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11.675.1 i EXPOR T IMPOR T PROCEDURE AND DOCUMENT A TION EXPORT IMPORT PROCEDURE AND DOCUMENTATION COURSE OVERVIEW The world is forever changing, but the events that have taken place since1989 have been particularly dramatic. There have been border changes, in the name of country changes and technologi- cal innovations all of which have contributed to, altering the traditional depiction of countries in both shape and size. Our trading environment in terms of market structure and so we need new tools to deal with these new market dynamics. In this changing environment instead of just developing managers, executives, exporters and importers we need to develop them, to become good competitors. I am trying to provide a simple, verbiage-free and, above all, holistic compen- dium of principles and concepts pertaining to one of the most important areas of International Business. This course pack is designed in accordance with the requirement of this area, which is practically applicable in the organizations of the country. The main features of this course pack are: 1. In-depth analysis of the latest EXIM policy 2. Simplified explanation of the export-import Procedures. 3. Explanation of all the export-import Documentation. Export-import documentation and procedures is an important area of International Trade. Documentation and policy formalities are required to protect the interests of the buyer and the seller. This course pack has been divided into four parts, each part has its own importance in each of the organizations and countries. The explanations are given below: Part-I This part is related with the Introduction of Interna- tional Marketing and Exim Policy, which tells about the modes of entry into the foreign market and about the dynamics of Import and export market. Part II Under this part export finance plays very important role in export- import business. Adequate availability of export credit and attractive terms of payments followed by favourable exchange regulations facilitate the export import business. Shipment of export cargo is also a important area. Exporters are supposed to pack, mark and label the consignment in accordance with the requirements of the buyers. Apart from the selection of proper modes of transport, exporters are also required to comply with the legal aspects of the export busi- ness. Part III Government of India have setup several institutions for export promotion. At the same time, various incentives have been provided to the exporters to boost the export business. This part deals with the role of institutional infra- structure for export promotion and various export incentives and procedures for claiming export incentives. PART IV Import plays very important role in the economy of every country, rich and poor alike. Rich countries need to import capital goods, raw materials and technology to ensure an optimum utilization of their production capacity. Poor countries need to import technology and capital equipment to develop industries for accelerating pace of their development. For importing the goods various types of policies and documentations have been discussed in this part. The impact of liberal trade policy has also been highlighted in this part. I hope this study material will be helpful to all whether you are a student, entrepreneur, exporter, importer or marketers. Constructive suggestions for the qualitative improvement of the course pack, if any, will be received and honoured with deep sense of gratitude.
Transcript
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EXPORT IMPORT PROCEDURE AND DOCUMENTATION

COURSE OVERVIEW

The world is forever changing, but the events that have takenplace since1989 have been particularly dramatic. There have beenborder changes, in the name of country changes and technologi-cal innovations all of which have contributed to, altering thetraditional depiction of countries in both shape and size. Ourtrading environment in terms of market structure and so weneed new tools to deal with these new market dynamics.

In this changing environment instead of just developingmanagers, executives, exporters and importers we need todevelop them, to become good competitors. I am trying toprovide a simple, verbiage-free and, above all, holistic compen-dium of principles and concepts pertaining to one of the mostimportant areas of International Business.

This course pack is designed in accordance with the requirementof this area, which is practically applicable in the organizationsof the country. The main features of this course pack are:

1. In-depth analysis of the latest EXIM policy2. Simplified explanation of the export-import Procedures.3. Explanation of all the export-import Documentation.

Export-import documentation and procedures is an importantarea of International Trade. Documentation and policyformalities are required to protect the interests of the buyer andthe seller. This course pack has been divided into four parts,each part has its own importance in each of the organizationsand countries. The explanations are given below:

Part-I This part is related with the Introduction of Interna-tional Marketing and Exim Policy, which tells about the modesof entry into the foreign market and about the dynamics ofImport and export market.

Part II Under this part export finance plays very importantrole in export- import business. Adequate availability of exportcredit and attractive terms of payments followed by favourableexchange regulations facilitate the export import business.Shipment of export cargo is also a important area. Exportersare supposed to pack, mark and label the consignment inaccordance with the requirements of the buyers. Apart from theselection of proper modes of transport, exporters are alsorequired to comply with the legal aspects of the export busi-ness.

Part III Government of India have setup several institutionsfor export promotion. At the same time, various incentiveshave been provided to the exporters to boost the exportbusiness. This part deals with the role of institutional infra-structure for export promotion and various export incentivesand procedures for claiming export incentives.

PART IV Import plays very important role in the economy ofevery country, rich and poor alike. Rich countries need to importcapital goods, raw materials and technology to ensure anoptimum utilization of their production capacity. Poorcountries need to import technology and capital equipment todevelop industries for accelerating pace of their development.For importing the goods various types of policies anddocumentations have been discussed in this part. The impactof liberal trade policy has also been highlighted in this part.

I hope this study material will be helpful to all whether you area student, entrepreneur, exporter, importer or marketers.Constructive suggestions for the qualitative improvement ofthe course pack, if any, will be received and honoured with deepsense of gratitude.

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SYLLABUS

Description of UnitThis unit focuses on effective and efficient planning andmanagement of various EXIM processes and Documentationsthereof. It provides students with the knowledge and skills tomanage the export Import documents and consignments foroptimal result. At the end of module, the student will have ageneral appreciation of Export - Import Markets enabling themto integrate human and technological skills for achievingoptimal solutions suited to the changing global business order.

SummaryTo achieve this unit student must

• Examine concepts of Export Import Policy• Explore the procedures and how to make documents

relating to Import-Export• Practical applications of all theoretical aspects for the benefits

of the organisation.

Content1. Introduction of International MarketingConcepts of self Reliance: Introduction, Meaning, Impor-tance & achievements Towards Self reliance.

International Marketing & Policy of international Trade :Definition, Process, scope and Globlisation, Trade Barriers inInternational Marketing, Objectives, functions and UrgencyGround of WTO,GATT, and trading blocks Etc.

Regulation of international trade and foreign trade inIndia: Introduction, Major laws Governing Export Importtrade and FEMA act. ,Trends in Exports, trends in India’sImports, Main Features of World trade in 1998, The IndianTextile Industry etc.

Profit of the European Countries and Trade Agreement:Introduction, Objectives, trade policy of European Union., newgeneration Regulation etc. Programs on trade and economicoperation, International Conferences.etc.

Labelling, packaging of Export Consignment: Introduc-tion, what is Labelling and packaging , Marking and Newpackaging rules.

2. Exporting & Export ProceduresLegal aspect to Export Contract:- Meaning, Elements ofExport contract, Meaning and Elements of Export AgencyAgreement

Export import policy of India: Objectives, Implications andshort notes on EXIM Policy, Letter of Credit & Industrialdispute, Exemption of sales tax and Excise Clearance.

What is Exporting: Introduction, hoe it is benefits to thecountry, why should a business export, special exportingproblems, assessing export potential

Export Processing order : Introduction, Objectives, DutyDrawback scheme, Refund of Central Excise and Tax Exemp-tion, project export, Govt. support to project export, etc.

Export Procedure: Meaning, Types and Procedure forsettlement of Claim of Marine Insurance etc. Quality Controland preshipment Inspection etc.

3. Export Documents & Export PromotionOrganizationExport Credit Insurance & Overseas agents: objective,Introduction, Organisation Covering credit risk Basic principleof ECGC, Small exporters policy etc, Finding of an Agents,Methods of paying agents and relationship with the agents etc.

Export Documentation: Explain all documentations likeCommercial bills, shipping bills, airway Bill, Bill Of Lading Etc

Export Finance: Introduction, Pre-Shipment Finance, Post-Shipment Finance, Role of Export Import Bank of India,Recent Developments in Export Finance etc..

Export assistance and incentives: Introduction, Exportpromotion Measure in India, expansion of product Base forexports, Rendering export price Competitive etc..

Export Promotion Organisation : Explain in short allpromotional organisations.

4. State Trading &Import Trade ProcedureState Trading Corporation: Introduction, Functions,Performance, Weakness and future plans, state Trading in India.

State trading Organisation: Introduction, Discuss the MajorState Trading Organisations like-HHEC,PEC, MMTC, etc.

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Import Trade Procedure: Introduction of Import, Liberaliza-tion of Import, Types of Import, Special schemes, Importprocedure.

Import documentation: Introduction, Capital Goods, ImportDocuments, Custom Clearance procedure for import goods ,Retirement of Import Documents, Bill of Entry.

Import Finance: Introduction, Objectives, Regulatoryframework, Methods of import Finance

Suggested Leading and Links• www.export911.com• Sak Onkvisit & John J.shaw- International marketing

(prentice-hall of india 1992)• Gupta & Varshing International Marketing Sultan Chand &

Sons• D.C. Kapoor-Export Management -Vikas Publishing House• Khurana: Export management- Galgotia Publishing House• Export –Import Procedures and Documentation- Acharaya

& Jain-Himalaya Publishing House.• IGNOU Study materials.

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Unit No. Lesson No. Topic Page No.

Lesson Pla n vi

Course Requirements xi

1

Lesson 1 National Economic Self-reliance 1

Lesson 2 Introduction To International Marketing 8

Lesson 3 Globalisation of Indian Economy

Lesson 4 International Marketing Environment 20

Lesson 5 International Marketing Environment

Lesson 6 WTO, GATT and Trading Blocs 33

Lesson 7 Regulations for International Trade 41

Lesson 8 Legal Aspect of Export Contract 49

Lesson 9 57

Lesson 10

Lesson 11 Law Relating to Settlement of International trade disputes 71

Lesson 12 Export- Import Policy of India 78

Lesson 13 Terms Used in EXIM Policy 86

Lesson 14 Export Procedure 93

Lesson 15 Procedures For Claiming Export Incentives 105

Lesson 16 Marine Insurance 113

Lesson 17 Export Documentation 119

Lesson 18 Export Finance 137

Lesson 19 Processing of An Export Order 144

Lesson 20 Export Assistance In India 150

Lesson 21 Export Promotion Organisations 156

Lesson 22 State Trading in India 164

Lesson 23 State Trading Organisation in India 172

Lesson 24 Import Trade Procedures 178

Lesson 25 Import Trade Documentation 185

Lesson 26 Import Finance 190

Lesson 27 Locating and Selecting Overseas Agents 196

Lesson 28 Export Documentation - I 200

Lesson 29 Export Documentation - II 209

CONTENT

EXPORT IMPOR T PROCEDURE AND DOCUMENTATION

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Unit No. Lesson No. Topic Page No.

Lesson 30 Export Assistance In India 218

Lesson 31 Export Finance 224

Lesson 32 Export Promotion Organisations 232

Lessom 33 State Trading in India 240

Lesson 34 State Trading Organisation in India 248

Lesson 35 CASE- 18 - Mmtc Keeps Exports toS. Korea Intact Through Novel Tieups 255

Lesson 36 Import Trade Procedures 256

Lesson 37 Import Trade Documentation 263

Lesson 38 Import Finance 268

Lesson 39 274

CONTENT

EXPORT IMPOR T PROCEDURE AND DOCUMENTATION

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COURSE REQUIREMENTS

Class ParticipationIt forms the backbone of the system of Continuous evalua-tion. The students are expected to have gone through thepre-study material and come prepared for discussion. Wevisualize that the quantum and quality of learning throughdiscussion would be much superior to simple delivery of thecourse material in the classroom. The process is intended toidentify the following aspects in a student:

a. Commitment to learning.b. Regularity to attend classes.c. Desire to studiously go through the study material and

research books, Net, etc. to gain significant knowledge.d. Ability to present his point view systematically/logically.e. Ability to take criticism.f. Approach adopted to find solution to a given problem.g. Communication skills.

SyndicateIt refers to the group of students who are assigned same tasksto be performed. In our system the assignments are executedby the Syndicates. This helps in inculcating the culture of teamwork. It also helps those who are not as good in the subject assome of their other colleagues are. The Syndicate accomplishesthe assignment as under:

a. Initial discussion to identify the job description.Completion of the assigned job within the allocated timeframe.

b. Integration of the inputs to an unified Syndicate solution

AssignmentsEach student is expected to submit two assignments persubject during the semester. The system of assignment followsthe procedure given below:

a. Different assignment is given to different Syndicate.b. Each member of the Syndicate is expected to participate

equally to solve the given problem.c. All students of the syndicate are expected to submit the

assignment individually. While they are expected to presentcommon solution, they have the opportunity to expressthemselves as individuals and demonstrate their exceptionalability. They may recommend deletion/modification/addition to the syndicate solution.

d. Students may furnish additional data/informationdownloaded from the Internet/other literature and put updiverse views away from to syndicate solution.

e. Each student is required to make self and peer evaluation inaccordance with a format. This is a confidential documentbetween the students submitting the assignment and thefaculty member.

Group PresentationMost professional courses train their students in developingpresentation skills. All the members of the syndicate areexpected to share the presentation of the assignment executedby them. They shall be prepared to answer queries raised by thestudents as well as the faculty members. The students maycorrect the error committed by them while submitting theassignment at the presentation stage.

Group ProjectThis activity is also aimed at developing the culture of team-work. The team members shall get together to decide at theshare of the work. Each member of the team gathers thedesired data, which is integrated together to form the project.The project report is evaluated for the following:

a. Statement of the problem/issues (correctness/quality).b. Research on existing practices, if any, and their critical analysis,

highlighting their advantages and defects.c. Suggested Solutions, analysis, correctness, practicability, use

of technology and application of statistical tools.d. Presentation, clarity of concept, quality of presentation (Slide

/Power point presentation/OHP Film), ability to respondto queries, etc.

e. Recommendation.

The evaluation is made on the basis of the project report andpresentation.

End Semester ExaminationThese examinations are conducted in the usual manner. Eachstudent is expected to meet the attendance requirement of 75%in aggregate.

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UNIT ILESSON 1:

NATIONAL ECONOMIC SELF-RELIANCE

IntroductionMeaning of Self-reliance

Self-reliance and Indian Economy

• Importance.• AchievementsSelf-reliance is the only road to true freedom, and being one’sown person is its ultimate Reward.” — Patricia SampsonNever wear your best trousers when you go out to fight forfreedom and truth.”

—Henrik Ibsen (1828 - 1906)

Introduction

Dear Friends- Good MorningThis is our first session with “National Economic Self-reliance.Lets be active and make this lecture interactive and interestingwith the discussion of self reliance and self sufficient, first ofall we will discuss what is self-reliance? My tomatoes need heatand sun and the weather is giving me grey and cool. We get aday of two of wonderful growing weather and then, blam, it’sFall. Fortunately, I am not yet counting on my garden to meetall my food needs, if I was I’d be concerned right now. See, Iknow what the weather can do and anticipate poor seasons bykeeping a larder stocked with enough food so that if I have abad growing year, we will not go hungry. I also start seedsindoors six to eight weeks in advance (tomatoes) so that theycan handle the cool temperatures when they are transplanted.This knowledge of my local conditions comes from payingattention to the daily weather. This knowledge can enable me toplan my food production so that it suits the weather it encoun-tersKnowledge is the essence of being self-reliant. Self-reliancerequires confidence and knowledge builds that confidence. Youneed to become, not an info-junky, but someone who has anactive curiosity and constantly strives to enhance their knowl-edge base. You have to learn to value the little tidbits of datathat float your way and to do so while swimming in aninformation stream. You may find it difficult to understandwhat it is you need to know and be tempted to try and collecteverything. You may drown while doing so. You avoiddrowning by having a clear vision of where you are going. Ifyou live within a community you do not need to know how todo everything yourself, you merely need to know who can assistand have something to trade. Even where the required skills arebeyond those possessed by the individual, a more directinvolvement with the production process or service, can resultin greater self-reliance, because the individual has enhanced hisor her knowledge base and reduced his or her dependence uponsomeone else to achieve the desired goal. This increasesconfidence. Self-reliance paves the path towards self-sufficiency.

A major goal of self-sufficiency is to enable the individual todirectly produce. If you are a homesteader living far beyond thesidewalks then this may need to be your goal. Communitiesmay be self-sufficient unto themselves as they can produce allthey need. A community, even though self-sufficient, may stillwant to engage in social exchange with other communities, justas individuals, often seek the company of other like-mindedpeople.Most of the newly independent countries, including India,adopted a policy of protectionism for bringing about all rounddevelopment of their economies. However, this strategy notonly failed to boost up the stagnant traditional economies ofsuch countries but also kept them aloof from the latestdevelopments in the technological and-scientific fields in mostof the developed countries of the world.However, the attitude of such countries changed radically inrecent past. Many developing countries adopted programmersof import liberalisation and export promotion in the 1960’sand achieved remarkable success. Such countries includingJapan, Singapore, Hong Kong, South Korea and Taiwan. Thesuccess of these countries has prompted many economists andinternational agencies, such as the IMF and the World Bank, toadvocate import liberalisation and export promotion as apanacea for many economic ills, facing developing countries likeIndia. Following the footsteps of such countries, the Govern-ment of India adopted the policy of the trade liberalisation in1991. The trade policy of 1991 introduced many reforms toopen up the Indian economy to foreign trade and to integrate itwith the global economy in the new international economicorder that taking shape with the setting up the WTO (worldtrade Organisation) in 1995.

Meaning of Self-RelianceSelf-reliance is being independent, which is being able to dependon yourself alone and to do things by yourself withoutassistance from others. Self-reliance is what you do using yourmind, body and soul.I believe that self-reliance is just being your own person and notalways following behind one person and not to be influencedby negative things from negative people. This is why youshould be your own person.We accomplished self-reliance as a group because we were alonea lot doing things as a group without the counselors. We hiked,cooked, and found camp alone at times. That is an example ofthe Outlawz using self reliance.The term self-reliance is often confused with self-sufficiencythough they are not one and the same. Self-sufficiency can beinterpreted in both a general as well as a partial sense. In generalsense, self-sufficiency implies that a country is in a position tofulfil all its requirements of goods and services from domesticsources and is not at all dependent on import. In such a

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situation the possibility as exports can also be ruled out as, ifthe country is not dependent on imports, foreign, exchangeearned through exports has no relevance for such country. Infact, self-sufficiency in general sense is an unrealistic situation.However, self-sufficiency in partial sense implies that a countryis in a position to fulfil all its requirements of goods andservices either from domestic sources or has adequate foreignexchange to import goods and services it requires from abroad.Self-reliance implies self-sufficiency in partial sense, i.e., a countryis capable of meeting all its requirements either from domesticsources or has an ability to import them from abroad. There-fore, it can be said that to be self-reliant a country need not beself-sufficient.

Importance of Self-relianceIndia won independence after about two centuries of colonialexploitation. At this juncture, the world politics as whole wasundergoing a revolutionary change but the developed countries,were not prepared to abandon their imperialistic pursuit.Hence, India, like many other newly liberated countries, couldnot risk its freedom again by opening up its economy to thewestern world. However, Indian economy at that time wasafflicted by severe problems like shortage of foodgrains,underdevelopment of agricultural as well as industrial sector,scarcity of capital and technological obsolescence. We need toanalyse these aspects of Indian economy in order to understandwhy economically backward country like India should becomeself reliant in these key areas of development.a. Shortage of Foodgrains:- At the time of independence,

India was purely an agrarian economy and this character ofIndian economy has not changed over the past five decades.At the time of independence, the production of foodgrainsin India was much less than its demand. Shortage offoodgrains in the country often led to mass unrest andtherefore India entered into the PL-480 agreement with theUSA for the import of foodgrains. Though this benefitedconsumers in the short run but it had many adverserepercussions such as threat of political blackmailing frommajor foodgrains suppliers, bad impact on domesticproducers, etc. However, with the withdrawal of PL-480programme by the US and subsequent launch of the GreenRevolution strategy by India has removed obstacles to thedevelopment of agricultural sector in India and today we areself sufficient in the production of foodgrains.

b. Underdevelopment of Industrial Structure:- on the eveof independence, the industrial development in the Indiawas confined to traditional indigenous industries producinghandful of consumer goods such as cotton textile, sugar,paper and leather goods. Industries manufacturingintermediate good like iron and steel, cement, etc., had acapacity much below the requirements. Capital goodsindustries were almost non-existent. In short, industrialdevelopment in India after independence manifested all thesigns of underdevelopment. The government, thus,accorded a top priority to the programmes of industrialdevelopment as soon as planning process began in India.As a part of planned efforts, a number of industries weresetup in public sector. The second Five Year Plan was

referred to as industrial plan and number of basic and heavyindustries, including iron and steel, non-ferrous metal, coal,cement, heavy chemicals and others were set up.

c. Scarcity of Capital: - Accounting to the Central StatisticalOrganisation (CSO) the Gross Domestic Saving (GDS) ratewas just 8.95 in 1950-51. This rate was much belowstandard. The GDS rate did not show much increaseduring the planning period in the initial phase. As a result,India had to depend on external foreign aid for meeting itsimport requirements. The country, however, failed to raiseadequate funds from foreign sources on account of certainpolitical constraints. Besides the low rate of saving, theother factor which compelled the government to seekforeign aid, was the persistent deficit in balance ofpayments. The problem with foreign aid is that whilegiving loans, donor countries taking advantage of the weakbargaining position of the capital recipient country imposehighly objectionable conditions which can affect theautonomy of the decision making processes in the recipientcountry.

d. Obsolete Technology:- India is an overpopulated countrywith ready availability of efficient and cheap labor at hand.Unemployment is the major problem, which country isfacing even today, and as a result capital-intensive methodsof production are not suitable for our economy Therefore,a very little attention was paid to the development ofmodern technology at home. At the same time, whatevertechnologies are being utilized presently are obsolete andoutdated technologies, are being utilized presently areobsolete and outdated technologies, absorbed form foreigneconomies, which hardly contribute to the economicdevelopment of the country. As a result, in order to keeppace with world economy, India had to import technologyfrom outside. Some of which are not at all suitable forIndian conditions. Taking this into consideration Indianeeds to develop its own technology, which can fulfill theneeds of providing job opportunities as well as help theeconomy in keeping with the modern world.

India’s Achievements Towards Self-relianceSo far India is not a completely self-reliant economy, though itsprogress towards self-reliance in foodgrains, capital equipment,science and technology and capital formation is quite significant.The balance of payments situation right now is not precarious,but the country’s dependence on MNCS for setting up powerprojects and large oil imports raise serious doubts about India’scapability to become completely self-reliant in near future.a. Self Sufficiency in Foodgrains :- Self sufficiency in

foodgrains has always been considered and essentialcondition for India’s self reliance. Consequent to theWithdrawal of PL-480 programme by the US andsubsequent launch of the Green Revolution strategy byIndia, agricultural sector received a boost and due toassiduous efforts of more than a decade India achieved thedream of self-sufficiency in the production of foodgrainsby 1977-78. During the 1980s the imports of food grins inIndia reduced considerably. The reason not being a suddenrise in production of foodgrains, but because the country

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Nhad been able to build up large buffer stocks of foodgrainsfrom which supplies could be released in the years of badharvests to match the demand. In 1986-87 and 1987-88 thecountry experienced serious droughts. And yet the countrysuccessfully handled the food problem without recourse tolarge imports. In January 2002, buffer stocks of foodgrainswere more than 50 million tones. This level of bufferstocks was much larger than that was required to sustainpublic distribution system and stabilize prices offoodgrains in the open markets.

b. Self-Reliance in Capital Equipment:- The second FiveYear plan laid the foundation of industrial development inIndia. Since initially the private sector did not come forthdue to high investment and long gestation period, majorityof basic and heavy industries such as heavy engineering,machine tools, iron and steel and some other capital goodsindustries were set up in public sector. As a result of boostgiven by the public sector and active participation of privatesector later on, India marched on the path of industrialdevelopment. Today, we are self-sufficient in theproduction machinery, plant and other capital equipments.Today, engineering goods constitute one of the biggestexport items. This shows that India’s capital base isreasonably strong. India is capable of setting up bigindustrial units with indigenous machines and technicalknow-how. This undoubtedly is a big achievement ofeconomic planning.

c. Self-Reliance in Science and Technology:- Developmentof science and technology plays a crucial role in theeconomic development of a country. However, given thepolitical environment at the international level, it is notalways possible to acquire the necessary technology oncommercial terms. Hence, there is a strong case for self-reliance in science and technology. In fact, the countryrealized this quite early and as a result, the country has makea considerable headway in various areas of science andtechnology. Over the years agricultural research has played acrucial role in raising the production of foodgrains andtoday we are self-sufficient in the production of foodgrains.India’s competence in industrial technology has grown somuch that it has now emerged as a leading Third Worldexporter of industrial know-how, technical consultancy andturnkey projects. Even n the atomic energy programme, ahigh degree of self-reliance has been attained in terms ofdesign, fabrication and commissioning of nuclear powerreactors and all associated elements. In the spaceprogramme, capabilities relating to design and fabricationof satellites and of satellite launch vehicles have beendeveloped which should lead in a few years to thepossibility of launching and utilizing operational satelliteon an indigenous basis.

d. Self-Reliance in Capital Formation:- When Indialaunched the programme of planned economicdevelopment in 1951, the saving rate (Gross DomesticSaving as the percentage of Gross Domestic Product) was aslow as 8.9% Since then it has risen to over 20% and was24.4% in 2000-01. At this level of saving not much external

assistance is required for realizing a modest rate ofeconomic growth of around 5.5% per annum. Over theyears dependence on external assistance has declined. Forthe Seventh Plan 8.8% resources were mobilized throughexternal assistance as against 26.3% for the Third Plan and26.4% for the three Annual Plans of the latter half of the1960s. This fact clearly shows that the country has make asignificant advance towards self-reliance in the realm ofcapital formation. The planning Commission has hopedthat the country’s dependence on external assistance woulddecrease further during the Eight Plan period. However,these expectations were belied as 9.9% resources had to bemobilized through external assistance. This becausenecessary because of the presence of large black income inthe economy, which is channeled to conspicuousconsumption and thus play no role in the development ofthe economy. With appropriate fiscal measures if this blackincome is canalised for the development of the country, theeconomy would reach a still higher level of saving and itsdependence on foreign aid would be reduced significantly.

e. Balance of Payments Deficit and Self-reliance:-Although India’s balance of payment position has alwaysremained unfavourable, there is no doubt that theconditions since 1993-94 have been distinctly favourable incomparison to the conditions prevailing in the period 1980-81 to 1992-93. In 1993-94 the current account deficit wasonly 0.4% of GDP. The foreign exchange reserves wereequal to eight and a half month’s imports. In this yearwhile imports increased at a rate of 10.0%, exports rose atan impressive rate of 20.2%. In 1996-97, the currentaccount deficit was 1.2% of GDP. Over the whole of theEighth Plan period (1992-93 to 1996-97), the currentaccount deficit declined to an annual average of 1.2% ofGDP from 1.8% of GDP during the Seventh Plan. Inaddition of these significant developments, a noteworthyfeature in India’s balance of payments in recent years hasbeen improvements in the invisible account due to mainly aspurt in tourism earnings and shift of private transfersfrom illegal channels to banking channels. In 2000-01India’s current account deficit declined to 0.5% of GDP asagainst 1.1% in 1999-2000.

f. Energy Crisis and Self Reliance:- At present India isfacing a serious energy crisis and until it is solved thecountry cannot hope to become self-reliant. There is anacute shortage of power and energy resources in the country.At the same time, transmissions and distribution losses arehigh. The agricultural consumers are supplied power at verysubsidized prices, which has led to inefficient use ofelectricity. The State Electricity Boards are grossly overstaffedand are plagued with rampant corruption. Under thesecircumstance India has to depend on foreign MNCs forsetting up power projects. These MNCss insist onexceptional rights and privileges for making investments inIndia.

