the shipment should be made by first class steamer (not over 20 years old) carrying highest class in any one of the classification societies mentioned in clause. Further the vessel should not be more than 15 years old.

CLAIMS

In case of railway claims the consignees should be advised to lodge claim on railways within six months of the issue of railway receipt.

The following documents are necessary in case of marine claim.

1. Policy.

2. Bill of Lading.

3. Invoices.

4. Letter of Subrogation.

5. Survey Reports.

Survey Reports

The following details are necessary in the survey report:

1. Whether packing was sufficient?2. If not, what improvement are recommended?3. How claim could have been minimised?4. Was there failure of insured to protect interest by not taking measures to avoid

or minimise loss or not protecting the rights of recovery from cariers/port, etc.

Lesson – 19 Management of Risk and Export Financing

Finance and marketing are inseparable in the conduct of international business. The relationship between the two functions permeates the entire marketing plan, reaching into almost every marketing activity. Pricing, for example, must consider the financial aspects of transaction if the sale is to be profitable. The credit terms may be even more important than the price in a given transaction. Promotional expenditures and themes must be coordinated with financial practicality. The establishment of overseas branches,

subsidiaries, and marketing channels requires both long-term expenditures and working capital.

The large size of many international transactions, the great distances involved, the many sovereign nations, and the limited knowledge about customers all combine to require close co-ordination between the financial and marketing departments. Furthemore, marketers need more than a causal knowledge of the financial considerations in international marketing since the sources and instruments used there are different from those used in domestic trade.

This chapter describes some of the major sources of funds for international marketing, the principal instruments that are used and the management of risk.

Finance and Export Trade

Export financing starts after the order from the buyer has been received, the export order has bee accepted, manufacturing for the export order begins, and the shipping documents are issued; and it ends at ports when the goods are cleared. In other words, export finance refers to the financing of the goods from the home port to the foreign port and the inland centres, and remittances accruing from the sale of these goods. Financing of exports is a specialised business demanding the operations of institutions that are engaged in it and have special skills in handling the intricacies of foreign exchange transactions, a network of contracts abroad and a willingness to assume the risks peculiar to it. It follows, therefore, that good financing arrangements are a prerequisite for the success of the export trade.

In export trade, where business dealings are carried on between parties who may be separated by many thousand miles, it is necessary to have a clear understanding of how and when the buyer will pay the exporter for the goods which have been ordered; and it is up to the exporter to indicate the way in which he wants the importer to pay him, i.e., whether he requires prompt payment or whether he is willing to allow credit to the buyer.

An importer may often be attracted by payment terms, which allow good credit rather than by low prices. References should be checked to ascertain whether it is safe to allow credit. If it is safe, it is up to the exporter to decide whether he can afford to give such credit at the prices he has calculated. He may find that he cannot afford to do this; and yet he may also find that his inability to give credit is the only hindrance which prevents him from doing business with certain class of good buyers abroad. The way out may be to borrow money from a bank or any other financial institution tofinance such credit.

Basically, the export trade is financed like any other trade. The development of the export business is, in one form or another, a capital investment, and must be paid for by the exporter. The investment is generally made in a less tangible form than in domestic business should not blind us to the fact that it is a capital investment and that it cannot generally be made the object of banking credit.

Provision of the necessary funds with which to carry the merchandise from the date of manufacture to the date of delivery should therefore be made plus the provision of whatever credit the exporter believes should and can be extended to the buyer by the

exporter.In the case of export trade, credits generally cover specified shipments of

merchandise and are represented by documents without which ownership of the merchandise cannot change hands. In this respect, therefore, the extension of credit in foreign trade is not only on a different basis but on a sounder basis than in domestic trade.

Sources of Funds for International Marketing

As might be surmised from earlier discussions of the different marketing strategies that can be employed by the multi-national firm, there is likewise a variety of capital requirements that must be satisfied to support these approaches. Funds are needed by firms with foreign subsidiaries for physical facilities and for working capital to supply inventories, credit, and operating expenses. Even when the company limits its international activity to exporting, it needs funds for inventory, credit, and promotional activities. These many needs are met from a variety of sources, some within the corporate structure and some external to the firm.

Internal Sources of Funds

The multinational firm, with its subsidiary, joint venture, or other affiliate operations abroad, may be able to raise a portion of the required funds internally. Some of these funds may be obtained from the parent company’s operations and investments, while others might be generated by the affiliate itself or other subsidiary operations within the corporate structure. The parent organization is an important financial sources as it provides equity for the subsidiary or loan funds directly to the local unit. In some cases these loans may take the form of credit extended for inventory or equipment. The parent organization also has the opportunity to aid its subsidiaries by guaranteeing any loans that the affiliate negotiates with local financial sources.

External Sources of Funds

Usually the financing of international marketing requires funds in excess of those that can be allocated from the parent company. Thus, the firm turns to outside sources of both a private and governmental nature to meet these needs. Over the long course of international trading history, a variety of financial institutions have evolved to aid the firm in supporting its marketing activities. Some of these are private sources, but others have been developed by the Indian Government and multinational sources.

Commercial Banks, Banking is one of the most important facilities for the conduct of international as well as domestic marketing. Some of the major banks not only evolved an extensive system of branch banks in foreign countries, but they also began to expand the number and types of services they offered to meet the needs of the emerging multinational firms.

The international firm can choose from a number of banking sources for its foreign operations. Banks have developed different types of facilities to extend credit and otherwise support the overseas operations of their customers. When the international firm makes its choice of banks, there are several possibilities that are open:

(1) A firm may choose to do its banking through the international department of its local bank. This bank may carry out its functions through correspondent banks

abroad or it may have its own subsidiaries or branches abroad;(2) Alternatively, the firm may choose to route certain transactions, perhaps at the

request of its customers, through banks in the foreign markets; and(3) One additional possibility that has emerged in recent years is to work with one

of the consortiums formed by banks of several nations.Each of these has special advantages for certain situations and companies.

The World Bank Group, This group of three financial institutions is especially important for the financing of projects in developing countries that are related to infrastructure.

(i) The International Bank for Reconstruction and Development. The IBRD is the central institution of the group. Founded in 1946, its functions are:

(1) To assist in the reconstruction and development of its member countries by facilitating the investment of capital for productive purposes, and thereby promote the long-range growth of international trade and the improvement of standards of living;

(2) To make loans for productive purposes out of its own funds when private capital is not available on reasonable terms; and

(3) To promote private foreign investment by guarantees, and participation in loans and investments made by private investors.

The bank makes loans on conventional terms for basic development projects chiefly to governmental bodies in the borrowing countries or for government guaranteed loans to private interests.

(ii) The International Finance Corporation (IFC). This organization was formed in 1956 to assist in the economic development of its member countries by promoting the growth of the private sector of their economies. The corporation is to supplement and assist the investment of private capital and not to compete with it. It is a development agency that is to finance only enterprises which are productive in the sense of contributing to the development of the economies of the member countries in which they operate.

(iii) The International Development Association (IDA). The third member of the World Bank group, IDA, has the primary objective of creating a supplementary source of development capital for countries whose balance of payment prospects would not justify their incurring external debt on conventional terms. IDA credits arc repayable in foreign exchange, but on very lenient terms. A government entity is usually the borrower. Credits may be repayable over a period of 50 years, including a grace period of 10 years. Compared with conventional loans, these terms substantially alleviate the repayment problems of the borrowing countries and bear less heavily on balance of payments.

Regional Development Banks, Various regional development banks have been established to promote the development of underdeveloped areas through the provision of intermediate and long-term loans. Other development banks which have been established including regional banks such as the Asian Development Bank, the African Development Bank, and national development banks such as the National Financier South American of Mexico.

International Commercial Payments

International commercial payments may be broadly grouped into the following categories: (1) cash, (2) open accounts, (3) bills of exchange, and (4) letters of credit.

CashCash is both a method of payment and a term of payment, but as a method of

payment it is rarely used in international marketing. As a method of payment, the international marketing firm may use cheques like domestic trade. If accounts are maintained in banks in various countries, cheques may be drawn and paid in a variety of currencies. Or cash may be remitted by means of an international money order for small amounts.

Banks in India have deposit accounts abroad, and foreign banks have deposit accounts in Indian banks. Funds may be paid from any of these accounts for purposes of financing trade, yet an exporter in India receives rupees for the merchandise that is sold, regardless of whether the price was stated in Indian rupees or in some other currency. If, for example, the price was stated in Italian lira, then the Indian bank’s lira account in Italy is increased and the Italian bank’s rupee account in the Indian bank is reduced. The conversion of the lira into Indian rupees is a foreign exchange transaction taken care of by banks. Of course, exporters can accept foreign currencies in payments but they usually do not care to do so.

Cash is also a term of payment. Cash may be called for with the order, or against certificates of manufacture as work on a complicated piece of equipment progresses. Today credit is increasingly demanded. Cash payment is not attractive to buyers since they bear the entire burden of financing the shipment. The buyer loses the use of funds for a considerable time before the goods are received, incurring a loss in the use of working capital as well as loss of interest. There may also be resentment of the view that the buyer is unworthy of credit. Furthermore, the buyer is dependent upon the honesty, solvency, and promptness of the exporter in the business deal. Today cash payment will probably be used when the importer is of doubtful credit standing, when the exporter is financially weak, on orders requiring special instructions,, or when the exporter is not cognizant of the competitive situation faced by manufacturers of other countries.

Open Account

The open account method of payment for export shipments is the opposite of the cash method. Under the open account, goods are shipped without documents calling for payment — the commercial invoice of the exporter indicating the liability. Since no documentary evidence of ownership or obligation exists, the open account presents difficulties because of differences in the laws and customs of countries which make it difficult to safeguard the interests of the exporter. In the open account method, the burden of financing rests upon the exporter. This requires a greater amount of working capital than other forms of payment and the exchange risks are assumed by the exporter. Despite the disadvantages of the open account, competitive pressures have forced many producers use this method after years of selling on more secure terms. The Indian government has recognized the competitive advantage of this form of credit in the system of credit guarantees, it has established to aid Indian producers in competing with their European and American counterparts.

Channels for Financing

These channels are:

(i) By the Exporter Himself. This method is most unusual because comparatively few manufacturers and professional exporters eithers have sufficient capital or wish to employ their capital in this manner. Even if manufacturers and exporters have ample capital, it is to be doubted whether this is the wisest policy to employ it in this manner. Not only are the interest rates charged by banks comparatively low, not only are the fees for negotiating drafts usually quite small, but in refusing to use the facilities offered by banks, the manufacturer or exporter deprives himself of constant contact with a source of information covering a wide range of countries and subjects which may be of importance to him in deciding whether or not to extend credit in some particular instance.

(ii) By the Export Middleman. The export middleman, particularly the export merchant or export commission house, finances export shipments. The manufacturer may have his shipments to overseas markets financed by paying the export middlemen a fee. The fee usually charged by a middleman for services of this nature is comparatively high. Credit risks which are not ordinarily acceptable to banks naturally gravitate towards this type of financing. Usually, the middleman turns around and refinances his own drafts through a bank. The manufacturer, therefore, is paying the middleman a profit for the use of his credit. If the manufacturer is able to present a reasonably sound financial position to a bank, there seems to be every reason why he should finance his export business direct, provided that he is qualified by experience and training to judge the credit risks involved in the export trade.

(iii) By Banks. The financing of export shipments is usually done through the discount of documentary drafts by banks.

(iv) By importers. When the exporter insists upon letters of credit or cash in advance with the order, he is virtually asking the importer, in the overseas market to finance the transaction. The importer does this either by placing the actual cash in the hands of the exporter or by establishing a letter of credit with some bank. In either case, the effect is the same — the importer has financed the transaction.

(v).By Factors. This method is useful to those exporters whose working capital is limited. The factor is a combination of mercantile and banking house which finances manufacturers, exporters, commission houses and selling agents through the purchase and discount of receivables created by sales of merchandise. They are documentary drafts and transactions related to Letters of Credit. Charges for factoring export transactions are generally assessed on a percentage basis. But because little or no cash is required, this type of financing is attractive to many manufacturers and exporters.

Terms of Credit

The terms of credit are contractual matters of prior arrangements between buyer and seller, and their determination depends upon a number of such factors as the type of merchandise to be shipped, the availability of the merchandise, the amount involved, the market customs, the credit standing of the buyer, the country in which the consignee is

located, the exchange restrictions existing in that country, the amount due from the buyer at the time the shipment is made, the availability of feight space to the country of destination, whether the account is a new one or an old one, and many other considerations.

The terms of sale should be carefully distinguished from the closely related ‘terms of credits’. The terms of sale are the conditions of content, time, place and delivery of the merchandise, and only indirectly affect the extension of credit or the length of time for which credit is allowed. The terms of credit are the expression of the extent of trust, the seller (exporter) is willing to place in the buyer.

TERMS OF CREDIT IN EXPORT TRADE(i) Consignment. This method is probably used in the export trade, possibly

because export transactions are always wholesale transactions. In the end, payment is frequently made by means of a clean draft, that is, a draft without any documents attached, and, therefore, a draft which the buyer may honour or not as he sees fit.

(ii) Open Account. It may be liquidated by means of a clean draft.

(iii) Sight Draft. This refers to documents against acceptance (D/A). In this case, credit is extended on the basis of the buyer’s “acceptance” of a draft calling for payment within a specified time.

(a) This specified time may be expressed as a certain number of days after sight, that is, after the draft is first presented to the consignee.

(b) This specified time may be expressed as so many days after the date on which the draft is drawn. Date drafts are preferable because they indicate a definite date for their maturity.

(c) Generally, the drawee is permitted to examine the merchandise before he accepts the draft; but in some cases this is not allowed.

(iv) Letter of Credit. Payment is made against the documents surrendered to the named bank. The buyer arranges for the establishment of a Letter of Credit through his local bank and specifies the conditions under which payment may be made to the seller. Upon the arrival of the credit, the Indian bank notifies the Indian exporter that the credit is at his disposal, and upon what terms. To secure payment, the exporter in India simply presents the necessary or specified documents covering the shipment to the notifying bank, either directly or through his own bank in India. If the documents are in order, they are accepted by the bank, and the exporter receives the payment in full. As far as the exporter is concerned, the transaction is closed. Great care, however, must be taken by the Indian shipper to comply with all the conditions set forth in the original Letter of Credit. Even experienced exporters occasionally get into difficulties by overlooking some item.

(v) COD (Cash on Delivery). This may be worked out in one of the several ways:(a) Cash against documents at the point of shipment (usually at the port of

shipment). This involves advance payment. The goods are not released for

shipment until the buyer pays for them. Part payment may be made in advance and part payment against documents.

(b) Cash against documents at destination: (sight draft) The goods are shipped without prepayment but the buyer must take up the draft and pay the face amount of it upon presentation.

c) Document against payment: (time draft) The goods are shipped without pre-payment, with a draft calling for payment within thirty, sixty, ninety or one hundred and twenty days from the date or sight. On arrival, the merchandise is placed in a warehouse. Payment may be made at any time within the period specified in the draft, at which time the buyer may take possession of his goods. Partial deliveries, against proportionate payments, can usually be arranged under this method.

(vi) Cash with Order (CWO). Although once a practically unknown procedure, due to difficulties currently encountered by foreign importers in securing merchandise, this may now be a practice which is used at times. it may be accomplished either by actual remittance of cash by a bank draft, or by a cheque on an account in India, or by an available letter of credit.

It should be emphasised that the terms of sale virtually represent a contract between the buyer and the seller and include the “terms of credit”. “Terms of sale”, when once agreed upon between buyer and seller, should include every condition on which the sale has been made.

INSTRUMENTS USED IN FINANCING EXPORT TRADE(1) Letters of Credit

Letters of credit are the most important single factor in the export trade. They form the basis of a very large portion of world trade, and give security to both buyer and seller. Letters of credit are much more than a means of arranging payment between the two parties to a transaction; they also set out the ways in which the contract between the two parties is to be performed.

A letter of credit has been defined as a written instrument issued by the buyer’s bank, authorising the seller to draw in accordance with certain terms, and stipulating in a legal form that all such bills shall be honoured. Letters of credit are also known as commercial credits and banker’s credits.

The terms of letters of credit vary greatly, because alterations are made to suit the requirements of each individual transaction. All such credits, however, have certain characteristics in common; all contain an authorisation for some seller of goods to draw on a bank which promises to honour the drafts, although in the case of revocable credits, this promise is contingent upon the cancellation of the letter of credit or its not having been received. The bank thus places the security of its name behind the buyer. In the case of irrevocable credits, this security cannot be taken away, except with the consent of the beneficiary. Herein lies the main point of attractiveness of letters of credit from the exporter’s point of view — he is assured of obtaining payment for his goods, provided that he lives to the terms specified therein. On the other hand, the buyer, provided that he is able to satisfy his local bank as to his standing and the legitimacy of his requirements, can have his orders accepted by almost any firm in any country of the world.

It may be pointed out here that the bank issuing the letter of credit is the stake-

holder in the transaction and is acting on behalf of the buyer who opens the credit. It is not a party to, and knows nothing about, the negotiations between the parties, and is not interested in the goods as such. In issuing a letter of credit, the bank is acting in accordance with the instructions which have been given to it by the buyer. The bank is not in a position to modify any of the details contained in the credit, whatever the reasons given by the exporter. This position must be clearly understood before describing the usual letter of credit requirements. Every little detail must be complied with by the exporter to enable him to obtain payment against the letter of credit and one small (and often apparently senseless) divergence will lead to considerable complications, entailing extra expense delay in payment, or non-payment and, probably also, offence to the buyer who opened the credit. The letter or credit must be minutely studied by the exporter; and if there are any details, however small, which call for adjustment, the exporter must ask the buyer to amend his instructions to the bank and the exporter must wait until the bank, which issued the credit to him, notifies him that the letter of credit has been amended as required. The amendments must follow the same channel as the original credit; it is no use for the exporter to ask the bank at his end to make the amendments. The form and actual wording of a letter of credit vary from bank to bank; but the basic contents are the same.

It is a frequent practice among exporters to request their foreign buyers to arrange with their local banks for the establishment of credits through a designated preferred bank in India. Commercial letters of credit used in connection with exports fall into the following three principal categories.

(1) An irrevocable letter of credit (L/C) issued by a foreign bank and confirmed or guaranteed by an Indian bank. This type of letter of credit is referred was a “confirmed irrevocable letter of credit”, and becomes the irrevocable obligation of the Confirming Indian bank.

(ii) An irrevocable letter of credit issued by a foreign bank but without the responsibility of an Indian bank. It simply transmits advice of the issuance of the letter of credit. This is called an “unconfirmed irrevocable letter of credit”.

TYPES OF LETI’ERS OF CREDIT

In accordance with their terms, letters of credit may be classified as:

(i) Clean and Documentary Letters of CreditLetters of credit may be either clean or documentary.

A clean letter of credit is one in which payment is made to the beneficiary against his receipt or against his clean draft. Most commercial letters of credit are documentary, the payment being made by the notifying bank against the beneficiary’s draft accompanied by the delivery of the full set of documents called for by the terms of the letter of credit.

(ii) Revocable and Irrevocable Letters of CreditIt is obvious from the above classification of letters of credit that they may be

either revocable or irrevocable.

Irrevocable letters of credit may be either confirmed or unconfirmed. A confirmed

letter of credit is one which is the irrecovable engagement of the issuing bank and which has been guaranteed to the beneficiary by another bank. The Indian bank gives its undertaking that drafts drawn in accordance with the terms of the letter of credit will be duly honoured. For confirming a credit, the confirming bank charges a commission; for that reason, confirmation is usually avoided unless it is necessary or desirable. It would be necessary, for example, when the bank establishing the credit is practically unknown in the beneficiary’s country; in such a case, confirmation of the credit by a local bank would enable the beneficiary to negotiate drafts drawn under it much more readily.

Revocable letters of credit are obviously never confirmed, since confirmation would render them irrevocable so far as the confirming bank is concerned.

It should not be assumed that revocable credits carry no obligation on the part of the bank which establishes them. The bank cannot cancel transactions, under revocable letters of credit, after they take place — that is, after the drafts are negotiated.

Revocable credits are invariably addressed to a bank and not to the beneficiary. Under some circumstances, the exporter may be satisfied and accept the irrevocable letter of credit of a foreign bank without confirmation by an Indian bank. This form may provide for drafts dawn on the Indian bank; but in either case, the Indian bank has no obligation to honour the drafts. The revocable letter of credit is less frequently used than the irrevocable letter of credit. The revocable form serves only as a means of arranging payment. for it affords the exporter no protection prior to payment and may be amended or cancelled without the consent of the beneficiary and without placing him on notice of changes or cancellations. As a matter of courtesy, however, banks generally notify beneficiaries of changes or cancellations; but there is no obligation on their part to do so.

(iii) Assignable and Non-Assignable Letters of Credit

Letters of credit may also be divided into two groups, depending upon their assign ability. An assignable letter of credit is one which may be assigned by the beneficiary to some other party. A non assignable letter of credit is one which may not be transferred by the beneficiary named in the letter of credit. An assignable letter of credit is usually issued to a representative of the importer whom he does not know at the time he requests the letter of credit who will actually be the exporter of the merchandise. Once the representative of the importer has found a suitable person or firm which is able and willing to ship the goods on the terms specified by the importer, the letter of credit will be assigned to that party, who’ becomes the exporter, ships the merchandise, and collects under the terms of the letter of credit which has been assigned to him.

(iv) Revolving Letters of Credit

A revolving letter of credit was devised to meet the needs of firms in different countries whose business transactions with one another were more or less regular and continuous, at least over a certain period of time. A firm in Iraq, for example, which expects to buy a substantial quantity of fertilizers in India over a period of 4 or 5 months, may not find it convenient to establish a separate letter of credit covering each transaction. It can, however, arrange with a bank in Baghdad to establish a letter of credit with a bank in New Delhi to be availed of against sight documentary drafts, with the

provision that not more than $ 100,000 is outstanding at one time. Two common types of revolving letters of credit are:

(a) Revolving Cumulative Letters of Credit. A letter of credit which indicates the maximum amount of drafts which may be outstanding at any time. When once this maximum is reached, the paying bank may negotiate fresh bills only to the extent that those previously negotiated have been paid, and advise to that effect received from the bank which established the credit.

(b) Revolving Non-Cumulative Letters of Credit. A credit which provides for a certain maximum payment in any one month (or some other period of time). It is a normal precaution in establishing such credits to indicate that if the credit is not drawn against during one month (or the period of time specified), the amount not availed of cannot be availed of subsequently.

(v) Foreign Currency Letters of Credit

Letters of credit may specify the currency in which drafts against them shall be drawn. The currency specified depends on the arrangements made between the seller and the buyer at the time the sale is effected, and these arrangements vary according to the countries in which the seller and the buyer are located.

(vi) Cable CreditsUnder arrangement, these letters of credit are opened by cable.

(vii) Ancillary Letters of Credit (Back to Back Letter of Credit)These assisting letters of credit are based on the original letters of credit.

Suppose our exporter in India has received a letter of credit for the shipment of sports goods. The exporter has no funds and no line of credit with a bank, and consequently is unable to buy the sports goods ordered by the importer. He, therefore, requests the bank, which has notified him, of the letter of credit to open its own letter of credit to a third party (the seller of sports goods) under the identical terms contained in the importer’s letter of credit. If the importer’s letter of credit is irrevocable, the bank may issue its own letter of credit (ancillary letter of credit), honour the drafts of the seller (the owner of the sports goods) on receipt of the shipping documents and cancel the ancillary letter of credit The exporter presents his draft for the amount of the original letter of credit, but receives only the difference between the amount of the draft and the amount paid by the bank on the draft drawn under the ancillary letter of credit.

Discrepancies

The discrepancies most frequently found in documents scrutiniscd by the paying bank are:

(1) The letter of credit has expired, or the tune of shipment specified in the letter of credit has expired.

(ii) The invoice of the draft exceeds the maximum amount specified in the letter of credit.

(iii) The charges included in the invoice are not authorised in the letter of credit.

(iv) The insurance coverage supplied by the consignor is not complete, either as to amount or as to the risks covered.

(v) The date of the insurance certificate is later than the date indicated on the bill of lading.

(vi) The bill of lading is riot “clean”.(vii) The bill of lading does nor include the “on board” endorsement, or changes on

the bill of lading have not been signed by the shipping company or have not been initialled by the same party who signed the bill of lading.

(viii) The bill of lading is made out to “order” whereas the credit stipulates a “straight” bill of lading, or vice versa. Bills of lading to some countries are prohibited and heavy penalties or additiona1 duties are imposed for failure to ship on a straight bill of lading.

(ix) Description marks and numbers of the packages are not exactly the same on all documents presented, or as called for in the letter of credit.

(x) All the documents required under the letter of credit have not been presented.(xi) The invoice does not set forth the terms of shipment as stipulated in the letter of

credit, such as C & F, CIF, FOB, FAS, etc.(xii) Documents are “stale dated”, i.e., not presented to the opening bank promptly

after date of their issuance. – (xiii) The bill of lading does not indicate “freight prepaid,” when freight charges are

included in the invoice.

It is difficult to exaggerate the importance of carrying out all these stipulations to the last detail. The bank must thoroughly satisfy itself as to the accuracy and completeness of the documents attached to the drafts presented for discounting. Once the drafts under a letter of credit have been accepted or paid, the bank is committed. If an error has been made, the party for whom the credit was originally established is not considered to be liable in any way and cannot be forced to take up the drafts so accepted or paid by the bank.

The bank negotiating, accepting and paying the drafts under a letter of credit covering shipments of, merchandise is not responsible for the quantity or quality of the merchandise. The buyer must be satisfied as to the integrity of the exporter before he closes the transaction. But the bank is entirely responsible for the fulfilment of the conditions Specified in the letter of credit itself.

Main Parties to a Letter of Credit

There are four main parties to a ‘letter of credit. They are:

(i) The importer or buyer on whose account the letter of credit has been opened

(ii) The seller or beneficiary who is authonsed to draw against it.

(iii)The bank which opens or establishes the credit, called the “issuing bank”.

(iv) The paying or accepting bank, frequently called the “advising” or “notifying” bank, on which the beneficiary is authonsed to draw.

A third bank may become a party to this transaction when, under an irrevocable letter of credit, the beneficiary chooses to present his drafts, drawn against the letter of credit, for negotiation to a bank other than the notifying bank.

When opening a letter of credit, it is necessary to state:

(i) Whether the letter of credit is revocable or irrevocable, and whether confirmed or unconfirmed.

(ii) The name of the beneficiary.

(iii) The person on whose account the credit has been opened.

(iv) The tenor of the drafts to be drawn.

(v) Description of the goods.

(vi) How goods are to be consigned and bills of lading drawn.

(vii) Details of documents required and the disposition to be made of them.

(viii) Where and how insurance is to be placed and to whose order it is payable.

(ix) Expiry date.

(x) The number of the letters of credit and instructions that bills drawn under it shall bear the clause “Drawn under (the name of the issuing bank) Letter of Credit No …..”

(B) Drafts or Bills of Exchange

A draft or a bill of exchange, as it is known throughout the world, is an unconditional order in writing, addressed by one person to another, signed by the person giving it, requiring the person to whom it is addressed to pay, on demand or at a fixed or determinable future time, a definite sum in money to, or to the order of, a specified person or the bearer.

An accepted draft or an accepted bill of exchange is called an acceptance. The person to whom it is addressed is called the drawee, and if he signifies his assent to the order in due form, he is called the acceptor. Such assent usually consists of the acceptor writing across the face of the bill, the date, “accepted payable at…….and affixing his signature.

A draft is payable to the bearer when it is expressed to be so payable or when the only or last endorsement is an endorsement in blank. This endorsement in blank is one in which the name of the company only is shown, with the name of signatory and his title. For example:

Indian Export Company, B.S. RathorFinance Officer.

The form of endorsement conveys title to the bearer.

A special or direct endorsement would read as follows:

Pay to the order of Joe Macanzie & Co.Indian Export Co.B.S. RathorFinance Office

The sum payable is a definite and specified sum, although it is required to be paid with interest or with collection charges, or according to an indicated ascertainable rate of exchange.

No special form of words is essential for the validity of a draft, provided that the sense is clear and the bill conforms to the provisions laid down in the definitions given above.

Drafts are usually drawn in pairs, one of which is the “first of exchange” and the other the “second of exchange”. It is customary to send the first of exchange by the first mail and to send the second of exchange by a subsequent mail. If the first of exchange is lost, the second of exchange then becomes negotiable. However, if the first of exchange is negotiated, the second of exchange ceases to have any value.

It is drafts or bills of exchange, drawn by the shipper of goods or the provider of services in one country, on people in another country who are buying the goods or using the services, that constitute the chief supply of international currency.

A draft or a bill of exchange performs two or three functions. A draft payable at first sight is a demand for payment due and a receipt for payment made. A draft payable at some future period after sight becomes a demand for payment by the seller, a promise of payment by the buyer on the agreed date, and a receipt for payment after such payment has been made.

The person who makes out the draft (i.e., the person who receives the money) is said to draw the draft and is called the drawer. The person to whom the draft is addressed and from whom payment is demanded is called the drawee. When the drawer expects the drawee to make payment immediately, the draft is presented to him and this draft is called a “sight draft” which is said to be “drawn at first sight” or “on demand” or on presentation.” In its Strict technical meaning, a sight draft should be retired or honoured (meaning thereby the payment demanded should be made) by the drawee immediately when it is presented to him; but in export trade, most drawees wait until the vessel carrying the goods arrives at the port of destination before doing so.

The bank in the buyer’s country normally receives a sight draft and the shipping documents which accompany it sometimes before the goods arrive, as these documents are sent by air mail; but whilst the bank will notify the buyer that the documents have been received and are due for payment, it will not take any further action to obtain payment until it knows that the vessel has arrived. This notification to the buyer that the draft is with the bank awaiting payment is called presentation; and when the buyer pays the draft, the bank will hand over the shipping documents (i.e., the bill of lading, invoices, insurance certificates, etc.) to him. The buyer is then said to have taken up the documents.

Unless and until the sight draft has been returned, the bank will not hand over the shipping documents and the buyer cannot, therefore, obtain the goods which can only be released by the shipping company in exchange for one of the copies of the bill of lading. If the exporter has been paid through a letter of credit, the bank making the payment will own the goods if the drawee does not pay. If the exporter has agreed to send the goods abroad on D/P terms (documents against payment terms) without asking for credit to be opened, the goods will remain the exporter’s property until the drawee has paid.

When the draft is drawn for payment at any date later than the presentation, it is called a usance draft or a usance bill. When the exporter has agreed to give credit to the foreign buyer for a certain number of days or weeks, the exporter will draw such a usance draft on the buyer. Similarly, the buyer may be able to arrange with his bank to advance the money for the goods and to pay the bank back, sometimes after he has received the goods. In this case, the bank will open a letter of credit and arrange to pay the seller, but will require the seller to submit drafts at 30 days’ sight or 60 days’ sight or after the number of days they have arranged to allow credit to the buyer. The period which is allowed between presentation and payment is referred to as tenor of the draft. When a draft is drawn at 30 days’ sight, it means that the drawee has to retire it thirty days after it has first been presented to him. What in fact happens is that, as soon as the draft is received by the bank abroad, it will be handed over to the drawee, who will then write upon the word draft accepted with the date and his signature. The actual wording will, in all likelihood, be: “Accepted payable at and in the blank space will be inserted the name of the drawee’s own bank, thereby converting the draft into a post-dated cheque.

As soon as the bank abroad receives the accepted draft from the drawee, it will hand over the shipping documents to him and this is the explanation of the term, “D/A or documents against acceptance”. When the exporter has already been paid under letter of credit, the bank abroad will recover the payment after 30 days, or whether other tenor is allowed, have elapsed from the date on which the drawee signed this acceptance.

If there is no letter of credit, the bank aboard will notify the exporter that his draft has been accepted and give the date of acceptance, unless instructions have been given to the contrary that the bank should hold the accepted draft as agent for the exporter and recover payment from the drawee after the appropriate number of days has expired. The bank will then remit the money to the exporter after deducting its own charges.

While it is usual for usance drafts to be presented and accepted immediately they arrive abroad, there are some cases where buyers will not sign their acceptance until the vessel carrying the goods has arrived at their port. As the documents are sent by airmail and reach the foreign bank within three or four days, the goods many take four or five weeks to reach the foreign port. The acceptance of a draft only on the arrival of the vessel will, therefore, give the buyer credit for another four to five weeks.

Once the draft has been accepted, the exporter can, if he wants to get his money quickly, discount it. If he has Sent the draft and documents direct to the foreign bank, he can instruct that bank to send the bill back after acceptance; and when he receives it back, he can hand it over to his own bank, or to a discounting firm, which will pay the amount of the draft, less a Commission for discounting, which will vary according to the tenor of the draft and the amount of risk involved in obtaining payment from the drawees when it

becomes due. In the alternative, the exporter, without asking for the draft to be sent back, may request the foreign bank to do the discounting and remit the proceeds to him. In actual fact, drafts are normally and preferably handed over by the exporter to his own bank, which sends, them abroad to the bank with which they have dealings; and the bank abroad will notify the exporter’s own bank of acceptance. in this instance, the exporter’s bank will arrange for the discounting of the bill for him. Commercial practice, in fact, goes a stage further; the exporter’s bank wilt normally discount the bill at the time it is handed over to it for transmission abroad and will not wait for a notification of acceptance. Whether the bank will do this depends largely upon how well the bank knows the exporter and how much it trusts his commercial acumen and morality.

Such discounting of bills Costs the exporter money in bank charges, and these charges vary and depend upon whether the draft is discounted with recourse or without recourse. The term with recourse means that if the draft is not paid by the drawee, the bank or discounting house can claim back the money paid to the exporter when it discounted the draft. ‘The term without recourse means that the bank or discounting house takes the full risk of not being able to get its money back from the drawee. Drafts presented against a letter of credit are almost always without recourse (even though the phrase is not mentioned on the actual draft). If with recourse drafts are asked for in a letter of credit, the exporter is advised to obtain an amendment before taking action to ship the goods.

In some countries, it is customary to allow the drawee three days in which to make payment after the due date of a usance draft. These days are called grace days, and adrawee, who has accepted a draft for payment in 60 days after sight, will in fact make payment on the sixty-third day after the date on which it was accepted. Such grace days are not allowable on at sight or on presentation drafts. In India, no stamp duty is required on but usance drafts must be stamped legally acceptable. The amount of tenor of the draft — whether it is 3 sight — but is calculated on the amount.

While it should not happen if proper care and attention is taken, there may be an instance when the drawee does not make payment against the draft even if it is a draft which he has signed as accepted. In such a case, the first procedure is to have the bill noted. This means that the unpaid draft is handed over to Notary Public (who is a specially authorised lawyer) who again presents it to the drawee (or to the bank at which he accepted the draft as payable) for payment. If payment is not made, the Notary Public will note the fact on the draft, giving also the reasons why payments as not been made.

After the draft has been noted, the same Notary Public will draw up a formal document known as protest. The protest is legally necessary to enable the drawer to enforce payment from the drawee. The bank abroad will see to it that the unpaid draft is not noted and is unprotected if instructions to do so have been given by the exporter.

Noting and protesting can also be done if the drawee refuses to accept the bill. The consequences then will be the same for the buyer who refuses acceptance.

In most countries there is a time limit for noting and protesting. Care must, therefore, be taken to ensure that if such action is necessary, it is taken within the legal period, which may be within one week or within one month after the date on which payment should have been made.

While the main reason for noting and protesting an unpaid or unaccepted draft is to enable the drawer to sue the drawee or a proven debt, it often happens that the effect of noting and protesting is to frighten the buyer (or the drawee) into honouring his obligations because if he allows the noting and protesting to be carried out, his credit and reputation with other possible suppliers will be badly damaged.

It is not usual for drafts and documents to be sent direct to a collecting banks abroad. The exporter hands over the drafts and shipping documents to his own banker and usually fills in a special form, supplied by the bank, which provides space for the exporter’s instructions to be filled in, including space headed “if paid” and “if unpaid” and it is in these spaces that the exporter will fill in the words protest or not protest he wants the banks abroad to note and protest in the case of non-acceptance or non-payment. If the word protest is filled in, the exporter will be responsible for the payment of the noting and protesting fees, which he may not be able to recover from the drawee. However, all this may not happen if drafts are drawn under a letter of credit.

One more fact should be borne in mind in connection with D/P and D/A terms of payments- and that is that both the exporter’s bank to which the documents are handed and the foreign bank which collects from the drawee will make a charge for their own services. The charges are not excessive, but are certainly worth considering, especially when the exporter wishes to have the money remitted by cable as soon as it is collected from the drawee. The banks also charge extra for sending the documents by air mail. As the actual amount of these costs is not known to the exporter before the transaction is finalised, he may, instead of adding a calculated amount to the total of his invoice, as he would when drawing against a letter of credit, add the words plus bankers’ collection, air mail and remittance charges immediately following the amount of draft.

Credit Extension

One of the ever-present problems in international marketing is the extension of credit. Whenever international marketing people assemble and the subject turns to marketing conditions in particular countries, the question inevitably raised is: “What terms do you grant?” The differences in the terms are often due to the products for which the terms are cited. There is also difference in the way marketers appraise a particular market. Therefore, it would appear that the appraisal of the credit situation of a buyer in a particular market is determined by a number of factors. Before looking at these factors, however, it would be well to examine closely the meaning of credit.

The Meaning of Credit

Credit usually refers to the procedure of surrendering title to merchandise without immediate payment. In other words, credit means trusting the buyer to pay for goods after title to them has been obtained by the buyer. Under the various credit and payment terms described earlier, a buyer would receive credit under open account and under all draft transactions. Under a letter of credit, the exporter (beneficiary) is assured of payment; therefore there is no credit risk.

There is another aspect of credit, however, that should also he considered. That is the credit needs of the firm which is engaged in exporting merchandise, because there is a period of time elapsing between the shipment of the order and the time that payment is received. A payee of a draft may discount or borrow against the draft before its maturity but in doing so, interest for the period of time for which the funds are advanced must be paid. Moreover, there is no assurance that the draft will eventually paid by the drawee.

The inference may easily be drawn that under all credit and payment terms except open account, a payee (exporter) can make use of valuable documents to obtain immediate finances, if such finances are required. However, banks will not discount or loan against accepted drafts beyond a certain limit set by the line of credit that the bank has set up for each individual customer. The line of credit establishes a maximum amount that will be loaned to a customer. A limit may be placed on the rupee value of discounting or borrowing that an exporter will be permitted to receive.

Conditions Influencing Foreign Credit Extension

There are several conditions peculiar to international marketing that require an exporting firm to view foreign credit differently from domestic credit. These conditions are:

(i) Supply of banking capital.

(ii) Interest rates.

(iii) Diversification of production.

(iv) Time in transit and business turnover.

(v) Exchange rate fluctuations.

(vi) Competition.

(vii) Customs.

At the outset, it is well to emphasize that the influence of these conditions varies from country to country. While in Canada credit conditions are practically identical with those in the United States, except for foreign exchange rates and tariffs, the conditions influencing credit extension are different in Mexico. The supply of capital varies greatly among countries and is highly dependent on the nation’s natural resources and past production.

Importers located in underdeveloped areas have depended upon foreign sellers to finance their purchases of consumer goods, transportation, automobiles, or infrastructure improvements because local bankers were unable to provide the financing. The supply of capital is quite meagre in these countries.

Interest rates in non-industrial areas may be substantially higher than in industrial

countries. In such circumstances, the wisdom of an importer borrowing abroad at relatively low interest rates and lending the funds at home becomes apparent.

The lack of developed business system is another factor entering into the foreign credit situation. In underdeveloped or developing areas of the world, intensive specialization in commodity or functional lines may not be warranted, and the business person may frequently combine several types of business ventures in order to earn an adequate income. This imposes a heavy financial responsibility. Another factor accentuating this condition is the lack of diversified production. Many countries have only certain primary products for export such as sugar, rubber, coffee, etc. It is quite conceivable that a crop failure or a low price could cause an economic collapse. If this occurs, not only the growers, but also businesses, bankers, and others may be placed in precarious positions.

Because of the length of time elapsing between the date of shipment by the exporter and the time when goods are received by the importer, there may be a considerable period during which, in the case of cash payment, the importer is without both — funds and goods. If credit of sufficient duration is granted to enable the importer to obtain the goods before making payment, the exporter bears the financial burden of the import transaction, but the sluggishness of turnover may leave the goods in the hands of the buyer for a considerable additional period of time, during which the buyer’s funds would also be tied up. This condition is of little significance in domestic trade where shipments may be made quickly, but in international marketing it presents an important problem. It may be weeks or months before the importer located at an inland destination receives the merchandise. Moreover, customs duties and transportation charges may be paid before delivery. In addition, distance and time compel importers to place orders for substantial quantities of goods long before the selling season opens

Still another condition influencing credit extension in international marketing is the fluctuation in foreign exchange rates. Whenever a buyer receives quotations and accepts prices in a currency other than the native currency, the buyer assumes a speculative risk against which protection may or may not be obtained.

If the buyer has agreed to pay for the purchases by sight draft, utmost the that payment can be postponed and possession of the goods received is upon their arrival. An exchange loss sufficiently great to eliminate the anticipated trade profit may be incurred.

Finally, credit may also be extended for competitive reason. As a means of promoting sales, liberal credit terms may be offered. Moreover, it may be difficult for an exporter to refuse credit terms at least as liberal as those granted by rival suppliers.

Credit extension is influenced by the credit customs of the foreign market. Certain terms are often established in each market along commodity lines, and they are to be recognized by exporters selling in those markets.

Counter Trade (Barter)

Most international trade involves a cash transaction. The buyer agrees to pay the seller in cash within a certain stated Lime period. Yet many nations today lack sufficient hard currency to pay for their purchases from other nations. They want to offer other

items in payment, and this has led to a growing practice called countertrade. Approximately 40 percent of trade with Communist-block nations in yesterycars was handled through countertrade. Less developed countries are also pressing for more counterirade agreements when they buy. Although most companies dislike countertrade deals, they may have no choice if they want the business.

Countertrade takes following forms:

(i) Barter. Barter involves the direct exchange of goods, with no money and no third party involved. For example, the Germany agreed to build a steel plant in Indonesia in exchange for Indonesian oil.

(ii) Compensation deal. Here the seller receives some percentage of the payment in cash and the rest in products. A British aircraft manufacturer sold planes to Brazil for 70 percent cash and the rest in coffee.

(iii) Buyback arrangement. The seller sells a plant, equipment or technology to another country and agrees to accept as partial payment products manufactured with the equipment supplied. For example, a U.S. chemical company built a plant for an Indian company and accepted partial payment in cash and the remainder in chemicals to be manufactured at the plant.

(iv) Counterpurchase. The seller receives full payment in cash but agrees to spend a substantial amount of money in that country within a stated time period. For example, Pepsi-Cola sold its cola syrup to the USSR for rubles and agreed to buy USSR vodka at a certain rate for sale in the United States.

More complex countertrade deals involve more than two parties. For example, Daimler-Benz agreed to sell thirty trucks to Romania and accept in exchange 150 Romanian made jeeps, which it sold in Ecuador for bananas, which in turn it sold to a German supermarket chain for deutsch marks.Through this circuitous transaction, Daimler-Benz finally achieved payment in German currency. Various barter houses and counter-trade specialists have emerged to assist the parties to these transactions. Everyone agrees that international trade would be more efficient if carried out in cash, but too many nations lack sufficient hard currency. Sellers have no choice but to learn the intricacies of countertrade, which is a growing phenomenon in world trade.

Export-Import Bank of India

Objectives: The objective of Exim Bank is to promote India’s international trade. Its logo reflects this. The Logo has a two-way significance. The import arrow is thinner than the export arrow. It also reflects the aim of value addition to exports.

The Export-import ‘Bank of India was established for providing financial assistance to exporters and importers, and for functioning as the principal institution for coordinating the working of institutions engaged in financing export and import of goods and services with a view to promoting the country’s international trade. The Exim Bank was established under: The Export-Import Bank of India Act, 1981. The bank started its functioning in 1982.

The Post Decades

Net profits, on a cumulative basis over eight years reached Rs. 1.35 billion. Reserves aggregated Rs. 989 million. Paid-up capital of the Bank increased to Rs. 2.34 billion, with the authoriscd capital at Rs. 5 billion. Asset footings recorded Rs. 17.24 billion. Dividend to Government in cumulative terms, amounted to Rs. 360 million. Over the eight years, export contracts valued of Rs. 48 billion have been financed. Aggregate loans and advances outstanding reached Rs. 11.18 billion. Total staff of the Bank stands at 138.

Resources

Exim Bank’s resources as a March 31, 199Q aggregated Rs. 17.2 billion. This includes paid up capital of Rs. 2.3 billion, wholly subscribed by the Government of India and accumulated reserves, over a period of eight years, of Rs. 989 million, Rupee borrowings including long term loans of Rs. 671 million from the Government of India, Rs. 6.3 billion from the Reserve Bank of India (RBI) and Rs. 338 million payable to the Industrial Development Bank of India, on account of its transfer of the international loan portfolio to Exim Bank in March 1982. Rs. 3.2 billion raised in the domestic bond market and equivalent of Rs. 1.4 billion raised as loans in foreign currencies. The authorised share capital of the Bank is Rs. 5 billion.

Finance for exports is needed at five stages

(1) First, an exporter may need finance to develop an exportable product.

(2) Second, finance is needed to upgrade export production through acquisition of new equipments, ongoing technology.

(3) Third, pre-shipment finance is needed to acquire inputs that get convened into an export product.

(4) Fourth finance may be needed for systematic marketing activities.

(5) Fifth, buyers abroad may need credit terms to stimulate purchase. Exim Bank is helping at all five stages. In the financing of non-traditional exports, exim Bank serves as a single source for export finance.

Range of Financing Programmes

Exim Bank promotes Indian exports through a range and a variety of lending programmes. This encompasses direct financial assistance to exporters at preshipment stage, term finance for 100% export oriented units, overseas investment finance, a lending programme fore export product development, term finance for export production, finance for computer software exports, finance for export marketing, buyer’s credit, lines of credit, export bills rediscounting, refinance and bulk import finance to commercial banks. Exim Bank also extends non-funded facility to Indian exporters in the form of guarantees. The Bank now offers a diversified range of lending programmes. These cover

various stages of the export cycle. i.e., research and product development, pre-shipment finance, market entry financing term loans for capacity upgradation, production loans, post shipment credit. The current focus of the Bank is to promote export of industrial durables, project exports, export of technology services, export of computer software. These together constitute the expanding base of non-traditional exports from India.