Domestic production of oil has stagnated for the last few yearsand our index of self-reliance in oil has come down from 70%in 1984-85 to 32.5% in 2000-01. As a result, imports ofpetroleum products in 2000-01 were as large as Rs. 71,497 crore.

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As far as the power sector is concerned the problem is far moreserious. In this sector, until the State Electricity Boards aremade autonomous, the pricing policy is rationalized, inefficien-cies in the use of created capabilities are removed and rampantcorruption is checked, energy sector units will not be financiallyviable and the power sector will remain starved of ingestibleresources. Under these circumstances, the country has no choicebut to depend on MNCs for expanding the capacity in theenergy and power sector.To sum up, over the years the goal of overall self-reliance hasproved to be elusive because of the balance of paymentsproblems created largely by oil imports and the serious crisis inthe power sector which has lately gripped the to attain thisobjective. Indications are that debt service on borrowings willincrease in the years ahead. Recently export growth has acceler-ated, but imports have also increased. These trends are expectedto persist for some time at least. Hence, India’s advancetowards the goal of self-reliance in the near future is somewhatdoubtful.

Article - 1Making our nation strong and self-reliant(Rashtra Samartha Aur Sashakta Kaise Bane?)Individuals make the families; families constitute the societies;and societies together form the nations, an ensemble of whichis seen as the world…. This relationship is not hierarchical innature, rather, it naturally persists and expands like the mutuallysupportive motion of the waves in an ocean. Disturbance in thenatural order of any component, though implicitly, affects theothers in corresponding proportions…. Social anarchy acceler-ates the law and order problems at national level… Moraldegradation and instability of the family institution is reflectedin similar negative trends at the social levels too….Harmony of all musical nodes is necessary for the melody of atune. Analogously, when we talk of all round peace, progressand prosperity of the nation, we will have to ensure harmoni-ous endowment of these prospects in its constituent social,familial and personal domains too.The present scenario at global level depicts an arbitrary mélangeof bright and gorgeous as well as dark and dull colors ofpositive and negative progress. The national picture – especiallyin the Indian context, is equally blurred. After 50 years ofpolitical independence, it is not clear where the nation is reallyheaded? There certainly has been significant progress in somefields of science and technology. Self-reliance in agriculture,decrease in mortality rate, increase in literacy, are also counted aspositive signs of progress. But, the explosive growth ofpopulation, rapidly declining cultural values, unequal economicprogress, social disparity, rising corruption in almost every walkof national life, decreasing morality and reduced sense ofresponsibility in the personal, familial and social spheres ofcommon man’s life, ….etc, show the depressing sides.Excellent constitutional provisions have not been implementedto the extent as might have been planned by the architects ofsovereign Indian democracy. Social status of women has notbeen ameliorated much as compared to that in the pre indepen-dence period. Similar is the case of the economic exploitation of

the weaker and the poor ones. Wealth of the nation, itseconomic growth and industrialization, seem to have made therich men richer… ; the poor ones continue to increase innumber. The condition is more pathetic on other facets ofsocial development.Castism, religious misconceptions, blind faith, superstitions,the curse of dowry and similar absurdities of the customs andconvictions born out of the pernicious era of ignorance andslavery – continue to dominate the Indian mind. The politicaland economic systems too are infected by these social evils inone form or the other…. The large number of literacy cam-paigns, healthcare projects, social welfare schemes, etc, appear tohave little effect in diverting the wrong trends.The egotistic and selfish attitudes of the learned and elite ones– including many of the journalists, writers, artists, scientists,philosophers, bureaucrats, industrialists, planners, policymakers and managers, etc, and, the ambitions and aspirationsof the majority for luxuries and aplomb…, have added to thecomplications of the challenging problems associated withnational development.It is surprising to note that even the awareness generated duringthe great movement of India’s independence could not bechannelized for similar revolution on the social front. Despitesignificant progress in agriculture, economy, science andtechnology, the social and religious systems have remained theareas of lesser attention.It is indeed unfortunate that after over 2500 years of slavery,when we finally got the opportunity to breath in free India, we,rather than resurrecting our original glory, chose to remainculturally enslaved and confused. We became the followers ofsingle tracked materialistic development without botheringabout what could be essential for elevating the status of adiversified and illiterate society like ours. We hardly cared aboutthe inherent nature, culture, convictions, and attitudes of ourmasses, without whose compatible response, efficient coopera-tion and justified sharing in the national progress, our dreamsof prosperous development were bound to be shattered in thelong run….Our democracy and our constitution are indeed the best in theworld, and we have the right to crown ourselves with the prideof the dignified values these stand for… But, have we everthought, whether or how much, do we deserve them?How can a democracy be healthy and strong unless the voters,who design its political edifice, are made aware of their rightsand responsibilities? How would we prevent biased votinginfluenced by caste, bribery, personal favors or threats and fearsin a society, where, the majority of voters are uneducated,ignorant and deprived of even the basic necessities of humanlife? How could we expect efficient, honest and responsiblerepresentatives to be elected from a society, where, “might isright”; where, social injustice prevails in almost every family –depriving its female members of the fundament human rights;where, the impact of ‘religion’ has been confined to emotionalexcitation, blind faith and backward traditions?Some of us might think that this is not our duty to answer theabove or to search, our level best, for the solutions to accelerate

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Nrighteous progress of our beloved nation. But then, we mightbe either selfish, coward, irresponsible or cynical in some respect,or, might be unaware of our duties and ignorant about thefacts of – where our true welfare and ultimate interest wouldlie? Many of us think that the best we could do is to improveourselves, increase our own integrity and efficiency in order tofulfill our immediate duties…; because, after all we are notleaders, politicians or activists, who could initiate revolutionarymovements. We don’t even believe in the purpose and successof any such movement these days….We might be correct, but that is neither the end of our duties,nor, do we get to try best use of the limitless potentials of ourlives because of the above attitude. We may not generatemovements, but we can certainly expand the peripheries of ourimmediate duties to inspire all others in our contact to educegreater faith in moral values, righteous thinking, self-confidenceand sense of responsibilities in them too. Some of us do wantto contribute in this direction; we do care for altruist service ofthe nation, but do not know how to proceed?This volume brings motivating guidance, detailed informationand feasible and creative programmes for each one of us to helpameliorate our personal, familial and social lives by means ofthoughtful orientation and collective contribution of our ownpotentials and talents. The volume also elucidates what isnecessary in terms of policy decisions and planned reformativeactivities at national level towards righteous implementation ofour constitution and prestigious progress of our democracy.Guidelines for viable economic techniques for progress ofagricultural sector and small-scale industries are also presentedhere along with details on creative programmes of effectivecontrol of population growth, considering the psychologicalmakeup of Indian public.Acharya Sharma was a dedicated freedom fighter, who hadsincerely participated in the movement of India’s independence.He was trained under the noble guidance of Pt. Madan MohanMalviya, Mahatma Gandhi, Dr. S. Radhakrishnan, (Maharshi)Arvindo Ghosh, and other revered national heroes of India.Right since he was a young volunteer in the non-violentfreedom-struggle, this great patriot, saint, spiritual master,social reformer, and sagacious scholar had envisaged that – “anabsolute revolution would be necessary on the cultural fronttoo, if India were to be independent and progressive in thetruest sense of the words…”. The state of the nation today –after 50 years of political independence, evinces that his visionwas indeed real.What Acharya Sharma had warned 50 years ago, has nowbecome a reality. His trenchant views concerning the presentstate of the nation and its cultural and social system shouldopen the eyes of the leaders, policy makers, planners and theintellectuals of today…. His guidance for the future develop-ment is realistic and takes into account the multifariousproblems and impedance existing in the present system.After India’s independence, he had, unlike many other freedom-fighters, chosen to dedicate his life for social and culturalreformation from the religious rather than political platform.He knew the psychology of Indian mind and the depth of itsreligious spirit….. His definition, philosophy, and realisations

of religion (refer volume nos. 36, 53 of this series) are scientificand universal as they emanate from absolute understanding ofhuman mind and realisation of the inner self. His sagaciousdeliberations would convince us that it is religion, whichseparates animals from humans; which can eliminate the smogof animal instincts and unethical passions, and illuminate theintrinsic world by the nitid glow of pure intellect and divinepiety….Religion is an integral and intimate component of human life.Then, how could it be separated from the social and nationaldomains? In fact, cultural and moral rise of a nation becomespossible only when religion – ideal philosophy of life, is givendue place in the lives of its people. Political anarchy, corruptionand autocracy can be controlled by the righteous disciplines(ethics) of religion. Acharya Sharma therefore emphasizes theneed of compatible conjugation of religion, culture and politics.He critically warns those who propagate communalism,superstitions and prejudiced principles and traditions in thename of religion.His deliberations on the role of religion in national develop-ment should be analyzed by all those who discard religion fromthe “prudent modes” of life and who are dead against thecollaboration between the religious and political systems. Histrenchant views should also be read by all those, who try topoliticize the concept of religion, or who exploit people’s faithfor their vested political interests. Misconceptions and hypocrisyhave no place in Acharya Sharma’s perspicuous explanations.His thorough discussions encompass comprehensive reviewsof other authentic experts of the concerned topics. Withreference to the reformation of political system, he describes thequalities essential for a good leader. The leader should be someone who knows the enormous problems of the socioeconomicsystem of his nation; who has the will and experience ofsolving people’s problems and also has vision to guide viablesolutions. A leader has to be an efficient manager – of thenational system, who is wise, innovative, creative and deter-mined. Integrity of character, altruist attitude and stability ofmind are fundamental requirements in public service. It is in thecontext of establishing such virtuous tendencies, that thelinkage of religion with politics is advocated here.The author also reminds each voter of the latter’s duties andrights, and, at the same time, inspires courage and motivationto enable the voters come forward and strengthen the demo-cratic system. He has specially called the awaken talents to feelthe pains of the nation and share the collective responsibility ofnational development.Acharya Sharma’s mission of cultural and religious revolutionand social reformation and welfare is based on the fundamentalelements and principles of the original Indian culture – theculture, which had bestowed divine glory on this nation. In hiswords – “the enlightened development of a nation progresseson the strong foundation of the prudence, piety of sentimentsand strength of character of its citizens….” It is this class ofideal citizens, which has come forward to contribute in theconstructive programmes and reformative activities of hismission.

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Acharya Sharma’s mission and its dedicated volunteers standbefore us as guiding light and live evidences of how awakentalents would design the bright future of the nation. It is byour collective endeavors and confidence that, as assured byAcharya Sharma, this country will regain its lost prestige and setshining example before the world in the forthcoming century.

Article - 2Self reliance goal for now milleniumIn a couple of days from now we shall be in the Y2K – yeartwo thousand. And within hours of entering the nowmillenium we would know whether or not the “bug” whichworried the work, was real or imaginary will the computer fail oraccept the change of the century. Several MPs repeatedly askedthe government during the just-conclude winter session ofparliament as to what steps had been taken to meet thesituation if the computers stop. The issue is of as much worryto the armed forces as it is for others. Most of the latest,sophisticated military machines and weapon systems arecomputerized and for a common man. What would happen ifthe enemy attacks India on the now year’s day?No cause of alarm at all. India has already made giant strides inthe software technology, thanks to the Defense scientists,especialy those in the Bharat Electronical Ltd. (BEL) at Banga-lore. They are competent enough to meet the Y2K bug. Thepublic sector enterprise was the brainchild of Krishna Menonwho as the Defense minister in the 1960’s has predicted theneed for such an organization to design, develop and produceelectronics systems for the future armament industry. This andallied enterprises have developed consistently over a period oftime under the Defense Research and Development Organiza-tion (DRDO), and grown into an envy of the work. Theorganization had designed and developed for indigenousproduction most modern sophisticated machines and lethalweapon systems, like the missiles, raiders and pilotless aircraft,to name a very few.The indigenisation of military machines is the need for the nowmillennium, keeping in view the present strategic compulsions.The efforts to do that have no so far not progressedsatisfgactorily for various reasons. Actually, the problem for thesituation is not the DRDO. It is at the production level. Howfast to produce equipment designed and developed by ourscientists and considered the best in the worked even by thosewho are leaders of defense industry in millitary advancedcountries. Such items are many which have been tried andproduced by the DRDO, but have not gone into full produc-tion stream for either lack of funds or availability of foreignexchange to import some crucial components which are notproduced indigenously.The most glaring example of such a situation is the productionof gas turbine engines for warships, a field in which India’s shipbuilding industry has gone quite far. In this context, a questionis relevantly raised about the civil industry cooperation inimport substitution efforts in defense production. This arisedfollowing a feeling – and rightly too that the components whichthe defense-production units import at high costs should beindigenously produced by the private sector industry inadjoining areas of the Defense production units. Thus, the

production plans halted for want of funds or foreign exchangeproblems can continue and the state-of the-art machinerysupplied to the forces fully indigenously produced.This is something, which cannot be achieved and is not done byany production unit anywhere in the work. No special facility forthe production of a small component of machinery can beraised, particularly when its demand is limited to a barely fewpieces in an ear. Suppose, for example, a few specially designednuts and bolts are required for, say, a gas turbine engine. It willbe totally unwise to produce them indigenously, whether inprivate or public sector, because it will evidently be not eco-nomically feasible to do that. The components have to beprocured from wherever it is produced in bulk. Even if abroad.In case of Indian, incidentally, it is invariably abroad, with theresult that production activist is halted for long spells, at timesforever.This has happened with several projects. The low level radarswhich incorporate the latest and most sophisticated technologyin electronics and communications, where not being produced,because the costs have escalated for the indigenous productionof the components, as well as the imports which constitutebetween 25 and 30 per cent of the components used in itsproduction. But the user have no funds to buy them and hencethey cannot have the radar’s, despite the fact that the country hasa potential to produce them.The IAF is facing a similar situation on the jet trainer front. TheForce has been asking for an advanced jet trainer since themideighties. Their requirement should have been met at toppriority basis, because in the absence of an advanced jet, thefighter pilots training is suffering.They must be trained on a fast machine of an advanced jetbefore going in for a “Conversation” for supersonic fitter planeslike the Jaguars and Mirages. At the moment, we are denied thatand the denial is considered as one of the main cause for thehigh rate of accidents in the IAF. It has been variously esti-mated at 3.8 and 2.4 per 1,000 flying hours. This comparespoorly with 1.2 per 1,000 hours in Pakistan, 0.65 in the USAand 0.8 in the UK.There are several reasons for high rate of accidents in the IAF,like the fact that an IAF fighter pilot many , many times morehas the flying, say, in the UK and the USA . however, mostaccidents are attributed to pilot error and of course, lack ortraining on there right type of aircraft. Remember. The chief ofthe Air Staff way back in 1991, Air Chief Marshal S.K.Maharahad asserted that if we did not commit ourselves toindigenisation, “the IAF would cease to exist after the turn ofthe century”. Few days earlier during a visit to Bangalore, he toldme “if we do not indigenously produce our own jet trainer, wewill have to import one”.The light combat aircraft (LCA) project of the HindustanAeronautics Ltd., has been hanging fire for over a decade now ,and there are no signs yet of its completion this is not due toHAL’s failure to complete the project in time. It is only becauseof the Union Government’s failure to give the project htpriority it needed. Instead efforts are on importantly , of theirinterest! The result? Till today the IAF’s young fighter pilots do

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Nnot have either an imported or an indigenously producedtrainer.The delay in the implementation of the AJT project is just oneexample to show how indigenous production efforts of thepublic sector defense industry are halted and last minute rushtakes place to purchase from abroad off-the-shelf machinery athigh costs. This tendency is required t be changed and effortsmade to put all the emphasis on self-reliance in defenseproduction.This, as pointed out earlier, requires cooperation of the civilindustry, which can e achieved only if there is the political will tomake self-reliance a goal for the next millenium.

Question BankQ1. What do you mean by self-reliance? What role does it play

in the development of the developing economy likeIndia?

Q2. What are the achievements of Indian economy in thefield of self-reliance?

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Introduction

International Marketing

• Definition.• Process• Features.• Importance.• Special Problems.

Multinational Corporations (MNCs)

Globalise or Perish

• Meaning.• Globalisation of the Indian Economy.

Distinguish Between

• Export Marketing and Domestic Marketing.

Case Study

Question BankDear students, Today’s topic is “Introduction Of InternationalMarketing” .Before Discussing the International Marketing Wewill discuss “What is Marketing”? Marketing is the process bywhich the demand structure for products and services isanticipated or enlarged and satisfied. This process involvesanalyzing whether a marketing opportunity exist for the firm,developing suitable products and services to meet this opportu-nity, securing distribution of the product, designingpromotional strategy to persuade potential consumer of thedesirability of the offering and transferring control over the useof the product from vendor to user so that the user may enjoythe benefits.

Introduction of International MarketingInternational marketing is a broader concept and includesexport marketing. Export marketing is concerned with theproduction of goods in one country and marketing them indifferent countries of the world while international marketing isa broader concept and includes globalisation, MNCs and TNCsjoint ventures and foreign collaborations.

Definitions of International Marketing“International marketing is a process of planning and executingthe conception, pricing, promotion and distribution of ideas,goods and services to create exchanges between nations thatsatisfy individual and organizational objectives”.

American Marketing Association“The performance of business activities designed to plan, price,promote and direct the company’s flow of goods and servicesto consumers or users in more than one nation for a profit” (4P’s)

Process of International MarketingA study of international marketing should begin with anunderstanding of what mar-keting is and how it operates in aninternational context. Because of the large num-ber of market-ing textbooks, a variety of definitions of marketing are currentlyin use. Yet most of these definitions are .convergent in thesense that they all describe the basics of marketing in much thesame way. Any definition is acceptable as long as it captures theessential idea and as long as the strengths and limitationsassociated with the defIniti9n are acknowledged.A definition adopted by the AMA (American MarketingAssociation) is used as a basis for the definition of internationalmarketing given here: international marketing is the multina-tional process of planning and executing the conception,pric-ing, promotion, and distribution of ideas, goods, andservices to create exchanges that satisfy individual and organiza-tional objectives. Only the word multinational has been addedto the definition adopted by the AMA. That word implies thatmarketing activities are undertaken in several countries and thatsuch activities should somehow be coordinated across nations.This definition is not completely free of limitations. By placingindividual ob-jectives at one end of the definition and organiza-tional objectives at the other, the definition stresses arelationship between a consumer and an organization. In effect,it excludes industrial marketing, which involves a transactionbetween’ two organiza-tions. In the world of internationalmarketing, governments, quasi-government agen-cies, andprofit-seeking and nonprofit entities are frequently buyers.Companies such as Boeing and Bechtel, for example, havenothing to do with consumer products. The definition thusfails to do justice to the significance of industrial purchases.Nonetheless, the definition does offer several advantages. Itclosely resembles the AMA’s widely accepted and easily under-stood definition. In several ways, it care-fully describes theessential characteristics of international marketing. First, itmakes it clear that what is to be’ exchanged is not restricted totangible products (goods) but can include concepts and servicesas well.- When the United Nations promotes such concepts asbirth control and breast feeding, this should be viewed asinternational marketing.Religion is also a big business, tl1?ugh most people prefer notto view it that way. Religion has been marketed internationallyfor centuries. Billy Graham, in par-ticular, is a well-knownexporter of religion. His television programs have been shownin many countries. In 1995 he staged the most ambitiouscrusade of his fifty-year ministry by using thirty satellites tobeam his evangelical message, translated into 102 languages,across twenty-nine time zones to ten million people in 195countries.

LESSON 2 & 3:INTRODUCTION TO INTERNATIONAL MARKETING AND

GLOBALISATION OF INDIAN ECONOMY

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NThird, the definition recognizes that it is improper for a firm tocreate a prod-uct first and then look for a place to sell it. Ratherthan seeking consumers for a firm’s existing product, it is oftenmore logical to determine consumer needs before creat-ing aproduct. For overseas markets, the process may call for amodified product. In some cases, following this approach mayresult in foreign needs being satisfied in a new way (i.e., a brandnew product is created specifically for overseas markets). Mazda,for example, understands that it is no longer adequate to simplyadapt a Japan-ese car to the U.S. market, and its product strategyinvolves designing a car to meet U.S. buyers’ desires. Mazda’swidely acclaimed Miata was conceived and styled in SouthernCalifornia and was engineered and built in Japan.Fourth, the definition acknowledges that “place” (distribution)is just part of the marketing mix, and that the distance betweenmarkets makes it neither more nor less important than theother parts of the mix. Thus, it is improper’ for any firms toregard their international function as simply to export (i.e.,move) available products from one country to another.Finally, the “multinational process” implies that the interna-tional marketing process is not a mere repetition of usingidentical strategies abroad. The four Ps of marketing (product,place, promotion, and price) must be integrated and coordi-nated across countries in order to bring about the most effectivemarketing mix. In some cases the mix may have to be adjustedfor a particular market for better impact. Pep-siCo Inc.’s FritoLay Division, for chip for the British market, and the chipdiffers in both taste and texture from the American ver-sion. Inother cases, however, a multinational marketer may find it moredesirable to use a certain degree of standardization if theexisting market differences are some what artificial and can beovercome. As in the case of wshers, although Italian consum-ers once preferred front-loading machines while Frenchconsumers insisted on top-loading models, Whirlpool Corp.has been able to use the more standardized models to breakdown national traditions,

Features of International MarketingThe features of international marketing are as under:-a. Large Scale Operations: - Price is an important factor that

determines the success of an exporter in the highlycompetitive international market large-scale operations, fullutilization of installed capacity and transactions in bulkreduce overall cost of production and thereby price of theproduct.

b. Dominance of MNCs / TNCs from DevelopedCountries: - The international trade is dominated byMNCs and TNCs originating from developed countriesespecially form USA, Japan and European countries. Thesecompanies have huge financial and physical resources andoperate throughout the world

c. Trade Barriers:- Trade barriers are the artificial restrictionson the free movement of good from one country to other.These barriers are of two types, viz., tariff and non-tariff.Tariff barriers are in the form of taxes and customs duties.Non-tariff barriers are in the form of quotas and licences.

d. Trading Blocs: - Trading blocs are the associations ofcountries situated in a particular region whereby they come

on to a common understanding regarding rules andregulations to be followed while exporting and importinggoods among them. For example, European Union (EU).

e. International Marketing Research:- The needs andrequirements of individuals differ from region to region.Therefore, an effective marketing research technique shouldbe applied in order to understand the needs andrequirements of consumers in different parts of the world.

f. Importance of Advanced Technology:- Technology playsan important role in building competitive strength. MNCsoriginating from countries like USE, Japan and Germanydominate the world trade due to continuous research,innovations and inventions.

g. Foreign Exchange Regulations:- Different countries havedifferent currencies and conversion rates, which are subjectsto fluctuation. Therefore, each country has a separate set ofrules for collection of export proceeds and payment forimports. For example, In India, all foreign ExchangeRegulation Act, 1973 (FERA).

h. Three-faced Competition:- International market is highlycompetitive. An exporter faces competition from threeangles: -• Exporters from his own country.• Exporters from other countries.• Local suppliers in importing country.

i. International Organisations: - International trade issubject to the rules and regulations framed by theinternational organisantions such as the World TradeOrganization (WTO) and the United Nations Conferencean Trade and Development (UNCTAD). Theseorganizations have been formed in order to promote worldtrade by removing unnecessary trade barriers and helpunderdeveloped countries to develop their exportpotentials.

Importance of International MarketingNo country in the world is self-sufficient in all its domesticrequirements. The slogan “Export or Perish” by Shri JawaharlalNehru is applicable to all the countries of the world, developedas well as developing. There are various factors which give rise tointerdependence among countries. Therefore, internationaltrade plays an important role in the economic development of acountry.a. Division of Labour and Specialisation: -Certain countries

enjoy comparative cost advantage in the production ofspecific commodities due to favourable climatic conditions,technical know-how easy access produce commodities inexcess of their requirements and exchange surplusproduction with other countries for the commodities theyare deficient in.

b. Increases National Income and Per-capita Income: -Due to division of labour and specialization, each countryproduces commodities for which it is best suited andexports surplus production. Similarly, each country importscommodities for which it has comparative costdisadvantage. This generates additional income and saves

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real income by making available imported articles atcompetitive rates.

c. Facilitates Transfer of Technology: - Some countries likeJapan, USE, UK and Germany are highly developed interms of technology while most of the Afro-Asian andSouth American countries are backward in technology. Thisdirects the flow of technology from technically advancedcountries to technically backward countries of the world.

d. Resolves Balance of Payments Crisis:- Balance ofpayments may be defined as the difference between themonetary value of exports and imports of a country. Whenthe outflow of foreign currency exceeds the inflow, acountry suffers from an unfavourable balance of payments.In order to solve such imbalance a country of the world.

e. Global Peace: - In the age of nuclear weapons, there is agreater need of promoting dialogue between variouscountries of the world. International trade may be amedium for promoting exchange of ideas and thoughtsand thereby help promoting international peace and friendlyrelations among the countries of the world.

f. Optimum Utilizations of Resources: - A country canmake optimum utilization of its natural and humanresource by promoting exports, if the resources remainunutilized or underutilized due to the want of demand inthe domestic market, the same can be well utilized bypromoting exports of surplus production.

g. Employment Opportunities:- Development of exportsbrings about multiple increase in employmentopportunities. It not only creates employmentopportunities in the export sector sector but also in otherrelated service sectors such as banking, insurance,advertising, transport, etc. This helps overpopulatedcountries in soling their unemployment problem.

h. Research and Development :- International market ishighly competitive. In order to survive cut-throatcompetition at international level, every firm operating atthe global level needs to undertake continuous research anddevelopment. This leads to development of technology inbackward and developing countries of the world.