Operations under Programmes of Funded Assistance

During the period 1989-90 Exim Bank sanctioned Rs. 9.6 billion under various programmes of funded assistance and utilisations of these programmes amounted to Rs. 8.9 billion. Compared with previous year, sanctions have increased by 12% and utilisations have increased by 22. Outstanding as on March 31, 1990 stood at Rs. 11.2 billion compared with the previous year, outstandings have increased by 20%.

Out of sanctions for funded assistance during the period under report, the largest share was for exports to West Asia (61%), followed by Europe (12%), South Asia (9%), South East Asia/Far East Asia & Pacific (7%) and Sub-Saharan Africa (4%). Funded assistance was utilised mainly for exports to West Asia (61%) followed by South Asia (11%), Sub-Saharan Mrica (10%) and Americas (8%). Seventeen percent of funded sanctions and 25% utilisàtion of export credits were accounted for by construction and consultancy industry. Sanctions and utilisations covered exports of railway rolling stock, textile machinery, commercial vehicles, auto ancillaries, bicycles and spares, computer software, pharmaceuticals, power generation and distribution equipment, surgical instruments, telecommunications, leather and leather goods and paper mill machinery. Operations under individual programmes of funded assistance are briefly described in the following paragraphs.

1. Lending Programmes for Indian Companies

(a) Direct Financial Assistance to Exporters

During the period 1989-90, sanctions and utilisations of direct financial assistance to exporters amounted to Rs. 1553 million and Rs. 1235 million respectively. Direct assistance to exporters took the form of deferred payment, suppliers’ credit, foreign currency and rupees term loans to project exporters and finance for export of technology and consultancy services. Utilisations were largely for exports to West Asia (63%), South Asia(19%).

(b) Leading Programme for Export Product Development

Exim Bank introduced in 1988-89 a lending programme which provided export development loans for purpose of R&D, export product development and quality assurance activities which form part of a firm’s export programme. Utilisation under this programme during the year amounted to Rs. 4 million.

(c) Pre-shipment Credit

Pre-shipment credit is extended in participation with commercial banks for

procuring raw materials and inputs required to produce equipment whose manufacturing cycle exceeds 180 days. During the period, preshipment credit amounting to Rs. 237 million was sanctioned. Utilisations under this programme amounted to Rs. 243 million.

(d) Term Finance for 100% Export Oriented Units

During the period 1989-90, Exim Bank extended sanctions of Rs. 307 million by way of term loans for export oriented units. Utilisation in the same period covering sanctions was Rs.374 million. Sanctions were utilised to set up export-oriented units for manufacture of granite slabs, gem and jewellery, sports goods, medical equipment and garments. Outstandings under this programme amounted to Rs. 628 million as on March 31, 1990.

(e) Term Finance For Export Production

Under the Agency Credit Line concluded by Exim Bank with International Finance Corporation (IFC), Washington D.C., finance by way of foreign currency term loan is available from IFC to Small and Medium Enterprises in the private sector for investment in plant and machinery, as well as product and process know-how to create and enhance export capabilities. Exim Bank provides rupee term loans on a matching basis with JFC to such enterprises. Activities eligible for finance are new projects with expansion and modernisation plans and equipment imports. Exim Bank sanctioned term finance of USS 1 million and Rs. 22 million during the period. Utilisation under the programme amounted to USS 3 million and Rs. 44 million. Outstandings of the end of the year stood of USS 5 million and Rs. 80 million.

(f) Finance for Computer Software Exports

Under the Government of India Software Policy, Exim Bank has been named as a source of foreign exchange for software exporters. Exim Bank sanctioned to software exporters, foreign currency loans of USS 6 million and rupee term loans of Rs. 42 million. Utilisations were 1. SS 2 million and Rs. 25 million respectively. This is expected to catalyse exports valued at Rs. 886 million over a period of 4 years.

(g) Export Marketing Fund I

Under this programme, finance is available to Indian companies for undertaking export marketing activities. Such finance Covers upto 50% of the total cost incurred on eligible export marketing activities. The disbursals are in the form of grants. The Export Marketing Fund (EMF) is a component of a World Bank loan to India for promotion of a select group of engineering export products in developed country markets. Government of India has designated Exim Bank as the agency to manage the EMF. During the period 1989-90, Exim Bank extended sanctions amounting to Rs. 16 million to 36 firms for export marketing programmes. Utilisations under this programme aggregated Rs. 29 million.

(ii) Export Marketing Fund II

During the year under review, Exirn Bank was designated as agency to manage a second export development programme under World Bank funding. This programme

seeks to promote export of all manufactures to developed country markets, by providing loan cum grant finance in support of strategic export development plans, at firm level. Loan sanctions in respect of 2 proposals amounted to Rs. 27 million, and approval for grant finance was extended to one company, a manufacturer of herbal products.

(i) Overseas Investment Finance

During the period 1989-90, sanctions of overseas investment finance for Indian joint ventures abroad, amounted to Rs. 26 million. Utilizations under cumulative sanctions amounted to Rs. 7 million. Finance extended under this lending programme was utilised for equity investment. Under this programme, finance was utilised for investment in a subsidiary for melamine faced particle boards in USA. Outstandings at the end of the year stood at Rs. 30 million.

2. Lending Programmes for Foreign Governments, Companies and Financial Institutions.

(a) Overseas Buyer’s Credit

Utilisations under this programme aggregated Rs. 174 million for textile industry, construction activity, supply of products and services. Outstandings on March 31, 1990 stood at Rs. 871. million.

(b) Lines of Credit to Foreign Governments and Financial Institutions

Exim Bank offers lines of credit to foreign governments or overseas financial institutions. Lines of credit aggregating Rs. 880 million have been sanctioned during the period under review. Utilisation of lines of credit aggregated Rs. 466 million. Major part of utilisations ware for exports to West Asia (54%), followed by Sub-Saharan Africa (17%), Americas (11%) and South- East Asia/Far East & Pacific (10%). The major products financed under this programme were commercial vehicles, power generation and distribution equipment, bicycle and bicycle parts, paper mill machinery, diesel engines and pumps, auto ancillaries and spares and textile machinery.

3. Landing Programmes for Commercial Banks in India

(a) Export Bills Rediscounting

Under this programme, Exim Bank provides short term funds to Indian commercial banks against export bills that have unexpired usance of a maximum of 90 days. For this programme, the RBI sets the lending limit. At the year end, outstandings stood at Rs. 500 million

(b) Small Scale Industry Export Bills Rediscounting

Under this programme, commercial banks can rediscount eligible export bills of small scale industry exporters. For this programme, RBI sets the lending limit. Under this programme, outstandings at the end of the year stood at Rs. 500 million.

(c) Refinance

Exim Bank sanctioned and disbursed Rs. 654 million and Rs. 623 million respectively for refinance assistance to commercial banks during the period. This programme is operated primarily with the purpose of refinancing medium and long term post-shipment credit extended by banks to Indian exporters. Utilistions of export credit refinance for supplier’s credit was Rs. 431 million. Refinance assistance was also extended to commercial banks for rupee term loans extended by them to project exporters executing projects in West Asia. During the period, utilistions of refinance of rupee term loans amounted to Rs. 192 million.

(d) Bulk Import Finance

Under this programme commercial banks avail of finance by discounting promissory notes drawn in their favour by importer borrowers. Commercial banks in India extending finance to firms engaged in the bulk import of eligible industrial inputs can avail of this facility. For this programme, the RBI sets the lending limit. At the year end outstandings stood at Rs. 1.0 billion.

Operations under Programmes of Non-Funded Assistance

Exim Bank sanctioned non-funded assistance in the form of guarantees worth Rs. 498 million and guarantees worth Rs. 394 million were issued. Major part of non-funded assistance was for projects in West Asia, followed by South-East Asia/Far East & Pacific. Construction projects accounted for 34% of sanctions and 36% of issues.

Export Promotion

Exim Bank during the year launched three promotional programmes aimed at providing finance for export promotion. Funds were earmarked out of Bank’s Export promotion Reserve for financing of consultancy studies undertaken by Indian consultants enlisted by the Africa Project Development Facility. This facility has been set up by International Finance Corporation, Washington D.C. jointly with UNDP and African Development Bank. It seeks to promote private sector investment in Africa. Exim Bank also mounted a programme to finance feasibility studies in developing countries: the Project Preparatory Studies Overseas Programme. One approval was made during the year for a feasibility study in the transport sector in South- East Asia/Far East & Pacific. A third programme, provides finance towards market entry cost incurred by Indian firms exporting to development countries.

Results

Exim Bank registered for the 12 months under report a net profit of Rs. 272 million (on account of General Fund) during April 1989- March 1990, as against a profit of Rs. 284 million for the 15 months period January 1988- March 1989. This is after adjusting for depreciation, possible loan losses and other normal provisions. Net profit (on an annualised basis) has increased by 20% as compared to the previous year. Out of this profit, Rs. 80 million accounts for the dividend paid to the Government of India and Rs. 138 million is transferred to reserves. In addition, the Bank has transferred funds aggregating Rs. 55 million into Export Promotion Reserve available for export promotion purposes. Net profit of the export Development Fund during the period was Rs. 21

million, which is carried forward to the next year.

Current Position of Exim Bank – 1991-92

105% Rise in Export Bids by Exim Bank

The Export-Import Bank of India’s export bids touched Rs. 7,187 crore during 1991-92, showing a 105 per cent rise over the previous year as it completed 10 years of its operation in March 1992 posting a cumulative profit of Rs. 203.4 crore during the decade.

Exim Bank’s Performance:

The export contracts secured by Indian exporters shot up to Rs. 1,093 crore during 1991-92 from Rs. 896 crore, an increase of 22 per cent over the previous year.

The Exim Bank’s disbursements stood at Rs. 1,107 crore as against Rs. 858 crore in the previous year, a 29 per cent increase, while loan outstanding increased by 23 per cent, moving up to Rs. 1,616 crore on March 31, 1992, from Rs. 1.315 crore last year.

During the entire decade (1982-92) its exports bids were Rs. 48,740 crore, export contacts secured Rs. 6.035 crore in over 50 countries and total reserves and dividends paid, Rs. 147.5 crore and Rs. 55 crore respectively.

Eighty export contacts, covering 25 countries and worth Rs. 1.093 crore, export contracts secured Rs. 6.035 crore in over 50 countries and total reserves and dividends paid, Rs. 147.5 crore and Rs. 55 crore respectively .

The Bank’s net profit during the same period, on account of general fund, amounted to Rs. 37.6 crore as compared to Rs. 30.8 crore in the previous year. A sum of Rs. 10 crore would be paid to the central government as dividend, as compared to Rs. 9 crore during 1990-91.

The ratio of successful bids made was 12.4 per cent over the 10- year period against the international standard of 15 per cent. Indian exporters “missed out” on 70 per cent of the bids. Many bidders did not produce bank guarantees acceptable to the importing countries and lacked of proper analysis of “hidden costs”. There ware hardly any complaints about project exports, but there were some in the case of products.

Table 19.2EXPORT FINANCING PROGRAMMES OF EXIM BANK

Programme Use Rate of interest @Export Marketing Enables exporters to implement market

development programs1. Grant2. loan 14% p.a.

Export Product Development Enables Indian firms undertake product development, R& D for exports

11.2% p.a.Agency Credit Line* Enables upgradation/expansion of export

Production capabilities of small and medium enterprises

11.2% p.a.

Computer Software Exports Enable acquisition of imported and indigenous computer systems, and project related assets. 11.2% p.a.

Hundred per cent Export oriented Unit

Enables Indian companies to acquire: indigenous assets Imported machinery and other assets

9% p.a.11.2% p.a.

Preshipment Credit Enables Indian exporter to buy raw materials an inputs where exports require long cycle time

9.5% p.a.

Project Preparatory Services Overseas

Enables Indian Consultancy firms undertake project preparatory studies in developing countries by grant/loan financing.

-

Consultancy and Technology services

Enable Indian exporters of consultancy services and technology to extend term credit to importer overseas

7.5% p.a.

Direct Financial Assistance to Exporters

Enables Indian exporter to extend term credit to importer overseas, of eligible Indian goods

7.5% p.a.

Overseas Buyer’Credit

Enables overseas buyer to pay cost of eligible goods imported from India on deferred terms

7.5% p.a.

Lines of Credit Enables overseas financial institutions, foreign governments, their agencies to lend term loans to finance import of eligible goods from India. 7.5% p.a.

Refinance of export credit Enables banks to offer credit to Indian exporters of eligible goods, who extend term credit to foreign buyers

7.5% p.a.

Relending facility Enables overseas banks to make available term finance to their clients, for import of eligible Indian goods 7.5% p.a.

Export Bills Rediscounting Enables banks to rediscount usance export bills, with usance not exceeding 180 days and unexpired usance of a maximum period of 90 days.

7.5% p.a.

Small Scale Industry (SSI) Export Bills Rediscounting

Enables banks to fund SSI Export bills, with usance not exceeding 180 days and unexpired usance of a maximum period of 90 days

7.5% p.a.

Bulk Import Finance Enables banks to offer finance to importers for bulk import of consumable inputs

13.5% p.a.

Overseas Investment Finance Enables Indian promoter to finace equity contribution in joint ventures set up abroad

12.5% p.a.

Notes: (a) interest rates are as on March 31, 1990 and subject to change.• In collaboration with International Finance Corporation, Washington.

Table 19.2Past Eight Years of Exim Bank

1982* 1983 1984 1985 1986 1987 1988-89*

1989-90* Cumulative

Operations

68900 42109 41730 40420 15390 81550 53870 36430 380399

Value of birds approved*

Commitments in Principle*Sanctions

UtilisationsOutstanding

Not- Funded

3355 3898 5230 5770 3490 8280 5697 3948 396681990 3012 3386 4412 5621 6905 10626 9550 455021785 2057 3530 3813 5241 5989 9130 8878 404232199 2930 4147 5544 6438 7232 9347 11178

Guarantees Committed in principle*Guarantees sanctioned Guarantees Issued Guarantees outstanding

Resources and Income Resources

6833 3458 4300 3630 1790 10470 4070 3551 381021019 753 752 732 763 517 488 498 53423986 4515 5102 4661 5290 4844 5373 5969

Capital 750 1000 1275 1475 1725 1945 2205 2338Borrowings 2592 3486 4338 5090 6235 6992 7681 8614Bonds - 530 530 780 1175 1610 2620 3200Reserves 53 121 211 325 444 583 796 989Total Resources 3559 5369 6691 8163 10474 12812 14840 17243

Earnings63 88 120 154 170 199 284 272Net Profit

Dividend 10 20 30 40 50 60 70 80Staff (Numbers) 69 109 132 141 141 140 135 138

RatiosCapital AssetsRatio (%)***** 22.6 20.9 22.2 22.1 20.7 19.7 20.2 19.3Net Profit on Capital and Reserves (%) 9.1 9.2 9.4 8.6 8.5 8.2 8.6Net Profit on Assets (%)

2.0 2.0 2.1 1.8 1.7 1.6 1.7

Net Profit per Employee (Rs. mn) 0.989 0.996 1.128 1.206 1.416 1.652 1.993

• Exim Bank started its operations in March 1982, the accounting years 1982 refers to March- December 1982, 1983 are calendar years. 1988-89 years pertains to the period January 1988 to March 1989 due to change in a accounting year. 1989-90 is April 1989 to March 1990.

• For approvals and commitments-in principle, where more than one Indian company has submitted tenders for the same job, only one approval and commitment –in-principle of maximum value was considered up to 1985 and minimum value since 1986.

• Capital and Reserves as a % of Assets.Note: Data pertains to General fund.

The Role Played by Export Credit Guarantee Corporation of India Ltd. in Risk Management and Financial Gurantees

Role of the Corporation

ECGC Contributes to the country’s export efforts by improving the competitive capacity of Indian exporters. Through its schemes of export credit insurance, the Corporation makes it possible for exporters to match the credit terms offered by their counterparts from other countries and thereby win more export orders in the highly competitive international markets. By adopting a judicious underwriting policy which is aligned to the nation’s needs, the Corporation also makes it possible for Indian exporters to continue trading with certain counties to which, without its insurance cover, they would not be able to ship goods because of temporary payment problems faced by such countries. The Corporation also assists exporters to maximise their export turnover through the guarantees that issues to the commercial banks in India. The guarantees, which reduce the lading risk of the banks, create an environment in which exporters get easier access to export finance, which is a critical factor for the rapid expansion of business.

In the challenging and changing international environment, India’s export growth potential will become more dependent on penetrating markets in the developed countries and increasing its market share. The availability of ECGC’s insurance for short –term, medium-term and long-term credit transactions as well as the various types of guarantees to banks designed to facilitate easy availability of export finance, is of crucial importance for optimising this potential.

Payment for exports are open to risks even at the best of times. The risks have assumed large proportions today due to the far reaching political and economic changes that are sweeping the world. An out-break of war or civil war may block or delay the payment for goods exported. A coup or an insurrection may also bring about the same result. Economic difficulties or balance of payments problems may lead a country to impose restrictions on either import of certain goods or on transfer of payment for gods imported. In addition, one has to contend with the usual commercial risks of insolvency or protracted default of buyers. The commercial risks of the foreign buyer going bankrupt or losing his capacity to pay are heightened due to the polticial and economic uncertainties. Conducting export business in such conditions of uncertainty is fraught with dangers.

The loss of a large payment may spell disaster for any exporter, whatever is his prudence and competence. On the other hand, too cautious an attitude in evaluating risks and selecting buyers may result in loss of hard-to-get business opportunities. Export credit insurance is designed to protect exporters from the consequences of the payment risks, both political and commercial, and to enable them to expand their overseas business without fear of loss.

Export credit insurance also seeks to create a favorable climate in which exporters can hope to get timely and liberal credit facilities from banks at home. For this purpose,

export credit insurer provides gurantees to banks to protect them from the risk of loss inherent in granting various types of finance facilities to exporters.

In order to provide export credit insurance support to Indian exporters, the Government of India set up the Export Risks Insurance Corporation (ERIC) in July, 1957. It was transformed into Export Credit & Guarantee Corporation Limited (ECGC) in 1964. To bring the Indian identity into sharper focus, the Corporation’s name was once again changed to the present Export Credit Guarantee Corporation of India Limited in 1983. ECGC is a company wholly owned by the Government of India. It functions under the administrative control of the Ministry of Commerce and is managed by a Board of Directors representing Government, Banking, Insurance, Trade, Industry, etc.

The covers issued by ECGC can be divided broadly into four groups:(1) Standard Policies issued to exporters to protect them against payment risks

involved in exporters on short-term credit;(2) Specific Policies designed to protect Indian firm against payment risks

involved in (a) exports on deferred terms of payment, (b) services rendered to foreign parties, and (c ) construction works and turnkey projects undertaken abroad;

(3) Financial gurantees issued to banks in India to protect them form risks of loss involved in their extending financial support to exporters at the pre-shipmen as well s post-shipment stages; and

(4) Special schemes, viz., Transfer Guarantee meant to protect banks which add confirmation to Letter of Credit opened by foreign banks, Insurance cover Investment Insurance and Exchanges Fluctuation Risk Insurance.

I. Standard Policies ECGC has designed four types of Standard Policies to provide cover to shipment made on short-term credit.

(i) Shipments (Comprehensive Risks) Policy – to cover both commercial and political risks from the date of shipment.

(ii) Shipments (Political Risks) Policy- to cover only political risks from the date of shipment.

(iii) Contracts (Comprehensive Risks) Policy- to cover both commercial and political risks from the date of contract.

(iv) Contracts (Political Risks) Policy- to cover only political risks from the date of contract.

The Shipments (Comprehensive Risks) Policy is the only ideally suited to cover risks in respect of goods exported on short- term credit. This policy covers both commercial and political risks from the date of shipment. Risk of pre-shipment losses due to frustration of export contracts is nil or very low since goods, consumer goods or consumer durables which can be resold easily Contracts policies, which cover risks from the date of contract, are issued only in special cases when goods to be exported are manufactured to non standard specifications of buyer.

Shipments to-associates or to agents and those against letters of credit can be

covered for only political risks by suitable endorsements to the Shipments (Comprehensive Risks) Policy. Premium is charged on such shipments at lower rate. “Deemed exports” can also be covered under the Comprehensive Risks Policies.

1. Risks Covered

The risks covered under the Standard Policies are:

(i) Commercial Risk

(a) insolvency of the buyer;

(b) buyer’s protracted default to pay for goods accepted by him; and

(c) buyer’s failure to accept goods, subject to certain conditions.

(ii) Political Risks

(a) Imposition of restrictions on remittances by the government in the buyer’s country or any government action which may block or delay payment to the exporter;

(b) War, revolution or civil disturbances in the buyer’s country;

(c) New import licensing restrictions or cancellation of a valid import licence in the buyer’s country, after the date of shipment or contract as applicable;

(d) Cancellation of export licence or imposition of new export licensing restrictions in India after effective date of contract (under contracts policy);

(e) Payment of additional handling, transport or insurance charges occasioned by interruption or diversion of voyage which cannot be recovered from the buyer; and

(J) Any other cause of loss occurring outside India, not normally insured by general insurers, and beyond the control of the exporter and/or the buyer.

3. Risks not covered

The Standard Policies do not cover losses due to the following risks:

(a) Commercial disputes including quality disputes raised by the buyer, unless the exporter obtains a decree from a competent court of law in the buyer’s country in his favour;

(b) causes inherent in the nature of the goods;

(c) buyer’s failure to obtain necessary import or exchange authorisation from authorities in his country;

(d) insolvency or default of any agent of the exporter or of the collecting bank

(e) loss or damage to goods which can be coveted by general insurers;

(f) exchange rate fluctuation; and

(g) failure of the exporter to fulfill the terms of the export contract or negligence on his part.

3. Exporter Co-insurer

It is customary in credit insurance to make the insured share a small percentage of the risk. ECOC normally pays 90 per cent of the losses on account of political or commercial risks. In the event of loss due to repudiation of contractual obligations by the buyer, ECGC identifies the exporter upto 90 per cent of the loss if final and enforceable decree against the overseas buyer is obtained in a competent court of law in the buyer’s country. The Corporation, at its discretion, may waive such legal action where it is satisfied that such legal action is not worthwhile and in that event also losses are indemnified upto 90 per cent. Recoveries made after the payment of claim are shared with the ECGC in the same proportion in which the loss was borne.

4. Whole Turnover Principle

ECOC expects a fair spread of risks insured. Therefore an exporter is required to insure all the shipments that may be made by him during the next 2 years, except those made against advance payment or Irrevocable Letters of Credit confirmed by banks in India. Exclusions are, however, possible where items are not of an allied nature.

5. How to Obtain PolicyAn intending exporter should fill in a proposal form (No. 121) available with all

ECGC offices (addresses given at the end) and submit it to the nearest office. After examining the proposal, ECGC would send him an acceptance letter stating the terms of its cover and premium rates. The policy will be issued after the exporter conveys his consent to the premium rates and pays a non-refundable policy fee which will be Rs. 1001- for policies with Maximum Liability limit upto Rs. 5 lakhs; Rs. 200/- between Rs. 5 lakhs and Rs. 20 lakhs and Rs. 100/- for each additional Rs. 10 lakhs or part thereof subject to a ceiling of Rs. 2,500/-.

5. Maximum Liability

Maximum Liability is the limit upto which ECGC would accept liability for shipments made in each of the policy-years. It will be advisable for exporters to estimate the maximum outstanding payments due from overseas buyers at any time during the policy period and to obtain the policy with Maximum Liability for such value. The maximum liability fixed under the policy can be enhanced subsequently, if necessary.

6. Credit Limit

Commercial risks are covered by ECGC subject to approval of a credit limit on each buyer. Credit limit is the limit upto which claim can be paid under the policy for

losses on account of commercial risks. As commercial risks arc not covered in the absence of a credit limit, exporters would be well advised to apply to ECGC for approval of credit limit on buyer in the prescribed form (No 144) before making shipment. If complete information regarding the buyer and his banker is given in the credit limit application, it will facilitate receipt of credit information expeditiously. ECGC obtains credit information on overseas buyers through banks and credit information agencies. On the basis of credit information and its own experience, ECOC fixes suitable credit limits on overseas buyers.

In case an exporter has already obtained a credit report on the buyer or is in possession of other information that can help ECGC in fixing credit limit, the same may be furnished along with credit limit application to facilitate quick decision. If the exporter needs an enhancement in limit, he may apply in the prescribed form (NBNo.144A) giving his past experience with the buyer.

(i) Status Enquiry Charges

ECGC spends a good amount on getting status reports on overseas buyers but charges a nominal fee of Rs. 50/- for each application. An exporter need not pay any status enquiry fee for credit limits upto Rs. 5 lakhs if he furnishes a bank report not older than 6 months, on the buyer.

In case limit is required urgently, exporters may request ECGC to obtain cable report on the buyer and remit an amount of Rs. 400/- towards cable expenses. Alternatively exporter may obtain cable report through his bank and furnish the same in original to ECGC for a quick decision.

(ii)Discretionary Limits

If no application for Credit Limit on a buyer has been made, ECGC accepts liability for commercial risks upto a maximum of Rs. 5,00,000/- for D,P./C.A.D. transactions and Rs. 2,00,000/- for D.A. transactions provided that:

(a) at least three shipments have been effected by the exporter to the buyer during the preceding two years on similar payment terms and at least one of them was not less than the discretionary limit availed of by the exporter and.

(b) the buyer had made payment for the shipments on due dates.

(ii) Restricted Cover Countries

When payment risks become too high in a country, ECGC provides cover for shipments to such countries on a restricted basis. Policyholders intending to export to such countries are required to obtain specific approval of ECGC for each shipment/contract or series of shipments contracts upon payment of Specific Approval Fee. If such approval is not taken, cover is not available even for political risks.

8. Declaration of Shipments & Payment of Premium

The premium rates are closely related to the risks involved and vary according to

countries to which goods are exported and the payment terms.

An exporter who has taken a Shipments Policy has to send by the fifteenth of each month, a declaration of shipments made in the previous month, in the prescribed form (No. 203). An exporter who obtains a Contracts Policy has to send a declaration of all outstanding contracts immediately after the policy is issued. Thereafter he shall send a monthly declaration of contracts concluded and shipments made by him during the previous month. Premium has to be paid along with the declaration at rates shown in the schedule attached to the policy.

9. Consignment Exports

Exports on consignment basis may be covered under Shipments (Comprehensive Risks) Policy by a suitable endorsement thereon. While political risks are covered from the date of shipment till the date of receipt of payment in India, commercial risks are covered only alter the Agent/ Stockholder submits the ‘Accounts Sales’ to the exporter. The risk of the Agent/Stockholder not returning the unsold goods is not covered under the Policy.

10. Reporting Defaults

In the event of non-payment of any bill, policyholders are required to take prompt and effective steps to prevent or minimise loss. A monthly declaration of all bills which remain unpaid for more than 30 days should be submitted to ECGC in the prescribed form (No. 205) indicating action taken in each case.

Granting extension of time for payment, covering bills from D.P. to D.A. terms or resale of unaccepted goods at a lower price require prior approval of ECGC.

11. Settlement of Claims

A claim will arise when any of the risks insured under the policy materialises. If an overseas buyer goes insolvent, the exporter becomes eligible for a claim one month after his loss is admitted to rank against the insolvent’s estate or after four months from the due date, whichever is earlier. In case of protracted default, claim is payable after four months from the due date. Claims in respect of additional handling, transport or insurance charges incurred by the exporter because of interruption or diversion of voyage outside India are payable after proof of loss is furnished. In all other cases claim is payable after four months from the date of the event causing loss.

However, in case of exports to countries where long transfer delays are experienced, ECOC may extend the waiting period and claims for such shipments are payable after the expiry of such extended period.

Where the buyer does not accept goods or pay for them because of differences over fulfilment of the terms of contract by the exporter, ECGC considers claims after the dispute between the parties is resolved and the amount payable is established by obtaining a decree in a court of law in the country of the buyer. This condition is waived in cases where the -Corporation is satisfied that the exporter is not at fault and that no useful purpose would be served by proceeding against the buyer.

12. Debt Recovery

Payment of claim by the ECGC does not relieve an exporter of his responsibility for taking recovery action and realising whatever amount that can be recovered. The exporter should, therefore, consult the ECGC and take prompt and effective steps for recovery of the debt. For its part, ECGC will help exporter by providing the name of a reliable lawyer or debt collecting agency and by enlisting the help of India’s commercial representative in the buyer’s country.

All amounts recovered, net of recovery expenses, should be shared with ECGC in the ratio in which the loss was originally shared.

Receipt of a claim from ECGC does not relieve an exporter from obligations to the Exchange Control Authority for receiving the amount from the overseas buyers.

II. Specific Policies

The Standard Policy is a whole turnover policy designed to provide a continuing insurance for the regular flow of an exproter’s shipments of raw materials, Consumer goods and consumer durables for which credit period does not exceed 180 days. Contracts for export of capital goods or turnkey projects or construction works or rendering services abroad are not of a repetitive nature. Such transactions are, therefore, insured by ECGC on a case-to-case basis under specific policies.

All contracts for export on deferred payment terms and contracts for turnkey projects and construction works abroad require prior clearance of Authorised Dealers, Exim Bank or the Working Group in terms of powers delegated to them as per exchange control regulations. Applications for this purpose are to be submitted to the Authorised Dealer (the financing bank) which will forward applications beyond its delegated power to the Exim Bank.

1. Specific Policy for Supply Contracts

Specific Policy for supply contracts may take any of the following four forms:

(i) Specific Shipments (Comprehensive Risks) Policy to cover both commercial and political risks at the post-shipment stage;

(ii) Specific Shipments (Political Risks) Policy to cover only political risks at the post-shipment stage in cases where the buyer is an overseas government or payments are guaranteed by a Government or by banks, or are made to associates;

(iii) Specific Contract (Comprehensive Risks) Policy; and

(iv) Specific Contract (Political Risks) Policy.

Contracts Policy provides cover from the date of contract. Losses that may be sustained by an exporter at the pre-shipment stage due to frustration of contract are covered under this policy in addition to the cover provided by the Shipments Policy.

2. Insurance cover for Buyer’s Credit and Line of Credit

Financial institutions in India, like those in several other countries, have started direct lending to buyers or financial institutions in developing countries for importing machinery and equipment from India. This kind of financing facilitates immediate payment to exporters and frees them from the problems of credit management as well as from the fear of loss on account of overseas credit risks.

Financing may take the form of Buyer’s Credit or Line of Credit. Buyer’s Credit is a loan extended by a financial institution, or a consortium of financial institutions to the buyer for financing a particular export contract. Under Line of Credit, a loan is extended to government or financial institutions in the importing country for financing import of specified items from the lending country.

ECGC has evolved schemes to protect financial institutions in India which extend these types of credit for financing exports from India. Insurance Agreement will be drawn’ up on a case-to-case basis, having regard to the terms of the credit.

3. Services Policy

Where Indian firms render services to foreign parties, they would be exposed to payment risks similar to those involved in export of goods. Services Policy offers protection to Indian firms against such payment risks. The policy has been designed broadly on the lines of ECGC insurance policies covering export of goods.

Normally cover is issued on a case-to-case basis, covering risks from the date of contract. If the employer is an overseas government of if payments under a contract are guaranteed by an overseas government or a bank, a Specific Services Contract (Political Risks) Policy can be obtained. A Specific Services Contract (Comprehensive Risks) Policy will be appropriate for contracts concluded with private buyers not supported by bank guarantees.

If the nature of services rendered by an exporter is such that contracts covering short periods of time are concluded with a set of buyers on repetitive basis, it would be convenient for him to obtain a Whole turnover Services Policy providing cover for either comprehensive risks or only political risks. Such policies will obviate the need for getting approval of the Corporation for each and every contract. Contracts can be concluded with any buyer within credit limits previously approved by the Corporation and declared under the policy. Exporters taking such policies are required to cover under the policy all contracts that may be concluded by them over the policy period of 2 years.

A wide range of services like technical or professional services, hiring or leasing can be covered under the policies.

The Comprehensive Risks Policy covers the following risks:(i) insolvency of the buyer, (ii) (it) protracted default in payment;(iii) restriction on remittances in the buyer’s country or any Government action

which may block or delay payment to the exporter

(iv) war between India and the buyer’s country (v) revolution or other civil disturbances in the buyer’s country; (vi) Government action in India or in buyer’s country which prevents the performance of the contract; and

(vii) any other cause of loss occurring outside India and beyond the control of the buyer or the seller.

The policies do not cover losses arising from events preventing the completion of the contract in circumstances where such frustration could free the buyer from his obligation to make payment under the contract.

The policy covers 90 per cent of the loss suffered by the seller. The claim is payable after four months from the due date of payment if the loss arises due to the risk of protracted default. In case of insolvency, claim is payable after four months from the due date of payment or one month after the loss is admitted to rank, against the insolvent’s estate, whichever is earlier. It is payable after four months from the due date or the date of the event which is the cause of loss, as the case may be if the loss is caused by any of the other risks.

Premium rates are closely related to the risks involved and vary according to the country of the buyer and the terms of payment. Quotations for any specific proposition or business on hand can be obtained by writing to ECGC giving details thereof.

The Services Policy covers such contracts under which only services are to be rendered. Contracts under which rendering of services is part and parcel of a bigger contract for supply’ of goods or machinery or erection of a plant are covered under Construction Works Policies.

4. Construction Works Policy

ECGC’s Construction Works Policy covers civil construction jobs as well as turnkey projects involving supplies and services. It provides cover for all payments that fall due to the contractor under the contract.

Two types of policies have been evolved to cover contracts with (i) Government buyers and (ii) Private buyers. The former covers political risks in respect of contracts with overseas governments or where the payments are guaranteed by government and the latter comprehensive risks. In case of contracts with private employers, the policy may be issued to cover only political risks if the payments are guaranteed by a bank or covered by L/C.

The policy has been designed to cover business done under the Standard Conditions of Contract (International) prepared by the Federation Intemationale des Ingenieurs Conseils (FIDIC) jointly with the Federation Internationale due Batirnent et des Travaux Publics (FIBTP); but it may be modified to apply to other contracts.

The following risks, are covered in case of contracts with government employers or if the payments are guaranteed by the employer’s government

(i) default of the Government employer;(ii) delay in the transfer of payments to India;(iii) war between Indian and the employer’s country;

(iv) civil war or similar disturbances in the employer’s country;(v) imposition of import or export licensing (or cancellation of an existing licence)

for goods or materials manufactured or purchased by the contractor after the date of contract, for use on the contract, and for which on the date of loss the employer has no obligation to pay in terms of the contract;

(vi)additional handling, transport or insurance charges due to interruption or diversion of voyage; and

(vii) the employer’s failure to pay to the contractor sums awarded in arbitration proceedings under the contract.

The percentage of loss payable by ECGC is 85 under policies issued to cover contracts with Government employers and 75 in case of policies covering contracts with private employers.

The policy is issued on the basis of estimated basic contract price, estimated interest and other payments due under the contract. Premium is payable at the outset on the estimated figures. Proportionate refund of premium is allowed where the actual contract price and interest charges fall below the estimates.

Cover can also be provided for the contractor’s equipments (such as cranes, bulldozers and trucks which are used for the construction) against the risk of confiscation, by means of an endorsement to the policy if the contractor so desires.

The policy is issued to cover specific contracts and takes effect from the date of contract.

HI. FINANCIAL GUARANTEES

Exporters require adequate financial support from banks to carry out their export contracts. ECGC’s guarantees protect the banks from losses on account of their lendings to exporters. These guarantees have been designed to encourage banks to give adequate credit and other facilities for exports, both at pre-shipment and post-shipment stages, on a liberal basis.

Six guarantees have been evolved for the purpose:

(1) Packing Credit Guarantee.(2) Export Production Finance Guarantee.(3) Post-Shipment Export Credit Guarantee. (4) Export Finance Guarantee.(5) Export Performance Guarantee.(6) Export Finance (Overseas Lending) Guarantee.

These guarantees give protection to banks against losses due to nonpayment by exporters on account of their insolvency or default. ECGC pays thee-fourths of the loss in the case of Post-Shipment Export Credit Guarantee, Export Finance Guarantee, Export Performance Guarantee and Export Finance (Overseas Lending) Guarantee and two-thirds of the loss in others.

The Corporation agrees to pay higher percentage of loss to banks which offer to

cover all their pie-shipment advances under a Whole-turnover Packing Credit Guarantee. Similarly, a higher percentage of cover is offered under Post-Shipment Export Credit Guarantee if the bank agrees to cover all its post-shipment advances on whole turnover basis.

In special cases, ECGC also considers payment of claim to the extent of 80 per cent of the loss in respect of advances granted under Post-Shipment Export Credit Guarantee against shipments of engineering and metallurgical items of the value of Rs. 2 crores or more under a single contract. In the case of Export Performance Guarantee and Export Finance (Overseas Lending) Guarantee, ECGC provides higher cover of 90 per cent of the loss on payment of proportionately higher premium.

1. Packing Credit Guarantee

Any loan given to an exporter for the manufacture, processing, purchasing or packing of goods meant for export against a firm order or Letter of Credit qualifies for Packing Credit Guarantee. ‘Pie-shipment’ advances given by banks to parties who enter into contracts for export of services or for construction works abroad, to meet preliminary expenses in connection with such contracts are also eligible for cover under this guarantee. The requirement of lodgement of letter of credit/export order for granting Packing Credit advances may be waived, as permitted by the Reserve Bank of India for certain commodities.

The premium rate is 7.5 paise per Rs. 100/- per month or part thereof. A lower rate of 5 paise per Rs. 100/- per month is charged under the Whole turnover Packing Credit Guarantee (WTPCG). Premium under WTPCG is payable on the daily average product basis, while under individual guarantees it is payable on maximum outstandings. The percentage of loss covered under Whole turnover Packing Credit Guarantee is 75 as against 66-2/3 per cent under individual guarantee.

Banks which opt for WTPCG will be eligible for similar concessions in respect of Export Production Finance Guarantee and Export Finance Guarantee also. These concessions are available also in respect of advances against contracts for supplies on deferred terms and for construction works, but the banks will have to obtain separate guarantees for such advances.

2. Export Production Finance Guarantee

The purpose of this guarantee is to enable banks to sanction advances at the pre-shipment stage to the full extent of cost of production when it exceeds the f.o.b. value of the contract/order, the difference representing incentives receivable. The extent of cover and the premium are the same as the Packing Credit Guarantees. Banks having WTPCG/WTPSG are eligible for concessionary premium rate and higher coverage.

3. Post-shipment Export Credit Guarantee

Post-shipment finance given to exporters by banks through purchase, negotiation

or discount of export bills or advances against such bills qualifies for this guarantee. It is necessary, however, that the exporter concerned should hold suitable shipments or contracts policy of ECGC to cover the overseas credit risks.

The premium rate for this guarantee is 5 paise per Rs. 100/- per month. The percentage of loss covered under the individual Post Shipment Guarantee is 75.

This guarantee is also issued on whole turnover basis, offering a higher percentage of cover at a reduced rate of premium. The percentage of cover under the Whole turnover Post-Shipment Guarantee is 85 for advances granted to exporters holding ECOC policy. Advances to non-policy holders are also covered with percentage of cover being 60. The premium rate is 3paise per Rs.100/- per month if advances against LJC bills are also covered under the guarantee, otherwise it is 4 paise.

Post-Shipment Export Credit Guarantee can also be had, even where an exporter does not hold an ECGC Policy for finance granted against L/C bills, provided that an exporter makes shipments solely against Letters of Credit. The premium rate for this cover is 10 paise per Rs. 100/- per month on the highest amount outstanding on any day during the month and the percentage of cover is 75. Advances against bills under letters of credits opened by banks in countries placed under Restricted Cover shall be subject to prior approval of the Corporation.

4. Export Finance Guarantee

This guarantee covers post-shipment advances granted by banks to exporters against export incentives receivable in the form of cash assistance, duty drawback etc.

The premium rate for this guarantee is 5 paise per Rs. 100/- per month and the cover is 75 per cent. Banks having WTPCG/WTPSG are eligible for concessionary premium rate and higher coverage.

5. Export Performance Guarantee

Exporters are often called upon to execute bonds, duly guaranteed by an Indian bank, at various stages of export business. An exporter who desires to quote for a foreign tender may have to furnish a bank guarantee for the bid bond. If he wins the contract, he may have to furnish bank guarantees to foreign buyers to ensure due performance or against advance payment or in lieu of retention money or to a foreign bank in case he has to raise overseas finance for his contract.

Further, for obtaining import licences for raw materials or capital goods, exporters may have to execute an undertaking to export goods of a specified value within a stipulated time, duly supported by bank guarantees. Bank guarantees arc also furnished by exporters to the Customs, Central Excise or Sales Tax authorities for the purpose of clearing goods without payment of duty or for exemption from tax for goods procured for export. Exporters also furnish guarantees in support of their export obligations to Export Promotion Councils, Commodity Boards, the State Trading Corporation of India, the Minerals and Metals Trading Corporation of India or recognised Export Houses. To provide protection to banks which issue the above types of guarantees, ECGC has evolved the Export Performance Guarantee.

An export proposition may be frustrated if the exporter’s bank is unwilling to issue the guarantee. The Export Performance Guarantee is aimed at meeting such situations. The guarantee which is in the nature pf a counter-guarantee to the bank is issued to protect the bank against losses that it may suffer on account of guarantees given by it on behalf of exporters. This protection is intended to encourage banks to give guarantees on a liberal basis for export purposes.

Normally cover is extended upto 75 per cent of loss but in the case of guarantees in connection with bid bonds, performance bonds, advance payment and local finance guarantees and guarantees in lieu of retention money, the cover may be increased upto 90 per cent subject to proportionate increase in premium.

While the premium rate for guarantees issued to cover bonds relating to exports on short-term credit is 0.90% p.a. for 75% cover and 1.08% p.a. for 90% cover, it is lower for bonds relating to exports on deferred credit and projects. The rate of premium is 0.80% p.a. for 75% cover and 0.95% p.a. for 90% cover.

In the case of Bid Bonds relating to exports on medium/long-term credit1 overseas projects, and the projects India financed by international financial institutions as well as supplies to such projects, ECGC is agreeable to issue Export-Performance Guarantee on payment of 25% of the prescribed premium. The balance premium of 75% becomes payable to the Corporation by the bankers if the exporter succeeds in the bid and gets the contract.

6. Export Finance (Overseas Lending) Guarantee

If a bank financing an overseas project provides a foreign currency loan to the contractors it can protect itself from the risk of non-payment by the contractor by obtaining Export Finance (Overseas Lending) Guarantee. Premium rate will be 0.90% per annum for 75% cover and 1.08% per annum for 90% cover. Premium is payable in Indian rupees. Claims under the guarantee will also be paid only in Indian rupees.

IV. SPECIAL FACILITIES

I. Small Scale Exporters

With a view to enabling the small scale sector to participate to a greater extent in the export activities of the country, ECGC provides specials facilities to small scale exporters by offering higher percentage of cover and procedural relaxations under its policies and guarantees.

These facilities will apply to exporters whose annual export turnover is not more than Rs. 25 lakhs and total annual turnover, including exports, ices not exceed Rs. 40 lakhs. Also, small scale industrial units as defined by Government of India whose annual exports do not exceed Rs. 25 lakhs shall be deemed to be small scale exporters, irrespective of their total business turnover. Further, exports made by qualifying small scale exporters through (a) co-operative of artisans, (b) co-operatives or associations consortia of small scale industries, (c) Handloom and Handicrafts Export Corporation or state export corporations, (d) state small scale industries corporations, and (e)National Small Industries Corporation are also eligible for these special facilities.

Main facilities provided under the scheme are: higher cover of 90 per cent for

banks under the Whole turnover Packing Credit Guarantee; and higher cover of 90 per cent under the Whole turnover Post-shipment Export Credit Guarantee in respect of exporters who have taken ECGC contracts/ shipments policy and 65 per cent cover for non-policy holders. Cover under Standard Policy is increased to 95 per cent against commercial risks and 100 per cent against political risks, provided the Maximum Liability under the policy does not exceed Rs. 5 lakhs. The waiting period for payment of all types of claims is reduced to half the normal stipulated period.

2. Simplified Scheme for Small Exporters

With the objective of helping small exporters, ECGC has evolved a simplified scheme viz., the Lumpsum Premium Scheme. The scheme is applicable to the exporters whose annual export turnover does not exceed Rs. 10 lakhs. The maximum liability of the policy under the scheme is restricted to Rs. 5 lakhs.

The rate of premium on the policy is 50 paise per Rs. 100/- per annum on the maximum liability of the policy, payable as a lumpsum at the time of the issue of the policy. Small exporters who opt for this scheme have to observe all the terms and conditions of policy but they are not required to submit monthly shipment declarations. Specific approval has to be obtained in respect of exports to ‘Restricted Cover Countries’: such exports would attract payment of specific approval fee, wherever applicable. Shipments to restricted cover countries are required to be declared every month in form (No. 203) by the 15th of succeeding month and premium paid thereon at the rates indicated in the premium schedule attached to the policy.

3. Exporters of Books and Publications

In view of the special features of export trade in books and publications, the following liberalisaijons have been made under the Standard Policy for exporters of books and publications.

1. In case of exports to individuals, on whom Credit Limit is not fixed, normal cover of 90% will be available provided that the value of each consignment does not exceed Rs. 5,000.

2. In Case of exports to regular book dealers, on whom credit limit is not fixed, normal cover of 90% will be available provided that the value of each consignment does not exceed Rs. 25,000.

3. In case of exports to institutions like universities, libraries and research organisations, on whom he credit limit is fixed, normal Cover of 90% will be available provided that the value of each consignment is not more than Rs. 50,000.

4.Cover upto Rs. 50,000 will be available for exports to an individual, institution, or a dealer if at least two shipments on similar terms of payment had been made in the preceding twelve months and payment for them received on due dates.

5. Shipments made in a calendar month can be declared, along with payment of premium before the 25th of the following month, as against the normal time limit of 15 days.

6. Premium will be charged at a special low rate, varying with the group under which the country is classified.

The above facilities shall apply to buyers in all countries except those which are subject to Restricted Cover (i.e. the countries to which special condition No.7 of

Annexure 2 to the Premium Schedule applies).

V. SPECIAL SCHEMES

1. Transfer Guarantee

When a bank in India adds its confirmation to a foreign Letter of Credits it binds itself to honour the drafts drawn by the beneficiary of the Letter of Credit without any recourse to him provided such drafts are drawn strictly in accordance with the terms of the Letter of Credit. The confirming bank will suffer a loss ii the foreign bank fails to reimburse it with the amount paid to the exporter. This may happen due to the insolvency or default of the opening bank or due to certain political risks such as war, transfer delays or moratorium which may delay or prevent the transfer of funds to the banks in India. The Transfer Guarantee seeks to safeguard banks in India against losses arising out of such risks Transfer Guarantee is issued, at the option of the bank, either to cover political risks alone, or to cover both political and commercial risks. Loss due to political risks is covered upto 90 per cent and loss due to commercial risks upto 75 per cent.