Special Problems of International MarketingInternational marketing is a very complex and time-consumingprocess as it is subject to rules and regulations of both export-ing as well as importing county. At the same time, there areother problems such as long distance, currency fluctuations andhigh degree of competition. Some of the common problemsof international marketing have been analysed below:-a. Long Distance:- International trade is spread over the

world and therefore, goods are to be transported over aconsiderable distance. During transportation goods areexposed to risk and uncertainties of transportation andperils of sea. Again delay is coursed due to lengthy customsformalities. However, risk during transportation can beinsured by taking suitable marine insurance policies.

b. High Risks and Uncertainties:- International trade issubject to political as well as commercial risks. Political risksarise due to the political actions of the government(s). For

example, war and internal aggression. Commercial risksarise due to insolvency of buyer or buyer’s failure to acceptgoods. However, there risks can be insured by takingsuitable policies from the export Credit and GuaranteeCorporation of India(ECGC).

c. Customs Formalities: - Customs formalities are differentin different countries. Again, these formalities are verylengthy, time consuming and trade between countries of theworld.In order to solve the difficulties created by customsformalities, an exporter can obtain assistance of the Clearingand Forwarding (C&F) agents.

d. Trade Barriers: - Trade barriers are the artificial restrictionson the free movement of goods from one country to other.These barriers are of two types, viz., tariff and non-tariffbarriers are in the form of taxes and customs duties. Non-tariff barriers are in the form of taxes and customs duties.Non-tariff barriers are in the form of quotas and licences.However, efforts are being made by the World TradeOrganization(WTO) to eliminate and simplify tradebarriers.

e. Three-faced Competition :- An exporter faces competitionfrom three angles:-

• Exporters from his own country• Exporters from other countries.• Local suppliers in importing country.However, an exporter can sustain international competitionby upgrading the quality of product, innovations andinventions and cost reduction.

f. Payment Difficulties: -Different countries have differentcurrencies and conversion rates. These rates are subject offluctuations. Thus, an exporter may suffer a loss if there is achange in the exchange rate after entering into a contractwith a foreign buyer.Losses on account of fluctuations in the exchange rates canbe eliminated by entering into forward contracts.

g. Documentation Formalities:- There are a number ofdocuments to be filed with various authorities whileexporting goods. For example in India, an exporter isrequired to prepare and file as many as 25 documents ofwhich 16 are commercial and l9 are regulatory.

h. Diverse Languages, Customs and Traditions: -Languages, customs and traditions are very sensitive issuesand must be taken into consideration while exportinggoods to foreign countries. An exporter should try to getfirst hand information about such issues before exportinggoods.

i. Hug foreign indebtedness. Many countries of the worldthat would otherwise be attractive markets haveaccumulated such high foreign indebtedness that theycannot even pay the interest on their foreign debt. Amongthese countries are Mexico, Brazil, Poland and Romania.India’s present balance of payment position was real bad,though now It is looking up.

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Nj. Unstable governments. High indebtedness, high

inflation, and high unemployment in countries haveresulted in highly unstable governments that expose foreignfirms to the risks of expropria-tion, nationalisation, limitsto profit repatriation, and so on.

k. Exchange instability. High indebtedness and politicalinstability force a country’s currency to depreciate, or at leastadd a lot of volatility to the currency’s value. The result isthat foreign I investors hesitate to hold much of theforeign currency, and this limits trade.

l. Foreign government entry requirements. Governmentsare placing more regulations on foreign firms, such asrequiring joint ownership with the majority share going tothe domestic partner, a high level of nationals hired formanagement; technological transfer of trade secrets; andlimits on profit repatriation.

m. Tariffs and other trade barriers. Governments oftenimpose unreasonably high tariffs against imports in orderto “subsidies” or protect their own industries. They alsoresort to invisible trade barriers such as withholding orslowing down import approval and requiring adjustmentsin imported products to meet their standards.

n. Corruption. Officials in several countries require bribes inorder to co-operate. They often award business to thehighest briber rather than the best bidder. Kickbacksreceived by parties in Indian governments’ gun deal again isan example.

o. Technological pirating. A company locating its plantabroad worries about foreign managers learning how tomake its product and breaking away to compete openly.This has happened in such diverse areas as machinery,electronics, chemicals, phar-maceuticals.

p. High cost of product and communication adaptation.A com-pany going abroad must study each foreign marketcarefully, become sensitive to its economics, politics, andculture and make some adaptations in its products andcommunications to suit foreign tastes otherwise it mightmake some serious blunders.

q. International code of conduct for product to be tradedor marketed in a particular country by UNCTAD andWorld Trade Organisation as per Dunkel proposals.

A rapid increase in foreign exchange earnings through exports isvital for the success of our government’s programmes. Tointensify the drive for export development, it is not sufficient toexplore new markets for non-traditional products alone. Just asthe export potential of primary commodities is limited, so isthe growth potential of “non-traditional” items marketed inthe traditional manner. A major breakthrough resulting insizable additions to foreign exchange earnings is possible onlyif we:a. Identify new non-traditional products/services for export;b. Develop new ways of marketing them in new markets; and:c. Explore new marketing strategies for securing a fairly

consistent and long term foothold in these areas.

India has already started moving in” this direction. Construc-tion contracts, turnkey contracts,’ joint ventures in middleeastem Arab countries and African countries are indicators ofthis trend. The capital investment made by our country,especially during the last 40 years, in building a sophisticatedindustrial base and in training a very large number of people inthe development and application of modern technology is likelyto pay rich dividends in the near future. We should link ourfuture efforts in this direction to a well defined internationalmarketing programme for export development. It, therefore,becomes necessary to focus attention, on some of the moreimportant emerging opportunities for international marketingdevelopment in the non-traditional sector so that we may gaininsights into the types of integrated action needed at thecorporate and national levels to convert these opportunities intoviable business propo-sitions.International marketing is of growing importance to Indianbusiness. It is the duty of an international marketer to supportthe economic deve-lopment of our country. One should try tosell a portion of one’s output abroad. Benefits are gained in theobtaining of quotas for imported materials in exchange ofproof of the export of finished goods.

Multinational Corporations (MNCs)A multinational corporation is an enterprise whose ownershipand activities are spread in more than one country and itsvarious branches function independently. It is a giant firm withits headquarter located in one country but conducts a variety ofbusiness operations like manufacturing, marketing, servicing,etc, in several other countries.For some, the multinational companies are an invaluabledynamic force and instrument for wider distribution of capital,technology and employment; for other they are monsters whichour present institutions, national or international, cannotadequately control.

Characteristics of Multinational Corrporations(MNCS)Multinational corporations (MNCS) are major actors in theworld of international business. As shown by the GE case, it isdesirable for companies to become more internationallyinclined. Therefore, it is appropriscuss what an MNC is and therole it plays.The mentions of MNCs usually elicits mixed reactions. On theone hand. MNCs are associated with exploitation and ruthless-ness. They are often criticized for moving resources in and outof a country as they strive for profit without much regard forthe country’s social welfare. Varity Corp., a Canadian multina-tional firm, was criticized for its action in 1991 to relocate itsheadquarters from Toronto to the United States (Buffalo) inorder to take advantage of the U.S –Canadian Free TradeAgreement. For a long time, Indian referred to MNCs as“agents of neocolonialism.” It was not until 1991 that socialistIndian began wooing multinational companies. Yet severalyears later, multinationals are still not so welcome. To manyIndians, such MNCs as Pepsi Co, KFC. And Enron Corp. allare” foreign devils”

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In defense of MNCs, more and more of them have been tryingto be responsible members of the society. According to anumber of studies involving MNCs in Ivory Coast, Mexico,Morocco, and Venezuela, there is no evidence of MNCs beingdrawn to pollution havens, Furthermore, multinationalenterprises have raised local wages. However only those jointventures which receive foreign equity participation have ben-efited from technology transfer, while domestic competitorsmay be harmed by foreign entry.On the other hand, MNCs have power and prestige; addition-ally they create social benefit by facilitating economic balance. Asexplained by Miller, “with resources, capital, food, and technol-ogy unevenly distributed around the planet, and all in shortsupply, an efficient instrument of quick and effective productionand distribution of a complex of goods and services is firstessential. This instrument is, of course, the MNC.Regardless of whether MNCs are viewed positively or nega-tively, they are here to stay, and the important point is tounderstand when a company becomes a member of this elitegroup. MNC is not a one-dimensional concept. Similarly,globalization does not have a single definition. There is nosingle criterion that proves satisfactory at all times in identifyingan MNC. Varying explanations have been used to define amultinational corporation, but these definitions are notnecessarily convergent. As a result, whether a company isclassified as an MNC or not depends in part on what set ofcriteria is used.

Definitions

a. By Sizeb. By Structure:-c. By Performanced. By Behaviour

Definition by SizeThe term MNC implies bigness. But bigness also has anumber of dimensions. Such factors as market value, salesprofits, and return on equity, when used to identify the largestmultinationals, will yield varying results. As an example,although General Motors is number thirty-six in terms ofmarket value, it is number one in terms of sales and numbertwo based on profits.It is not unusual for corporate size in terms of sales to be usedas a primary requirement for judging whether or not a companyis multinational. As a matter of fact, according to the UnitedNations Department of Economic and Social Affairs, compa-nies “with less than $100 million sales can safely be ignored.Based on this definition, some 300,000 small and midsizeGerman companies do not qualify even though these firms(called the Mittelstand, or midranking) contribute mightily, toGermany’s export success. These midsize firms account fortwo-thirds of the country’s gross national product and four-fifths of all workers.Many multinational corporations are indeed large. According tothe World Investment Report of the United Conference onTrade and Development (UNC-TAD) there are some 40,000transnational corporations (TNCs) with more than 250,000foreign affiliates, altogether generating more than $5 trillion in

annual sales. TNCs control one-third of the world’s privatesector productive assets. Ownership of foreign assets is highlyconcentrated since half of the total is owned by just 1 percentof TNCs Interestingly multinationals overseas investment hasprogressed to the point

Definition by StructureAccording to Aharoni, an MNC has at least three significantdimensions: structural, performance, and behavioral. Structuralrequirements for definition as an MNC include the member ofcountries in which the firm does business and the citizenshipof corporate owners and top managers. Singers corporation,for instance, sells its sewing machines in 181 countries, thussatisfying the requirement with regard to the number ofcountries.Citicorp satisfies the requirement for multinationalism throughthe citizenship of members of its top management. Thecompany has done as much as other major American MNCs todiversify its management. In Asia, a notice of Pakistan is incharge of the firm’s $800 million finance business for all of Asiaexcept Japan. His colleague, an Indian national, heads theconsumer business. They are two of the eight non-Americansin the elite group of fifteen executive vice presidents.

Definition by PerformanceDefinition by performance depends on such characteristics asearnings, sales, and assets. These performance characteristicsindicate the extent of the commitment of corporate resourcesto foreign operations and the amount of rewards from thatcom-mitment. The greater the commitment and reward, thegreater the degree of interna-tionalization. Parker Pens, with 80percent of its sales coming from overseas, is more multina-tional (at least on the basis of foreign sales) than A.T. Cross,whose overseas sales account for only about 20 percent ofoverall sales.Japanese multinationals have shown willingness to committheir corporate re-sources to overseas assets. NEC has twenty-five manufacturing and forty-four mar-keting and servicesubsidiaries overseas, which employ 22,000 people. Half of Ri-coh’s cameras are made outside Japan, whereas nearly 100percent pf the firm’s copiers sold in North America and Europeare made there as well. Hitachi, a worldwide gi-ant, has forty-seven manufacturing subsidiaries and 130 sales and servicecompanies worldwide. Hitachi makes TV s, automobile parts,PBXs, computer products, and large-capacity magnetic disks inthe United States; TV tub’s in Singapore; CD play-ers and roomair conditioners in Taiwan; refrigerators in Thailand; and partsfor tur-bine generators in Canada.‘Human resources or overseas employees are customarilyconsidered as part of the performance requirements rather thanas part of the structural requirements, though the desirability ofseparating lower-level employees from top management isques-tionable. A preferable analysis would be to treat the totalextent of the employment of personnel in other countries asanother indicator of the structure of the company. In any case,the willingness of a company to use overseas personnelsatisfied a significant criterion for multinationalism. Avon, forexample, employs 370,000 Japan-ese women to sell its productshouse to house across Japan. Siemens, well-known worldwide

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Nfor its consumer and industrial products, has some 300,000employees in124 countries.By Behavior is somewhat more abstract as a measure ofmultinationalism than either structure or peiforml;1nce, thoughit is no less important. This requirements concerns the behav-ioral characteristics of top management. Thus, a companybecomes more multinational as its management thinks moreinternationally. Such thinking, known as geocentricity, must bedistinguished from two other attitudes or orientations, knownas ethnocentricity and polycentricity.Ethnocentricity is a strong orientation toward the homecountry. Markets and consumers abroad are viewed as unfamil-iar and even inferior in taste, sophistication, and opportunity.The usual practice is to use the home base for the productionof stan-dardized products for export in order to gain somemarginal business. Centralization of decision making is thus anecessity. Caterpillar Inc.’ s chairman recalled that, while makingsales calls in Africa in his younger days, pricing decisions wereoften forced upon him from headquarters even though thosedecisions did not fit the local market.18Polycentricity, ~e opposite of ethnocentricity, is a strongorientation to the host country. The attitude places emphasis ondifferences between markets that are caused by variations within,such as in income, culture, laws, and politics. The assumption isthat each market is unique and consequently difficult foroutsiders to understand. Thus, managers from the hostcountry should be employed and allowed to have a great deal ofdiscretion in market decisions. A significant degree of decentrali-zation is thus common across the overseas divisions.A drawback of polycentricity is that it often results in duplica-tion of effort among overseas subsidiaries. Similarities amongcountries might well permit the develop-ment of efficient anduniform strategies.Geocentricity is a compromise between the two extremes ofethnocentricity and polycentricity. It could be argued that thisattitude is the most important of the three. Geocentricity is anorientation that considers the whole world rather than anypartic-ular country as the target market. A geocentric companymight be thought of as denationalized. or supranational. Assuch, “international” or “foreign” departments or markets donot exist because the company does not designate anythinginternational or foreign about a market. Corporate resources areallocated without regard to na-tional frontiers, and there is nohesitation in making direct investment abroad when warranted.There is a high likelihood that a geocentric company does notidentify itself with a particular country. Therefore, it is oftendifficult to determine the firm’s home country except throughthe location of its headquarters and its corporate registration.According to Ohmae, business is “nationality less,” andcompanies should attempt to lose their national identity. Assuch, a corporation should not mind moving its head-quartersto a more hospitable environment. 19 The chairman ofJapanese retail giant Yaohan International Group, for example,moved the firm’s headquarters as well as his family and personalassets to Hong Kong to take advantage of Hong Kong’s lowtaxes and hub location in Asia. To reward his faith in China, the

Chinese government permitted Yaohan to build shoppingmalls in China.2oGeocentric firms take the view that, even though countries maydiffer, differ-ences can be understood and managed. Incoordinating and controlling the global mar-keting effort, thecompany adapts its marketing program to meet local needswithin the broader framework of its total strategy. The ap-proach combines aspects of cen-tralization and decentralizationin a synthesis that allows some degree of flexibility. The firmmay designate one country subsidiary as its research anddevelopment cen-ter while appointing another subsidiary inanother country to specialize in manufac-turing certain products.Although the corporation provides overall guidance so as toachieve maximum efficiency of its global system, the variousaspects of the local op-erations mayor may not be centralized aslong as they meet local market needs. Geo-centric firms competewith each other on a worldwide basis rather than a local level.Another study found evidence to support the hypothesis thatthere are four iden-tifiable stage in a firm’s internationalization.The four stages are: (1) Non-exporters. (2) Export intenders, (3)Sporadic Exporters, and (4) Regular Exports. The processshows how firms were initially constrained by resource limita-tions and a lack of ex-port commitment and how they canbecome more and more internationalized as more resources areallocated to international activity.26At present, there is no conclusive evidence to show that,domestic firms have generally indeed progressed from one stageto another as prescribed on their way to become more interna-tionally oriented. Likewise. No empirical evidence has beenpro-vided so far to support a competing hypothesis that somefirms are “born global” in the sense that their mission from theoutset is to become MNCs.Types of MNCs: - Main three types of MNCs are given below: -a. Transnational Corp.: - Incorporated or Unincorporated

enterprises comprising parent enterprises and their foreignaffiliates.

b. Parent enterprise: - controls assets of other entities incountries other than its home country, usually by owning acertain equity capital state (usually 10% or more)

c. Foreign Affiliate: - Is an incorporated or unincorporatedenterprise in which an investor, who is resident in anothereconomy, owns a stake that permits a lasting interest in themanagement of that enterprise, A subsidiary, associate, andbranches are all referred to as foreign affiliates.I. Subsidiary: - Is an incorporated enterprise in the host

country in which another entity directly owns morethan half of the shareholding voting power and hasthe right to appoint or remove a majority of themembers of the administrative, management, orsupervisory body.

II. Associate: - Is enterprise in the host country in whichan investor owns at least 10% but not more than halfof the shareholders voting power.

III. Branch: - Is a wholly or jointly owned unincorporatedenterprise in the host country.

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Host Country Related Issues

Technology Transfer and LDCsThere has been a significant controversy over the effects oftechnology transfer on the less developed countries. Thesupporters of MNCs claim that the developing countries derivegeneral economic benefits from the technology transfer. On theother hand, the opponents accuse the MNCs of chargingexcessive prices on technology exports. Manipulation of transferprices, the provision of technology that is too sophisticated andinappropriate for the best possible use of local resources, theprovision of technology that is obsolete and only capable ofproducing inferior products, and not providing foreign capital.As we enter the 90s, there is a widespread belief among thedeveloping countries that unless there is proper technologytransfer, there may, in general, be inadequate industrial andeconomic development.

Regulatory MeasuresOver the years, and following some bitter and costly experiencesin the less developed countries, it became clear that technologywas a particular kind of commodity which did not obey thesame rules as those found in the markets of other commoditiesand which classical economic theory managed to embodysometimes into neat and appealing models and processes. TheKind of investment. Required, the way it is produced, and itsvarious types of ownership imposed new rules and regulationson the trade of technology throughout the world, particularlywhen this transaction occurs between the developed and the lessdeveloped countries. It is the responsibility of the lessdeveloped countries to import appropriate technologies anddevelop their technological capabilities, and this developmentprocess needs proper regulatory effort.The technology regulation measures adopted by the developingcountries in the 70s were significantly modified in the latter halfof the 70s and 80s. Although fairly strict control over theprocess for technology acquisition has continued in certaincountries, as in Brazil, the regulatory measures have been relaxedin other countries (India). In some countries, the inflow offoreign technology has been promoted by various incentives(China). The trend towards liberalisation in technologyregulation has been accompanied by differentiation’s fordifferent kinds of industrial technology. During the 80s, twoma or trends have become manifest in the developing countries:(1) in countries where the acquisition of foreign technology hasnot been regulated by the government or where its scope hasbeen very limited, the governments are paying increasingattention to foreign technology and the conditions of acquisi-tions, and (2) where fairly rigorous regulatory norms wereintroduced in the 70s, there is an increasing relaxation andliberalisation for the acquisition of more advanced technologies.This trend Is continuing in the early 90s.

Technological Needs

The technology needs of the developing countries are great anddiverse, mostly in the sector of agriculture, infrastructure,import substitution, and export stimulation. Because of therelatively low technological capability, the assimilation of foreigntechnology and its adjustment to different factor endowments

and conditions is also a far greater task for the developingcountries. However, the trend has been that the developingcountries since early 80s acquiring high technologies. Not all ofthem are eager to receive high technology transferred from thedeveloped countries. The patterns of consumption and maintrading orientation are similar in the developed countries in thatthey have a greater need to use high technology in their modemsectors. Many developing countries are in the process ofmoving from import substituting industrial development toexport promotion strategies. These nations are attempting topursue the Japanese model of technological development, withmixed results. ‘Me export promotion orientation has led manyof them to seek ever higher levels of technology if exportpromotion strategies are to succeed. They should realise thatthe Japanese industry did not suddenly develop the ability toreap the advantages associated with vigorous export marketpenetration. Even though export specilisation was pursued as adeliberate goal early on in Japan, the policy makers realised that aprolonged period of protectionism (include exclusion offoreign goods and foreign direct investment wherever possible)would be necessary to build a strong home market before thedomestic industry could reach internationally competitiveproduction volumes and become effective in exporting.The question of appropriateness of technology has beenconsidered in terms of economic development strategy and,second in terms of the choice of techniques in a firm ofindustry. From a practical stand point, the most importantlesson that has emerged from the literature over the past twodecades is that even the simplest o f theoretical constructionsare much too opaque to enable one to assess what technology isappropriate for a specific set of circumstances. In recent years, ithas become clear that it is dangerous to discuss appropriatetechnology in technical terms only. The issue of technologycannot be discussed in isolation of the problems of society,ends focusing only on technological problems withoutconsidering the social conditions existing in the country mayproduce infeasible or inappropriate technology. Hence the social,political, and economic factors existing in a country are crucialdeterminants of the type of technology that may be adopted inthat country. It is up to each individual government to formu-late and implement public policies to import appropriatetechnologies to suit the needs.

Advantage of MNCs to the Host Country

a. MNCs bring about increase in the national income and per-capita income of the host country.

b. They bring about increase in the level of investment,employment and income in the host country.

c. They help the host country to solve the problem of tradedeficit through export promotion and import substitution.

d. They create employment opportunities in manufacturing aswell as allied service sectors.

e. They break protectionalism, create competition amongdomestic companies and thus enhance theircompetitiveness.

f. The marketing skills of the MNCs are impressiveparticularly in providing marketing infrastructure.

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Ng. They help rapid industrialisation and improve general

standard of living in the host country.

Home Country Related Issues

MNCs and ITTThe primary “agent” of technology transfer from the homecountry is the multinational corporation (MNC). In the lasttwo decades, there has been a rapid increase In the internationaltechnology transfer (ITT) agreements between firms in differentcountries. The commercialisation of technology, mostly in theform of royalties and licence fees for technical know-how andservices, has increased considerably. For instance, receipts fromthe export of technology by the US MNCs increased from $5.2billion in 1980 to $1 1.1 billion in 1988.These ITT trends have been the results of the profoundchanges in MNC’s corporate philosophy on the management oftechnology assets. MNCs are shifting their emphasis frombeing competitive in the domestic economy to maintainingglobal market positions. Besides, mounting costs of R & D.and in some cases, the difficulties in obtaining venture capitalhave contributed further to the release of competitive technol-ogy for foreign firms, the build-up of competitive productioncapabilities abroad, and the narrowing of international gaps inhigh technology industries. Thus, it appears that MNCs,especially the US MNCs, are (a) accelerating their technologytransfer, and (b) transferring abroad their most sophisticatedtechnology either as part of a global strategy or in an effort tosafeguard their competitive position. Historically, most MNCshave restricted their ITT efforts to opportunities in thedeveloped countries. After the 50s, dramatic changes took placeIn the less developed countries, and these markets opened upconsiderably. This development, along with the simultaneouspartial saturation of some of the markets In the developedcountries, has turned the attention of the multinationalstowards the less developed countries. Recent research haspointed towards an Increased interest being exhibited by MNCsIn transferring technology.

ITT and Government PolicyThere is a considerable controversy over the effects of ITT onthe home country. One group of people argue that ITT affectsthe home country’s economy negatively in terms of overallbenefits, employment, and technological lead. Transferringcurrent, state-of-the-art technology to the less developedcountries raises serious concerns about the rates of return andguarantees of confidentiality. In some circumstances, govern-ment restrictions from the developed countries on technologiesdeemed militarily strategic, Impose an added barrier. Propo-nents of ITT, however, have gained a growing support for theirnotion that lIT benefits the home country economically andtechnically. They argue that there are circumstances whereintransfers of cur-rent technologies make good business sense,and firms posses, or have access to, much useful technology thatis non-competitive in nature and which, in the hands of others,could in no way threaten home countries economic interests.The recent trend of accelerated outflow of technologies hasheightened some developed countries’ policy makers’ concernsabout the negative Impact of technology transfer on theircountries. However, these policy makers are more concerned

with the type of technology being transferred. In the past,technology transferred by MNCs to the developing countrieswas mature, standardised and of a type available from othersources as well. However, MNCs in the developed countries areincreasingly transferring high technology to some developingcountries in the recent years under the terms that assure rapidand efficient implantation of an internationally competitiveproduction capability. For example, a growing proportion of R& D expenditure in automobile industry by MNCs is located inthe labs of the less developed countries. This trend, somepeople believe, is one of the primary reasons responsible for thedecline in the international competitive position of thedeveloped countries.

Advantage of MNCs to the Home Coutry

a) MNCs create opportunities for domestic firms to markettheir products throughout the world.

b) They create employment opportunities for the people ofhome country, both at home and abroad.

c) They earn valuable foreign exchange for the country andtherefore, strengthen the balance of payments condition ofthe home country.

Articles

Multinational Corporations and Global ProductionNetworks

The Implications for Trade PolicyThe objective of this report is to understand the role ofmultinational enterprises (MNEs) and production networks ineconomic activity, and to investigate their implications for thedesign of trade policies. The focus of the report is the Euro-pean Union. MNEs account for a significant share of economicactivities in Europe. 18 % of EU employees in manufacturingwork in foreign owned subsidiaries and 8.6 % in subsidiariesowned by non-EU residents. The report also devotes particularattention to the activities of US subsidiaries in Europe and ofEU subsidiaries in the US, the only ones for which comprehen-sive data are available.The empirical analysis in the report reveals a positive correlationbetween sectors with relatively high protection and a highpresence of US FDI. This indicates that a substantial propor-tion of any rents created by restrictive trade policy is transferredto foreign firms. European trade policy is protecting thoseindustries where subsidiaries’ sales dominate over importsfrom the US and where the US subsidiaries’ share in EUemployment is large. The phenomenal increase of Europeannetworking in the CEECs following the Europe Agreements orbetween the US and Mexico after the implementation ofNAFTA are good examples of how trade liberalisation,proximity and differences in factor costs jointly provide strongincentives for firms to split geographically their productionprocesses.There are some strong arguments in favour of international co-ordination of foreign investment policies. A new investmentagreement could take care of this need for co-ordination;however, extending existing trade agreements could also do atleast part of the job.

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Globalise or Perish –MeaningGlobalisation of business has become a subject of very seriousdiscussions in the national economic policies and corporatesector. The subject has assumed a great significance in the lightof recent changes in the global business environment and thenational economic policy. In fact, the very first objective of theExport-Import Policy is to establish the framework forglobalisation of India’s foreign trade.Globalisation means integration of the national economy ofthe country with rest of the world and opening up of theeconomy for foreign direct investment by liberalizing the rulesand regulations and by creating favorable socioeconomic andpolitical climate for global business.

Globalise or PerishIn the wake of recent developments in the internationalenvironment, the slogan ‘Export or Perish’, coined by ShriPandit Jawaharlal Nehru, needs to be replaced by theslogan’Globalise or Perish’. Globalisation has become the needof hour and India must keep pace with the changing interna-tional scenario.

GlobalisationThe world has a new buzzword - globalisation. The Yanks,through Ted Levitt, created it, the Brits mouth it, the exertswave it like a flag - even India is flirting with this concept. Isglobalisation the first step to economic colonisation? Is this theway the rich nations are hoping to ensure their continueddomination of the world economic scene? Or is it the panacea,the new religion, something different, which will result in a trulybetter life for the citizens of those countries that practice it?How is globalisation different to exports? Are these twoconcepts in conflict? Or are they two sides of the same coin? Ifexports are going strong, why should one talk or bother aboutglobalisation? Is there a conflict between the domestic and theglobal (non domestic) market?

Concepts of Globalisation

1. World is the MarketFundamental to this concept is the nature of wants across theglobe and the means of satisfying these wants. There appearsto be greater cornmonalty in “wants” or “needs” across theglobe than had been imagined. It would appear that thedifferences in “wants” or “needs” were merely hypotheses,which have not stood the test on the ground. So, we have theneed for, say, “status” across the world. Only, in the US, aPorsche car satisfied this need while in India, it is probably aMaruti 1000. Through globalisation, a firm is offering similarmeans of satisfying these wants across the globe. Global TV isa prime example of this phenomenon. Among the manufac-tured goods, Sony consumer electronics, Toshiba products,IBM, Marlboro, Phillips, etc., are examples of catering for aworld market.It has been generally hypothesised that the concept of the worldbeing the market can only be actualised by island economies likeJapan, Korea, Singapore, etc. Continental economies like India,the US, are better off advised to catering for their domesticeconomies which provide all the required economic benefitsbecause of the size of the market.

The argument in favour of globalisation is not predicted onsize of the nation but on various other factors includingearning of competitive advantage on a global scale as a keytheme. We are not yet a seamless world though there is apresumption that tariff and non-tariff (traditional) barrierswould be less important. This is already happening with thecreation of economic blocs. In these blocs, competition isincreasingly dependent upon the consumer/customer pullrather than on political determinants! Consumer pull becomeseven more powerful as the technology content of the productincreases. The notebook computer, the Japanese consumerelectronics, the German high performance cars, are examples ofproducts that have jumped tariff and non-tariff barriers verysuccessfully.

2. Communications are Common Across the GlobeThe role of communications in fuelling globalisation issignificant in that the awareness of products and productpromises across the globe has increased. This, in turn, has ledto a consumer upthrust, which is the engine of globalisation.Communication themes are, increasingly becoming commonacross the globe. True, the idiom may have to change some-what, but the core theme is the same. Some classic examples arethe Honda motorbike, Marlboro cigarettes, Canon and Xeroxcopiers, etc.

3. Competition is also InternationalBy competition, we are referring to alternate means of satisfyinga given set of wants. We can already observe this phenomenonof global competition in India. Witness the entry, in ready-made garments, of a large number of foreign manufacturers,such as Pierre Cardin, LaCoste, Louis Philipe, etc. There will bemore, and in diverse product fields. The benefit of globalcompetition is manifold. The general price line will drop, therewill be immense improvement in the quality of goods availableto the consumer, new products will become available, etc. Takethe case of Doordarshan (DD). DD has had to become farmore user-friendly because of competition from Star TV, ZeeTV, Jain TV, etc. It seems to be taking various other decisionslike showing daily movies, changing the news format, etc. Itwill have to, or lose advertising revenue. MRF, a large advertiseris using Star in preference to DD to advertise its tyres. Morecompanies will follow suit if DD is unable to retain itsviewership. The advent of the Maruti has alreadyrevolutionised the automobile industry in India. Who wouldbuy an Ambassador car when he can get a more sophisticatedcar?

4. World Class

a. Manufacturing Scale: This does not mean sacrificingcustomisation, which is the new consumer revolution thatis taking place around the world, aided by technology. But,in the Indian context, it does mean some of our industriesmay well have to close down. The pressures are alreadybeing felt. The petrochemical industry in India operates ona scale that is minuscule, compared to global competitors.This places a burden on the costs of production, which, inturn, pushes up prices to the end-user. For example, Indiasells the most expensive fertiliser in the world because ofdiseconomies.

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Nb. Productivity: Going global is only possible when

productivity is comparable on a global scale (Fig 1). Thisrefers not only to labour productivity but also all otherresources, such as energy, space, and time. This is what ismeant by the statement that every activity of the firm has toadd value to the customer/consumer.

Quality: By quality, one is referring to standards, and adherenceto them. Going global would require a firm to ensure that itsstandards for the product are globally comparable. It is a fallacythat we can dilute standards, sell the product cheap, and hope tosecure global market share.

5. Factors of Production Sourced InternationallyOne of the strategies of firms that are global in outlook is thatthey are willing to shift manufacture to areas where valueaddition is the greatest. Hence, as in the earlier example,Malaysia is the world’s largest manufacturer of the Japanese airconditioners. This would be a case of manufacturer shifting toareas where factors of production are better, cheaper or both.

Globalisation of the Indian Economy

Why an Indian Firm should Globalise?

a. Profit Advantage: - Though the margin of profit in theinternational market is low due to intense competition, itcertainly increases the overall profitability of theorgainisation due to economies of scale.

b. Growth Opportunities: - Global market is spread all overthe world. The enormous growth potential of manyforeign markets is a very strong attraction for domesticcompanies to globalise.

c. Domestic Market Constraints: - Some companies mayglobalise in order the avoid constraints in the domesticmarket. For example, saturation of the domestic market.

d. Competition:- Liberalisation and globalisation of Indianeconomy has increased competition from foreign MNCs.Hence, in order to survive intense competition, Indiancompanies will have to globalise.

e. Government Policies and Regulations :- The incentivesand assistance provided by the government and encouragingEXIM policy for internationalization may also initiateglobalisation.

f. Spin-off Benefits: - Globalisation provides certain spin-offbenefits, viz., greater market share, economies of scale, easyaccess to imported capital goods, etc.

Why should India Globalise?Although India has several handicaps, there are also a numberof favouable factors for globalisation of Indian business.a. Human Resources:- Though labour productivity in India

is low, given the right environment Indian labour canperform excellently. While several countries are facing labourshortage, India has ample and cheap labour.

b. Wide Base: - India has a variety of other natural resources,which provide a wide base for development of industrialunits in India. For example, minerals, forest resource,animal manpower resource.

c. Growing Entrepreneurship: - In the recent years, there hasbeen a considerable growth in the number of new anddynamic entrepreneurs who could make significantcontribution to the globalisation of Indian business.

d. Growing Domestic Market: - The growing domesticmarket enables the Indian companies to consolidate theirposition and to gain more strength to make entry intoforeign markets or to expand their foreign markets or toexpand their foreign business.

e. Niche Markets:- A market niche is small segment of themarket which is ignored or overlooked by the major players.Such niches are particularly attractive for small companies.

f. Expanding Markets: - The growing population anddisposable income and the resultant expandinginternational market provide enormous businessopportunities to Indian manufactures.

g. Transnationalisation of the World Economy: -Transnationalisation of the world economy due to thegrowing interdependence and globalisation of markets is anexternal factor encouraging globalisation of Indianbusiness.

h. NRIs: - The large number of non-resident Indians, whoare resourceful in terms of l capital, skill, experience,exposure and ideas, are assets which can contribute to theglobalisation of Indian business.

i. Competition: - The growing competition both fromwithin the country and aboard, provokes many Indiancompanies to look to foreign markets seriously to improvetheir competitive position and to increase the business.

j. Economics Liberalisation: - The economic liberatlisationsuch as delicensing of industries, removal of traderestrictions, privatization, import liberalization, etc., wouldencourage globalisation of Indian business.

Distinction between –Domestic Marketing andExport Marketing

Domestic Marketing Export Marketing 1.Meaning Domestic marketing is the process of planning, organizing, directing and controlling activities related to exchange of goods between the different regions of a same country.

Export marketing is the process of planning, organizing, directing and controlling activities related to exchange of goods between the different countries of the world.

2. Scope The scope of domestic marketing is narrow and is restricted to the political boundaries of a country.

The scope of export marketing is wider as the whole world constitutes a market.

3. Trade Barriers In domestic markets, artificial restriction in the form of tariff and quota are negligible or the not present at all.

In export markets, server barriers in the form of tariff and quota are present in order to restrict excessive inflow of foreign goods.

4. Government Control The government exercises less control over domestic trade.

The international trade is subject to strict government controls and restrictions.

5. Product Strategy Due to similar socio-economic environment, a single product (Product Standardisation Strategy) can be marketed throughout the country.

Since the socio-eco environment in different countries is different, the goods of different quality standards (Product Adaptation Strategy) are required to be manufactured for different countries.

6. Competition The degree of competition in domestic market is low as the domestic markets are generally protected by the government from external competit ion.

An exporter faces an intense competition from his own country, from other countries and local suppliers in the importing country.

7. Scale of Operations Since the degree of competition in the domestic market is low, a firm can afford to operate on a smaller scale.

In order to compete at the international level, a firm has to operate at the optimum level in order to reduce its cost of production.

8. Mobility of Factors of Production Factors of production such as land, labour and capital are freely mobile in the domestic market.

There are strict restrictions on the mobility of factors of production in the international market.

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Case Study No.1

1. A Case Study on Spices Export MarketingGovernment of India has made special efforts throughmacroeco-nomic reforms in industrial, financial and trade sectorto boost export business. Fiscal and financial incentives areprovided to our corporate sector engaged in export business. Itis a controversy among the economists that there will begrowth-led export or export-led growth in India due toeconomic reform process in India. Inspite of either of thephenomenon, ever increasing domestic market is also consid-ered as one of the significant factors for slow rate of growth ofIndian exports. There is one school of thought believing thatIndian trade has been essentially inward looking largely due toits size and ever expanding internal market. Economicliberalisation and reforms opened new avenues for exportgrowth in general and specific commodities in particular aspolicy measures like simplification of excise and customprocedures, deregulation of licensing, formation of specialfocus group of commodity exports and a host of otherincentives directed at the export front.This case study examines the pattern of export growth ingeneral and export of spices in particular with a view to suggestaction plan to boost the exports up to the target of 2000 A.D.An attempt is also made for projection of production andgrowth of spices exports in Indian case.The case study is divided into 3 papers: the first one reviewsliterature that has grown in the recent past in area of exports ofspices so as to sort our issues, the second one examines trendsand of production and exports of spices among overall exportof India, whereas, the third one offers action plan to reach thetarget of 2000 A.D.

RetrospectConsiderable amount of literature has grown to know exportmarket-ing and diversification of export business by Indianeconomists. These include Pendse, Attri2, PNB3, Saxena4,Kameshwar Raos, Deolanker6, Debroy7, Government ofIndia8, Singh and Madhavan9. All these studies attempt tomeasure growth rate of exports in general or showing policymeasures for diversification of Indian export business.Commodity-wise and country-wise studies also highlightbehaviour of world export market and share of Indian exports.However, authors like Siddharthan10 and Sharmall attemptedto throw light on implifications of economic reforms andliberalisation policy for possible solution of problems arising inexport management. Decontrol and deregulation policy iswelcomed by all exporters inclusive of exporters of spices.In the case of export business of spices, there are studiesundertaken by Gargl2, Sandhu 13, UNCT AD, 14 MurlidharRao1s and by others with a view to know strategy of produc-tion and diversification of exports of species as well asexpansion of multilateral trade of spices. Most of the studieshave shown projections of production and export. Commoditywise and country-

Major Issues

1. Growth-led exports for India in the case of production ofspices draw attention of growers, processors and exporters.

2. Problems faced in getting high yielding varieties and theiruse with technological change in production, processing,packing and forwarding of spices.

3. What kind of role can be played by Kerala MarketFederation in order to achieve targets of exports in 2000A.D.?

4. Role of banks and financial institutions to fund productiontechnology and special export finance as pre-shipment andpost- shipment credit of spices.

5. Conservation, protection and storage of spices to stopwastage in export business.

6. Role of Spices Board, state government as well as centralgovernment. In India to boost exports with brand andspecifica-tion of investment spices.

7. Relaxation in formalities of exports for new entrants inexport of spices in India apart from budget exercise.

8. What kind of action plan is necessary to achieve targets ofproduction and exports of spices about 300 million dollarsin 2000 A.D in Indian case?

This paper is not answering all the above issues but attempts totouch the last one regarding action plan and related policies toboost exports of spices in India.

Production and Exports of SpicesIt is necessary to know the macro view of production andexports scenario of spices. According to Bureau of IndianStandards, there are 63 spices grown in India. These includeblack papper, chillies, cardmom, gin-ger, turmeric, coriander,cummin, garlic and others and leading both in production andexports too. As the level of living of people goes up, consump-tion of spices tends to increase. Spices are used worldwide toenhance or to vary flavour of the food. They act as appetisersand some of the spicies have anti-oxidant properties. Most ofthe spices are used in food processing as well as pharmaceuticalsand perfumery and cosmetics industry .Considering popular economic theory of growth-led exportsappear to be true in the case of production and export ofspices. Therefore, it is necessary to glance through macroeco-nomic management of spices in India. Spices are grown in allstates of India but their production differs from state to statelargely due to climatic changes. It is reported by Bureau ofIndian Standards that there are 63 spices grown on two millionhectares and having production of about 16lakh tonnes perannum. Exact figures about productions of the spices andstate-wise data is not available. However, estimates are availablefrom Ministry of Agriculture, Directorate of Econom-ics andStatistics as well as state departments of trade.By and large, spices are divided into annual and perennial. Pricefluctuation is affecting area under cultivation in different statesof India, whereas; in the case of perennial, the area does notchange significantly unless. exceptional change in price is found.The weak mechanism of marketing, lack of appropriate pricepolicy has also hindered higher productivity in the case ofIndian spices. As corporate sector in India has” taken activeinterest and. is playing a major role for production and exportsof spices, the production of spices needs to be on professional

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Nbasis. This is so as uneducated growers do not know abouthigh-yielding varieties in spices, ravages due to pest anddiseases, unscientific post-harvest technology of processing andstorage of spices reduces actual usable production.It must be understood by the professionals in corporate sectorof India that a country which is committed to globalisationneeds to reproduce far more efficiently than it had been doingso far. At least, it must be made sure for that the growers getreasonable return on their investment. The support pricemechanism has to be worked efficiently in commodities whereself-sufficiency is to be achieved.The share of spices export in total exports in the fiscal yearending 1952, 1960,1970,1980 and 1990 were 4.18, 2.87, 2.45,2.55 and 2.42 respectively. The compound rates of growth ofexports of spices in percent per year were 4.2, 3.0, 2.5, and 2.9during fifties, sixties, seventies and eighties respectively. In thecase of pepper, Indian had been exporting roughly about 79%of production to the world market. There are other competitorslike Brazil, Indonesia, Malaysia, Srilanka and Spain. Quantityexported by Indonesia is in big bulk considering her exportvolume but there are quality differences. In India 95% of thearea under cultivation is in Kerala, where 82% of pepperholdings are less than 3 hectares each and average holding is lowas 0.73 hectares. As a result productivity of pepper in India is aslow as 230 kg per hectare consisting of 580 vines, 925 kg inIndonesia, 417 kg in Malaysia and 3333 kg per hectare in Brazil.However, trend of exports of pepper is not steady butfluctuating from year to year after 1988. Looking to direction oftrade of spices USA and European countries were dominating.Nowadays USSR, East European countries, Canada, USA andItaly are major buyers provided that our prices come down tointernational parity. It is to be noted that export performance ofIndian spices remain very high subject to the world level growthof output of spices. Elasticity of Indian exports of spicesremained high with respect to world output of spices. In thecase of exports of pepper pimento in the world had resulted inincrease of per capita consumption in the importing countries.

Earnings from SpicesTrends of export earning both in terms of rupees as well as indollars is rising. However, export earning in terms of dollars isnot as high due to exchange rate policy and other technicalreasons. One can safely project as the basis of export earning ofRs. 69,751 crores in 1993-94 to Rs. 2,20,000 crores in 2000 A.D.for India. Similarly, in terms of dollars, it was 22239 milliondollars in 1993-94 which is likly to be 66,000 million dollars in2000 A.D. considering overall growth pattern of Indian exportgrowth2. Crop improvement devices of farm management onprofessional base will pave a way for quality and quantity ofspices for more exportable surplus. Concentrated R & D effortsfor production and marketing is absolutely. necessary both atfarm level and corporate level.3. Indian spices need brand and name to cope with competitionof global level through standards and specifications in the caseof all 63 import spices exported from India.4. Role of the state would be vital for market intervention andprice mechanism in order to save prices from crashing down so

as to protect interest of growers as well as small producers inparticular in the case of spices and other items.5. Corporate sector, export and process houses, will have to takeover the challenges to face in the process of globalisation ofmarket for spices. The eighth five-year plan of the Governmentof India aims at a growth rate of 10% in production comparedto 4% in the seventh plan. Investment strategy under the central-sector scheme is Rs. 150 crores. All potential exporters of spicesshould take advantage of the scheme.6. Very recently researchers maintained that in the case of pre-shipment credit by banks, 1 % increase in wholesale price, tendsto increase the credit required by 0.7% and 1% increase inquantity of exports trends to increase the requirement by 1.7%.As against this in the case of postshipment credit, 1 % increasein quantity of exports tends to increase the credit requirementby 1.58% and 1 % increase in normal effective exchange ratetends. to increase the requirement by 1.06% considering the factthat banking sector will have to playa vital role to boost ourexport business. After the nationalisation of banks exportcredit as per concept of total credit has fallen from 9% in 1969to 5.5 % in 1990.

Question BankQ1. Define international marketing. Enumerate its features.Q2. What are the benefits of internationl marketing ?Q3. Briefly explain the special problems of international

marketing.Q.4. Explain the role of MNCs in promoting exports.Q5. Explain the slogan”Globalise or Perish” in the context of

the new millennioum,Q6. Distinguish between internationa Marketing and

Domestic Markeinng.Q7. Exports are necessary only for underdeveloped

countries.”Comment.

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International Marketing Environment• Definition.• Components.

Trade Barriers• Definition.• Objectives.• Tariff Barriers.• Non-tariff Barriers.

Distinguish Between• Tariff Barriers and Non-tariff Barriers.• Advalorem Duty and Specific Duty.

Question Bank

Definition of International Marketing EnvironmentInternational environment consists of internal and externalfactors that may . influence nature and scope of businessorganisations operating at the global : level. It is can describedas: -a. Favourable or unfavourable.b. Liberal or conservative.e. Progressive or regressive.International environment is a very important determinant ofthe business strategy. The factors, which constitute internationalbusiness environment, can be classified as :a. Endogenous Factors :- The endogenous factors consist of

internal factors which a business unit can control andinfluence. For example, amount of labour and capital,technology to be used and marketing mix.

b. Exogenous Factors :- The exogenous factors consist ofexternal factors which a business unit cannot control andinfluence. The exogenous factors are constraints underwhich a firm operates. For example, structure of industry,market demand, supply conditions and governmentpolicies.

Exogenous factors keep on changing and businessorganisations have to adjust in order to survive. The businessunit, which cannot adjust to the changing environment,becomes extinct in long run.The analysis of internal environment factors indicates thestrengths and weaknesses of the business firm while theanalysis of external factors indicates the opportunities providedand threats posed by the environment to the business.

Components of International MarketingEnvironmentThe various factors constituting the international marketingenvironment are :

LESSON 4 & 5:INTERNATIONAL MARKETING ENVIRONMENT

a. Social and Cultural Environment :- The biggestenvironment is the social environment because business iscarried on by the people (businessmen), for the people(consumers) ,and through the people (executives andworkers). Social and cultural factors in various countries ofthe globe which affect the international businessenvironment are :-• Attitude of the consumers and management;• Changes in the population pattern.• Influence of religion and tradition.• Spread of education and its quality.• Role of social and cultural institutions.• General standard of living.

b. Technological Environment :- Nothing ever is permanentexcept change. Technological improvement brings aboutnew techniques of production, new products, automationand modernisation. Technology changes rapidly and thefirm, which cannot adjust to such a changing technologicalenvironment, may not survive. The technologicalenvironment consists of:-• State of indigenous technology.• Intermediate or appropriate technology.• Transfer of technology.• Technological collaborations.• Policy and legal framework ‘for research and

development.• Fiscal incentive for research and development.These technological changes enabled international business’to take the shape of multinational and transnationalbusiness.

c. Economic Environment :- International business ismainly affected by the economic policies adopted by thegovernments of various countries. The global economicenvironment has become favourable due to theestablishment of the WTO and emergence of the globalmarket. The changes in the international economicenvironment have been revolutionary after 1990. Thefollowing factors determine international economicenvironment:-• Type of economic system adopted by the country.• Continuous growth in quality and quantity of industrial

output.• Liberal and progressive policies of government.• Rising levels of income and employment.• Just and equitable distribution of wealth in the

economy.• Check over monopolies.

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Nd. Political Environment :- Change in the government

policies or government itself, many times bring aboutpractical difficulties in carrying on business operations.Sometimes, the government takes over some key units inthe interest of the nation. Political environment in thecountry is created by the following factors :--

• Political system accepted by the country, viz., capitalism orsocialism.

• Existence of political parties, i.e., dual party or multi partysystem.

• Parties in power, i.e., ideologies and policies of thegovernment.

• Legislative and judiciary systems.• External affairs and relationship.

e. International Environment :- International marketingenvironment is also affected by the internationalenvironment. The factors which make up the internationalenvironment are :-

• International socio-economic and political changes.• Contribution of foreign capital.• Import and export trade.• Functioning of multinationals and transnationals.• International trade cycles.• International relations and agreements.• War and peace conditions.

f. Legal Environment :- In every economy, whether socialisticor capitalistic, private sector is subject to governmentcontrol. Government controls the functioning of privatesector through its various policies and legislation. Thefactors which determine regulatory environment are :-

• Industrial planning and policies.• Tax structure and subsidies.• Import controls, tariff and duties.• Licensing system.• Policy regarding Foreign Direct Investment (FDI).• Policy decisions on joint ventures and foreign

collaborationsg. Ecological Environment :- Ecological degradation and its

protection have become a major issue in most of thedeveloped and developing countries of the world. In orderto protect our precious environment, series of acts andregulations have .been made by the government. These actsand regulations also affect the international marketing:environment.

Definition of Trade BarriersTrade barriers are the artificial restrictions imposed by thegovernments on free flow of goods and services betweencountries. Tariffs, quotas, taxes, duties, foreign exchangerestrictions, trade agreements. and trading blocs are the tech-niques used for restricting free movement of goods from onecountry to the other.Trade barriers can be broadly classified into two categories

a. Tariff barriers or fiscal controls.b. Non-tariff barriers or quantitative restrictions

Objectives of Trade BarriersTrade barriers are imposed with different objectives underdifferent situations as under :-a. To Protect Home Industries from Foreign

Competition:- In many of the developing countries,majority of basic and heavy industries are still in the initialstage of their development. The cost of production in suchindustries is very high and quality is poor in comparison tothe international market. Therefore such industries needprotection from foreign competitors.

b. To Promote New Industries and Research andDevelopment :-Developing countries, like India, areconducting research in various areas of technologicaldevelopment. In order to motivate the efforts of scientistsand enable them to work with greater initiative suchpotential areas of development need protection fromforeign giants.

c. To Conserve Foreign Exchange Reserves :- Theimmediate solvency of any country depends upon itsforeign exchange reserves. Excessive imports may lead toerosion of valuable foreign currency from the country.Therefore, the government has to use quotas and tariffs asinstruments for controlling imports and conserve foreignexchange.

d. To Maintain Favourable Balance of Payments :- Balanceof payments is defined as the difference between inflow andoutflow of foreign currency in the economy. A country,having favourable balance of payments, commandsgoodwill and reputation in the international market. Tradebarriers help in reducing imports and thereby improvebalance of payments situation.

e. To Protect National Economy from Dumping :-Dumping is the situation whereby a big MNC tries to sellits products at a price which is much below its cost ofproduction. As a result, the domestic manufacturers maynot be able to compete and will have to withdraw from themarket. To prevent this, the government may use tariffs toincrease the price of dumped goods.

f. To Curb Conspicuous Consumption :- Goods, likediamonds and gold, have inelastic demand. Generally,people buy such goods when their prices are high in orderto show off their wealth. Such consumptions are known asconspicuous consumptions. These consumptions cannotbe curtailed by charging high duties and hence, quotasshould be fixed for their curtailment.

g. To Make Economy Self-reliant :- Initially, infantindustries need protection from the government. Gradually,these protected industries develop competitive strength. Atthat juncture, the domestic market can be thrown open toforeign competitors to enable domestic companies toimprove further. This gradually makes the country self-reliant.

h. To Mobilise Public Revenue :- In every economy, whethercapitalist or socialist, the government plays a key role in the

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economic development. The government undertakesvarious developmental activities, which require enormousfinance. Customs duties charged on import and export ofgoods can serve as a significant source of finance for suchpurposes.

i. To Counteract Trade Barriers Imposed by OtherCountries :- Sometimes, in order to counteract tradebarriers imposed by other countries, a country may beforced to impose trade restrictions.