Premium will be charged at rates normally applicable to the Corporation’s insurance policy covering export of goods.

2. Overseas Investment Insurance

With the increasing exports of capital goods and turnkey projects from India, the involvement of exporters in capital participation in overseas projects has assumed importance. The developing countries, who are bur main customers, have the problem of scarcity of capital and management and may like to invite Indian participation in capital and manageinent when large turnkey projects are set up. The exporter’s participation in capital and management instills confidence in the buyer about proper functioning of the project.

ECGC has evolved a scheme to provide protection for such investments. Any investment made by way of equity capital or united loan for the purpose of setting up or expansion of overseas projects will be eligible for cover under investment insurance.

The investments may be either in cash or in the form of export of Indian capital goods and services. The cover would be available for the original investment together with annual dividends and interest payable.

The risks of war, expropriation and restriction on remittances are covered under the schemes. As the investor would be-having a hand in the management of the joint venture, no cover for commercial risks would be provided under the scheme. For investment in any country to qualify for investment insurance there should preferably be a bilateral agreement providing investment of one country in the other. ECOC may consider providing cover in the absence of any agreement or code, provided it is satisfied that the general laws of the country afford adequate protection to the Indian investment.

The period of insurance cover will not normally exceed 15 years. In case of projects involving long erection period cover may be extended for a period of 15 years from the date of completion of the project Subject to a maximum of 20 years from the

date of commencement of investment. Amount insured shall be reduced progressively in the last five years of the insurance period.

3. Exchange Fluctuation Risk Cover Schemes

The Exchange Fluctuation Risk Cover Schemes are intended to provide a measure of protection to exporters of capital goods, civil engineering contractors and consultants who have often to receive payments over a period of years for their exports, construction work or services. Where such payments are to be received in foreign currency, they are open to exchange fluctuation risk and the forward exchange market does not provide cover for such deferred payments.

The Exchange Fluctuation Risk Cover is available for payments scheduled over a period of 12 months or more, upto a maximum of 15 years. Cover can be obtained from the date of bidding right upto the final installment.

At the stage of bidding, an exporter/contractor can obtain Exchange Fluctuation Risk (Bid) Cover. The basis for cover will be a “reference rate” agreed upon. The reference rate can be the rate prevailing on the date of bid or a rate approximating it. The cover will be provided initially for a period of twelve months and can be extended if necessary. If the bid is successful, the exporter/contractor is required to obtain Exchange Fluctuation (Contract) Cover for all payments due under the contract. The reference rate for the contract cover will be either the reference rate used for the Bid cover or the rate prevailing on the date of contract, at the option of the exporter/contractor. If he bid is unsuccessful, 75 per cent of the premium paid by the exporter/contractor is refunded to him.

The Exchange Fluctuation Risk (Contract) Cover can be issued only if the payments under the contract are scheduled to be received beyond 12 months from the date of contract but in such cases, the cover will apply for any instalment falling due within I2months as well. Cover will be available for all amounts receivable under the contract, whether it is payment for goods or services or interest or any other payment. Contracts coming under Buyer’s Credit and Lines of Credit are also eligible for cover under the schemes. The exporter has also an option to terminate the-contract at the expiry of the third year, by giving three months’ advance notice.

Cover under the schemes is available for payments specified In US Dollar, Pound Sterling, Deutsche Mark, Japanese Yen, French Franc, Swiss France UAE Dirham and Australian Dollar. However, cover can be extended for payments specified in other convertible currencies at the discretion of the ECOC.

Exchange Fluctuation Risk Cover will normally be provided along with suitable credit insurance cover. There is, however, provision to grant the cover independently also in which case premium will be loaded by 20%.

The contract cover provides franchise of 2 per cent loss or gain within a range of 2 per cent of the reference to the exporter’s account. if loss exceeds 2per cent, ECOC will make good the portion of loss in excesse of 2 per cent but not exceeding 35 per cent of the reference rate. In other words, losses upto 2 per cent and beyond 35, per cent of the reference rate will be to the exporter’s account. If there be a gain in excess of 2 per cent of the reference rate, the portion which is beyond 2 per cent and upto 35 per cent will be turned over the ECGC.

The rate of premium is 40 paise per Rs. 100/- per year or 10 paise per Rs. 100/- per quarter for the bid cover and the total premium is payable at the time of issue of the policy.

Premium for contract cover is also payable at the rate of 40 paise per Rs. 100/- per annum. Ten per cent of the total premium payable and premium for the first two years should be paid at the Lime of issue of the policy. Thereafter the annual premium will have to be paid in such a manner that premium for the next two years is always kept paid to the Corporation.

Over the Years Performance Evaluation of ECGC

The total premium earned by the Corporation from its inception in the year 1957 to the end of the financial year 1989-90 amounted to Rs. 274 crores. Gross claims paid during the same period amounted to Rs.272 crores. After taking into account the recovery of Rs. 69 crores effected during the period, the net claims paid by the Corporation amounted to Rs. 203 crores. A surplus of Rs. 71 crores has thus resulted but, as against this, there are pending claims for which the estimated net liability is Rs. 107.32 crores and claims that may arise in respect of transactions for which premium has been received but the risks have not yet expired. The total value of risks covered by the Corporation during the period amounted to Rs. 1,59,730 crores indicating the extent of support provided by the Corporation to the country’s export promotion efforts.

The outstanding features of the Corporation’s performance during the year are the 56% increase in Risk Value and 67% growth in premium income. That the year ended with a surplus of Rs. 9.10 crores in 1988-89 and Rs. 3.18 crores in 1987- is another not worthy feature.

Premium income from short-term business increased from Rs. 13.31 crores in 1987 to Rs. 18.53 crores in 1988-89 (annualised) and from there to Rs. 37.65 crores in 1989-90, while the premium income from medium and long-term business remained almost stagnant at around Rs. 9 crores during this period. Although the lack of growth in the medium and long-term business has been a setback, the beneficial effects of the rapid growth in the income from short-term business must be recognised. Firstly, shot-term business under guarantees as well as policies is a steady business as compared to medium and long-term business which is subject to wide fluctuations from year to year. Secondly, short- term business which is composed of a very large number of small value transactions is a low risk business while the medium and long-term business which consists of a relatively small number of large-value transactions is a low risk business while the medium and long-term business which consists of a relatively small number of large-value transactions is far more risky. The short-term business is less risky also because it has a wide country spread, whereas the medium and long-term business is concentrated in a very small number of countries which are more risk prone. The operational results of the last five years bear out this point. Between 1985 and 1989-90, claims paid under shot-term business totaled Rs. 43.90 crores as against a premium income of Rs. 56.13 crores. On the other hand, claims relating to premium income added up to only Rs. 51.60 crores. It is thus clear that short-term business assuming an increasing share of the total business is a highly desirable development.

The last decade has been a turbulent period for export credit insurers in general.

Except for the last 2 or 3 years of the decade, most export credit insures experienced decline in business and in income. Their travails were further heightened by an abnormally large outgo on account of claims which arose as a result of the bad balance of payments position of an increasingly large number of developing countries. ECGC was not as badly affected as some of the other export credit insurers who had large exposures on the heavily indebted countries. Yet, the total amount of the Corporation’s money blocked in half-a-dozen African countries on account of claims paid due to transfer delays comes to as much as Rs.118 crores. These claims relate mainly to business underwritten by the Corporation in late 1970s and early 1980s when these countries were considered as acceptable credit risks. These claims are tapering off but the relief arising on this account appears to be short lived because of certain new developments. The turmoil in the Middle East following Iraqi annexation of Kuwait holds the threat of large claims not only on account of counties directly involved in the conflict but also from some other countries because of the adverse impact of the conflict on them.

The immediate future of export credit insurers, therefore, looks far from rosy. Added to this are the uncertainties arising from certain fundamental changes that are taking place in the political and economic spheres in the former USSR, Eastern Europe and Western Europe. ECGC has, therefore, to tread warily in the coming years. Too much caution will run counter to its very objective of export promotion. Too liberal an attitude, on the other hand, may land it in serious financial embarrassment. In any event, Corporation’s ability to extend to Indian exporters the kind of support that is legitimately expected of a national export credit insurer in such circumstances will be severely restricted unless Government support in one form or the other becomes available. ECGC had made a proposal to the Government of India for setting up a National Export Insurance Fund under which the Corporation can grant insurance, in the national interest, to transactions for which it would not be possible for the Corporation to grant cover on its own account on grounds of financial prudence.

It is necessary for the Corporation to keep on expanding its business base and

augmenting its financial strength to the maximum extent possible. The number of steady and satisfied customers needs to be continually increased and this is possible only be responding better to their needs and by improving the quality of service. Much has been achieved in the last tow years through improved systems and procedures and the increased use of computers. A lot more along these lines needs to be done in the coming years to turn the corporation into a modern and highly efficient organisation capable of creating and retaining an ever-increasing number of customers. The field organisation was strengthened last year with a view to increasing personal contact with customers and getting new business. A decision has recently been taken to post additional officers in the Regional and Branch officers to specifically take care of satellite centers in the geographical area covered by the respective officers. The main job of the officer, who will be based in the Regional or Branch Office, will be to develop business form certain centers which have export activity that is too small to justify setting up of a branch office.

The premium income of the Corporation which is rising fast-from Rs. 22.25 crores in 1987 to Rs. 47.46 crores in 1989-90 and targeted to touch Rs. 80 crores in 1990-91- has already imparted a measure of strength to the financial position of the Corporation and has considerably augmented its capacity to meet claims. The premium rates under policies and whole turnover guarantees were raised from June 1989 in order to improve the viability of the schemes. But, considering the nature of the business and the very large risk exposure of the corporation, it is necessary that the capital of the

Corporation, which is at present Rs. 50 crores, is raised further so that equity will bear a reasonable relation to risk exposure.

Performance Highlights

The operational results for the year were very satisfactory. The total value of business covered under all the schemes increased from Rs. 25,340 crores in 1988-89 which was a 15 month period, to Rs. 31,709 crore in 1989-90. Premium income rose from Rs. 35.42 crores in 1988-89 to Rs. 47.46 crores in 1989-90. On an annualised basis, the growth rate was 56% in business covered and 67% in premium income, which are the highest rates of growth achieved by the Corporation, in the last fifteen years. Claims paid during the year were higher at Rs. 43.97 crores as compared to Rs. 34.72 crores in 1988-89. Recoveries also showed a marked improvement, rising from Rs. 4.79 crores in 1988-89 to Rs. 9.39 crores in 1989-90. Net claim payments went up form Rs. 29.93 crores in 1988-89 to Rs. 34.58 crores in 1989-90.

From Stagnation to Rapid Growth

There has been a sea- change in the fortunes of the Corporation during the last two years. The stagnation encountered by the Corporation between 1983 and 1987 has since been transformed into an era of rapid growth as would be evident from the Table 19.3.

It is most significant to note that the total income of Corporation has increased from Rs. 31.48 crores in 1987 to Rs. 67.39 crores in 1989-90 and have a healthy target of Rs. 84.19 crores for the year 1990-91. This growth infused vitality and strength to the financial position of the corporation and makes it possible for it to take larger claims in its stride.

Table 9.3(Value Rs. Crores)

YEAR Risk value Premium Income

Other Income

Total % growth*

198319841985198619871988-891989-90

8,46510,08310,13812,29314,83425,34031,709

19.4921.3421.6021.4222.2535.4247.46

4.86 5.26 7.03 8.67 9.2319.1419.93

24.3526.6028.6330.0931.4854.5667.69

+9.24+7.63+5.10+4.62

+38.66*+54.39*

* growth on annualised basis

This improvement has been achieved despite a stagnation in the project and term exports sectore. The premium income in this sector increased only marginally from Rs. 8.94 cores crores in 1987 to Rs. 9.81 Crores in 1989-90. This brings into sharper focus the fact that the growth in the short term sector has been very fast. The premium on short term policies and guarantees increased from Rs. 13.31 crores in 1987 to Rs. 37.65 crores in 1989-90. Fixing of challenging business targets for all officers, effective monitoring of the monthly progress and strengthening of marketing efforts are the main reasons for this remarkable performance.

Standard Policies and Transfer Guarantees

The Standard Policies provide insurance for shipments made on short term credit covering commercial and political risks. Transfer guarantees protect the banks in India against certain losses which may arise when they add confirmation to foreign Letters of Credit.

The number of Standard Policies in force at the end of the year was 10,385 showing and increase of 23.57% over the corresponding figure of 8,768 for the preceding year. Thirty six Transfer Guarantees were issued during the year s against 60 in 1988-89. The total value of shipments declared under both the schemes amounted to Rs. 4,561crores, registering year. This growth is the highest registered in the last two decades. Premium income at Rs. 12.66 crores showed an impressive growth of 84.28% over that of 1988-89 on an annualised basis.

Claims paid during the year amounted to Rs. 1.94 crores. Of this, 73.71% were claims paid on account of commercial risks viz., default, insolvency and repudiation, mainly in the UK, USA, France, Malaysia and Italy, Recoveries amounted to Rs. 7.28 crores as against Rs. 2.34 crores in 1988-89. The net position was surplus of Rs. 8\18 crores as against a deficit of Rs. 0.05 crore in 1988-89.

Engineering goods, readymade garments, leather goods and chemicals continued to account for a major portion of the value of exports covered by the Corporation. Their share in the total exports covered by the Corporation increase from 54.23% in 1988-89 to 61.29% in 1989-90. The Contribution of the four commodity groups to the premium income also increase from 52.40% in 1988-89 to 55.79% in 1989-90. The highest rate of growth was seen in respect of chemicals which contributed to 14.91% of exports covered and 10.22% of premium income in 1989-90 as against 8.04% respectively, in the preceding year.

Policies- Project and Term Exports Business in this sector comprising policies issued to cover credit risks involved

in exports on medium and long term credit, constriction works, services, lines of credit, buyers credit and overseas investments, showed marginal improvement. Seventy six fresh Policies were issued during the year as against 150 policies in the preceding year. The premium income amounted to Rs. 4.93 crores, registering a growth of 11.29% on and annualised basis. The value of business covered rose from Rs. 333 crores in 1988-89 to Rs. 480 crores in 1989-90. The total number of policies in force at the end of the year was 678 as against 655 in the preceding year.

Claims paid during the year amounted to Rs. 24.65 crores, which is a substantial increase over the figure of Rs. 10.69 crores for the preceding year. Mozambique, Zambia, Tanzania and Sudan accounted for the major portion of claim payments, the deficit in this sectore rose from Rs. 3.45 crores in 1988-89 to Rs. 18.67 crores in 1989-90.

Guarantees

The guarantees issued to banks have been designed to encourage banks to give adequate credit and other facilities for exports. These protect the banks from losses inherent in their granting advances to exporters or their giving guarantees oh behalf of exporters.

(i) Guarantees - Short Term Exports

The guarantees relating to short term exports showed excellent results. The value of bank finance covered by the guarantees rose by 57.52% over the annualised figure for the previous year to reach the level of Rs. 26,473 crores. Premium income also rose from Rs. 14.58croes to Rs. 24.99 crores, registering a very impressive annualised growth of 114.32%. The total value of claims paid during the year came to Rs. 5.87 crores. Recoveries at Rs. 0.65 crores were less than Rs. 0.75 crore in the preceding year. The net position was a surplus of Rs. 19.77 crores as compared to Rs. 2.28 crores in 1988-89.

The Packing Credit Guarantee continued its pre-eminent position accounting for 72% of advances covered and 75% of the premium income under all guarantees. The post shipment Guarantee contributed 26% to the advances covered and 17% to the premium income in this sector.

(ii) Guarantees- Project and Term Exports

Business under this sector showed an improvement in the year under report, in terms of value covered. The value of risks covered rose to Rs. 195 crores in 1989-90 from Rs. 164 crores in 1988-89, registering a growth of 48.63% on an annualised basis. Premium income allocable for the year, however, declined from Rs. 6.71 cores in 1988-89 to Rs. 4.88 crores (the accounting practice is to allocate the premium income proportionately to the year years during which the guarantees remain in force). With very high claim payments of Rs. 11.51 crores and a low recover of Rs. 0.41 crore, this sectore of business showed a deficit of Rs. 6.22 crores as against a surplus of Rs. 6.71 crores in 1988-89.

Exchange Fluctuation Risk Cover

The scheme covering exchange fluctuation risk at bid and contract stages are operated by the Corporation on behalf of the Government of India and the operational gains or losses are transferred to the Market Development Fund administered by the Ministry of Commerce. The Corporation receives only 5% of the gross premium towards administrative costs.

Under this scheme which covers export receivable, one policy covering a Risk Value of Rs. 69 lakhs was issued during the year. As at the end of March, 1990, 13 policies were in force covering a total value of Rs. 93.19 crores.

The scheme covering Exchange Fluctuation Risk on account of export-linked-import-transactions, and advance payments for exports was suspended in January, 1990 pending review in the light of unsatisfactory experience gained in operating the scheme since its introduction in September, 1988 At the end of the year, three policies were in force covering a total Risk Value of Rs. 84.41 crores.

The total income for the year under both the schemes came to Rs. 28.94 lakhs comprising premium income of Rs. 16.06 lakhs and exchange gains amounting to Rs. 12.88 lakhs. The outgo was Rs. 8.33 lakhs, comprising Rs. 753 lakhs of claims paid and Rs. 0.80 lakh being ECGC’s service charges, etc.;

resulting in a surplus of Rs. 20.61 lakhs.

The cumulative financial result of the schemes from their inception upto 31st March, 1990 was a net surplus of Rs. 214.91 lakhs.

Premium income

The total premium income for the year 1989-90 amounted to Rs. 47.46 crores as compared to Rs. 35.42 crores for the year 1988-89 registering a growth of 67.47% on an annualised basis. The main contribution to the growth came from Standard Policies and Transfer Guarantees and Guarantees for short term exports. Premium from Standard Policies and Transfer Guarantees rose from Rs. 8.59 crores in 1988-89 to Rs. 12.66 crores in 1989-90, registering an annualised growth rate of 84.28%. Guarantees for short term exports yielded a premium of Rs. 24.99 crores as compared to Rs. 14.5 8 crores in 1988-89 registering a very impressive growth of 114.32%. Premium Income from Project and Term Export Policies and Guarantees, however, declined from Rs. 12.25 crores jn 1988-89 to Rs. 9.81 crores in the year under report, reflecting the sluggish conditions of India’s export trade in this line.

Claims and Recoveries

The total amount of claims paid during the year came to Rs. 43.97 crores as compared to Rs. 34.72 crores in 1988-89. As much as Rs. 24.65 crores was paid as claims under policies for project and Term Exports. Claims under Guarantees for long term Exports accounted for another Rs. 11.51 crorcs. Claims under guarantees for short term exports came to Rs. 5.87 crores and for Standard Policies and Transfer Guarantees Rs. 1.94 crores.

There was a significant improvement in the recoveries which amounted to Rs. 9.39 crores as against Rs. 4.79 crores- in 1988-89 evidencing the fact that the various recovery steps initiated by the Corporation are bearing fruit. Of the total recoveries made during the year, 77.53% was on account of Standard policies and Transfer Guarantees, 11.18% on account of policies for Project and Term exports, 6.92% on account of short term guarantees and the remaining 4.37% related to long term guarantees.

ReinsuranceThe Corporation has been reinsuring the political

risks covered by it with the Lloyds of London since the underwriting year 1981. The reinsurance that corporation has obtained, which is on an excess of loss basis, provides a certain amount of protection to the Corporation when claims exceed an agreed cut off point ant it is proving to be generally beneficial.

A claim of Rs. 0.44 crore pertaining to the underwriting year 1982 was received during the year under report. No claim has arisen in respect of underwriting year’ 1983 and onwards since the Ultimate Net Loss figures were below the cut-off point for the respective years.

Foreign Exchange Earnings and Expenses

Foreign exchange earned by the Corporation during the year came to Rs. 1.18 crores, comprising Rs. 044 crore of reinsurance claims received and Rs. 0.74 crore of interest received on claims recovery. Outgo of foreign exchange amounted to Rs. 3.40 crores, of which reinsurance premium accounted for Rs. 3.13 crores, the balance being expense on account of member ship fees and travel expenses.

Lesson 22 Import Management

In 1992, imports of goods and services into India ware valued at Rs. 50,000 crores, Merchandise imports exceeded exports. This flow of goods and services from abroad provides a wide variety of critical materials, parts and products not otherwise available. Additionally, the flow provides a basis for foreigners to pay for Indian exports and provides a basis for foreigners to pay for Indian exports and provides Indian

consumers with a wider selection of goods from which to purchase. The import function, however, often receives little attention because of the emphasis on the expansion of exports, except when imports directly compete with domestically- produced products. Despite the quantitative importance of the function and the critical need for imported goods, the import function, remains little understood by many in universities, governments, and businesses alike.

Importing refers to the purchase of foreign products for use or sale in the home market. It involves searching foreign markets for acceptable products and sources of supply, providing for transfer of the product to the home market, arranging financing, negotiating the import documentation and customers procedure, and developing plans for use or for resale of the item of service, Thus, Successful importing depends on more than good buying; it requires planning for acceptance of the product and delivery of the promised benefits. The importing firm has the responsibility to determine whether the foreign product or service will meet the needs to the home market.

THE IMPORT PROCESS

Importing has been considered in several places in this text. The present chapter service: (1) to organize the various aspects of importing by presentation of the import process, (2) to describe major importing institutions, (3) to portray the problems confronting Indian importers, (4) to elucidate major facets of the customs law and procedure, and (5) because of its close relationship to customs arrangements. The discussion should aid you in conceptualizing the import process and should provide a somewhat different perspective on Indian commercial policy.

Earlier sections of the text presented many of the tariff, quota, exchange, and administrative barriers to exporting. The usual interpretation is that such obstacles are placed by foreigners against Indian exports. Now we need to take a closer look at some barriers that foreigners meet in exporting to India, or otherwise stated, what are the problems found by foreigners or Indian national in importing into the Indian market? This chapter presents many such obstacles. Such inconsistencies in foreign commercial policies are common. It is appropriate to anlyse the import system and to inquire into the ramifications of the system with which importers must deal.

Essentially the import process comprise the following five stages:1. Determining market demand and purchases motivation.2. Locating and negotiating with sources of supply.3. Securing physical distribution.4. Preparing documentation and customs processing to facilitate movement

among countries and organisations.5. Development a plan for resale or use.

1. Determining Market Demand and Purchase Motivation.Importers can have a distinct advantage over foreigners in the home market,

because often they know or can more easily learn the requirements and nuances of the market. They are closer to the market, may live there, and may be native to the market. They are familiar with information sources and institutions. This knowledge can, however, be a disadvantage when familiarity leads to carelessness and individuals assume

a level of knowledge that does not really exist. Enthusiastic exclamations of family and friends over souvenirs from abroad are no substitute for careful market analysis. Studies similar to those proposed in Chapter 8 or described elsewhere in standard marketing research texts are needed also by the local importer to achieve realistic estimates of market potential and as a basis for development of the promotional plan.

Raw material and component parts are imported for use by home country manufactures in fabricating their own final products. The potential for such material and parts is determined by the expected sales of the manufactures who use them. A careful analysis of trade reports and business conditions will aid importers in determining the market potential for both final products and components. Manufactures may not only buy crude materials from abroad but may operate mines and processing plants abroad from which they import to meet their requirements.

Affluence and the lifestyles of the population affect the level and types of manufactured products imported by merchants for resale. Some equipment and supplies are imported to facilitate and make more efficient our manufacturing, commercial, educational, and governmental processes.