Types of Tariff Trade BarriersTariffs are extensively used trade barriers. Tariffs’ are in the formof customs duties and taxes imposed on internationally tradedcommodities when they cross the national boundaries. The aimof tariffs is to. Increase prices of imported goods and therebyreduce their demand and discourage their consumption.

Tariffs:- Tariff derived from a French word meaning rate, price,or list of charges is a customs duty or tax on products thatmove across borders. Tariff can be classified in several ways. Theclassification scheme used here is based on direction, purpose,length, rate, and distribution point. These classifications’1reiiotnecessarily mutually exclusive.

Direction: Import and Export TariffsTariffs are often imposed on the basis of the direction ofproduct movement, which is, on imports or exports, with thelatter being the less common one. When export tar-iffs arelevied, they usually apply to an exporting country’s scarceresources or raw materials (rather than finished manufacturedproducts). Companies exporting from Russia must pay anaverage export tariff of about 20 pe{cent on a number ofgoods sold in cash transactions and an average export tariff of

about 30 percent for goods sold in noncash (barter) transac-tions.

Purpose: Protective and Revenue TariffsTariffs can be classified as protective tariffs and revenue tariffs.The distinction is based on purpose. The purpose of aprotective tariff is to protect home industry, agri-culture, andlabor against foreign competitors by trying to keep foreigngoods out of the country. The South American markets, forinstance, have high import duties that hinder the import offully built cars. Brazil has a 50 percent import tax on imported“flyaway” planes.The purpose of a revenue tariff, in contrast, is to generate taxrevenues for the government. Compared to a protective tariff, arevenue tariff is relatively low. When Japanese and other foreigncars are imported into the United States, there is a 3 per-centduty. On the other hand, American cars exported to Japan aresubject to a vari-ety of import taxes. Even the cost of shippingis taxed, since Japan considers that the shipping cost adds valueto a car. As a result, a U.S. car sold in Japan can easily cost twiceas much as its price in the United States. The U.S. tax is arevenue tariff, whereas the Japanese tax is more of a protectivetariff.

Length: ‘Tariff Surcharge versus CountervailingDuty’Protective tariffs can be further classified according to length oftime. A tariff sur-charge is a temporary action, whereas acountervailing duty is a permanent Surcharge. When HarleyDavidson claimed that it needed time to adjust to Japanese im-ports, President Reagan felt that it was in the national interest toprovide import relief. To protect the local industry, a tariffsurcharge was used. The tariff on heavy motor-cycles jumpedfrom 4.4 percent to 45 percent for one year and then declined to35 percent, 20 percent, 15 percent, and finally 10 percent insubsequent years.Countervailing duties are imposed on certain imports whenproducts are subsi-dized by foreign governments. These dutiesare thus assessed to offset a special ad-vantage or discountallowed by an exporter’s government. Usually, a governmentpro-vides an export subsidy by rebating certain taxes if goodsare exported.

Rates: Specific, Ad Valorem, and CombinedHow are tax rates applied? To understand the computation,three kinds of tax rates must be distinguished: specific, advalorem, and combined.Specific duties are a fixed or specified amount of money perunit of weight, gauge, of other measure of quantity. Based on astandard physical unit of a product, they are specific rates of somany dollars or cents for a given unit of measure (e.g., $l/gallon, 25~/square yard, $2/ton, etc.) Product costs or prices areirrelevant in this case. Because the duties are constant for low-and high-priced products of the same kind, this method isdiscriminatory and effective for protection against cheap prod-ucts because of their lower unit value. That is, there is a reverserelationship between product value and duty percentage. Asproduct price goes up, a duty when expressed as a percentage ofthis price will fall. On the other hand, for a cheap productwhose value is low, the duty percentage will rise accordingly.

Import Tariffs

Direction Export Tariffs

Protective Tariffs

Purpose Revenue Tariffs

Tariff Surcharge

Time length Countervailing Duties

Tariffs Specific Duties

Tariff rate Ad Valorem duties Combined rates

Single - stage

Production, Value - added Distribution and Cascade Consumption Excise

Turnover or equalization Trade Barriers

Government Administrative Guidance Participation Subsidies in Trade Government procurement

and stand trading Product Classification Product valuation

Customs and entry Documentation Procedures License or permit

Inspection

Health & safety regulation

Product Standards

Product Packaging, labeling & marking Requirements Product testing Product specifications

Nontariff Barriers Export Quotes

Quotas Absolute Import Tariff Quotes Voluntary (OMA & VER)

Exchange & control Multiple exchange rates

Financial Control prior import deposit Credit restriction Profit remittance restrictions

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NAd valorem duties are duties “according to value.” They arestated as a fixed percentage of the invoice value and are appliedas a percentage to the dutiable value of the imported goods.Japan’s ad valorem tariffs on beef llnd processed cheese are 25percent and 35 percent, respectively. This is the opposite ofspecific duties since the percentage is fixed but the total duty isnot. Based on this method, there is a di-rect relationshipbetween the total duties collected and the prices of products.That is, the absolute amount of total duties collected willincrease or decrease with the prices of imported products. Thestrength of this method is that it provides a contin-uous andrelative protection against all price levels of a particular product.Such pro-tection becomes even more critical when inflationincreases prices of imports. -If spe-cific duties were used, theireffect lessens with time because inflation reduces the propor-tionate effect. Another advantage is that ad valorem dutiesprovide an easy comparison of rates across countries and acrossproducts.Combined rates (or compound duty) are a combination of thespecific and ad valorem duties on a single product. They areduties based on both the specific rate and the ad valorem ratethat are applied to an imported product. For example, the tar- ifmay be l0¢ per pound plus 5 percent ad valorem. Under thissystem, both rates are used together, though in some countriesonly the rate producing more revenue may apply.

Distribution Point: Distribution and ConsumptionTaxesSome taxes are collected at a particular point of distribution orwhen purchases and consumption occur. These indirect taxes,frequently adjusted at the border, are of four kinds: single-stage,value-added, cascade, and excise.Single-stage sales tax is a tax collected only at one point in themanufacturing and distribution chain. This tax is perhaps mostcommon in the United States, where retailers and wholesalersmake purchases without paying any taxes simply by show-ing asales tax permit. The single-stage sales tax is not collected untilproducts are purchased by final consumers.A value-added tax (VAT) is a multistage, noncumulative taxon consumption. It is a national sales tax levied at each stage ofthe production and distribution sys-tem, though only on the.Value added at that stage. In other wants, each time a prod-uctchanges hands, even between middlemen, a tax must be paid.But the tax col-lected at a certain stage is based on the addedvalue and not the total value of the product at that point.Sellers in the chain collect the VAT from a buyer, deduct theamount of VAT they have already paid on their purchase of theproduct, and remit the balance to the government. EuropeanUnion customs officers collect the VAT upon importation ofgoods based on the CIF (cost, insurance, and freight) value plusthe duty charged on the product. Table 3-2 on page 94 providesthe V AT rates through-out the world.The VAT is supposed to be non-discriminatory because itapplies to both prod-ucts sold on the domestic market andimported goods. The importance of the value--added tax is dueto the fact that GATT allows a producing country to rebate thevalue-added tax when products are exported. Foreign firmstrying to get a refund from European governments have found

the refund process to be anything but easy (see MarketingStrategy 3 -1).Since the tax applies to imports at the border but because it isfully rebated on exports, the VAT may improve a country’strade balance. The evidence, however, of-fers a mixed picture. Astudy in Europe showed no evidence that the VAT had anymaterial impact on the balance of trade.12 Regarding Korea andthe Philippines, the rebated VAT, by increasing profits fromexports compared with the previous tax regime, may haveencouraged exporting.Cascade taxes are collected at each point in the manufacturingand distribution chain and are levied on the total value of aproduct, including taxes borne by the product at earlier stages.Of the tax systems examined, this appears to be the mostsevere of them all. For over thirty years a now-defunct cascadetax system of taxation in Italy (the IGE) hurt the developmentof large-scale wholesale business there.14 Since the IGE wasimposed each time the goods changed hands, Italian manufac-turers min-imized transfers of goods by selling productsdirectly to retailers. The IGE was re-placed by a value-added taxin 1973, and it. was hoped by foreign manufacturers that therevival of wholesale organizations might facilitate imports offoreign consumer goods. Table 3-3 shows how the tax variesamong the three systems.An excise tax is a one-time charge levied on the sales ofspecified products. Al-coholic beverages and cigarettes are goodexamples. In the United States the federal government collects a3 percent excise tax on telephone services and collects 161t foreach pack of cigarettes. State, county, and city governments mayhave their own ex-cise taxes.These four Kinds of indirect taxes are often adjusted at theborder. Border taxes can be used to raise prices of imports orlower prices of exports. Prices of imports are raised by chargingimported goods with (in addition to customs duties) a tax usu-ally borne by domestic products. For exported products, theirexport prices become more competitive (i.e., lower) when suchproducts are relieved of the same tax that they are subject towhen produced, sold, and consumed domestically. The rebateof this tax when the goods are exported, in effect, lowers theirexport prices.The United States also has border taxes. To protect bourbon,for example, the United States imposes an average tax of $2.68per fifth on Scotch whiskey, in addition to an import tariff topay federal, state, and local excise taxes. Canada replaces itsFederal Sales Tax (FST), which had been 13.5 percent for mostproducts. The FST was collected at the manufacturing stage ofproduction on ‘domestic goods. On im-ports, the tax wascollected by Canada Customs. Because” of the hidden nature ofthe FST, many foreign marketers selling into the Canadianmarket did not’ realize that Canadian manufacturers had alreadybuilt the 13.5 percent FST into their prices. As a result, foreignfirms found that they were not as price competitive as they hadas-sumed. The new tax is a more broadly based Goods andServices Tax (GST); it is a value-added tax similar to thosefound in most European countries. ‘The GST taxes bothgoods and services and curbs exemptions. U.S. exporters

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should benefit from the more transparent nature of the newGST and find it easier to plan export pricing.Many countries have a turnover or equalization tax. This tax isintended to compensate for similar taxes levied on domesticproducts. Any critical examination of this would demonstratethat the tax does not equalize prices at all. When the same taxrate is applied to the imported and domestic products, the effectis uneven. There is a greater impact on the import because thetax is usually levied on the full ClF, duty-paid value, rather thanon the invoice value alone.

Nontariff BarriersTariffs, though generally undesirable, are at least straightforwardand obvious. Non-tariff barriers, in comparison, are moreelusive or nontransparent. Tariffs have de-clined in importance,while nontariff barriers have become more prominent. Oftendisguised, the impact of nontariff barriers can be just asdevastating, if not more, as the impact of tariffs. Laird andYeats have documented the spread of nontariff barri-ers from1966 to 1988 that have been applied unevenly across countriesand indus-trial sectors. is Another study of the occurrence andimportance of nontariff barriers also found significant varia-tions across selected Pacific Rim countries..There are several hundred types of nontariff barriers. Thesebarriers can be grouped in five major categories. Each categorycontains a number of different non-tariff barriers.

Government Participation in TradeThe degree of government involvement in trade varies frompassive to active. The types of participation include administra-tive guidance, state trading and subsidiesAdministrative Guidance Many governments routinelyprovide trade consultation to private companies. Japan has beendoing this on a regular basis to help implement its industrialpolicies. This systematic cooperation between the governmentand busi-ness is labeled “Japan, Inc.” To get private firms toconform to the Japanese gov-ernment’s guidance, the govern-ment uses a carrot-and-stick approach by exerting the influencethrough regulations, recommendations, encouragement,discouragement, or prohibition. Japan’s government agencies’administrative councils are influential enough to make import-ers restrict ‘their purchases to an amount not exceeding a cer-tainpercentage of local demand. The Japanese government deniesthat such a prac-tice exists, claiming that it merely seeks reportson’ the amounts purchased by each firm.Government Procurement and State Trading State trading isthe ultimate in gov-ernment participation, because the govern-ment itself is now the customer or buyer who determines what,when, where, how, and how much to buy. In this practice thestate engages in commercial operations, either directly orindirectly, through the agencies under its control. Such businessactivities are either in place of or in addition to private firms.Although government involvement in business is mostcommon with the com-munist countries, whose governmentsare responsible for the central planning of the whole economy,the practice is definitely not restricted to those nations. The U.S.government, as the largest buyer in the world, is required by the

Buy American Act to give a bidding edge to U.S. suppliers inspite of their higher prices.When the government is further involved in reselling importedproducts, mat-ters become even more complicated. Americantobacco companies complained that Japan’s Tobacco and SaltAgency kept prices of their products artificially high and thatsales representatives from this government tobacco monopolyparticipated in dis-crediting the advertising of Americanproducts.The Government Procurement Code requires the signatorynations to guarantee that they will provide suppliers from othersignatory countries treatment equal to that which they providetheir own suppliers. This guarantee of “national treatment”means that a foreign government must choose the goods withthe lowest price that best meet. The specifications regardless ofthe supplier’s nationality. The Code requires that tech-nicalspecifications not be prepared, adopted, or applied with a viewto creating ob-stacles to international trade. The purchasingagency must adopt specifications geared toward performancerather than design and must base the specifications on interna-tional standards, national technical regulations, or recognizednational standards, where appropriate.Subsidies According to GATT, “subsidy is a “financialcontribution” provided di-rectly or indirectly by a governmentand which confers a benefit.” Subsidies can take many formsincluding. Cash interest rate, value-added tax, corporate incometax, ‘sales tax, freight, insurance, and infrastructure. Subsidizedloans for priority sectors, preferential rediscount rates, andbudgetary subsidies are among the various subsidy policies ofseveral Asian countries.There are several other kinds of subsidies that are not soobvious. Brazil’s re-bates of the various taxes, coupled withother forms of assistance, can be viewed as subsidies. Tennes-see, Ohio, Michigan, and Illinois, in order to attract foreignau-to makers to locate their plants in those states, providedsuch services as highway con-struction, training of workers, andtax breaks, which are simply subsidies in disguise.Sheltered profit is another kind of subsidy. A country mayallow a corporation to shelter its profit from abroad. TheUnited States in 1971 allowed companies to form domesticinternational sales corporations (DISCs) even though they costthe U.S. treasury more than $1 billion a year in revenue. GATT,the multilateral treaty, even-tually ruled that a DISC was anillegal export subsidy. A new U.S. law allows com-panies thatmeet more stringent requirements to form foreign salescorporations (FSCs), which have the same purpose as DISCs.The Subsidies Code, technically named the Agreement onInterpretation and Application of Article VI, XVI and XXIIIof the General Agreement on Tariffs and Trade, recognizes thatgovernment subsidies’ distort the competitive forces at work ininternational trade. The rules of the international agreementnegotiated during the Tokyo Round of Multilateral TradeNegotiations (MTN) differentiate between export subsidies anddomestic subsidies. The Code’s rules also differentiate betweensubsi-dies paid on primary products (e.g., manufactures) andthose paid on nonprimary products and primary minerals. Aprimary product is any product of farm, forest, or fishery in its

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Nnatural form or that has undergone such processing as iscustomarily re-quired to prepare it for transportation andmarketing in substantial volume in inter-national trade (e.g.,frozen and cured meat). The Code prohibits the use of exportsub-sidies on nonprimary products and primary mineralproducts.There is considerable debate over what should be consideredmanufactured prod-ucts, since such products are not entitled toany subsidies. For instance, according to the United States, theEU’s export subsidies for such manufactured products as pastaand wheat flour are banned by the international subsidies code.The EU’s position is that pasta and wheat flour are notmanufactured products.To combat subsidies, the United States has proposed theadoption of the “traf-fic light” approach to provide a frame-work for the classification of all subsidy pro-grams. Based on asubsequent GATT agreement, there are three Lategories: (1)pro-hibited (red light) subsidies, (2) permissible but actionable(yellow light) subsidies, and (3) permissible but nonactionable(green light) subsidies. The permissible but ac-tionablesubsidies are actionable multilaterally and countervailableunilaterally if they cause adverse trade effects. Regardingpermissible but nonactionable subsidies, they are notcountervailable if provided according to criteria intended tolimit their po-tential for distortion.)

Customs and Entry ProceduresCustoms and entry procedures can be employed as nontariffbarriers. These restric-tions involve classification, valuation,documentation, license, inspection, and health and safetyregulations.Classification How a product is classified can be arbitrary andinconsistent and is often based on a customs officer’s judg-ment, at least at the time of entry. The U.S. Customs reclassifiedNissan’s imported truck cabs and chassis from “parts” with 4percent duty to “assembled vehicles” subject to 25 percent leviesinstead.Product classification is important because the way in which aproduct is clas-sified determines its duty stams. A company cansometimes take action to affect the classification of its product.For example, a ruling of the U.S. Customs resulted in a 100percent punitive tariff on certain Japanese computers. Toshibaand NEC, how-ever, took advantage of the ruling’s loopholeby importing boards without micro-processor chips. Theboards were not classified as computers and were thus allowedto enter the United States duty-free. The microchips were theninstalled after entry.In the United States, if an imported product is determined tohave the accept-able minimum percentage of materials pro-duced in a designated country, it can be classified by a customsofficer as having duty-free status. Classification thus deter-minesif certain product categories are qualified for a special treatment,but it also de-termines whether some products should bebanned altogether. Most countries ban ob-scene, immoral, andseditious materials, as well as imports of counterfeit coins, bills,securities, postage stamps, and narcotics. In South Korea,prohibited articles include books, printed matter, motionpictures, phonograph records, sculptures, and other like articles

that are deemed subversive or injurious to national security ordetrimental to the public interest, as well as articles used forespionage or intelligence activities.Valuation Regardless of how products are classified, eachproduct must still be val-ued. The value affects the amount oftariffs levied. A customs appraiser is the one who’ determinesthe value. The process can be highly subjective, and the valua-tion of a product can be interpreted in different ways,depending on what value is used (e.g., foreign, export, import,or manufacturing costs) and how this value is constructed. InJapan a commodity tax of 15 percent is applied to the FOBfactory price of Japanese cars. Yet U.S. cars are valued on the ElFbasis, adding $1,000 more to the final re-tail price of these cars.Documentation Documentation can present another problemat entry because many documents and forms are often necessary,and the documents required can be com-plicated. Japan held upGivenchy’s import application because the company left out anapostrophe for its I’Interdit perfume.Documentation requirements vary from country to country.Usually, the fol-lowing shipping documents are either requiredor requested: commercial invoice, pro j(ml1(/ invoice, certificateof origin, bill of lading, packing list, insurance certificate, importlicense, and shipper’s export declarations. Without properdocumentation, goods may not be cleared through customs. Atthe very least, such complicated and lengthy documents serve toslow down product clearance. France, requiring customsdocumentation to be in French, even held up, trucks from otherEuropean countries for hours while looking for products’ non-French instruction manuals, which were banned.License or Permit Not all products can be freely imported;controlled imports re-quire licenses or permits. For example,importations of distilled spirits, wines, malt beverages, arms,ammunition, and explosives into the United States require alicense issued by the Bureau of Alcohol, Tobacco, and Firearms.India requires license for all imported goods. IS An article isconsidered prohibited if not accompanied by a li-cense. It is notalways easy to obtain an import license, since many countrieswill is-sue one only if goods can be certified as being necessary.Japan simplified its licensing procedure in 1986. Previously, aseparate license application had been required for any newcosmetic product, even when only a change in shade wasinvolved. The new requirements categorize cosmetics intoseventy-eight groups and list permitted ingredients. A marketersimply notifies the government of any new product usingthose ingredients.Inspection Inspection is an integral part of product clearance.Goods must be ex-amined to determine quality and quantity.This step is highly related to other customs and entry proce-dures. First, inspection classifies and values products for tariffpur-poses. Second, inspection reveals whether imported itemsare consistent with those specified in the accompanyingdocuments and whether such items require any li-censes. Third,inspection determines whether products meet health and safetyregu-lations in order to make certain that food products are fitfor human consumption or that the products can be operatedsafely. Fourth, inspection prevents the importation of prohib-ited articles.

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Marketers should be careful in stating the amount and qualityof products, as well as in providing an accurate description ofproducts. Any deviation from the state-ments contained ininvoices necessitates further measurements and determination,more delay, and more expenses.Inspection can be used intentionally to discourage imports.Metal baseball bats from the United States, for instance, have apotential for selling very well in the Japan-ese market. But amajor obstacle is that every single bat must carry a stamp ofcon-sumer safety, and this must be “ascertained” only afterexpensive on-dock inspection.Health and Safety Regulations Many products are subject tohealth and safety reg-ulations, which are necessary to protect thepublic health and environment. Health and safety regulationsare not restricted to agricultural products. The regulations alsoapply to TV receivers, microwave ovens, X-ray devices, cosmet-ics, chemical sub-stances, and wearing apparel.Concern for safety was used by Japan against aluminum softballbats from the United States. The manufacturing process leaves asmall hole in the top filled with a rubber stopper. Japan thusbans the bats on the ground that the stopper might fly out andhurt someone. According to U.S. manufacturers, this fear isunfounded.

QuotasQuotas are a quantity control on imported goods. Generally,they are specific provi-sions limiting the amount of foreignproducts imported in order to protect local firms and toconserve foreign currency. Quotas can be used for export controlas well. An export quota is sometimes required by nationalplanning to preserve scarce resources. From a policy standpoint,a quota is not as desirable as a tariff since a quota gener-ates norevenues for a country. There are three kinds of quotas:absolute, tariff, and voluntary. .Absolute Quotas An absolute quota is the most restrictive ofall. It lilnits in ab-solute terms the amount imported during aquota period. Once filled, further entries are prohibited. Somequotas are global, but others are allocated to specific foreigncountries. Japan imposes strict quotas on oranges and beef. Toappease the EU, it has lifted quotas on skimmed milk powderand tobaccos from Europe. The most extreme of the absolutequota is an embargo, or a zero quota, as shown in the case ofthe U.S. trade embargoes against Iraq and North Korea.Tariff Quotas A tariff quota permits the entry of a limitedquantity of the quota product at a reduced rate of duty.Quantities in excess of the quota can be imported but aresubject to a higher duty rate. Through the use of tariff quotas, acombination of tariffs and quotas is applied with the primarypurpose of importing what is needed and discouragingexcessive quantities through higher tariffs. When the UnitedStates increased tariffs on imported motorcycles in order toprotect the U.S. motorcycle in-dustry, it exempted from this taxthe first 6,000 big motorcycles from Japan and the first 4,000-5,000 units from Europe. Exhibit 3-5 lists products that aresubject to tariff-rate and absolute quotas.Voluntary Quotas A voluntary quota differs from the othertwo kinds of quotas, which are unilaterally imposed. A

voluntary quota is a formal agreement between na-tions orbetween a nation and an industry. This agreement usuallyspecifies the limit of supply by product, country, and volume.

Two kinds of voluntary quotas can be legally distinguished:VER (voluntary export restraint) and OMA (orderly marketingagreement). Whereas an OMA in-volves a negotiation betweentwo governments to specify export management rules, themonitoring of trade volumes, and consultation rights, a VERis a direct agreement between an importing nation’s govern-ment and a foreign exporting industry (i.e., a quota withindustry participation). Both enable the importing country tocircumvent the GATT’s rules (Article XIX) that require thecountry to reciprocate for the quota received and to impose thatmarket safeguard on a most-favored-nation basis. Be-cause thisis a gray area, the OMA and VER can be applied in a discrimina-tory man-ner to a certain country. In the case of a VERinvolving private industries, a public disclosure is not necessary.The largest voluntary quota is the Multi-Fiber Arrangement(MFA) for forty-one export and import countries. This morethan two-decade-old international agree-ment on textiles allowsWestern governments to set quotas on imports of low-pricedtextiles from the Third World. The treaty has been criticizedbecause advanced na-tions are able to force the agreement onpoorer countries.As implied, a country may negotiate to limit voluntarily itsexport to a particu-lar market. This may sound peculiar becausethe country appears to be acting against its own self-interest.But a country’s unwillingness to accept these unfavorable terms

Absolute Quotas • . Animal feeds, containing milk or milk derivatives. • Butter substitutes, containg over 45% butterfat

provided for in subheading 2106.90.15, HTSUS, and butter oil.

• Buttermix, over 5.5% butnot over 45% by weight of butterfat.

• Cheese, natural cheddar, made from unpasteurized milk and aged not less than nine months.

• Dried milk containing 5.5% or less butterfat. • Dried milk described in it em 9904.10.15, HTSUS. • Chocolate crumb and other related articles

containing more than 5.5% by weight of butterfat. • Chocolate crumb containing 5.5% or less by

weight of butterfat. • Ethyl alcohal and mixtures there of for fuel use

from the Caribbean and U.S, Insular Prossession under number 9901.00.50.

• Meat (Australia and New Zealand) • Milk and cream, fluid or frozen, fresh or sour

(New Zealand). • . Malted milk and articles of milk or cream

described in item 9904.10.60, HTSUS. • . Ice cream. • . Milk and cream, condensed or evaporated.

. Cotton having a staple length of under 1-1/18. or more but under 1-3/8..

• . Cotton having a staple length of 1-3/8" or more. • . Cotton card strips made from cotton having a

staple length under 1-3/16" and comber waste, lap waste, sliver waste, and roving waste, whether or not advanced

• . Fibers of cotton processed but not spun. • . Upland cotton. • . Peanuts, shelled or not shelled, blanched, or

otherwise prepared or preserved (except peanut butter).

• . Sugar -containing products.

Commodities Subject to Import Quotas Administered by the Commissioner of Customs as provided for in the Harmonized Tariff Schedule of the United States (HTSUS). Tariff-Rate Quotas • Milk (whole) and cream. • Anchovies, satsuma mandarin oranges, and

olives as described in Presidential Proclamation 5924.

• Tuna fish, described in item 1604.14.20, HTSUS.

• . Whiskbrooms, wholly or in part of broom corn

• . Other brooms, wholl y or in part of broom corn • . Sugars, syrups, and molasses described in

headings 9904.40.20 and 9904.40.60 HTSUS. . NAFTA

• Presidential Proclamation 6411 implem8l1ted the North American Free Trade Agreement and established trade preference levels on the following qualifying imported goods'

Imported from Mexico Milk and cream, Dried milk and dried cream Milk and cream,condensed and evaporated Cheese Tomatoes Onions and shallots Eggplant Chili peppers Squash Watermelons Peanuts Sugars, syrups, and molasses Sugars derived from sugar cane or sugar beets Blended syrups Orange juice Raw cotton Brooms Cotton or man -made fiber apparel, wool apparel, fiber fabrics and made -ups, and cotton or man made fiber yarns Imported from Canada: Cotton or man -made fiber apparel, wool apparel, cotton or Man-made fiber fabrics and make-ups, and cotton or man-made fiber yarns

Textile Articles The U.S. Customs Service administers import controls on certain cotton, wool, man-made fiber, silk blend and other vegetable fiber articles manufactured or produced in designated countries. The U.S. Customs Service ad -ministers the Caribbean Basin Initiative (CBI) Special Ac-cess Program on certain products which are made of U.S. formed and cut fabric and accompanied by a properly certified form ITA -370P. These controls are imposed on the basis of directives issued to the Commissioner of Customs by the Chairman of the Committee for the Im-plementation of Textile Agreements

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Nwill eventually invite trade retaliation and tougher terms in theform of forced quo-tas. It is thus voluntary only in the sensethat the exporting country tries to avoid al-ternative tradebarriers that are even less desirable. For instance, Japan agreed tore-strict and reprice some exports within Great Britain.Quotas are still quotas regardless of what they are called. Theyalways inhibit free trade, and frequently they fail to achieve thedesired goal. The example set by u.s. automakers is instructive.After arguing for quotas and price increases to gain extra moniesto improve productivity and competitiveness, the automakersended up using record profits to pay big bonuses to theirexecutives.

Financial ControlFinancial regulations can also function to restrict internationaltrade. These restrictive monetary policies are designed to controlcapital flow so that currencies can be de-fended or importscontrolled. For example, to defend the weak Italian lira, Italyim-posed a 7 percent tax on the purchase of foreign currencies.There are several forms that financial restrictions can take.Exchange controls also limit the length of time and amountof money an ex-porter can hold for the goods sold. Frenchexporter, for example, must exchange the foreign currencies forfrancs within one month. By regulating all types of the capitaloutflows in foreign currencies, the government either makes itdifficult to get im-ported products or makes such itemsavailable only at higher prices.Multiple Exchange Rates Multiple exchange rates are anotherform of exchange regulation or barrier. The objectives ofmultiple exchange rates are twofold: to encourage exports andimports of certain goods and to discourage exports andimports of others. This means that there is no single rate for allproducts or industries. But with the application of multipleexchange rates, some products and industries will benefit andsome will not. Spain once used low exchange rates for goodsdesignated for ex-port and high rates for those it desired toretain at home. Multiple exchange rates may also apply toimports. The high rates may be used for imports of particulargoods with the government’s approval, whereas low rates maybe used for other imports.Because multiple exchange rates are used to bring in hardcurrencies (through exports) as well as to restrict imports, thissystem is condemned by the International Monetary Fund(IMF). According to the IMF, any unapproved multiple currencyprac-tices are a breach of obligations, and the member maybecome ineligible to use the Fund’s resources. South Africa,trying to stem capital outflows, started in 1985 to re-quirenonresidents to transact capital transactions at a separately freelyfloating ex-change rate (i.e., the financial rand). The financialrand was much more depreciated than the commercial randexchange rate. In 1995, as political uncertainty declined, SouthAfrica unified the two exchange rates.Prior Import Deposits and Credit Restrictions Financialbarriers can also include specific limitations or import restraints,such as prior import deposits and credit re-strictions. Both ofthese barriers operate by imposing—certain financial restrictionson importers. A government can require prior import deposits(forced deposits) that make imports difficult by tying up an

importer’s capital. In effect the importer is pay-ing interest formoney borrowed without being able to use the money or getinterest earnings on the money from the government. Import-ers in Brazil and Italy must de-posit a large sum of money withtheir central banks if they intend to buy foreign goods. To helpinitiate an aircraft industry, the Brazilian government hasrequired an importer of “flyaway” planes to deposit the fullprice of the imported aircraft for one year with no interest.Credit restrictions apply only to imports; that is, exportersmay be able to get loans from the government, usually at veryfavorable rates, but importers will not be able to receive anycredit or financing from the government. Importers must lookfor loans in the private sector-very likely at significantly higherrates, if such loans are available at all.Profit Remittance Restrictions Another form of exchangebarrier is the profit re-mittance restriction. ASEAN countriesshare a common philosophy in allowing un-restricted repatria-tion of profits earned by foreign companies. Singapore, inparticu-lar, allows the unrestricted movement of capital. Butmany countries regulate the remittance of profits earned in localoperations and sent to a parent organization lo-cated abroad.Brazil uses progressive rates in taxing all profits remitted to aparent company abroad, with such rates going up to 60 percent.Other countries practice a form of profit remittance restrictionby simply having long delays in permission for profit expatria-tion. To overcome these practices, MNCs have looked to legalloop-holes. Many employ the various tactics such ascountertrading, currency swaps, and other parallel schemes. Forexample, a multinational firm wanting to repatriate a cur-rencymay swap it with another firm that needs that currency. Or thesefirms may lend to each other in the currency desired by eachparty.

Distinction Between - Tariff Barriers and Non-tariffBarriersTariff Barriers Non-tariff Barriers 1. Meaning:-

Tariff barriers are in the form of taxes and duties charged .on commodities imported and exported.

Non-tariff barriers are quantitative restrictions on physical units of a commodity imported or exported.

2. Types:- Tariff barriers. are classified on the basis of origin, purpose, criteria and relations between the trading countries.

Non-tariff barriers are in the form of quotas, licensing, consular formalities, foreign exchange restrictions, etc,

3. OBJECTIVES The objective of tariff barriers is to increase the price of imported goods and thereby reduce their consumption and import.

The objective of non-tariff barriers is to restrict the quantity of import and there by provide protection to domestic industries.

4. Nature:- It is an indirect method of curtailing imports by increasing the price of imported articles.

It is a direct method of curtailing imports by imposing restrictions on the physical quantity of imports.

5. Effectiveness:- As a method of controlling imports; tariffs may not be effective as people may continue to buy imported goods at a higher price.

As a method of controlling imports non-tariff, barriers may be more effective as they directly control the total volume of goods imported.

6. Revenue:- Tariff barriers generate revenue for the government in the form of taxes and duties.

Non-tariff barriers do not generate any revenue for the government.

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Distinction Between - Advalorem Duty and SpecificDuty

Specific duty

1. MeaningSpecific duty is a duty imposed on each unit of a commodityimported or exported.

2. ConvenienceIt is easy to calculate and administer as it can simply be calculatedby multiplying the rate of duty with number of units importedor exported.

3. Nature of GoodsIt is levied on such goods whose quantification in terms ofnumber of units is possible. For example, number of T. V. setsand metres of cloth.4. In spite of advantages over advalorem duty, specific duty isnot very popular as most of the countries use advaloremduties

5. Main ConsiderationsIn this case value of commodity is not taken into consideration.For example, Rs.5 on each meter of cloth imported or Rs.500on each T.V. set imported.

Advalorem Duty1 Advalorem duty is a duty imposed on the total value ofcommodity imported or exported2 It is difficult to calculate as it requires a proper assessment ofthe value of goods imported o* exported3 It is levied on such goods whose quantification in terms ofnumber of units is not possible. For example,’ rare Paintine:sand statues.4 Generally most of the countries charge duties on the basis ofvalue of goods imported or exported, i.e., advalorem duties5 In this case physical units of commodity are not taken intoconsideration. For example, 5% of F.O.B. value of cloth im-ported or 10% of C.I.F. value of T.V. sets imported.

Question BankQ1. Define International Marketing Environment. Explain its

components.Q2. Define Trade Barriers. What are the objectives of trade

barriers?Q3. What are Tariff Trade Barriers? How are they classified?Q4. Define Non-tariff Barriers. What are the different types

of non*tariff barriers?Q5. When and why was the GATT agreement signed?Q6. What are the functions and objectives of the WTO ?Q7. Explain the Uruguay Round of GATT negotiations with

special reference to India.Q8. Explain the MFN clause of the GATT.Q9. When and why was the UNCTAD constituted?Q10. Explain the GSP under the UNCTAD.Q11. “Trading Blocs create obstacles to international trade.”

Examine critically.

Q12. Define Trading Blocs. What are the different types oftrading blocs?

Q13. Distinguish between Tariff and Non-tariff barriers.Q14. Distinguish between Specific Duty and Advalorem Duty.

Article-1

Non-Tariff BarriersGiven the firm commitment made by the Member Countrieson the programme of tariff reduction under the CEPT Scheme,attention has now shifted to non-tariff barriers. Now Article 5of the CEPT Agreement calls on Member States to “eliminateother non-tariff barriers on a gradual basis within a period offive years after the enjoyment of concessions”. MemberCountries are working to develop detained work programmeson eliminating NTBs for endorsement by the ASEANEconomic Ministers Meeting scheduled in September 1995.Currently, the Preparatory work for NTB elimination is beingundertaken by the Interim Technical Working Group (ITWG)on CEPT for AFTA, which reports directly to the ASEANSenior Economic Officials.Significant progress has already been made in identifying thoseNTBs that affect intra-regional trade the most. The identifica-tion process involved a number of important steps. First, aworking definition of NTBs had to be agreed upon. Thisworking definition (see Table 3) adopted by the ITWG wasbased on a classification developed by the United NationsConference on Trade and Development (UNCTAD). Second, itwas decided to focus on those NTBs that affect the mostwidely-traded Products in the region. These products are thosein chapters 27 (minerals), 84 (electrical appliances) and 85(machinery) of the Harmonised System classification. In 1994,these products made up nearly 55% of Indonesia’s imports;over 64% of Malaysia’s imports; over 50% of the Philippines’imports; and nearly 70% of Thailand’s imports. Then theASEAN Secretariat began compiling information on NTBsfrom a number of different sources, including submissionsmade by Member Countries, the GATT Trade Policy Review,submissions by the ASEAN Chambers of Commerce &Industry (ASEAN-CCI) and the UNCTAD’s Trade Analysisand Information System (TRAINS) database.

Major NTB’s IdentifiedBased on these various information sources, the followingmeasures have been identified as major NTBs affecting intra-regional trade: customs surcharges, technical measures andproduct characteristic requirements, and monopolistic measures.Table 4 gives us an indication of the most widespread NTBs inASEAN. Customs surcharges are applied to about 2.683 tarifflines. Technical measures and product characteristic requirementscome in second involving more than 975 tariff lines. Finally wehave monopolistic measures involving state-trading or the useof a selected or limited group of importers.Table 3

Working Definition of Non-tariff Measures forPurposes of Implementing the Cept AgreementThis section presents working definitions for the trade controlmeasures adopted by the Interim Technical Working Group onCEPT for AFTA. These measures are classified under broad

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Ncategories according to their nature. Within the broad categories,the measures are further subdivided according to their character-istics. Special mention should be made of the measures forsensitive product categories and technical regulations, which aresubdivided according to their corresponding objectives, i.e. forthe protection of human health, animal health and life, planhealth, the environment and wildlife, to control drug abuse, toensure human safety and to ensure national security.

Para-tariff MeasuresOther measures that increase the cost of imports in a mannersimilar to tariff measures, i.e. by a fixed percentage or by a fixedamount, calculated respectively on the basis of the value and thequantity, are known as para-tariff measures. Four groups aredistinguished: customs surcharges; additional charges; internaltaxes and charges levied on imports; and decreed customsvaluation.

Customs surcharges/import surchargesThe customs surcharge, also called surtax or additional duty, isan ad hoc trade policy instrument to raise fiscal revenue or toprotect domestic industry.

Additional chargesAdditional charges, which are levied on imported goods inaddition to customs duties and surcharges and which have nointernal equivalent, comprise various taxes and fees. Thecategory of additional charges includes the tax on foreignexchange transactions, stamp tax, airport license fee, consularinvoice fee, statistical tax, tax on transport facilities and chargesfor sensitive product categories. Various other taxes. such as theexport promotion fund tax, taxes for the special funds, themunicipal tax, registration fee on imported motor vehicles,customs formality tax, etc., are classified as additional charges,n.e.s. It should be noted that Article VIII of GATT states thatfees and charges other than customs duties and internal taxesshall be limited in amount to the approximate cost of servicesrendered and shall not represent an indirect protection todomestic products or a taxation of imports or exports for fiscalpurposes.

Decreed customs valuationCustoms duties and other charges on selected airports can belevied on the basis of a decreed value of goods (the so called“valeur mercuriale” in French). This practice is presented as ameans to avoid fraud or to protect domestic industry. Thedecreed value de facto transforms an ad valorem duty into aspecific duty.

Price Control MeasuresMeasures intended to control the prices of imported articles forthe following reasons : (i) to sustain domestic prices of certainproducts when the import price is inferior to the sustainedprice; (ii) to establish the domestic price of certain productsbecause of price fluctuation in the domestic market or priceinstability in the foreign market; and (iii) to counteract thedamage caused by the application of unfair practices of foreigntrade.Most of these measures affect the cost of airports in a variableamount calculated on the basis of the existing difference

between two prices of the same product. compared for controlpurposes. The measures initially adopted can be administrativefixing of prices and voluntary restriction of the minimum pricelevel of exports or investigation of prices, to subsequentlyarrive at one of the following adjustment mechanisms;suspension of airport licenses; application of variable charges,anti-dumping measures or countervailing duties.

Administrative price fixing of import pricesBy administrative price fixing, the authorities of the importingcountry take into account the domestic prices of the producer orconsumer establish floor and ceiling price limits; or revert todetermined international market values. Various terms are used,depending on the country or sector, to denominate the differentadministrative price fixing methods, such as official prices,minimum import prices or basic import prices.

Voluntary export price restraintA restraint arrangement in which the exporter agrees to keep theprice of his goods above a certain level.

Variable chargesVariable charges bring the market prices of imported agriculturaland food products close to those of corresponding domesticproducts, in advance, for a given period of time, and for a pre-established price. These prices, are known as reference prices,threshold prices or trigger prices. Primary commodities may becharged per total weight, while charges on processed foodstuffscan be levied in proportion to the primary product contents inthe final product. In the case of the EU, the charges applied toprimary products as such are called variable levies and those aspart of a processed product, variable components.

Finance MeasuresMeasures that regulate the access to and cost of foreignexchange for imports and define the terms of payment. Theymay increase the airport cost in a fashion similar to tariffmeasures.

Advance payment requirementsAdvance payment of the value of the import transaction an /orrelated imported taxes, whichis required at the moment of theapplication for, or the issuance of, the import license.

Advance import depositsObligation to deposit a percentage of the value of the importtransaction for a given time period in advance of the imports,with no allowance for interest to be accrued on the deposit.

Cash margin requirementObligation to deposit the total amount corresponding to thetransaction value, or a specified part of it, in a commercial bank,before the opening of a letter of credit; payment be required inforeign currency.

Advance payment of customs dutiesAdvance payment of the totally or a part of customs duties,with no allowance for interest to be accrued.

Refundable deposits for sensitive product categories

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The deposit refunds are charges which are refunded when theused products or its containers are returned to a collectionsystem.

Regulations Concerning Terms of Payment for ImportsSpecial regulations regarding the terms of payment of importsand the obtaining and use of credit (foreign or domestic) tofinance imports.

Transfer Ddelays, QueuingMinimum permitted delays between the date of delivery ofgoods and that of final settlement of the import transaction(usually 90, 180 or 360 days for consumer goods and industrialinputs and two to five years for capital goods). Queuing takesplace when the prescribed delays cannot be observed because offoreign exchange shortage, and transactions are settled succes-sively after a longer waiting period.

Monopolistic MeasuresMeasures which create a monopolistic situation., by givingexclusive rights to one or a limited group of economic opera-tors. for earlier social, fiscal or economic reasons.

Single Channel for ImportsAll imports or imports of selected commodities have to bechannelled through state-owned agencies or state-controlledenterprises. Sometimes the private sector may also be grantedexclusive import rights.

Compulsory National ServicesGovernment-sanctioned exclusive rights of national insuranceand shipping companies on all or a specified share of imports.

Technical MeasuresMeasures referring to product characteristics such as quality,safety or dimensions, including the applicable administrativeprovisions, terminology symbols, testing and test methods,packaging, marking and labelling requirements as they apply to aproduct. The implementation of these measures by sensitiveproduct categories can result in the application of one of themeasures listed under codes ending in 71 to 79.

Technical RegulationsRegulations that provide technical requirements, either directlyor by referring to or incorporating the content of a standard,technical specification or code of practice, in order to protecthuman life or health or to protect animal life or health (sanitaryregulation); to protect plant health (phytosanitary regulation); toprotect the environment and to protect wildlife; to ensurehuman safety; to ensure national security; to prevent deceptivepractices.The regulation may be supplemented by technical guidance thatoutlines some means of compliance with the requirements ofthe regulation, including administrative provisions for customsclearance, such as prior registration of the importer or obliga-tion to present a certificate issued by relevant governmentalservices in the country of origin of the goods. In certain cases, aprior recognition of the exporter or certificate issuing service bythe importing country is also required.

Product characteristics requirementsTechnical specifications prescribing technical requirements to befulfilled by a product.

Marking RequirementsMeasures defining the information for transport and customs,that the packaging of goods should carry (country of origin,weight, special symbols for dangerous substances, etc.)

Labelling RequirementsMeasures regulating the kind and size of printing on packagesand labels and defining the information that may or should beprovided to the consumer.

Packaging RequirementsMeasures regulating the mode in which goods must be orcannot be packed, in conformity with the importing countryhandling equipment or for other reasons, and defining thepackaging materpackaging materials to be used.

Testing, Inspection and Quarantine RequirementsCompulsory testing of product samples by a designatedlaboratory in the importing country, inspection of goods byhealth authorities prior to release from customs or a quarantinerequirement in respect of live animals and plants.

Pre-shipment InspectionCompulsory quality, quantity and price control of goods priorto shipment from the exporting country, effected by aninspecting agency mandated by the authorities of the importingcountry. Price control is intended to avoid under invoicing andover invoicing, so that customs duties are not evaded or foreignexchange is not being drained.

Special Customs FormalitiesFormalities which are not clearly related to the administration ofany measure applied by the given importing country such as theobligation to submit more detailed product information thannormally required on the basis of a customs declaration, therequirement to use specific points of entry, etc.Table 4

Most Prevalent NTBS, by number of Tariff Lines(Preliminary)

Source: The ASEAN Secretariat

Modality for Eliminating NTBsSince the measures that act as NTBs tend to vary greatly in theirnature, NTB-elimination will mean a different thing dependingon the measure concerned. In the case of surcharges this mightmean something as simple as doing away with these surcharges.On the other hand, technical regulations cannot be done awaywith because there are valid reasons for maintaining them, such

Non-tariff Barrier Number of Tariff Line Affected

Customs surcharges 2,683

Additional Charges 126

Single Channel for Imports 65

State-trading Administration 10

Technical Measures 568

Product Characteristic Requirement 407

Marketing Requirements 3

Technical Regulations 3

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Nas public safety, environmental concern, or health reasons. Inwhich case, the elimination of these measures as NTBs mightmean harmonizing product standards or developing mutualrecognition of standards across Member Countries. The idea isto limit the trade-hampering effects of technical regulations ormeasures. In the case of monopolistic measures or statemonopoly, the process of NTB elimination might meancreating a window for competition and market access by otherASEAN Member Countries successively after a longer waitingperiod.Measures which create a monopolistic situation., by givingexclusive rights to one or a limited group of economic opera-tors. for earlier social, fiscal or economic reasons.

Single Channel for ImportsAll imports or imports of selected commodities have to bechannelled through state-owned agencies or state-controlledenterprises. Sometimes the private sector may also be grantedexclusive import rights.

Compulsory National ServicesGovernment-sanctioned exclusive rights of national insuranceand shipping companies on all or a specified share of imports.

General Features of the Process for Eliminating NTBsThere has already been an agreement on the general features ofthe process for eliminating NTBs in ASEAN. The processInvolves (a) verification of information on NTBs, (b)prioritisation of products/NTBs, (c) developing specific workprogrammes, and (d) obtaining a mandate from the ASEANEconomic Ministers to implement the work programme.Member Countries are now in the process of verifying the listof NTBs and products covered by these measures compiled bythe ASEAN Secretariat. Several criteria have already beenconsidered by the Interim Technical Working Group on CEPTfor AFTA (ITWG) to identify which products/measures haveto be dealt with first. These criteria can be used singly or incombination with each other to set priorities. These criteria arein order of importance: (a) number of private sector com-plaints, (b) difference between domestic and world prices, and(c) trade value. The first criterion would rely on the privatesector’s or exporters’ complaints. Presumably, they are in a betterposition to tell how different measures existing in the countryof destination acts as a trade barrier. The second criterion is theprice divergence between domestic and world prices. The pricewedge gives an indication of how much trade is hindered sinceif there are no trade barriers presumably importation wouldtend to wipe out this price difference. The difficulty with thiscriterion is that it is difficult to find the price data to make thissort of comparison. Finally, the trade value criterion wouldprioritise those NTBs/products which is traded most widely(both within and outside the region). The advantage of thiscriterion is that the ASEAN Secretariat already has this informa-tion. The disadvantage of this criterion is that it does not tell uswhether the NTB present in the sector hampers trade or not.The fact that there is extensive trade in this product may indicatethat the NTB is not an important hindrance to trade. Aspointed out above, these criteria are not mutually exclusive.They can be used jointly, and in fact, where all three criteria

converge, they should give a robust indicator of the degree towhich NTBs exist in that product or sector.

Other ASEAN-wide Activities Bearing on NTBsAlthough, the work on NTB elimination is now currentlycentered in the Interim Technical Working Group on CEPT forAFTA (ITWG), it is recognized that expertise from differentASEAN bodies will have to be tapped for carrying out thiswork eventually. One of these bodies is the ASEAN Consulta-tive Committee for Standards and Quality (ACCSQ) which hasalready set up a Task Force to deal with NTB elimination. TheNTB elimination process, specially that bearing on technicalstandards, will require the assistance of ACCSQ. It can convenethe expert panels or expert groups that will be involved inassessing how far ASEAN can go in harmonising technicalstandards or developing mutual recognition agreements. Thereis also some work along these lines currently being done onSanitary and Phytosanitary (SPS) measures for agriculturalproducts. Under the Senior Officials of the ASEAN Ministersof Agriculture and Forestry (SOM AMAF) is a Working Groupon SPS measures which have come up with action plans onNTB elimination in the areas of crops, livestock and fisheries.The action plans involve compiling information on technicalmeasures in ASEAN countries covering agricultural products,and looking into how greater transparency, mutual recognitionand harmonisation of SPS standards can further liberalise intra-ASEAN trade in agricultural products.

Decision of the Seventh AFTA CouncilThe Seventh AFTA Council has tasked these Working Groupsto finalise their Action Plans by November 1995 providing adetailed timetable of all their activities.

Article-2

Trade Tariffs: The Next GenerationThis week the authorities responsible for public safety inWashington, D.C. have been on high alert. No one wants arepeat performance of last year’s Seattle protests, looting, andvandalism. At issue is a difficult-to-understand, but powerful,fear of “globalization.”The dominant thread in the protests against globalization isAmerica’s international trade relationships. Next month,Congress is expected to vote on legislation to make our traderelationship with China normal – to make it match ourrelationship with other countries.Normal trade status would have a direct and positive effect onthe high tech sector of our economy. Tariffs would be put on alevel playing field for telecommunications equipment. Americanconsumers who purchase telecommunications equipmentsimply pay for the products. However, Chinese consumers whobuy American-made telecommunications equipment pay a tariff– an unnecessary and unfair tax – on top of the price of theproduct, which makes it difficult for American companies to selltheir products in China.Critics maintain that China has a history of eliminating tariffsonly after they are no longer needed to keep American productsout, because either the product is obsolete or there is a superiorChinese product available.

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However, every trade barrier and tariff removed on a type ofproduct – like telecommunications equipment – is a tradebarrier and tariff that will no longer harm the next generationof American-made products. Normal trade relations wouldwork to remove tariffs and trade barriers when they are a realthreat, not after the fact.Continued growth demands new ideas and the innovation ofnew products. American high-tech workers excel in this respect.It is only sensible that a high rate of growth also demands alarger marketplace for these new ideas and new products. Thereis little doubt that China is the largest marketplace on Earth.Let’s hope that Members of Congress understand that it is timeto eliminate barriers to trade and tariffs on American-madehigh-tech products.

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World Trade Organisation (WTO)• GATT - Background.• Objectives.• Functions.• GATT Negotiation Rounds.• Uruguay Round.• Most Favoured Nations (MFN) Clause.

United Nations Conference on Trade andDevelopment (UNCTAD)• Background.• Functions.• Generalised -System of Preference (GSP).

Trading Blocs• Meaning.• Types.Opportunities and Threats.