(2) Locating and negotiating with Sources of supply Importers must develop dependable supply sources in order to assure customers

and themselves of their ability to deliver promised goods at the negotiated time and place and in the correct quantity and quality. Various types of sourcing strategies are available ranging form a constant scouring of the foreign market by the importer, resident buyer, or middlemen to the ownership and control of supplying firms. The choice among the various options is dependent on supply market characteristics, the product involved, and the importer’s ability to finance and manage the operation.

The importer and the importer’s customers are interested in supply sources that are capable for producing the quantities and the quality levels needed as well as having financial stability and dependability. Where possible, sources should be operating in an environment that is conducive to satisfactory future performance if the relationship is expected to continue.

Product quality is partly a technical matter of specifications or conformance to samples or description. It also has another dimension. Foreign products may be perceived differently than local ones. Some foreign products from some countries may be seen as being of higher quality than local products (e,g., cars) while other foreign products may find it difficult to overcome an image of poor quality. The quality perception can change over time, but importers should, at least, be aware of the potential differences perceived by their customers.(3) Physical Distribution

The logistics of supply, including delivery dates, transportation modes, inventory policy, and claims servicing, may be the responsibility of either the buyer or seller or both- and may be subject to negotiation. These considerations affect the ability of the ability of the importer to deliver goods to customers or the assemble line on time and they affect the final cost. Risk management policies will very with the negotiated results.

(4) Documentation

Documentation is important in international trade. The distances between trading partners and the sovereign rights of nations require more elaborate systems than those in domestic trade. Each business person desires to protect a personal interest and each nation wishes to be certain its laws are upheld, it revenues protected, and its sovereignty maintained. Previous chapters have indicated some of the documents needed to support these systems. The individual importer has little choice but to conform- at least in the short-run. Failure to carry out documentation procedures can be costly and result in nondelivery. Exporters who require irrevocable confirmed letters of credit will not ship merchandise on revocable unconfirmed letters. Customs procedures are especially relevant.

(5) Developing a Plan for Resale or ReuseImporters need to have a plan for resale or use of the goods they buy Otherwise,

they may find themselves stuck with a product that doesn’t appleal to the local people or does not necessarily fit the production and use systems of a specific business or institution. It is advantageous, then, for the importer to have plan for convincing others of the merits of a product or service. The distribution channels, promotional activities, pricing, and financing should be organized for orderly and effective marketing because selling in the home market may be even more competitive and difficult than in foreign markets. There is no reason to expect that the majority of foreign products will sell themselves any more than it would be true for domestic goods. Competitive products and sources make a marketing plan necessary for successful selling if resale if resale is contemplated.

TYPES OF IMPORTERS

Four basic types of importing institutions are found in most countries: private industrialists, end users, government agencies, and facilitating agencies. These are augmented by many agents of foreign suppliers.

(a) Private IndustrialistsPrivate industrialists who buy and sell for their own account. There are numerous

private industrialists, some large and many very small. In Western countries these industrialists may carry on a significant portion of the import business while in India, the activities of industrialists are hampered by governmental attempts to achieve economic development goals. Restrictions such as the following are not unusual:

Private industrialists are precluded from importing any item on the controlled list, and they are often unable to get government approval to import on deferred payment terms. For industrial raw materials, importation licensing has been liberalised by the government of India.

(b) End UsersEnd users are manufactures, public-utilities, hospitals, colleges, universities etc.,

who buy for their own use. They purchase raw materials, supplies, machinery, and equipment to facilitate their own operations and gear the level of their importing to their

expected level of operations. Imports of this group often constitute the major source of imports for our country.

Traditionally Indian Industrial buyers purchased from abroad only when the domestic suppliers could not service their requirements. Recently however, the growth of multinational companies, improved transportation and communication, supply shortages, and increased exposure to foreign firms have led to increased use of foreign sources.

The importation of goods form abroad has enabled many end users to gain the advantages of technological developments abroad as the Europeans, Japanese, and others have expended their research and development. Often goods are available at lower prices than from domestic sources, thereby permitting domestic manufacturers to be more competitive when they incorporate materials and parts in their final product. Importation of products from subsidiaries abroad may lead to more efficient utilization of those palnts due to greater volume. Furthermore, imports provide materials that are in short supply.

(c) Governmental AgenciesGovernmental agencies constitute a separate class of importers because of their

operating characteristics, usually being subject to an extensive budgeting process, detailed procedures for biding and ordering, and attempted close co-ordination with governmental development and social plants. The exact role of governmental agencies varies among countires.

In India purchases by government agencies and government-owned corporations account for a large percentage of all imports. This is true of all developing countires where the emphasis is on developmental plants and conservation of foreign exchange.

(d) Facilitating Agencies(a) Clearing agents. For the routing associated with clearing merchandise through

customs as well as resolving controversies that may ensure, an importer may engage the services of a customhouse broker. These intermediaries are experts in the complicated paperwork connected with customs procedures. They often combine functions and serve also as forwarding agents.

The clearing agent verifies the documents on shipments into India, sees to the payment of duties and collects freight charges, and arranges for the shipment of goods from ports to importers. Not only must broker have knowledge of documents, classifications, and duty rates, but they must also be familiar with countervailing duties, licensing requirements, trade mark restrictions, and controls set by other governmental agencies. The customshoues broker is useful in expediting the shipment. For these services brokers charge a service fee. The value of their services is indicated by the fact that over 90 per cent of all imports are processed through customhouse brokers.

(b) Custom’s bonded warehouse, Importers may not always want to take immediate possession of imported merchandise They can postpone the payment of duty by storing dutiable imports in customs bonded warehouses where they may clean, sort, repack and make certain change in the condition of merchandise.

Custom’s bonded warehouses are in the charge of a customs officer who, jointly with the proprietor, has custody of all stored merchandise subject to detailed customs,

regulations. Imported merchandise may be withdrawn from the warehouse: (1) for consumption (upon payment of import duties and accrued charges); (2) for transportation and exportation; or (3) for transportation and warehousing at another port.

Indian CustomsThe customs service of a country administers regulations governing the

movement of persons, ships, vehicles, and merchandise across national boundaries. In line with this general statement, the primary activities of the Indian Customs include:

The assessment and collection of all duties, taxes, and fees on imported merchandise, the enforcement of customs and related laws, and the administration of certain navigation laws and treaties. As an enforcement organization, it engages in combatin smuggling and frauds on the revenue and enforces the regulations of numerous other governmental agencies.

Major Facets Customs Procedure that affect Indian Importers.

(1) Entry of GoodsCareful adherence to customs procedure is necessary if foreign goods are to be

brought into India. Among the first requirements is one that states the good must be formally “entered” by the consignee. An entry is filed with the district customs collector by submitting (1) a special customs, commercial, or pro forma invoice, (2) a bill of lading, and (3) a declaration that prices and other data in the invoice are correct.

In the entry, the consignee declares the value of the merchandise, indicates the rate of duty (if any) and tariff classification of the merchandise, and designates how the goods will be disposed. If the goods are to be released from customs custody immediately, a consumption entry is filed. In this situation a deposit is made with customs equal to the estimated duty, and when the duties are finally determined, a refund or an additional payment is made. A warehouse entry permits merchandise to be placed in a customs bonded warehouse. This postpones the release of dutiable goods and postpones payment of duty. Provision exists under Section 65 of the Sea Customs Act and under Rule 191-A of the Central Excise Rules for the manufacture of goods under Bond. This facility would enable the manufactures to take into bonded warehouse, excisable material without payment of customs duties and indigenous excisable material without payment of central excise duty, for use in the manufacture of a finished product.

(2) Dutiable StatusAll goods imported into India are subject to duty unless they are specifically

exempted. In India, duties may be assessed on an ad valorem, specific, or compound basis according to classifications and rates in the Tariff Schedules of India. If information on the classification and rate for goods is desired, the importer may obtain it from the customs service by furnishing the necessary information. The decision of the Customs department may be relied upon as the basis for placing orders for goods to be imported. These is no provision under Indian law for prepayment of duty or taxes prior to the importation of goods as liability for the payment of duty is fixed at the time goods are entered.

(3) Appraisal of Merchandise by Customs Officials

When a shipment is classified as dutiable, it must be appraised by customs officials to determine the value for duty purposes. The importer is responsible for ensuring that all the statements and the information in the documents field with customs officials are correct to the best of the importer’s knowledge. If a package contains several articles subject to different rates of duty, the assessment may be at the rate applicable to the highest dutiable product in the package, but this assessment is usually avoided by separating the different articles. This is another indication of how seemingly minor variations can affect the final cost of imported goods.

(4) Valuation BasisThe basis used for valuation of an imported article in the appraisal process is

established by law. Indian customs valuation has been based on systems established under Sea Customs Act, as amended:

(a) The transaction value is defined as “the price actually paid or payable for the merchandise when sold for exportation to India, plus amounts equal to:

(i) The packing costs incurred by the buyer.(ii) Any selling commission incurred by the buyer.The value of any assistance (materials, tools, design undertaken outside India).

(iii) Any royalty or license fee that the buyer is required to pay as a condition of the sale.

(iv) The proceeds, accruing to the seller, of subsequent resale, disposal, or use of imported merchandise.”

If sufficient information is not available to establish transaction value of the Imported merchandise, several other bases of value are prescribed, to be used in the following order of preference.(b) Transaction value of identical merchandise.© Transaction value of similar merchandise.(d) Deductive value to similar to previous Indian value).(e) Computed value (similar to previous constructed value).

This new basis reflects the multilateral trade negotiations under GATT (The General Agreement of Tariffs and Trade) in the so-called Tokyo Round. The Agreement was negotiated because of dissatisfaction with the multitude of systems then in use. Many of these valuation systems have protective features that can act as non-tariff barriers. The Agreement establishes rules that seek to be more fair and to preclude the use of arbitrary and fictitious customs values. Use of transaction values should enable the importer to more redily determine the appraised value of imports, and appraisals should be more uniform among importers.

Customs Rules Simplified

Controversies over valuation, Classification, and other customs maters are common; therefore, a procedure for resolution has been established. An importer may protest a decision and get an administrative review by the customs authorities.

In a significant extension of liberalisation schemes, which the government has been following over the past one year, government of India have simplified and rationalised customs laws and procedures as pert of the liberalised economic, industrial and trade policies of the government in June 1992.

The following is the gist of official announcement on simplification of customs rules and procedures, both for goods and passengers.

- Self- assessment of import document by which importer of proven identity with unblemished record of past conduct to self-assess the goods, determine duty liability and disburse the duty.

- This is applicable to government departments and undertakings.- Any breach of trust to attract penalty.- Green channel for clearance of cargo under which cargo imported by persons of

proven identity with unblemished record as well as private sector units to be cleared without scrutiny.

- Only 10 percent consignments to be selected at random for physical verification.- Chemical test of samples to be extended to other institutes and laboratories in

view of the congestion in the central revenues control laboratory.- The powers of assistant collectors and deputy collectors enhanced. Export

documents in certain prescribed categories not required to be put up to assistant collector.

- Import document up to a value of rupees one lakh to be assessed by the appraisers.

- Greater facility to imports through international courier service to be provided. The level of duty cut and value up which the articles to e imported through courier raised.

- Bonafide commercial samples restricted to Rs. 200 duty free imports allowed up to Rs. 1300

- Passenger clearance rules simplified and inconvenience and irritants eliminated.- Duty-free allowance to passengers enhanced from Rs 2000 to Rs 3000. This

includes those arriving from Sri Lanka and Maldives provided their stay abroad is more than three days.

MAJOR CONCESSIONS IN CUSTOMS DUTYIn further bid to boost exports and bring tariffs down to international levels, the

government of India have announced major concessions in customs duty for capital goods and their components.

The first notification prescribes a concessional rate of customs duty of 25 per cent ad valorem or 15 per cent ad valorem on capital goods imported under the export promotion capital goods (EPCG) scheme, subject to specified conditions.

The second notification prescribes customs duty at a concessional rate of 15 per cent ad valorem on components imported for the manufacture of capital goods to be supplied to the manufactures- exporters under the EPCG scheme, subject to specifed conditions.

The third notification fully exempts capital goods and components imported under the scheme from auxiliary duty to customs.

According to the first notification, an importer undertaking an export obligation equivalent to three times the CIF value of the capital goods over a period of four years would attract customs duty at the rate of 25 per cent ad valorem.

Imports undertaking an export obligation equivalent to four times the CIF value of the capital goods over a period of five years would have to pay customs duty at the rate of 15 per cent ad valorem.

Capital gods include plant, machinery, equipment or accessories required by an importer for manufacture of goods and also machinery for packing goods, testing equipment and equipment required for research and development activity.

The second notification prescribes a concessional rate of customs duty of 15 per cent ad valorem on components imported for the manufacture of capital goods.

All such imports of capital goods and components have also been fully exempted from the additional customs duties.

IMPORT PROCEDUREPreliminaries

The first step toward the import of goods from abroad into India will be to set up an establishment for importing things and secure recognition from the government as an importer. A person or a firm can import goods only on the strength of an import licence issued by the Controller of Exports and Imports. If the firm imported goods of the class in which it is interested during the basis period prescribed for such class, it will be treated as an established importer. In such cases, application can be made to secure a quota certificate. For this the intending importer furnishes details of the goods imported in any one year in the basic period prescribed for the goods together with documentary evidence including the Bill to Entry/Postal Declaration forms and Customs Duty receipts with relevant invoices and Bank Drafts/Chartered Accountant’s Certificates in the prescribed from certifying the C.I.F value of the goods imported in the selected year. The quota certificate entitles the established importer to import up to the value indicated therein which is calculated on the basis of past imports. In case the importer is an actual user, that is, one who requires raw materials, accessories, machinery, and spare parts for his own use in an industrial manufacturing process, he has to secure licence through the prescribed sponsoring authority which certifies his requirement and recommends the grant of licence. The sponsoring authority for Scheduled Industries borne on the Register of the Director-General to Technical Development have to move through the Director General of Technical Development (Technical Cell), New Delhi, and others have to move though the authority prescribed for them. Small industries (with a capital of less than Rs. 5 lakhs) have to apply for licence through the sponsorship of the Director of Industries of the State where the factory is located unless some other authority is expressly prescribed by the Government. For other categories of importers – (a) those importing against exports made under a scheme of export promotion, and (b) other- licences have to be

secured from the Office of the Chief Controller of Exports and Imports. The import licences are usually issued for a period of one year at a time.

Stages in an Import- Transaction

The following stages mark the various steps involve in importing goods into India under an import licence and quota.

1. Placing the IndentThe importer places orders for the goods he requires, and for which he holds and

import licence. The order is called ‘indent’ and may be placed either directly or through specialised intermediaries called “indent houses” The word “indent” is used for import of goods, according to which two or three copies of the order are prepared and indented. An ‘indent’ may be ‘open’ or ‘closed’. An open indent is one which does not specify the price and other details of the goods ordered but leaves them to the discretion of the buyer in the exporting country. A closed indent, on the order hand specifies the brand of the goods ordered, the price at which they are to be purchased, and the details of packing, shipping and insurance, etc. if indent specifies the price at which goods are sought to be imported, it may give rise to negotiations between the parties. In such a case, the indent incorporating the price finally settled is called a ‘Confirmatory indent’.

Though one can order goods directly, generally importers prefer to make use of the services of indent houses for this purpose. The indent firms serve as middlemen between the exporters and importers and charge a certain percentage of commission from the importer. In Indian, many of the big indent houses have their officers in port towns like Bombay, Calcutta, Madras, etc.

The Indent houses maintain close touch with the well- known foreign foreign firms who send the samples of their products to them. Their salesmen take these samples to the intending importers and book orders from them. The details of the orders taken down by the salesmen in their note-books are entered in the indent form. Two copies of the indent form are sent to the importer for his acceptance. The importer returns one of the copies duly accepted and signed to the indent house which then sends a copy of the indent to its agent in the foreign country concerned.

If an importer does not act through and indent house, he may place an order directly with the exporter.

2. Obtaining Foreign ExchangeThe foreign exchange reserves of any country are controlled by the Government

and are released through the central bank. In India, the Exchange Control Department of the Reserve Bank of India deals with applications for the release of foreign currency. However, an importer is able to get the foreign exchange only from an exchange bank approved and recognised by the Reserve Bank of India for dealings in foreign exchange. The importer has to produce the import licence along with the prescribed form for securing foreign exchange required to pay for the goods ordered from another country. The exchange bank through which the payment is proposed to be routed puts its endorsement on the application form. On the strength of the application and the licence

and the exchange policy of the strength of India in force at the time of application, the Reserve Bank of India sanctions the release of a certain amount of the desired foreign currency. This paves the way for the importer to go ahead with the other formalities in connection with an import transaction. It must be noted that while licence by the Government for all imports during the period of its validity, exchange is released and made available only for a specific transaction for which an order has been placed.

3. Arrangement for PaymentAfter the importer has succeeded in securing the requisite amount of foreign

exchange from the Reserve Bank of India, he has to make arrangements for paying for the goods ordered. This may be done through an L/C where it is intended to enable the shipper to obtain payment for the goods immediately on surrendering a documentary bill to a bank in his own country.

Another method will be to request the exporter to forward the documentary bill through his banker to the importer for being delivered to him either against acceptance of the bill of exchange or against its payment. In such cases, when the shipper (exporter) his shipped the goods, he sends an advice not to the importer stating the date of shipment of goods and the probable date when the ship is expected to reach its destination. At the same time he draws a bill of exchange on the importer (also called indentor) for the full invoice value of the goods. Various documents like master document, insurance policy, bill of lading and certificate of origin are attached to this bill. That is why it is called the ‘Documentary Bill”. A Documentary bill may either be D/A or D/P, i.e., the banker through which it is sent may be instructed to deliver the documents against the acceptance of the bill-by the importer or against the payment by him. ( D/A = Documents against Acceptance; D/P = Documents against Payment).

The bank’s branch in the importing country, or its agent there, arranges for the bill to be presented to the drawee (importer). The attached documents are handed over to him immediately thereafter if it is a D/A bill; in case of a D/P bill, the bank delivers the documents only after the importer pays the amount of the bill on maturity. Generally, indent House is mentioned as the ‘Referee in case of need’ on the bill. In Case, the importer cannot comply with the requirements regarding acceptance or payment, the indent house does so on his behalf

4. Clearing the GoodsAssuming that the importer has taken possession of the various documents

relating to the goods shipped, he will have to comply with the formalities prescribed for clearing the goods. When the ship carrying the goods touches at a port, it is notified in the newspaper and the importer has to secure the release of cargo from the custody of the customs authorities. The first thing for him to do is to obtain the ‘Endorsement for Delivery’ Delivery or order on the back of the Bill of Lading which is the document of title to the goods. The shipping company will make such endorsement only if is satisfied that the freight has been paid. If freight has not already been paid by the shipper or exporter, the importer will have to make the payment on this score before he can be given

a green signal by the shipping company. The importer then presents two copies of the Port Trust Dues Receipt and three copies of the Bill of Entry to the Port Trust Office to obtain clearance regarding dock dues, etc. Thereafter, one copy of the first form and tow copies of the second are presented to the Customs office.

Bill of Entry The Bill of Entry, drawn in triplicate, attests the fact that goods of specified quantity, value and description are entering the bounds of the country. Separate forms of the Bill of Entry are used for each one of the three classes of good: (i) free goods which are exempted from customs duty, (ii) goods for home consumption, and (iii) bonded goods.

5. Payment of Customers Duties if the goods are free, no import duty is to be paid at the Customs Office. On

dutiable goods, the importer or his agent will pay the import duty which may be specified, i.e., based on weight, measurements, etc. it may be ad valorem, i.e., according to the tariff value or the market value of the commodity or its invoice value.

Payment of customs duty can also be made under the system called the “Permanent Deposit System” Under this system, an importer may maintain a running account with the Customs office and make deposits from time to time. The duty payable on a particular consignment of goods received at the customs is charged to the account and the importer is informed of this.

In case the importer is not in a position to pay the customs duty on the whole of imported goods, he may apply to the customs authorities to get them placed in the ‘Bonded Warehouse’ He can then pay the duty on each installment of good that he withdraws from time to time.

To save themselves from the botheration of going through all the above mentioned, the importers may entrust the job to clearing and forwarding agents. In such as case, these agents will take it upon themselves to deliver the goods at the exporter’s warehouse. Clearing agents charge commission for their services.

IMPORT PROCEDURE SIMPLIFIEDAs per the new Import Policy 1992-1997 Import procedure has been simplified:

(1) Against seven application forms required for import of various items in the negative list only on form will now be required (2) Most of the imports are now free from licensing. However, where licensing is required- cases like duty-fee imports for export production- considerable delegation of powers has been made to the regional licensing authorities.

(3) Under the new procedure, import licences/ customs clearance permits will have validity of 12 months. However, capital goods licences and customs clearance permits will be valid for 24 months. Revalidation may be granted on merits.

(4) Other highlights of import procedures are: grant of licences for certain items of raw materials, components and consumables in the negative list of imports, decentralised

application for second hand capital goods upto a CIF value of Rs. 50 lakh to be considered by the regional licensing authorities;

(5) Imports though courier service upto a value of Rs. 5,000 at a time can be made in accordance with the policy

(6) Licences for import of cloves, cinnamon and cassia to be granted to the extent of 10 per cent of best year’s imports in value in any of the preceding 5 licensing years, subject to fulfillment of export obligations. Items qualifying for exports include tea, coffee, tobacco and certain spices.

(7) Dealers of books may be granted licences on the basis of 20 per cent of the purchases turnover for import of fiction and other books.

(8) Import of motor vehicles including tourist coaches and air-conditioning units will be permitted within the entitlement of the licences given to hotels, travel agents and tour operators.

(9) The import entitlement of any one licensing year can be carried forward, either in full or in part and added to the entitlement of the two succeeding licensing years.

(10) A special licensing committee headed by the Chief Controller of Imports and Exports may consider applications for advice on the grant of licence for import of restricted items.

(11) Import of spares for imported motor vehicles and tractors upto a maximum value per year of Rs. 20,000 (for motor vehicles) and Rs. 10,000 for tractors for each imported vehicle can be made without a licence.

(12) Similarly, aircraft spares can also be imported without a licence on the basis of the manual of the aircraft or on the recommendations of the department of civil aviation.

(13) Goods imported without restrictions may be transferred to others However, in the case of gods imported with actual user condition can be transferred only with the prior permission of the licensing authority.

(14) Import licences issued under various provisions of the policy will indicate the value both in rupees and in foreign currency at the exchange rate prevailing on the date to the issue of licence. No enhancement of rupee value will be necessary if the imports are covered by the amount of foreign currency indicated in the licence.

(15) Authorised dealers of foreign exchange will indicate the value in foreign currency as well as in rupees determined on the basis of the market and official exchange rate in the letters of credit opened for import of freely importable items or the items proposed to be imported against a licence.

Foreign Exchange and Exchange Control

The edifice of foreign exchanges arrests on the foreign trade as every transaction in foreign exchange originates from foreign trade. In the world today it is frequent that the product of one country crosses its border and money being a common medium, in which the relative value of goods can be expressed, all claims for the value are settled by payment of money. When the buyer in another country desires settlement of any claim he has to do so either in his home currency or in the currency of the seller’s country or even in the currency of a third country. If, for example, an American businessman sells to an Indian a machine, the rupee in the possession of the Indian buyer will need to be exchanged into US dollars demanded by his supplier for settlement of the transaction. Thus, every international transaction involves an exchange of currency, which can aptly be described as a “coexistence between internationalism of trade and the nationalism of currencies.”