World Trade Organisation (WTO) -ObjectivesThe Uruguay Round negotiations concluded on 15th April1994 at Marrakech, Morocco. According to the Marrakechdeclaration - the results of the Uruguay Round wouldstrengthen the world economy and would lead to more trade,investment, employment and income growth throughout theworld. In order to implement the final act of Uruguay Roundagreement of GAIT, the World Trade Organisation (WTO) wasestablished on 1st January 1995 with the following objectives :-a. To raise the standards of living.b. To ensure ,full employment and a large and steadily

growing volume of real income and effective demand.c. To expand production of goods and services and

international trade.d. To allow for the optimal use of the world’s resources in

accordance with the objective of sustainable development.e. To protect and preserve the environment.f. To ensure that developing countries secure a share in the

growth in international trade commensurate with the needsof their economic development.

g. To effect substantial reduction in tariffs and other barriers totrade and to eliminate the discriminatory treatment ininternational trade relations and;

h. To develop an integrated, more viable and durablemultilateral trading system.

WTO – FunctionsThe WTO is the umbrella organisation responsible foroverseeing implementation of all agreement-multilateral

LESSON 6:WTO,GATT AND TRADING BLOCS

(signed by all WTO members) and plurilateral (signed by agroup of members for specific issue) that have been negotiatedunder Uruguay Round or will be negotiated in future. It is toprovide a forum for further negotiations on matters covered bythe agreements as well as on new issue and responsible forsettlement of disputes among member nations.The main functions of the WTO as set out in Article III are :a. To facilitate the implementation, administration and

operation of the Multilateral Trade Agreement and thePlurilateral Trade Agreements.

b. To secure implementation of the significant tariff cuts andalso reduction of non-tariff measures agreed in the tradenegotiations.

c. To provide for Dispute Settlement Mechanism in order toadjudicate the trade’ disputes which could not be solvedthrough bilateral talks between the member countries.

d. To co-operate with other international institutions like theInternational Monetary Fund (IMF) and the InternationalBank for Reconstruction and Development (IBRD)and itsaffiliated agencies to achieve greater coherence in globaleconomic policy making.,

e. To act as a watchdog of international trade:f. To act as a management consultant for the promotion of

international trade.g. Fourthly, it is responsible for periodic reviews of Trade

Policies of the member nations.

WTO- PrinciplesThe Guiding principles of WTO (many inherited from GATT)are• Non-discrimination, which in practice means two things.

First: Most Favoured Nation (MFN) Treatment. Any Tradeconcession offered by one member of WTO to anothermember must be offered to all members. Second: NationalTreatment. Imported goods should not be discriminatedagainst the domestic goods – same treatment to be accordedto both.

• Freer trading system – with barriers coming down throughnegotiations

• Predictable trading system-foreign companies, investors andgovernments should be confident that trade barriers(including tariffs, non-tariff barriers and other measures)would not be raised arbitrarily; more and more tariff ratesare to be ‘bound’ against subsequent increases.

• More competitive trading system – by discouraging ‘unfair’practices in the guise of export subsidies and dumpingproducts at below cost

• More beneficial to less developed countries – by givingmore time to adjust, greater flexibility and special privileges.

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WTO -The Uruguay RoundThe VIIIth and the latest round of Multilateral Trade Negotia-tions is known as Uruguay Round because it was held inPantadel Este in Uruguay in September 1986. Because of thecomplexities of the issues involved and conf1ict of interests.among the participating countries, ‘the Uruguay Round couldnot be concluded in December 1990 as’ it was originallyscheduled: This round concluded in 1993.The major highlights of the Uruguay Round are:-a. Expansion in the Sphere of Activities :- The traditional

concerns of the GAIT were limited to international trade ingoods. The Uruguay Round, however, went much beyondgoods to services, ‘technology, investment and information.

b. Liberalisation of Trade in Agriculture and TextileGoods :- These were the highly protected sectors indeveloped as well as developing countries. Farmers werepatronised in various ways such as import of subsidisedinputs and export subsidies. Similarly, trade in textiles wasrestricted by the Multi-fiber Agreement (MFA). TheUruguay Round successfully brought about liberalisation ofboth these sectors by dismantling the MFA and reducingimport barriers on agricultural goods.

c. Patents:- One of major areas of objection in India is aboutTRIPs agreement. The TRIPs agreement includes sevenareas of intellectual property rights namely copyright,trademark, trade secrets, industrial designs, geographicalappellations, integrated circuits and patents. It is importantto note that of these seven areas, it is only in the area ofpatents that India’s present policy laws and regulations arenot in conformity with TRIPs agreement.

d. Farmers’ Interest :- Contrary to the wrong propaganda inIndia, leading to farmers’ agitation, the Uruguay Roundagreement regarding patenting of seeds does not preventfarmers from retaining seeds for their own use or exchangeof seeds. However, if should be noted that liberalisation ofagriculture by developed nations would benefit developingcountries more as there is no reciprocity on the part ofdeveloping countries to liberalise agricultural sector in theircountries.

e. Subsidies:- Export subsidies to farmers to be cut by 13.3%in developing countries and by 20% in developed countriesover a period of 6 years. Again direct subsidies to be cut by:36% over the same period. All these are applicable providedthe value of subsidies is more than 10% of the value ofoutput. Agriculture subsidies in India are much below 10%of the total value of output and therefore, India remainsunaffected by these provisions.

f. Tariff Cut:- While developing countries have to cut tariffsby 24% over the period of next 10 years, the developedcountries are committed to effect tariff cut by 36% over aperiod of 6 years. In industrial countries, tariffs would betotally eliminated in several sectors like steel, pharmaceutical,wood and wood products, etc.

g. Trade in Services :- Developing countries were veryapprehensive about the proposal to liberalise trade inservices. However, the difference of opinion between the

U.S. and European Community (EC) on this issue left, theservice sector largely unaffected.

h. Establishment of the WTO :- One of the majorachievements of the Uruguay round is the making of rulesand regulations more transparent which has made unilateralactions more difficult. The results of Uruguay round are tobe implemented by the newly set up WTO, which hasreplaced the GATT.

WTO-Most, Favoured Nations (MFN) ClauseNon-discrimination is one of the most important principles ofthe WTO. The principle of non-discrimination requires that nomember country shall discriminate between the members’ ofWTO in the conduct of international trade. This principle isknown as the Most Favoured Nations (MFN) Clause.According to this Clause, a member nation of the WTO mustgive the same most favourable treatment with, respect to tariffsand related matters to other members, which it gives to anyother member country. This non-discriminatory treatmentensures that any tariff reduction or other trade concession isautomatically extended to all contracting parties of the WTO.For example, if the USA gives ‘ a preferential treatment toPakistan in respect of tariff reduction then the USA must givethe same preferential treatment of tariff reduction to all themembers of WTO.However, there are some exceptions ,to the MFN principle :-a. Grandfather Clause :- Article 1 (2) permits contracting

parties to continue with the preferences received or grantedunder different arrangements, which were in existence priorto the formation of the GATT. But it prohibits any changein the margin of preferences granted’ or received. For examplethe United States preferences to Philippines fall under thiscategory, as also Common Wealth Preferences (CWP).

b. Customs Union and Free Trade Areas :- Article XXIVprovides for the formation of Customs Union and FreeTrade Areas. As per this clause, nations of the world areallowed to form Customs Union and Free Trade Zones. Forexample, member countries of the European Union areallowed to freely import and export not only goods andservices but also factors of production such as capital andlabour between them.

Ministerial Conference

General Council

Dispute Trade Policy Settlement Review Body Body

Secretariat (Director General)

Council for Trade in Goods

Council for Trade in Services

Council for Tra de-Related

Aspects of Intellectual Property

Right (TRIPs)

Committee on Trade and

Development

Committee on Balance- of- Payments

Restrictions

Committee on Budget,

Finance, and Administration

Committee on Trade and

Environment

Committee on the Agreement

on Trade in Civil Aircraft

Committee on the Agreement

on Government Procurement

Committee on the International

Dairy Arrangement

Committee on the Arrangement

Regarding Bovine Meat

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NWTO Organization Chart

General Agreement on Tariff and Trade (GATT) -BackgroundVirtually all nations seek to pursue their own best interests ininternational trade. The result is that sooner or later interna-tional trade and marketing can be disrupted. To prevent or atleast alleviate any problems, there is a world organization inGeneva known as the General Agreement on Tariffs and TradeGATT). GATT is a mul-tilateral trade agreement with oversea,and it has been labeled the locomotive that powers internationalcommerce.Created in January 1948, GATT is intended to achieve a broad,multilateral, and free worldwide system of trading. Forexample, its code requires international bid-ding on majorprojects. GATT provides the forum for tariff negotiations andthe elim-ination of trade discrimination. Its members accountfor some 90 percent of world trade. Those who are notGATT’s members include some Latin American and Africancountries as well as many others in southern Asia and theMiddle East.The four basic principles of. GATT are:1. Member countries will consult each other concerning trade

problems.2. The agreement provides a framework for negotiation and

embodies results of negotiations in a legal instrument.3. Countries should protect domestic industries only through

tariffs, when needed and if permitted. There should be noother restrictive devices such as quotas prohibiting imports.

4. Trade should be conducted on a nondiscriminatory basis.Reductions of barriers should be mutual and reciprocal becauseany country’s import increases caused by such reductions will beoffset by export increases caused by other countries’ reductionof restrictions. This concept is the basis of the principle of themost favored nation (MFN), which is the cornerstone ofGAIT. According to this principle, countries should grant oneanother treatment as favorable as treatment given to their besttrading partners or any other country. For example, reductionsaccorded France by the United States should be extended toother countries with which the United States exchanges theMFN agreement (e.g., to Brazil). Likewise, if a country decidesto ‘temporarily protect its local industry because that industry isseriously threatened, then the newly erected barriers must applyto all countries even though the threat to its industry mightonly come from a single nation. The MFN principle thus movescountries away from bilateral bargaining to multilateral (orsimultaneous bilateral) bargaining. Each country must beconcerned with the implications that its concessions for onecountry would mean for other countries. The only exception isthat an advanced country should not expect reciprocity fromless-developed coun-tries.The United States does not accord MFN status to communistcountries that re-strict emigration, but this requirement can bewaived by the President. After China first received MFN statusfrom the United States in 1980, mushroom imports fromChina jumped from nothing to nearly 50 percent of all U.S.mushroom imports. This increase owed much to the decline of

canned mushroom duties, from 45 percent to 10 percent. Thegranting of MFN status to China was done largely for politicalrea-sons. The Soviet Union, despite having traded with tl.1eUnited States longer than China, remained unable to gain MFNstatus and denounced the U.S. action. Russia, however, didfinally receive MFN status later on. On the other hand, thecontinuing trade and political conflicts have led many politiciansand groups to demand that the United States stop renewingMFN status for China. The Chinese, of course, have been quitevocal with their unhappiness with this threat.According to GATT, the only valid reason for tariffs in worldbusiness is for the protection of an infant industry. Otherunderstandable reasons include defense or noneconomicconcerns, such as some revenue raising. The other noneconomicrea-sons-improvements in terms of trade, income, and balanceof payments-are “beggar-thy-neighbor” policies which creategains at the expense of others, and they are not considered byGATT to be valid reasons for refusing to reduce tariffs.Seven successive rounds of multilateral trade negotiationsunder GAIT auspices produced a decline in average tariff onindustrial products in industrial countries from more than 40percent in 1947 to about 5 percent in 198.8. In the meantime,global trade greatly expanded as the volume of trade inmanufactured goods increased twenty--fold.The preamble of the GATT mentions the following as itsimportant objectives :-a. Raising the standard of living.b. Ensuring full employment and a large and steadily growing

volume of real income and effective demand.c. Better utilisation of the resources of the world.d. Expansion of production of goods and services and

international trade.

The GAT  T- Negotiation Rounds

So far, eight rounds of negotiations are over. Each round tookseveral years. .a. The Geneva Round, 1947.b. The Annecy Round, 1949.c. The Torquay Round, 1950-51.d. The Geneva Round 1956.e. The Dillon Round 1960-61.f. The Kennedy Round, 1964-67.g. The Tokyo Round, 1973-79.h. The Uruguay Round, 1986-1993.The first six rounds of Multilateral Trade Negotiations wereconcentrated almost exclusively on reducing tariffs.The VIIth Round, the Tokyo Round, tackled non-tariffbarriers also.The VIIIth Round, the Uruguay Round, tackled trade inservices, Trade Related Aspects of Intellectual Property Rights(TRIPs) and Trade Related Investment Measures (TRIMs).

The Uruguay RoundThe Uruguay Round of multilateral trade negotiations,launched in Punta del Este, Uruguay, in September 1986, aimed

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to liberalize trade further, to strengthen GAIT’s role, to fostercooperation, and to enhance the interrelationships betweentrade and other economic policies that affect growth anddevelopment. The Uruguay Round attempted to deal with newareas such as services, intellectual property rights, and trade-related investment. Developed nations offered to reduce tradeprotection to their agriculture and textile industries in exchangefor less-developed countries’ greater imports of services andgreater respect for intellectual property. However; the vari-ouscountries’ varying interests repeatedly stalled the talk. Francewanted to veto the accord between the United States and theEU which cut production supports, export subsidy payments,and import tariffs. Japan and South Korea, on the other hand,did not want to give up their ban on rice imports. The UnitedStates, in contrast, wanted to keep import quotas for ThirdWorld textile imports for 15 more years while de-manding theEU to drop quotas on imported films and TV programs.Agricultural disputes even led to violent protests by farmers inFrance, Japan, South Korea, and others.Inability to reach an agreement led to consecutive continuationso f the Uruguay Round in 1990 and 1991. Not surprisingly, LeeKuan Yew o f Singapore once called GATT the GeneralAgreement to Talk and Talk. Fortunately, delegations frommore than 100 countries were finally able to conclude negotia-tion at the end of 1993 after seven years of talks. The 109nations signed the 22,000-page agreement in 1994. This mostambitious and comprehensive global commercial agreement inhistory provides for a phase-out of the Multifiber Arrangement(MFA) over a 10-year period while re-forming trade in agricul-tural goods. The agreement also lowers tariffs by greater thanone-third ($700 billion), writes new rules of trade for intellectualproperty and ser-vices, and strengthens the dispute-settlementprocess.

United Nations Conference on Trade and Development -BackgroundIt is true that the functioning of the WTO has mainly benefiteddeveloped countries. That does not mean that the developingcountries like India are losing. The gains of these countries arelimited as compared to those of the developed countries. Thisled to intense dissatisfaction among the developing countriesand a need was felt for the formation of an internationalorganization for the development of underdeveloped anddeveloping countries of the world.Hence, the widening gap between the industrial and developingcountries, the general dissatisfaction of developing countrieswith the GATT and the need for a new international economicco-operation in the field of trade and aid encouraged theestablishment of the UNCTAD.The Cairo Conference of developing nations, held in July 1962,passed the “Cairo Declaration of Developing countries”convening the United Nations Conference on Trade andDevelopment (UNCTAD). The UNCTAD was established bythe UN General Assembly in 1964. The main function of theUNCTAD is to promote international trade with a view toaccelerate economic development.

UNCTAD:- Functions

The main functions of UNCTAD are :-

a. To promote international trade and economic developmentof less developed and developing countries;

b. To promote trade ‘and economic co-operation particularlybetween countries, at different stages of economicdevelopment and having different economic and socialsystems

c. To formulate the principles and policies for internationaltrade and problems related to. economic development;

d. To secure execution of the principles and policies framed forinternational trade and solving problems related toeconomic development.

e. To promote a more equitable international economic order;f. To secure a larger voice for developing countries .in decision-

making.Since 1964, the UNCTAD has conducted so far ten’ conferenceat different, places, with an internal of four years.

UNCTAD - Generalised System of Preferences (GSP)At the Second UNCTAD Conference, which was held at NewDelhi in 1968, it was strongly advocated that meager exportsfrom developing countries would reduce their importingcapacity and thereby would hamper the development of theworld trade as a whole. Thus; an immediate need for boostingexports from developing countries was felt. As a result,Generalised System of Preferences (GSP) was introduced.The Generalised System of Preferences (GSP) is a. schemelaunched by the UNCTAD to encourage exports from develop-ing countries to developed countries. Under this scheme, thedeveloped countries are expected to grant a special dutyconcession on imports of specified manufacturers and semimanufacturers from the developing countries.Although the benefits derived from the creation of GAIT arerarely disputed, LDCs do not necessarily embrace GAIT becausethose countries believe the benefits are not evenly distributed.Tariff reduction generally favors manufactured goods ratherthan primary goods. LDCs rely mainly on exports of primaryproducts, which are then converted by advanced nations imomanufactured products for export back to LDCs. As a result, anLDC’s exports will usually be lower in value than its imports,thus exacerbating the country’s poverty status.In response to LDCs’ needs, the United Nations Conference onTrade and De-velopment (UNCTAD) was created as a perma-nent organ of the UN General As-sembly. Efforts by UNCTAD led to the establishment of the New International Eco-nomic Order (NIEO) program. The program seeks to assistLDCs through the stabi-lization of prices of primary products,the expansion of LDCs’ manufacturing capa-bilities, and theacquisition by LDCs of advanced technology.The goal of UNCTAD is to encourage development in ThirdWorld countries and enhance their export positions. This goalled to the establishment of a tariff pref-erence system forLDCs’ manufactured products. In spite of GATT’snondiscrimina-tion principle, advanced nations agreed to grantsuch preferences to LDCs’ goods. UNCT AD also played a keyrole in the emergence of a maritime shipping code, spe-cialinternational programs to help the least developed countries,and international aid targets.

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NThe European Economic Community (EEC) countries and anumber of other countries, such as the USA, the USSR, Japan,Norway, New Zealand, Finland, Sweden, Czechoslovakia,Hungary, Switzerland, Austria, Canada, Australia, Bulgaria andPoland have introduced the GSP.The GSP facility is subject to the following conditions:a. The GSP facility is available only to the developing

countries.b. It is available only on the products included in the GSP list.c. The value added requirements and process criteria must be

complied with.d. It is subject to certain stringent quantitative limitations.e. It is applicable for a period of 10 years from its institution

by the preference granting countries.’h. The preferential rates of duty under the scheme differ from

country to country.

Objectives of GSP

a. To promote exports from developing countries of theworld and thereby to promote their economicdevelopment.

b. To improve competitiveness .of exporters from thedeveloping countries by giving them an exemption orconcession in duties.

c. To promote market accessibility of products from LDCsand thereby help. Such countries in the process ofindustrialisation.

Meaning of Trading BlocsTrading Blocs are the associations of countries situated in aparticular region whereby they come on to a common under-standing regarding rules and regulations to be followed whileexporting and importing goods among them. Such blocs haveliberal rules for member countries while a separate set of rules islaid for non-members. For example, European Union (EU),Association of South East Asian Nations (ASEAN).

Definition –Trading BlocsThe definition of a trading bloc varies widely. However, onedefinition that encompasses the main attributes of tradingblocs and touches on the reasons that countries may have forforming such an organization is that given by the United StatesNational Policy association. According to this definition, atrading bloc is defined by four characteristics, it:1. participates in a special trade relationship established by a

formal agreement that promotes and facilitates trade withinthat group of countries in preference to trade with outsidenations by discriminating against nonmembers;

2. has attained or has as a stated goal the deepening of tradeliberalization or integration with the objective ofestablishing a free trade area, customs union, or commonmarket;

3. strives to reach common positions in negotiations withthird countries, with other trade blocs, or in multilateralforums; and

4. attempts to coordinate national economic policies tominimize disruption to intrabloc economic transactions.

Trading blocs are created because according to the theory ofcomparative advantage, countries should specialize in producingthose goods in which they have a comparative advantage; thatis, those goods that they have a lower opportunity cost ofproduction than other nations. By specializing in the produc-tion of these goods, a group of nations as a whole canproduce, and therefore consume, a greater quantity of eachproduct. However, as countries become more specialized in theproduction of goods, it becomes necessary to trade withcountries that need these goods or that have resources that arenot available in that nation. Due to this factor, as nationsbecome more specialized, they also become increasinglydependent on their trading partners. Furthermore, since smallercountries with fewer resources and land are generally lesspowerful than larger nations, the need arises to developeconomic alliances to gain buying and selling power. Hence,trading blocs arise.Trading blocs provide many economic benefits to their mem-bers. These can be grouped in two categories: competition andscale effects, and trade and location effects. Competition andscale effects refer to the benefits that arise from the possibleincrease in foreign direct investment, from the formation ofeconomies of scale, and from increased competition as separatenational markets become more integrated into a single market.By creating larger markets, trading blocs may assist in attractingforeign direct investment. When foreign firms want to supply aproduct to a country, they have two options: to import it or tobuild a local plant. Importing has the disadvantages created bytariffs and by other trade barriers that may be used. However,domestic production is riskier in that a certain amount of saleshave to be made for the initial investment to be profitable.Therefore, a company may still choose to import the producteven with the disadvantages that this entails. However, byincreasing market size and making markets more competitive,trading blocs favor the lower marginal costs of locally producingproducts rather than importing them, and therefore often leadto an increase in foreign direct investment. In fact, this wasobserved to be the case in Mexico where foreign direct invest-ment more than doubled the year after it joined NAFTA.Similarly, following the formation of the European Union, theEU’s share of worldwide inward foreign direct investmentflows increased from 28% to 33% during the period from 1982to 1993.Creating large markets not only serves an important function byincreasing the amount of foreign direct investment, it alsoallows for economies of scale. Many nations are not largeenough to support the production of goods with largeeconomies of scale because they lack large enough markets inwhich to sell their products or from which to obtain inputs.Trading blocs can provide these and consequently allow foreconomies of scale to be achieved. By allowing for bulkproduction, economies of scale decrease the average cost ofproduction by making it more efficient. However, the develop-ment of economies of scale may mean that there are only a fewproducers of each product, which could lead to the establish-ment of high monopoly prices. On the other hand, tradingblocs bring producers in member countries into closer contact,thereby increasing competition among them. This leads to the

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erosion of monopoly positions and consequently promotesefficiency gains within firms. This effect is not only felt byproducers in the member states; producers in nonmembernations will also experience these changes and have to adapttheir pricing and the quality of their products to be able tocompete in a more efficient market. Therefore trading blocsresult in a more efficient market.1[4]

Trading blocs also result in trade and location effects. Byeliminating tariffs, imports from other member countries willbecome cheaper, so demand patterns will change. Consumersand firms will buy products from the cheapest source withoutprice distortions, thereby ensuring that production is allocatedto those firms with a comparative advantage in production.This will increase the market’s efficiency by allowing a greaterquantity of products to be manufactured with the sameamount of resources and consequently result in higher levels ofconsumption.

Types of Trading BlocsTrading Blocs can be classified on the basis of the degree ofintegration among different economies :-• Free Trade Areas• Customs Unions• Common Market• Political Unions• Economic Uniona. Free Trade Area :- This is the simplest form of economic

integration whichprovides for internal free trade betweenmember countries. Each member is allowed to determineits own commercial policy with respect to non-members. Forexample, Latin American Free Trade Association (LAFTA),North American Free Trade Area (NAFTA) between theUSA, Canada and Mexico; Asia Pacific EconomicCooperation (APEC) and COMESA.

b. Customs Union :- A customs union is a more advancedform of economic integration which not only provides forinternal free trade between the member countries but alsoadopts a uniform commercial policy against the non-members. The countries will be represented at tradenegotiations with organisations such as the World TradeOrganisation by supra-national organisations e.g. theEuropean Union. For example, European EconomicCommunity (EEC).

c. Common Market :- A common market allows freemovement of labour and capital within the commonmarket in addition to having free movement of goodsbetween the member countries and having commoncommercial policy is respect to non-members.

d. Economic’ Union :- This is a common market where thelevel of integration is more developed. The member statesmay adopt common economic policies e.g. the CommonAgricultural Policy (CAP) of the European Union. Theymay have a fixed exchange rate regime such as the ERM ofthe EMU. Indeed, they may have integrated further andhave a single common currency. This will involve commonmonetary policy. The ultimate act of integration is likely to

be some form of political integration where the nationalsovereignty is replaced by some form of over-archingpolitical authority. For example, the European Union (EU)has introduced a common currency Euro 2000.

e. Political Union :- Political union is the ultimate type ofeconomic integration whereby member countries achievenot only monetary and fiscal integration but also politicalintegration. For example, the Europe Union (EU) is movingtowards a political union similar to one created by 52 statesof America.

Static Effects of a Country Joining a Trading Bloc

• Trade patterns change• Trade creation: Joining bloc allows access to cheaper goods

from other members. The country can export to othermembers goods in which it has comparative advantage.

• Trade diversion: consumption shifts from low-costproducers outside bloc to higher cost, tariff-free productioninside bloc

Dynamic Advantages of Joining a Trading Bloc

• Access to larger markets leads to internal economies of scale.• External economies of scale due to improved infrastructure

(e.g. transport and telecoms links)• Greater international bargaining power.• Increased competition between members.• More rapid spread of technology

Dynamic Disadvantages of Joining a Trading Bloc

• Country may lose resources to more efficient members, orto geographical centre, and become depressed region.

• Firms may co-operate, collude and merge, leading to greatermonopoly power.

• Diseconomies of scale if firms become very large.• High administrative costs of trading bloc.

Trading Blocs - Opportunities and ThreatThe prime objective of the Trading Blocs is to promote tradebetween different regions of the world. Some people viewworld trade as consisting broadly. of intra-regional trade andinter-regional trade. The regionalism offers certain advantagesand poses certain threats.

Opportunities

a. Elimination of trade barriers within the region wouldencourage the efficient firms to expand their businessactivities in all countries within the region.

b. Healthy competition within the region would help the lessefficient firms in

c. acquiring competencies in order to challenge the efficientfirms.

d. The overall business performance in ‘terms of productivity,quality, price,

e. delivery and customer service will improve.f. Consumers get better quality goods and services at

competitive price.

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Ng. Employment opportunities in the region increase.

Threats

a. The removal of trade barriers provides opportunities to theefficient firms to enter the different markets within theregion. This endangers the survival of the less efficientfirms.

b. The resources of the less efficient countries are exploited bythe firms from the advanced countries of the region.

c. The less developed countries of the region mostly becomeconsumption centres while the advanced countries of theregion become the production centres.

d. The less developed countries become still poorer whereasthe advanced countries of the region become still richer.

e. It discourages trade with non-members as trade with non-members is subject to strict rules and trade barriers.