Meaning of Foreign Exchange

Foreign exchange is a branch of economic science which seeks to deal with the means and methods by which rights to wealth in one country’s currency are converted into rights to wealth in terms of the currency of another country.1 Again, in the words of Dr. Einzig, foreign exchange is the system or process of converting one national currency into another and of transferring money from one country to another.2 According to Indian Exchange Control, “Foreign Exchange” means foreign currency and includes all deposits, credits and balances payable in any foreign currency, and any drafts, travelers’ cheques, letters of credit and bills of exchange and promissory notes.3 To the holders of these instruments mean a right to wealth.

Dr. Einzig refers them as foreign exchange (plural form to be noted), which are “means of payment in which currencies are converted into each other and with which international transfers are made, also the activity of transacting business in such means.”4

Foreign Exchange Market

Every deal in foreign trade is a two-way transaction, i,e., the buyer pays the consideration money and the seller receives the value of merchandise sold. For this, the buyer has to arrange for foreign currency (by converting his home currency) through his bank, who asks his foreign branch or correspondent at seller’s place of domicile for ultimate payment to the seller. In Other words, the seller obtains money form his bank against shipping document, i.e., his bank buys, and the buyer of the goods to take delivery of the shipping documents pays into this bank the equivalent value of foreign currency, i.e., his bank sells the required foreign currency. Thus, the purchase and sale of foreign currencies take place at two different countries. Therefore, to bridge the gap there arises the need for a foreign exchange market, which plays the part of a clearing house, through which the twin purposes of purchases and sales of foreign exchange are off set against each other.

Through the modus operandi in international dealings in exchange between different foreign centres is more or less uniform; the dealings between the banks and their customers of between the banks themselves within the same markets are based on tow different systems. In the UK, the USA, Canada, India, Switzerland and in some other

countries, the foreign exchange markets are not ‘markets’ in the concrete sense of the term. They are really informal markets and not actual meeting places for the participants, the buyers and the sellers. The term ‘foreign exchange market’ is applied in an abstract sense only, meaning thereby a number of buyers and sellers systematically in contact with each other for the purposes of transacting business in foreign exchange. Whereas, in the continental sense, prevailing in France, Italy, Netherlands and Germany, etc., foreign exchange market usually means a section of the Bourse (not connected with the dealing of shares and stocks), where operators in foreign exchange meet on every business day at a fixed time, in order to transact business and to fix official exchange rates.

The transactions in foreign exchange are effected, broadly at four different levels, viz., (a) between the banks (who are authorised to deal in foreign exchange, i.e., authorised dealers) and their customers; (b) between the banks themselves in the same market (i.e., inter-bank) at times supplemented by the central banks; (c) between the banks and their branches in different foreign centres ; and (d) between the central banks.

The activities in first tow levels are, in fact, confined to the local or domestic markets while the dealing at the other two levels are on international plane.

Means of Setting International Transactions

It has already been stated that a foreign exchange market plays the part of a clearing house, while, similarly, banks (authorised dealers in foreign exchange) act as clearing agents for international debts. The authorised dealers buy rights to wealth from those who have them to dispose of and sell rights to wealth who wish to acquire them.

In practice, it is very much usual that when the exporter parts with his goods, either he wants money immediately or wants to be sure that it will be paid at the pre-determined date without any contestation. The importer, on the other hand, does not want to pay the goods until arrival of the carrying vessel. This two-faced problem in all cases is solved where both parties are favourable known to their own bankers. Depending upon the terms of agreement, the exporter can draw on his counterpart, the importer, or on the importer’s banks (or even on any third party) and hand the bill to his banker either for collection (i.e. proceeds are received only after realisation from the importer) or he may outright sell the bill to his banker.

It is not totally impossible that the importer, at times, remits to the exporter the value of goods-maybe in advance or on receipt of advice of shipment from the exporter- through the latter’s bank. The importer may also settle his obligation by a cheque on his own bank or its correspondent either in the exporter’s country or in any other country.

The above methods of settlement of transactions arising form sale and purchase of goods are common. Nevertheless, it should be borne in mind that when an exporter (c reditor) has to draw a bill of exchange on the importer (debtor) he will ordinarily draw the bill of exchange in any one of the following methods:

(i) On the importer (may be under a letter of credit, if any);(ii) On the importer’s bank under a letter of credit established by the same

bank;(iii) On his own banks or any other banks in his own country under a letter of

credit opened by the importer’s bank; or(iv) On a third country bank (Obviously a correspondent of the importer’s

bank) under a letter of credit established by the importer’s bank.

In whatever manner the buyer and the seller of goods agree to settle the transactions, it will not be too much to say that in foreign trade payment for goods in ultimately made between one bank and another.5 There is also a great volume of transactions which does not result from commercial deals and the bills of exchange are not indeed the means of settlement for such transactions, viz., exchange of service, borrowing money from one another and paying interest on such borrowing, etc. These can be settled by the use of various credit instruments, the buying and selling of which are virtually the primary operations of an exchange dealer. The principal credit instruments are:

(a) Telegraphic Transfers (TTs) or Cable Transfers: These are the speediest mode of effecting remittances without involving any loss of interest and the principal banking means of transferring funds in large amounts to a foreign centre. The availability of sufficient funds at the other end is the criterion for such remittances and, therefore, is confined to banks and large commercial houses who maintain ample funds abroad. The rate of exchange quoted by banks for such remittances is considered to be the basic rate of exchange between two currencies.

(b) MTs (Air or Sea-Mail):These are the orders for payment transmitted by letter by banks, financial and large commercial houses, and disbursements are effected either by payment of cash to a third party or by credit to the account of the beneficiary (ies). Under this method, the mechanism is similar to that of TTs except that the instructions to pay to the beneficiaries are transmitted by mail (generally by air-mail) instead of cable, consequently there occurs a time lag of some days in each case before the relevant instructions are received by the paying banks and the payments are actually effected. If the paying banks does not have an account with the issuing bank the former remains out of funds until it is re-imbursed by the latter’s correspondent. For that reason the rate applied by paying bank is slightly inferior to that quoted for TTs.

(c) Guaranteed Mail Transfer (GMT): This is a combination of the qualities of mail transfer and cable transfer. It may also be called as deferred cable transfer (or deferred TTs).Before the airmail transfers developed, this system was in use and had its utility as postal transit time was relatively more. Banks, after dispatch of mil transfer, used to advice their correspondents by cable

the issuance of such instructions and on receipt of the cable they could pay on the stated value date irrespective of the date of receipt of the relevant mail transfer. The value date, if fact, used to be future or deferred date. With the development and popularity of airmail services, the guaranteed mail transfer (or deferred cable transfer) has lost much of its importance and is rarely used now as remittance facility.

(d) Cheque or Draft: This is another means of payment of debts abroad, or effecting remittances for any other purposes. The instruments are ordinarily drawn on their own foreign branch or correspondent. Although these instruments were widely used in the past for settlement of debts, their popularity now –a – days is on the wane as the risks of loss and delay in transit are there. The uses of cheques drawn by firms/ companies on their account and sent abroad for settlement of debts is however not totally absent. Cheques of this nature are also purchased by dealers from the selected customers with recourse to them.

(e) Circular Credits and Travellers Cheques: These instruments are treated at sight basis by any bank (or travel agents handing banking business) called upon to issue such instruments or to make payment (encashment) against them. The issuance of such instruments in a foreign currency is simply a sale of that currency against ready cash and until the instruments are encashed abroad or the issuer’s account abroad is debited, there is no outlay of fund. Therefor, there is a gain of interest on the amount involved in the transaction. As and when such instruments, expressed in ‘foreign currency, are encashed by a bank abroad there is an actual outlay of funds by that bank and there are also occurs a time lag to get the amount credited to its foreign currency account abroad. As a result, the paying bank has to make necessary provision for loss of interest in the rate of exchange applicable for such transactions.

Accounts in Foreign CurrencyWhile dealing in any transaction in foreign currency, be it a purchase of

commercial documents, retirement of a bill of exchange under a letter of credit or a remittance, a bank must have accounts (normally current accounts) in foreign currencies with its overseas correspondents through which the transactions in relevant – Currencies can be put. The balances of such accounts – debit or credit – are taken into overall financial position of the banks involved. These accounts are known as ‘Nostro’ Vostro’ and ‘Loro’ accounts.

‘Nostro’ accounts mean current accounts of banks maintained in the books of their branches or correspondents in foreign centers in terms of the latter’s currency. For example, in order to meet its requirements for transactions in pound sterling, ABC Bank, Calcutta (an authorised dealer), maintains an account in pound sterling with its

correspondent in the UK, say XY Bank, London. Such an account would be designated by the ABC Bank as its Nostro account with the XY Bank.

‘Vostro’ accounts are current accounts of foreign banks maintained in the books of their correspondents in terms of the latter’s currency. The so- Called Vostro accounts are the Nostro account of another bank involved.

Taking the example under ‘Nostro’ account above, the XY bank London will refer the pound sterling account of ABC Bank, Calcutta, as ‘Vostro’ account. Similarly, the XY Bank, to meet its requirements in Indian rupee, may maintain a current account in Indian rupee with ABC Bank, Calcutta. This account will be designated by XY Bank as its ‘Nostro’ account, while ABC Bank will designate it as XY Bank’s ‘Vostro’ account.

‘Loro’ accounts represent current accounts of third parties (banks) kept with foreign correspondents in terms of either foreign currencies or in the home currency. In short, these mean ‘third party’ accounts.

To explain the position, suppose, RS Bank, New York, also keeps a rupee account with ABC Bank, Calcutta. A remittance in rupee made by the XY Bank, London, to the ABC Bank for account of RS Bank will mean the proceeds of the remittance are ‘for credit of Loro account’ of RS Bank. In the instant transaction, the XY Bank in their correspondence with ABC bank will refer the account of RS Bank as ‘their account with you’

The three types of accounts, in the light of the examples cited above, can be summarized as under:

(i) ABC Bank’s account in pound sterling with XY Bank, London, is the former’s ‘Nostro’ account and they will refer it to the latter as ‘our account with you’.

(ii) XY Bank will treat the ABC Bank’s account with them as the latte’s ‘Vostro’ account and the former will refer it to the ABC Bank as ‘your account with us’.

(iii) From the point of view of the XY Bank, London, the rupee account of Rs Bank, New York, with ABC Bank, Calcutta, is the ‘Loro’ account and the XY Bank will refer this account to the ABC Bank as ‘their account with you’.

As and when there is a sale and purchase of a commodity and the settlement of Value thereof has to be effected in a foreign currency, there arises the occasions of a sale of foreign currency by a bank at buyer’s end, i,e., acquiring (purchase) of the foreign currency by the buyer of the goods for payment to the seller and a purchase of the same foreign currency by a bank at seller’s end, i.e., disposing (selling) of the foreign currency by the seller of the goods. Even when the price is paid by the buyer in his home currency and its remittance to the foreign seller, or credit of the amount to the seller’s account with a bank in the buyer’s country, means the acquiring of right to wealth for he can at any time withdraw the amount and utilise in the manner he likes, which, at some point of

time, means conversion of the amount into foreign currency. Therefore, the sale and purchase of goods by traders at international plane give rise to buying and selling of foreign currencies by banks at foreign centers. This affair of buying or selling, i.e., conversion of foreign currencies, is widely known as foreign exchange transaction. It may be also noted that the buying and selling of foreign specialised job for allo concerned including the professionals engaged in the foreign exchange dealings; the main principles involved, however, can be easily understood by anyone interested in it.

Sale and Purchase Transactions: Two-In-One

It has already been stated that every deal in foreign trade is a two-way transaction, i.e., the buyer settles the value by payment in his home currency and the seller received the amount in predetermined currency (presumably in his home currency, which is a foreign currency to the buyer of the goods). Thus, it needs a conversion of one currency into another. Now let us take the example of the American businessman selling an Indian a machine. Suppose, the value of the machine is S 500 and in order to pay the seller’s bill the Indian buyer has to deposit an appropriate amount in Indian rupee (i.e., the buyer’s home currency) which has banker will convert into U.S. dollars for remittance to the seller’s bank in settlement of the transaction. Let us also take another case. An Indian sells certain quantity of the jute goods worth of $ 1,500 to an American buyer. The seller’s bank purchases the relevant documents and pays his customers an amount in Indian rupee, equivalent of $ 1,500. This involves a conversion of dollar into Indian rupee. Again, a foreign tourist encashes in a bank in India a travellers cheque for £ 10 and obtains from the bank the proceeds in Indian rupees. Conversely, a bank in India issues to his customer travellers cheques for £ 50 against rupees. In these twin examples, if viewed from the angle of the bank, the former is case of buying of foreign exchange while the latter is a case of selling of foreign exchange. If it is viewed form the customer’s point of view, the former is a sale, while the latter is a purchase, of foreign exchange.

From the above analysis, we can conclude that to pay for the goods purchased (imported) there takes place a conversion of home currency into foreign currency which, form the bank’s point of view, is a sale transaction and to receive payment for the goods sold (exported) there occurs a conversion of foreign currency into home currency which is a purchase transaction in the bank’s book.

The analyses are reflected in the following chart which, if examined carefully, will afford a clear understanding of the affair.

Foreign Exchange Transaction Involve

Export Import (i.e., sale by trader) (i.e., purchase by trader) Exporter receives home Importer pays in home currency to Currency from Bank i.e., sale of foreign (i.e., purchase of foreign

currency by exporter currency by importer which means) from bank which means) Bank’s purchase of foreign Bank’s sale of foreign Currency (i.e., conversion of currency (i.e., conversion of Foreign currency into home home currency into foreign Currency currency

The banks provide a service to their customers by converting foreign exchange into vice versa. In a single day they will both purchase foreign exchange from some customers and sell it to others. In orders to meet the needs of their customers, the larger bank maintain deposits in branches of commercial banks abroad, while smaller and inland banks work through these banks on a correspondent basis. The bank quotes rates at which it will buy of sell foreign exchange. The rates will differ among the currencies, thereby establishing the price of one currency in terms of another.

A distinction is to be drawn between spot and forward exchange. When an importer purchases sport exchange. Actual delivery is taken of a definite amount of foreign exchange at the time of purchase, and the rate then being quoted is paid for the particular bill of exchange. When a forward exchange contract is purchased, the purchaser agrees to buy a given amount of exchange on a fixed date in the future at the rate specified in the forward contact, this future rate many be higher or lower than the spot rate. The direction and extent of the deviation from the sport rate is largely governed by two factors; (1) the supply and demand for delivery of a given currency at a future time, and (2) the speculative opinion of the market concerning the future course of the rate of exchange.

Factors Affecting Exchange Rate Fluctuations.

(A) Demand and Supply of Currencies Exchanged

Free or uncontrolled exchange rates fluctuate almost continuously, for they are constantly subject to a variety of influences. If countries were still on the gold standard, the fluctuations would be limited by the cost of shipping gold from one country to another, but between these limits constant fluctuations could occur. In the absence of the gold standard, gold embargos, currency inflation, or similar abnormal disturbing factors, the fluctuations in the exchange rate are caused basically by the supply of and the demand for the currencies being exchanged.

A maze of merchandise and other business transactions is constantly conducted between India and foreign countries. These transactions influence the supply of and the demand for foreign exchange.

The transactions comprising the credit items (in-payments) of the India’s balance of payments tend to increase Indian holding of foreign exchange and /or to reduce foreign holdings of rupee exchange; the debit items (out-payment) have, of course, the reverse effect.

The principal items that normally constitute the supply of foreign exchange in India are exports, shares and bonds sold to investors abroad, foreign capital movements to India, interest and dividend payments on foreign securities held in India, foreign securities resold to foreigners, and payments due to Indian companies for shipping, insurance, and other services. All of these items, require remittances to this country and, therefore, result in a demand for rupees or a large volume o claims against foreign currencies.

The principal items constituting the demand for foreign exchange are merchandise imports into India, foreign shares and bonds sold in India, Indian securities bought back from foreigners, interest and dividends on Indian securities held abroad, Indian tourist expenditures abroad, and payments to foreigners for services.

(B) Other Factors

Foreign exchange rates, however, are not always dominated by these normal forces of supply and demand. A number of other factors may cause people to lose confidence in a currency and lead to a decline in its value. Loss of confidence may result from:

(i) government instability:(ii) large public debts;(iii) high rates of inflation;(iv) major industrial of banking failures, etc;(v) At times speculative trading may also contribute to exchange fluctuations

even though speculators usually have stabilizing effect. However, if a preponderance of them believe the currency is overvalued, they may all be trying to sell at the same time.

(vi) Exchange rates also are influenced by the money markets in India and foreign countries, because interest rates influence the flow of funds and, consequently, the supply of and demand for foreign exchange, Rising interest rates in India normally attract foreign bank funds to this country and bring home Indian bank balances held abroad. The effect is to depress exchange rates. Declining interest rates in India tend to reverse this flow of bank funds and to raise exchange rates. Similarly, a rise in money rates in a foreign money market normally tends to draw foreign bank funds held in India and available Indian bank balance in the foreign market, while a decline in money rates abroad tends to cause a reverse flow of bank funds.

It does not follow that every fluctuation in the money market will be promptly reflected in foreign exchange rates. In the absence of exchange

control or restriction plans, however, changing money rates frequently are associated with fluctuation in foreign exchange rates.

Effect of Exchange Fluctuations.

When a seller quotes an export price for a product or receives an offer in terms of foreign currency, there is concern with the exchange rate fluctuations that may occur before the seller receives payment. When quoting prices in terms of the foreign currency, the exporter knows how many rupees are to be received at the current rate of exchange. However, when the customers pays in sterling pounds, deutsche marks, pesos, US dollars, Japanese yen or some other acceptable foreign currency, the amount received in terms of rupees will depend upon the rate of exchange when the currency is converted. When the price is quoted in the foreign currency, the exporter accepts the risk of exchange fluctuation. Unless steps are taken to protect expected profits, a decline in exchange rates may reduce profits or even convert them into a loss.

Exporter’s Means of Protection

An Indian exporter can obtain protection against exchange losses by quoting a price in terms of Indian rupees, thereby shifting the exchange risk to the foreign importer. In that case, unless the importer seeks protection, an unfavourable change in the exchange rate may cause the importer to pay a higher price (on the basis of his/her currency) then had been anticipated.

When quoting prices in a foreign currency, an exporter may deliberately accept an exchange risk if it is believed that the rate will be more favourable later, then the exporter is speculating on the merchandise export transaction, for the amount of profit will not be known until the payment has been converted to domestic currency. The exporter may be more inclined to accept this if exchange rates have recently been quite stable and if a product carries a wide price margin. Although the exchange risk may be taken into account in quoting export prices, such action could raise the price and thereby limit sales.

(i) Agreed- Upon Exchange Rate. When exchange rates fluctuate within a comparatively narrow range, the exporter may be able to induce the foreign importer to agree upon a fixed or guaranteed rate of exchange, but arrangements such as these may be unbtainable at the very time the exporter is most anxious to protect profits. When the exchange risk is greatest because of wide fluctuations, the exporter who quotes foreign currency prices may find that the only safeguard is in the open exchange market, where foreign currency bills for future delivery are bought and sold.

(ii) Hedging. When an exporter makes a sale, foreign currency may be sold for future delivery. Later, when a draft from the foreign customer is received, the exporter will present it to a banker and

receive payment on the basis of the agreed- upon rate. Thus, the exporter has

A businessperson may hedge or protect export profits in a large measure by selling future contracts, if there is a future market for the foreign currency.

When a sale is made, the exporter who expects to receive foreign currency at some future date may sell an equivalent amount of foreignCurrency for delivery in future at the time the foreign currency is expected to be received by the exporter. If the exchange rate declines, the exporter will receive fewer rupees for the merchandise transaction than anticipated, hit will be able to cover or buy back at a reduced rate the foreign currency that had been sold for future delivery. The profit derived from this future exchange transaction will approximately balance the reduced number of rupees the exporter is’ paid for the merchandise. In effect a fixed rate of exchange will again have surfaced for the exporter.

The sale of future contracts often affords real protection to the exporter, but it does not always eliminate the exchange risk entirely because the exporter may be unable to close the export sales contract and sell the futures contract at exactly the same moment. In the meantime the exporter bears the exchange risk. The futures and spot markets may not fluctuate in the same amount, so the transactions exactly offset each other. Bankers also have at times withdrawn from future exchange operations in some currencies, so hedging may not be possible in currency. Hedging through the use of future contracts implies that there is such a market. If the sale to a small country, or one with few international dealings, there may be no future market for the currency.Importer’s Means of Protection

Importers, when buying merchandise in terms of foreign currencies, are faced with a possible loss of profit resulting from unfavourable exchange fluctuations. The importer, knowing that a given amount of foreign currency will have to be delivered at a future date, may purchase spot exchange when ordering imported merchandise. This will eliminate the danger of a rise in the exchange rate in the importing country, but in doing so the importer ties up funds until the merchandise is received. When purchasing imports in terms of a foreign currency for which there is a market for future exchange rate, the importer may hedge transactions by purchasing a future exchange contract. Thus, the importer is assured that when the time comes for payment, the necessary foreign currency will be available at a price determined when the future contract was purchased.Indirect Risks

The most complete safeguard against unfavourable exchange fluctuations is, of course, enjoyed by marketers when payment is to be made in their domestic currency, but even then they have an interest in exchange fluctuations. Fluctuations following the closing of the sales contract may be so unfavourable that the foreign customer may refuse to accept delivery, or, having accepted the goods, may be unable or unwilling to meet the financial obligation. Thus, the exchange rate fluctuations may increase the exporter’s credit and commercial risks

The importer who has purchased foreign goods in terms of domestic currency may have an indirect interest in exchange rate fluctuations because losses resulting from exchange fluctuations may include the foreign seller to delay shipment or fail to make delivery of the ordered merchandise. Although the importer will not make payment and therefore will not suffer a direct loss from exchange rate fluctuations, business is disrupted and, if any of the ordered items has been resold in advance of its receipt, the importer cannot deliver.

Influence of Price Levels

If price levels could be promptly readjusted as exchange rates depreciate and a so-called international purchasing power parity could be maintained, the depreciated exchange would have little effect upon merchandise exports and imports. Such a prompt readjustment, however, rarely occurs.

Exchange rates can depreciate very substantially,-even though the general commodity price level within a country does not change. If a foreign currency depreciated relative to the rupee while Indian prices remained stable, exports from India would be handicapped. Indian prices, quoted on the basis of the current depreciated exchange rate with a view to obtaining the number of rupees normally expected, would appear high to the foreign importer in comparison with the general level of the domestic prices prevailing in the other country and higher than the import prices that were formerly paid.

If an exporter quotes prices in line with the domestic price level of the foreign country, or if price offers from aboard are accepted on that basis, then the exporter would receive fewer rupees than before the exchange rates depreciated. Imports received from the foreign country would be encouraged because the importer could temporarily purchase merchandise at prices that, in terms of Indian rupees, would be attractive. The resulting decline of exports and increase of imports would eventually tend to readjust the exchange rates because there would be an increasing demand for the foreign currency and a declining demand for the rupee.

The exchange situation also is complicated by inflationary conditions. When inflation occurs within a country, the prices of its products increase and, even if the exchange rate does not change, exporters find sales more difficult. The increased cost of imported items leads foreign buyers to other countries. Thus, the exporter whose products are price-sensitive faces either a declining market or the need to cut the export price and receive a lower profit. Anti-dumping laws in many countries might make the latter policy unlawful.

Consumers and industries in the country with the inflated currency would find, however, that the rise in internal prices has made importing more attractive. Lower prices abroad, relative to the higher domestic prices, may lead to increased use of foreign sources of supply.

The inflation thus affects not only the market for domestic and foreign goods and services, but also the demand and supply for the currencies of the various countries. In a fluctuating, or floating, exchange system, this should change the rate of exchange to partially compensate for the shift to the use of foreign suppliers. In a managed currency system, as under the IMF, inflation may result in a reduction of exports and an increase in imports in the inflationary country. If this persists, it would pressure the country to consider a change in par value, i.e., pressure to formally devalue the currency. By devaluing the currency, the monetary managers want to make exports cheaper; therefore, hopefully, the exports will expand and imports, now more expensive, will be reduced.

Foreign Exchange ControlIn today’s world nations are reluctant to have the value of their currency

determined solely by the normal supply and demand in order to facilitate trade and investment. Monetary authorities intervene in the foreign exchange market either to stabilize the value of the currency in accordance with arrangements under the IMP or because of other trade and national goals. Furthermore, governments can restrict the amount of exchange that is available for trade and investment and thus indirectly influence exchange rates. Any governmental measures affecting the volume of exports and imports influence exchange rates. A country may restrict the importation of certain goods in conformance with its economic development programme in order to conserve foreign exchange for projects with a higher priority. Furthermore, protective tariff rates, import quota, licence requirements, export subsidies, governmental price control, and trade agreements, all imply a certain amount of exchange control.

Direct Government Intervention

When countries suspended the gold standard in the 1930s they often took direct action to change or stabilize exchange rates, thereby altering the market potentials. Currencies were devalued in order to increase exports, stabilization funds were used to buy and sell foreign currencies in the open market, gold exports were controlled, and blocked accounts were used to overcome exchange rate depreciation problems.

Foreign Exchange Restrictions

Although the direct intervention methods referred to have influenced many exchange rates, they do not fully serve the needs of countries witha continuous shortage of foreign exchange. To supplement the direct measures many countries adopted a number of exchange restrictions. Most countries have employed them from time to time. Developing countries especially have found restrictions necessary to secure compliance with their development plans.

An exchange restriction plan implies that the government of a nation restricts the uses to which the available supply of exchange shall be put. Foreign exchange may be allocated specially for the payment of import bills, interest on foreign loans, and on other specific purposes. Sometimes the restrictions prevent the use of exchange for trade with a given (unfriendly) country. In the latter case the purpose may be political, but the basic reason for most exchange restrictions is the shortage of foreign exchange sufficient to meet freely all of the requirements of international marketing and finance. More specifically, exchange restrictions are designed:

(i) To provide the exchange necessary for the financing of essential imports and to discourage specific imports that are considered to be luxuries or that may be available from local producers.(ii) To allocate or limit exchange for the servicing of exterlial debts and investments.(iii) To prevent the flight of capital.(iv) To limit speculation.(v) To encourage lagging exports.(vi) To encourage tourist travel.

In addition to these objectives, all of which are primarily related to a shortage of exchange, exchange restrictions also contribute to influencing or determining of foreign exchange rates. When a government limits and prescribes the uses of all or most of the available exchange, it fixes the nation’s official exchange rates. The exchange rates fixing power of some government’s further enhanced by import quotas, licensing plans, and other foreign trade control measures. This ability of a government to manipulate the rate of its exchange can thus become an important instrument in the foreign commercial and even political, policy of a country.

Administration of Exchange Restrictions -In India exchange restrictions are administered through RBI. Exporters are

required to receive payment in foreign currency and turn over to the RBI all or such portion of their exchange as the current regulations require at an official buying rate. Importers and others requiring foreign exchange then purchase it, so far as the restrictions permit, at an official selling rate.

In some countries there is also a free exchange market in which exchange derived from certain exports or from other authorized services may be obtained, usually at higher cost~ to the buyer. Thus, in a single country, there may be one or more pegged exchange rates for official exchange and also a free market rate. This is known as a system of multiple exchange rates. Multiple exchange rates are most likely to be used by developing countries when a nation faces a shortage of foreign exchange.

Marketers are interested in these rates because the rate affects the price of, their products. Multiple rates are established to inhibit the importation of specific products. The least favourable rates are set for luxury goods such as automobiles, especially if these are also produced locally. As the economy develops, the items might be shifted from one category to another.

Other types of exchange restriction systems of interest to marketers include those in which a country requires that a licence be obtained in order to import certain products. These import licences are allocated by the exchange control authority in accordance with priorities set by the government. Countries also have levied import surcharges and have provided export subsidies to local producers. They have required that importers pay an advance deposit for desired exchange, thereby tying up the importer’s capital and increasing the cost of importing. In addition, various measures have been used to affect capital movements.

Effects of Exchange Restrictions

Exchange restrictions, although intended to accomplish the internal objectives of the country enforcing them, have necessarily affected the international trading of the other trading nations throughout the~ entire world. As they are imposed primarily because certain countries are faced with a shortage of foreign exchange, international trading as a whole has not always been curtailed. But it is clear• that exchange restrictions have:(1) affected the importation of some classes of goods more adversely than others, the essential character of imports being considered in the allocation of exchange;

(2) affected the trade of some exporting countries more seriously than that of others;

(3) tended, particularly in connection with certain international agreements, to channelize trade bilaterally;(4) been used by some countries for bargaining purposes;(5) been utilized by some countries for the purpose of subsidizing particular exports;(6) influenced domestic prices in some countries so as to handicap exports; and(7) Complicated the routine work of importers and exporters.

Exchange restriction measures, however, also have certain desirable features under conditions of serious and more than seasonal or strictly temporary exchange shortages. Exchange restrictions have:

(1) stabilized exchange rates for both importers and exporters;

(2) aided various needy Countries in obtaining a larger supply of the commodities considered most necessary by their governments; and

(3) enable debtor nations to safeguard their currency, control exchange rates in the national interest, protect their economy to some extent against unfavourable commodity price changes, regulate interest and other financial payments, and otherwise protect themselves against threatening disturbances.

In general it is clear that marketing opportunities and efforts for specific firms have been altered as a result of governmental Intervention in the exchange process. No marketing programme is complete until it has taken into account the potential effect of anticipated changes in governmental policies and rates of exchange.

David Carson, a student of international marketing, stated, “Foreign exchange or political developments may often outweigh strictly marketing considerations in tipping management’s judgments regarding certain market decision. Unfortunately, professional literature in marketing has not adequately reflected these broader managerial considerations.’

Floating exchange rates probably have not inhibited trade to the degree expected by the proponents of fixed rates. They have, however, altered the conditions under which international marketing occurs. Business have adjusted and have become better in managing of foreign exchange. The larger multinational firms and commercial banks arc improving their information systems for monitoring the foreign exchange market and forecasting foreign exchange rates.

Exchange Control Regulations Relating to ExportsSection 18 of the Foreign Exchange Regulation Act 1973 forms the basis for

various regulations framed to regulate export transactions. In exercise of powers confered in this section, the Government of India have issued two notifications on 1st January, 1974, one relating to exports by post and the other pertaining to exports otherwise than by post. The Central Government have also framed the “FERA 1973” which also came into force on 1st January, 1974.•These rules deals with the allotment of code number to the exporter, different forms of declarations to be completed by the exporter; the prescribed authority to whom the declaration is to be made, manner of realisation of exports proceeds etc.

Government of India issued a Notification in August 1983 amending the Foreign Exchange Regulation Act 1973 when the export declaration forms were revised. Chapter II of the Exchange Control Manual (1987 edition) published by the Reserve Bank of India contains the various provisions to be followed by the authorised dealers as well as exporters in matters relating to exports from India.

Under FERA it is obligatory for an exporter to surrender to RBI foreign exchange earned through exports within 180 days of its realisation. It is essential for the persons/firms/companies engaged in export trade to be aware of the relevant provisions contained in this Act, Notifications and Manuals issued by the RB! (Government of India) from time to time.

Recent TrendsCurrently the balance of payments position facing the country had become critical

and foreign exchange reserves had been dcplcted to dangerously low levels. The export momentum built up during the period 1986-87 to 1989-90, when India’s exports grew at an average annual rate of 17% in terms of US dollars, was lost in 1990-91 when export growth decelerated to only 9% in terms of US dollars. Export in April-May 1991 have actually shown a decline of 5.8% in terms of US dollars compared with April-May 1990, imports had to be severely contained in the course of 1990-91 because of the shortage of foreign exchange. This effected the availability of many essential items and also led to a distinct slow down in industrial growth.

Restoration of viability in our external payments situation is an urgent task and requires action on several fronts. The government is of the view that Imports and Exports (Control) Act 1947 and the orders thereunder require review. The present finance minister is of the view that RBI should remove import curbs fully on the export sector.

FOREX SALE NORMS LIBERALISED

In a further liberalisation of the foreign exchange control regulations, the Reserve Bank of India (RBI) instructed authorised dealers o sell exchange at market rate without its prior approval to seven categories of people, including businessmen, exporters and journalists.

Instructions had been issued to the dealers to increase from $100 to $500 the existing ceiling on sale of foreign exchange in the form of currency notes to travellers proceeding abroad.These steps had been taken as part of the Liberatised Exchange Rate Management System (LERMS), which came into effect from March 1, 1992.

The Foreign Exchange Dealers Association of India had been asked to instruct banks that Foreign Inward Remittance Payment System (FTRPS) instruments should be issued to resident beneficiaries immediately on receipt of relatives remittance up to Rs. 50,000 as against the existing limit of Rs. 10,000.

Under the new rules, authorised dealers can now sell foreign exchange without prior RBI approval for business visits overseas sponsored by firms, companies and organisations.

They can also do so in the case of visits by self-employed professionals and journalists on short-term assignments.

In these cases, the visit should be a single trip not exceeding 20 days and the exchange availability would not exceed $300 a day.

The facility will be available for medical treatment abroad, subject to the recommendation of the competent medical authority and to persons going abroad on employment or emigration to meet initial expenses up to $500.

It will extend to persons going abroad on the hospitality of overseas organisations up to S300 by way of incidental expenses and to exporters, by way of agency commission not exceeding 13 per cent of the invoice value.

The new rules will also extend to exporters by way of settlement of quality and other claims not exceeding 15 per cent of the invoice value and for sundry personal and commercial remittances not exceeding Sl00 for any purpose.

Applications not covered by the authority delegated to authorised dealers would be dealt with by the regional offices of the Exchange Control Department and in approved cases permits would be issued by them.

In all these cases (including cases approved and covered by permits issued by the RB!) foreign exchange would be sold by the dealers at market determined rates and subject to payment of tax, wherever applicable.

Transactions of the official and free market exchange rates would have to be done within the framework of the existing regulations.

For instance, a person wishing to travel aboard would be required to purchase foreign exchange at the free market rate but only to the extent permitted under the exchange control regulations.

The rationale for deciding that 40 per cent of export earnings would be converted at the official exchange rate and the remaining 60 per cent at the market rate. This takes into account the quantum of foreign exchange required for essential imports during the coming year.

Further, this had not taken into consideration the expected boost in earnings from exports and invisibles as a result of the liberalised economic policies.

The 40 per cent would not cover the government debt servicing needs, which would have to be met at the market rates.

The new system, which replaced Exim scrips, would cover workers’ remittances also unlike the earlier facility.

Initiatives have been taken by the government to deal with the third oil shock. Briefly speaking, measures were introduced to reduce consumption of petroleum products to contain the POL import bill. A set of measures were put in place to cut government expenditure and, more particularly, its import and foreign exchange component. Judicious import management geared to curtailment of non-essential/low priority imports, without at the same time introducing sharp changes in existing policies governing imports, was emphasised. Measures to generate additional exports were initiated which included exports of surplus agricultural commodities and certain manufactured items. Efforts were initiated to mobilise quick-disbursi4ig assistance from bilateral and multilateral sources, accelerate the utilisation of the authorised but

undisturbed external assistance, tap surpluses in the oil-exporting Gulf countries and attract inflow of resources through special investments, particularly from NRIs. Measures were taken to raise revenue and improve fiscal balance of the government. Short-term administrative measures were introduced to defer outflows and advance inflows in foreign exchange. During the early months of 1991-92 initiatives were taken to lighten the import regime and credit facilities for imports in the face of a worsening balance of pa3lments situation.

Exchange Rate Adjustment

The Indian rupee is linked to a basket of important currencies of the country’s major trading partners. The major objective of exchange rate policy is to adjust exchange rates in such way as to promote the competitiveness of Indian exports in the world market. Adjustments in the external value of the rupee are therefore made from time to time. The Reserve Bank of India effected an exchange rate adjustment on 1 July, 1991 in which the value of the rupee declined by about 7 to 9 per cent against the major currencies (the pound sterling, the US dollar, the deutsche mark, the French franc and the yen). There was another exchange rate adjustment on 3 July, 1991 in which the value of the rupee declined by about 10 to 11 per cent against the major currencies. Between 28 June and 3 July, 1991, the rupee depreciated by about 18 per cent vis-a-vis the basket of 5 currencies while this basket appreciated vis-a-vis the rupee by about 23 per cent. These adjustments had been necessitated by the growing external and internal imbalances in the economy. The balance of payments situation had become very critical and that was reflected in the sharp drawdown on, and low level of, foreign exchange reserves. Since October, 1990 there has been an appreciation in the relatively high rate of inflation in the country and a much slower rate of depreciation in the nominal exchange rate leading to an erosion in the international competitiveness of the economy. It was equally necessary to curb destablising market expectations which were generated by perceptions of a growing misalignment of the exchange rate. It is expected that these exchange rate adjustments will stop further deterioration in the country’s balance of payments in the short run and. improve it in the medium term by improving the trade balance.

The primary objective of the exchange rate adjustment is one of strengthening the viability of external payments position, i.e., to ensure that exchange rate movements maintain a reasonable incentive for export promotion and encourage efficient import substitution activities, and at the same time, to stem the flight of capital from India and discourage how of remittances from abroad through illegal channels. In the immediate short run, exchange rate adjustment is expected to facilitate realisation of outstanding export receipts and accelerate, in general, the inflow of remittances by quelling destabilizing market expectations. Downward adjustment in the exchange rate raises the~ relative price of traded goods (by increasing the domestic price of foreign currency) to non-traded (or home) goods, thereby encouraging production of tradeables while discouraging their consumption. This expenditure-switching effect at a macro level results in correcting the imbalances in the trade and current account.

The real effective exchange rate (REER) of a currency which is the nominal exchange rate adjusted for the relative change in prices in the respective countries, is a proxy for a country’s degree of competitiveness in world markets. Appreciation in REER reflects deterioration in the country’s international competitiveness, while depreciation in REER reflects the converse.

Many of India’s trade competitors made substantial exchange rate adjustments over the past few years. China and Indonesia, for instance, depreciated their currencies against the US dollar more than India did despite their lower inflation. Over the period end-December 1980 to end-December 1989, China depreciated by 68 per cent and Indonesia by 65 per cent while India depreciated by only 53 per cent against US dollar, whereas the increase in consumer prices in China and Indonesia were lower at 100 per cent and 111 per cent, respectively, against India’s 114 per cent over the same period.

Between October 1990 and March 1991 the REER of the rupee appreciated by about per cent as a result of a much slower rate of depreciation in the nominal exchange rate (2.4 per cent against the major five currencies over the same period) and the widening inflation differentials as the country’s domestic inflation accelerated after October 1990. Further, in the five month period between February 1991 and June 1991, the nominal effective exchange rate of rupee decreased only by 2.5 per cent while the inflation differentials continued to widen. All this resulted in an erosion of India’s international competitiveness.

To restore the competitiveness of our exports and to bring about a reduction in trade and current account deficits, a downward adjustment of the rupee had become inevitable. The Reserve Bank of India effected the exchange rate adjustment in two steps in early July 1991. The timing of the exchange rate adjustment was necessitated by the need to nullify adverse expectations and restore international confidence. On the other hand, the magnitude of the adjustment was predicted on the need to restore competitiveness of the country vis-a-vis her competitors in trade. On July 1, 1991 the value of the rupee declined by 8 to 9 per cent against the major currencies (pound sterling, the US dollar, the deutsche mark, the yen and the French franc). On July 3, 1991, the value of the rupee was further lowered by 10 to 11 per cent against the major currencies.

In determining the extent of adjustment, the relevant factors were:differentials in the price levels between India and her major trading partners; the extent of real depreciation of the currencies of competitors; the degree of correction required in our balance of payments; and market expectations. Taking all these factors into account the magnitude of downward adjustment in the external value of the rupee by about 23 per cent was appropriate.

A basic requirement for the success of this policy is that relative price change should bring forth requisite change in production and consumption patterns. Exchange rate depreciation could lead to an improvement of the current account only if export volumes rise and/or import volumes fall sufficiently to outweigh the price effect. Besides, lags in such response to exchange rate changes are also to be reckoned with. There is the well known “J curve” effect of the improvement in balance of trade occurring after an initial deterioration. However, following the stringent monetary restrictions on imports, the expected deterioration of trade deficit did not happen. The trade deficit during the first six months of the financial year 1991-92 contracted significantly.

UNCTAD Advises Against “Big Bang” ApproachThe United Nations Conference on Trade and Development (UNCFAD) had

advised developing nations with moribund economies not to go in for “ultra shock treatment” of sweeping reforms as it would lead to increased political resistance and

possibility result in its reversal due to foreign exchange constraints.

“The evidence suggests that a more traditional sequencing is preferable to the current inclination to mix together stabilisation and structural reforms.”

The “traditional sequencing” model presumed that macroeconomic stability — reflected in moderate inflation — was ensured before launching structural changes, including trade reforms.

However, the”big bang” approach, — described as the ultra shock treatment by UNCTAD -— prescribed simultaneous introduction of major stabilisation policies and structural reforms.

The experience of developing Countries in the eighties supported the view that macroeconomic stability was a necessary condition for successful structural change and economic growth. Microcconomic instability was characteriscd by constant changes in prices, economic policies and the possibility of profiting from speculation on changes in short term conditions. “This is not an appropriate environment for investment and growth.”

Growth was unlikely to he resumed unless microeconomic stability was guaranteed. At the same time, experience had also shown that macroeconomic stability, while necessary was not a sufficient condition for economic growth.

Don’t Make 90s Another Lost Decade

The current turmoil in European currencies provides a sobering lesson for developing countries. It has shown how the market can reduce governments to mere spectators while bankers make billions.

The monetarism and free market philosophy that characterised the 1980s seem to have failed. Eastern Europeans are now finding out what many in Third World know from bitter experience: that the market is not the global panacea.

The recession, the most severe since World War II, has wrecked the world economy, and, what is worse, there are few signs of recovery. The world economy is in a “danger zone” due to the policies of the 1980s. The production has fallen in the USA and stagnated in Western Europe and Japan. Post-Communist countries in Eastern Europe and the former Soviet Union have found that under capitalism living standards have actually fallen. Industrial and farm production have declined and trade flows have been disrupted.

In the Third World, Africa and much of Asia face economic stagnation. However, growth has picked up in Latin America and East Asia. For the first time in many years a positive net transfer of resources has taken place in Latin America. It remains to be seen how long it stays that way. In Africa poor export earnings have compounded the problems faced by the IMF-dictated structural adjustment programmes.

Commodity prices declined by 11 per cent in 1991. Prices of coffee and cocoa, Africa’s two key export earners, are currently at their lowest level in 17 years. A number of countries also have severe drought.

Despite recession in the North, some Third World countries have been able to maintain high growth rates. Import capacity of some Asian countries rose by 15 per cent and in some Latin American countries it rose by 10 per cent, at a time when imports of industrial countries were growing by only 1.5 per cent.

Banks are less willing to give loans because of their losses. This “debt deflation” in the world’s major economies has prolonged the recession.

Third World growth depends on the economic health of the industrialised world.

Keynesian policies of “raising government spending to stimulate private consumption and investment demand may be desirable and make fuller use of productive capacities.”

“A private sector weighed down by debt and high long-term interest rates will not generate stability or growth unaided. Governments must resume their responsibilities, by acting to foster a return to financial stability and to stimulate the level of economic activity.”

Export-oriented growth is necessary for the Third World, but the industrialised countries must relax their import restrictions

The trend towards greater openness in developing countries has been accompanied by more, not less, protectionism in developed ones.

A successful conclusion to the stalledGATT (General Agreement on Tariffs and Trade) talks on world trade is needed to stimulate global trade.

The experience of developing countries in the 1980s suggests that liberalising trade can have a destabilising effect if the economy has insufficient foreign exchange to finance an adequate level of imports, because it may need to be accompanied by sharp devaluation.

Developing countries which have rapidly liberalised their economies could face political instability, especially those with fledgling democracies.

The developing countries being forced by the IMF and the World Bank to “reform” their economies under structural adjustment programmes should exercise caution.

Gradualism is watchword.

Recommend

A phased approach is recommended whereby economic stabilisation comes first and structural reforms are implemented in a gradual sequence.

More generous debt relief for the poorest countries is needed. In 1991, total long-term debt of developing countries was $ 1,000 billion.

Without urgent policy measures the world economy will continue to stagnate. For global growth “1980s thinking should not be allowed to stand in the way by producing another lost decade.”

Table 10.2 Exchange Rate of Rupee Vis-à-vis Selected Currencies of the World

(Rupees per unit of foreign currency)

* On February 28, 1986 the Cruzado, equal to 1000 Cruzerios, was introduced. On January 15, 1989 the, new Cruzado, equal to 1000 old Cruzados was introduced.

YearMonth

USDoll-ar

PoundSterling

Deut--sheMark

Yen FrenchFrance

CandianDollar

ItalianLira

SDR TurkishLira

Indon-esianrupiah

Brozi--lianCruz-ados

MexicnPesos

KoreanWon

Pakis--taniRupee

Thil-andBhat

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16

1980-811981-821982-831983-841984-851985-861986-871987-881988-891989-901990-911991-92

AprilMayDec.

7.9088.9689.66610.34011.88912.23512.77812.96614.48216.64917.943

19.83720.53725.875

18.50017.11016.13615.41714.86716.84719.07222.08725.59626.91833.193

34.73335.42747.254

4.1883.8613.9603.9403.9884.5556.2977.4008.0499.09211.435

11.62211.95416.551

0.0370.0390.0390.0440.0490.0560.0800.0940.1130.1170.128

0.1450.1490.202

1.8001.5701.4251.2991.3011.4911.9292.2032.3702.6803.387

3.4503.5284.841

6.7207.4577.8108.3439.0078.8899.3099.91411.96014.09315.442

17.21017.86422.598

0.0090.0080.0070.0070.0070.0070.0090.0100.0110.0120.015

0.0160.0160.022

10.17810.33510.56310.94111.93312.92315.44717.12119.26221.36824.849

26.94927.63436.398

0.0960.0740.0560.0420.0300.0220.0180.0140.0090.0080.007

0.0050.0050.005

0.0120.0140.0140.0110.0110.0110.0090.0080.0090.0090.010

0.0100.0110.013

0.1370.0850.0460.0150.0050.0020.874*0.2701.2926.3600.203

0.0790.0760.027

0.3430.3400.1520.0760.0610.0380.0180.0080.0060.0060.006

0.0070.0070.009

0.0110.0130.0130.0130.0150.0140.0150.0160.0210.0250.025

0.0280.0280.034

0.8050.8990.7920.7880.8300.7770.7640.7520.7910.8000.827

0.8770.8881.071

0.3880.4030.4220.4520.4850.4610.4940.5150.5750.6510.710

0.7920.8271.042