Difference Between GATT and WTO

• GATT signified two things – GATT the body and GATT– the agreements.GATT – the body no longer exists, it was merged in WTOon 1st Jan’95.GATT – the agreement rests in WTO alongside otheragreements.

• WTO includes now GATT, GATS, TRIPS and DisputeSettlement body. GATT covered Trade in goods only; WTOcovers Trade in Goods, Services and Intellectual property aswell.

• Throughout its life, from 1948 to 1994, GATT was ad hocand provisional; WTO and its agreements are permanent.

• GATT had contracting parties, WTO has member nations.• WTO has two significant functions, which GATT did not

have; one, Trade Policy Review Mechanism – a periodicprocess to examine a country’s trade policies and to notechanges. Second, its in-built Dispute Settlementmechanism. Its ruling cannot be blocked.

• WTO is more democratic in character that GATT. Ifdecisions cannot be reached by consensus, the matter isdecided by voting; each WTO member having one vote.

WTO is inherently superior system than GATT having a soundlegal basis; even its agreements are ratified in Member’s parlia-ments

Article- I

India and WTO – A New ParadigmAs the D’day draws close, with the skeptics painting theirpictures of gloom, and the self-proclaimed augurers predictingchaos and disaster, India is on the threshold of a completemetamorphosis. Come April, and the economy will be openedup to foreign goods by the lifting of quantitative restrictions.There is fear that Indian industry will be thrashed to oblivionby the influx of imports, and the economy will be at the mercyof foreign companies, who will squeeze the country to fill uptheir coffers, just like their colonial counterparts did in the past.It is believed that the foreign goods will beat the Indianproducts in all parameters – price, quality, and of course, snob-

value. The arguments, I must agree, are tempting enough tolead the gullible to believe that the future indeed is headedtowards a sad end. I would like to say a few things whichintentionally, or not, have been conveniently overlooked by theharbingers of Rubicon Day.India is historically a very resilient nation. Its history providesample evidence to substantiate this fact. The Mongols, Greeks,rulers of Ghazni and Ghor, and even the British could notdestroy the country. Every time it sprung back, battered,bruised, but with that never-say-die attitude. Every time itsprung back, it had new self-confidence and inner strength topropel it to a higher dimension. With the LPG factor comingin, the domestic producers will have to spruce up their opera-tions to match their foreign competitors. This will drive themto conform to globally competitive standards and cutting edgetechnologies in order to survive. Believe me, they will do this,being the resourceful lot they are. In turn, this will help thembuild global brands, which, thus far, have only been a chimera.The argument about infant industry protection, though logicalto a certain extent, is, in my opinion, over-hyped. We mustrealise that if we do not allow our “infants” to walk the world,meet new challenges, face new adversities, taste the bitterness offailure and acquire new experiences, they will never grow up intothe complete, mature individuals we would want them tobecome. The triumph of success cannot be fully savouredunless the bitterness of failure has been tasted. If we find thatin the process, our “infants” are being exposed to unfair orunequal battles, there is always the option of exercising thetariff barrier. But, we must ensure that this tariff is imposed ona short-term basis, so that the “infants” realise that if they donot “grow up” in a certain specified time frame, they will haveto face competition, because the tariffs will be removed after theexpiry of the specified period. This realisation will drive them tostrive towards excellence, and considering their enterprise andresourcefulness, I am sure they will come out on top.To sum up, WTO should be viewed as an ally and not anadversary. It will help India get stronger. It will make India whateach one of us dream it will, during our lifetimes, become. So,my humble advice to the soothsayers of doom is – do not criband cry about the pitfalls. Convert them into your strengths, asthat is the only way the nation will survive and find prosperity. Iwill end with a quote from Sir Winston Churchill’s speech tothe British troops during World War II – “We will fight on thebeaches, we will fight on the streets, we will fight on themountains – we shall never give up”....Needlessly, I add, the British troops won the battle.

By Anirban Ghosh

Annexure-IIFunctions, Structure and Decision Making Process ofWTO

The Agreement establishing WTO provides that it shouldperform the following four functions:1. First it shall facilitate the implementation administration

and operation of the Uruguay Round legal instrumentsand of any new agreements that may be negotiation in thefuture.

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2. Second, it shall provide a forum for future negotiationsamong member countries on matters covered by theagreements as well as on new issues falling within itsmandate.

3. Third, it shall be responsible for the settlement ofdifferences and disputes among its member countries.

4. Fourth, it shall be responsible for carrying out periodicreviews of the trade policies of its member countries.

Structures of WTOThe apex WTO body responsible for decision making is theMinisterial Conference. It is expected to meet every two years.During the two years between meetings, the functions of theconference are performed by the General CouncilThe General Council meets as a Dispute settlement body whenit considers complaints and takes necessary steps to settledispute between member countries. It is also responsible forcarrying out reviews of the trade policies of individual countrieson the basis of the reports prepared by the WTO secretariat.The general council is assisted in its work by the:1. Council for trade in Goods, which oversees the

implementation and operation of GATT 1994 and itsassociate agreements,

2. Council for trade in services, which which oversees theimplementation and operation of GATTs and

3. Council for TRIPS which oversees the operation of theAgreement of TRIPS.

It is also indicates the various committees established by theWTO Agreement itself and the other committees that havebeen established for detailed work at the operational level underthe various associate agreements.

Decision – Making ProcessThe agreements stipulates the WTO shall continue the GATTpractice of decision making by consensus. Consensus is deemedto have been reached when at the time a decision is being taken,not a single member country voices opposition to its adoption.When a consensus is not possible the WTO agreementprovides for decision by majority vote with each country havingone vote. Despite these provisions decision on all importantpolicy matter are expected to continue to be taken by consensus.The rule of consensus prevents “tyranny of the majority”particularly where a sizeable section of opinion stronglyopposes the decision being taken.

Annexure – III

Unctad: Its Objectives And WorkingThe united nation conference on Trade & Development(UNCTAD) was established by the United Nations GeneralsAssembly as one of its permanent organs in December in 1964.its main objective is to promote international trade, particularlythat of developing countries with a view to acceleratingeconomics development.The conference of Government Minister concerned with tradeand development is held every four years in different capitals ofthe member – states. It has 166 members including India. Tensuch conferences have been held so far with last conference

being held at Bangkok in Thailand in 2000. The main recurringthemes of the conference relate to the following:a. The expansion and diversification of export of goods and

services of the developing countries. ….. and the need forthe developed countries to adopt policies and measures tosupport this aim.

b. The stabilization and strengthening of internationalcommodity markets on which most developing countriesremain dependent for exports earning.

c. The enhancement of the export capacity of developingcountries through mobilizing domestic and externalresources including development assistance and foreigninvestment, strengthening technological capabilities etc.

The major achievement of UNCTAD II (1968-72) has been theacceptance by the developed countries of the resolution on theGeneralized System of Tariff Preferences (GSP) in 1971. Eachof the developed countries agreed in terms of resolution toformulate a scheme called GSP scheme to implement thisresolution. Under this scheme developed countries grantconcession in the import tariff on the import of variousmanufactured or the semi-manufactured items of import fromthe developing countries. The tariff concession is grantedsubject to the rules of origin criterion laid down under each ofthe scheme.Another significant development is that the UNCTAD VIIIheld in Cartgagena de Indias, Columbia called for action to haltthe protectionism in order to bring about furniture liberaliza-tion and expansion of World Trade; to the benefit to all, inparticular the developing countries and to ensure that environ-ment and that trade policies were mutually supportive with aview to achieving sustainable development.The Xth conference of the UNCTAD held at Bangkok inThailand in the February 2000 has called for declining of theissue relating to labour and environment with the trade. Itassumes importance in the backdrop of the Seatle Round ofthe WTO meeting in December 1999 to decide the agenda forthe Millennium Round of international trade negotiations. Atthis meeting the developed countries particularly USA haddemanded the linking of labour and environment issues withthe trade agenda. Thus UNCTAD has been articulating theviews on the developing world on the issue of trade anddevelopment from time to time.

Question BankQ1. When and why was the GATT agreement signed?Q2. What are the functions and objectives of the WTO ?Q3. Explain the Uruguay Round of GATT negotiations with

special reference to India.Q4. Explain the MFN clause of the GATT.Q5. When and why was the UNCTAD constituted?Q6. Explain the GSP under the UNCTAD.Q7. “Trading Blocs create obstacles to international trade.”

Examine critically.Q8. Define Trading Blocs. What are the different types of

trading blocs?

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Introduction

Major Laws Governing India’s Export Import Trade

• Foreign Trade (Development & Regulation) Act.• Objective of the act• India’s foreign trade Policy.-

• Foreign Exchange Regulation Act (FERA).• Introduction and Concept.• Definition.• Main Provision of the Act.

• Regulation and management of foreign exchange• Pre-shipment Inspection & Quality Control Act, 1963.• Customs Act, 1962.

International Commercial Practices• Uniform Customs and Practice for Documentary Credits

(UCP), 1993.• INCOTERMS,2000.

Question Bank

IntroductionOne of the distinctive features of international marketing isthat exporters have to deal with different legal systems.- AnIndian manufacturer operating in domestic market is well awareof the fact that he is governed by the Indian laws and is subjectto the jurisdiction of Indian Courts. But an Indian exporterexporting his products to an importer, say in the USA, mustcontend with the fact that US laws may also have influence overtheir contractual relations as well as settlement of dispute, ifany, arising ‘out of the contract. This is technically referred to asthe conflicts of laws, which can be settled in advance byincorporating specific provisions in the contract as to the properlaw governing the contract and jurisdiction.At the same time, since the buyer and the seller are at a greatgeographical distance from each other, many intermediaries likeshipping companies, airlines, insurance companies and banksare involved in the transaction. These intermediaries are fromdifferent countries and trade terms and usages differ across thecountries. Therefore, it is advisable for the exporters to enterinto written export contracts, incorporating all the’ necessarydetails, so as to avoid all future conflicts and disputes.

Laws Governing India’s Export Import TradeThe major laws influencing Indian exporters and importer~ are:a. Foreign Trade Development and Regulation Act, 1992,b. Foreign Exchange Regulation Act (FERA), 1973.c. Pre-shipment Inspection and Quality Control Act, 1963.d. Customs Act, 1962.e. International Commercial Practices.

LESSON 7:REGULATIONS FOR INTERNATIONAL TRADE

Foreign Trade (Development and Regulation) Act,1992The Foreign Trade (Development and Regulation) Act, 1992,which replaced the. Imports and Exports Control Act, 1947,.Came into force on the 19th June 1992. However, all ordersmade under the latter Act shall continue the be in force if theseare not inconsistent with the provisions of the Foreign Trade(Development and Regulation) Act, 1992.Under the authority of this Act, the office of Director Generalof Foreign .Trade (DGFT) brings out the export import policyand lays down the procedures. The policy determines .amongother things :-a. Whether export of a product is banned;b. Whether the export of. the product is subject to quota

restrictions or licensing arrangements;c. Whether export of a product is canalised through a

Government undertaking; andd. Whether there is any floor price regulation regarding that

product.No export or import shall be made by any person except inaccordance with the provisions of this Act, the orders and rulesmade under this Act and the export and import policy.

Objective of the ActThe objective of the Act is to provide for the development andregulation of foreign trade by facilitating imports into andaugmenting exports from India and for matters connectedtherewith or incidental thereto.

Main Provisions of the Act

a. Development and Regulation :- The Act. empowers theCentral Government to make provisions for thedevelopment and regulation of foreign trade by facilitatingimports and increasing exports.

b. Prohibition and Restriction :- The Act also empowers theCentral Government to make provisions for prohibiting,restricting and otherwise regulating the import or export ofgoods as and when required:

c. Export Import (EXIM) Policy :-1. The Act lays down that the Central Government may

from time to time formulate and announce the EXIMpolicy and may also amend it keeping in mind thenational priorities.

2. The Central Government may also, by Order publishedin the Official Gazette, make provision for prohibiting,restricting or otherwise regulating, in all cases or inspecified classes of cases and subject to suchexceptions, if any , as may be made by or under theOrder, the import or export of goods.

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3. All goods to which any Order under sub section (2)applies shall be deemed to be goods the import orexport of which has been prohibited under section 11of the Customs Act, 1962 (52 of 1962) and all theprovisions of that Act shall have effect Accordingly.

d. Director General of Foreign Trade (DGFT) :- The Actempowers the Central Government to appoint the DirectorGeneral of Foreign Trade (DGFT) for advising it in theformulation of the EXIM policy and its execution.

e. Importer Exporter Code Number (IEC No.) :- The Actempowers the DGFT to issue, suspend or cancel theImporter Exporter Code (lEC) Number. No person shallmake any import or export except under IEC No.

f. Search, Inspection and Seizure :- Where anycontravention of any condition of the licence is suspected,any person authorised by the Central Government maysearch, inspect and seize such goods, documents andconveyances subject to such requirements and conditions asmay be prescribed.

g. Penalty for Contravention :- Where any person makes orattempts to make any export or import in contravention ofany provisions of this Act or the EXIM Policy, he shall beliable to a penalty not exceeding one thousand rupees orfive times the value of the goods involved, whichever ismore.

India’s Foreign trade PolicyThe then Commerce Minister, Mr. P. Chidambaram, announceda major overhaul of trade policy on July 4, 1991 entailingi. Suspension of cash compensatory support;ii. An enlarged and uniform Rep. rate of 30 per cent of f.o.b.

value;iii. Abolition of all supplementary licenses except in the case of

small scale sector and producers of life: Saving drugs/equipment;

iv. Abolition of unlisted OGL andv. Removal of all import licensing for capital goods and raw

materials, except for a small negative list in 3 years.

Rationale of Foreign Trade PolicyGiving the rationale for the new policy, the Commerce Ministernoted: For several decades, trade policy in India has beenformulated in a system of administrative controls and licenses.As a result, we have a bewildering number and variety of lists,appendices and licences. This system has led to delays, waste,inefficiency and corruption. Human intervention-described asdiscretion-at every stage, has stifled enterprise and spawnedarbitrariness.The Government, therefore, decided that while all essentialimports like POL, fertilizer and edible oil should be protected,all other imports should be linked to exports by enlarging andliberalizing the replenishment licence system. For this purpose,the following major reforms were announced1. Rep will become the principal instrument for export-related

imports. To describe Rep as a licence is a misnomer. Hence,it will now be called Exim scrip and can be freely traded.

2. All exports will now have a uniform Rep rate of 30 per centof the f.o.b. value. This was a substantial increase from thepresent Rep rates, which vary between five per cent and 20per cent of f.o.b. value.

3. The new Rep scheme gave maximum incentive to exporterswhose import intensity was low. For example, agricultural.Exports which earlier had very low replenishment rates offive per cent or 10 per cent will now gain considerably.

4. All supplementary licences shall stand abolished except inthe case of the small scale sector and for producers of life-saving drugs/equipment.

5. All additional licences granted to export houses shall standabolished.

6. All items now listed in the Limited Permissible List OGLitems would hereafter be imported through the Rep route.

7. The Exim policy contained a category known as UnlistedOGL. This category stands abolished and all items fallingunder this category may be imported only through the Repscheme.

8. Advance licensing had been an alternative to the Rep routefor obtaining imports for exporters. It was expected thatmany exporters would find the Reprouternore attractivenow. However, for exporters who wish to go throughadvance licensing, this route would remain open.

9. In three years time our objective will be to remove allimport licencing for capital goods and raw materials, exceptfor a small negative list.

10. The goal of the government was to decanalise all itemsexcept those that are essential.

11. In the light of the substantial liberalization of the traderegime, and also the recent changes in exchange rates (afterdevaluation), Cash Compensatory Scheme (CCS) wasabolished from July 3, 1991.

On August 3, 1991, the Commerce Minister announced a newpackage of incentives for Export oriented U5Jits (EOUs) andExport Promotion Zones (EPZs).

Foreign’ Exchange Regulation Act, 1973

Meaning: of Exchange ControlExchange control means regulating the demand for and supplyof foreign exchange with the objective of making rational useof available foreign exchange for various purposes according toa scheme of priorities laid down by the policy. Exchange controlis usually imposed on both, i.e., on payments as well as onreceipts. The purpose of introducing the exchange control onreceipts is to pool the countries foreign exchange reserves tofacilitate. their judicious use, while the purpose of imposingexchange control on payments is to restrain the demand andcontain it within the permissible limits.

Foreign Exchange Regulation Act (FERA), 1973In India, exchange control was introduced on the outbreak ofthe Second World War on 3rd September 1939 by virtue of theemergency powers derived under the financial provisions of theDefense of India Rules, mainly to- conserve the non-sterlingarea currencies and utilise them for essential purposes. Theemergency powers were later placed on a statutory basis by the

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Nenactment of the Foreign Exchange Regulation Act, 1947. TheAct was later replaced by a more comprehensive legislation, viz.,the Foreign Exchange Regulation Act (FERA), 1973.

Introduction and Concept of Foreign ExchangeManagement Act ( FEMA)The Foreign Exchange Management Act (FEMA) is a law toreplace the draconian Foreign Exchange Regulation Act, 1973.Any offense under FERA was a criminal offense liable toimprisonment, whereas FEMA seeks to make offenses relatingto foreign exchange civil offenses. Unlike other laws whereeverything is permitted unless specifically prohibited, underFERA nothing was permitted unless specifically permitted.Hence the tenor and tone of the Act was very drastic. Itprovided for imprisonment of even a very minor offense.Under FERA, a person was presumed guilty unless he provedhimself innocent whereas under other laws, a person ispresumed innocent unless he is proven guilty.With liberalization, a need was felt to remove the drasticmeasures of FERA and replace them by a set of liberal foreignexchange management regulations. Therefore FEMA wasenacted to replace FERA. It has laid down the areas wherespecific permission of the Reserve Bank or Government ofIndia is required. In rest of the cases, no such permissionwould be needed and a person can remit funds and acquireassets, incur liability in accordance with. the specific provisionslaid down in the Act or Notifications issued by the ReserveBank or Government of India under the Act.

DefinitionFEMA contains definitions of certain terms which have beenused throughout the Act. The meaning of these terms maydiffer under other laws or under common language. But for thepurposes of FEMA, the terms will signify the meaning asdefined there under. Let us take up some of the more impor-tant ones.“Authorized person” means an authorized dealer, moneychanger, off-shore banking unit or any other person for thetime being authorized to deal in foreign exchange or foreignsecurities;“Capital Account Transaction” means a transaction which altersthe assets or liabilities, including contingent liabilities, outsideIndia of persons resident in India or assets or liabilities in Indiaof persons resident outside India, and includes transactions byway of giving guarantees or surety for any debt, obligation orother liability of (1) a person resident outside India or (2) of aperson resident in India and owed to a person resident outsideIndia.“Currency” includes all currency notes, postal notes, postalorders, money orders, cheques, drafts, travelers cheques, lettersof credit, bills of exchange and promissory notes, credit cards orsuch other similar instruments, as may be notified by theReserve Bank;“Currency Notes” means and includes cash in the form ofcoins and bank notes;“Current Account Transaction” means a transaction other than acapital account transaction and includes :-

i. payments due in connection with foreign trade, othercurrent business, services, and short-term banking andcredit facilities in the ordinary course of business,

ii. payments due as interest on loans and as net income frominvestments,

iii. remittances for living expenses of parents, spouse andchildren residing abroad,

iv. expenses in connection with foreign travel, education andmedical care of parents, spouse and children;

“Export”, with its grammatical variations and cognate expres-sions, means :-i. the taking out of India to a place outside India any goods,ii. provision of services from India to any person outside

India;“Foreign currency” means any currency other than Indiancurrency;“Foreign Exchange” means foreign currency and includes :-i. deposits, credits and balances payable in any foreign

currency,ii. drafts, travelers cheques, letters of credit or bills of

exchange, expressed or drawn in Indian currency but payablein any foreign currency,

iii. drafts, travelers cheques, letters of credit or bills of exchangedrawn by banks, institutions or persons outside India, butpayable in Indian currency;

“Foreign Security “ means any security, in the form of shares,stocks, bonds, debentures or any other instrument denomi-nated or expressed in foreign currency and includes securitiesexpressed in foreign currency, but where redemption or anyform of return such as interest or dividends is payable in Indiancurrency;“Import”, with its grammatical variations and cognate expres-sions, means bringing into India any goods or services;“Indian currency” means currency which is expressed or drawnin Indian .rupees but does not include special bank notes andspecial one rupee notes issued under section 28A of the ReserveBank of India Act, 1934 by the Ministry of Finance.“Person” includes an individual, a Hindu undivided family, acompany, a firm, an association of persons or a body ofindividuals, whether incorporated or not, every artificial juridicalperson and any agency, office or branch owned or controlled bysuch person;“Person resident in India” means :-i. a person residing in India for more than one hundred and

eighty-two days during the course of the preceding Financialyear but does not include :-a. a person who has gone out of India or who stays

outside India,i. for or on taking up employment outside India, orii. for carrying on outside India a business or

vocation outside India, or

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iii. for any other purpose, in such circumstances aswould indicate his intention to stay outside Indiafor an uncertain period;

a. a person who has come to or stays in India, otherwisethani. for or on taking up employment in India, orii. for carrying on in India a business or vocation in

India, oriii. for any other purpose, in such circumstances as

would indicate his intention to stay in India for anuncertain period;

ii. any person or body corporate registered or incorporated inIndia,

iii. an office, branch or agency in India owned or controlled by aperson resident outside India,

iv. an office, branch or agency outside India owned orcontrolled by a person resident in India.

“Security” means shares, stocks, bonds and debentures,Government securities, savings certificates, deposit receipts inrespect of deposits of securities and units of the Unit Trust ofIndia or of any mutual fund and includes certificates of title tosecurities, but does not include bills of exchange or promissorynotes other than Government promissory notes or any otherinstruments which may be notified by the Reserve Bank assecurity for the purposes of this Act;“Service” means service of any description which is madeavailable to potential users and includes the provision offacilities in connection with banking, financing, insurance,medical assistance, legal assistance, chit fund, real estate,transport, processing, supply of electrical or other energy,boarding or lodging or both, entertainment, amusement or thepurveying of news or other information, but does not includethe rendering of any service free of charge or under a contract ofpersonal service;“Transfer” includes sale, purchase, exchange, mortgage, pledge,gift, loan or any other form of transfer of right, title, posses-sion or lien.

Main Provisions of the Act

a. Application of FEMA may be seen. broadly from twoangels :-• Capital Account Transactions :-Capital account

transactions relate to movement of capital Ortransaction which alters the assets or liabilities,including contingent liabilities, outside India ofpersons resident in India or assets or liabilities in Indiaof persons resident outside India, and includestransactions by way of giving guarantees or surety forany debt, obligation or other liability of (1) a personresident outside India or (2) of a person resident inIndia and owed to a person resident outside India. Forexample, transactions in property and investments andlending and borrowing money.

• Current Account Transactions :- Transactions whichdo not fall in capital account category are current

account transactions. Such transactions are permittedfreely subject to a few restrictions as given below :-

• Certain current account transactions would require RBIpermission if they exceed a certain ceiling.

• A few current account transactions need permission ofappropriate Government of India authorityirrespective of the amount.

• There are seven types of current account transactions,which are totally prohibited. These include.transactions relating to lotteries, football pools,banned magazines and a few others.

• Payments due in connection with foreign trade, othercurrent business, services, and short-term banking andcredit facilities in the ordinary course of business.

• Payments due as interest on loans and as net incomefrom investments.

• Remittances for living expenses of parents, spouse andchildren residing abroad, expenses in connection withforeign travel, education and medical care of parents,spouse and children India authority irrespective of theamount.

b. The Act provides that :-• For all cash exports, the foreign exchange proceeds

from exports must be brought back to India within180 days, except where exports are made on deferredpayment, terms or on consignment basis.

• Under FEMA, effective from June 2000, there is nolonger any ceiling as a percentage of FOB value ofexports for payment of commission. The erstwhileceiling of 12.5% of FOB value of exports has beenabolish• Residents going abroad for business purposes or

for’ participating in conferences or seminars will notneed RBI permission to avail foreign exchange upto US $ 25,000 per trip irrespective of the period ofstay.

• The Exchange Earner’s Foreign Currency (E,EFC)account holders and Residents Foreign Exchange(RFC) account holders are permitted to freely usethe funds held in such accounts for payment of allpermissible current account transactions.

c. The Act also contains comprehensive and transparent rulesfor foreign investment in India and Indian investmentsabroad and permits Indian companies engaged in certainspecified sectors to acquire shares of foreign companiesengaged in similar activities by share, swap or exchangethrough issue of ADRs/GDRs up to certain specifiedlimits.

d. FEMA is a civil law unlike FERA. Contraventions underFEMA will be dealt with through civil procedures. Unlike inFERA, the burden of proof under FEMA will be on theenforcement agency and not on the implicated. FEMAdescribes an elaborate redressal machinery for totCl1 justiceand fairness tothe implicated while deciding on the questionof contravention.

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NRegulation and management of foreign exchangeExcept with the general or special permission of the ReserveBank, no person can :-a. deal in or transfer any foreign exchange or foreign security to

any person not being an authorized person;b. make any payment to or for the credit of any person

resident outside India in any manner;c. receive otherwise through an authorized person, any

payment by order or on behalf of any person residentoutside India in any manner;

d. Where any person in, or resident in India receives anypayment by order or on behalf of any person residentoutside India through any other person (including anauthorized person) without a corresponding inwardremittance from any place outside India, then, such personshall be deemed to have received such payment otherwisethan through an authorized

e. enter into any financial transaction in India as considerationfor or in association with acquisition or creation or transferof a right to acquire, any asset outside India by any personFinancial transaction means making any payment to, or forthe credit of any person, or receiving any payment for, byorder or on behalf of any person, or drawing, issuing ornegotiating any bill of exchange or promissory note, ortransferring any security or acknowledging any debt.

No person resident in India can acquire, hold, own, possess ortransfer any foreign exchange, foreign security or any immovableproperty situated outside India except with the general or specialpermission of the Reserve Bank.Any person may sell or draw foreign exchange to or from anauthorized person if such sale or drawal is a current accounttransaction. However, the Central Government may, in publicinterest and in consultation with the Reserve Bank, imposesuch reasonable restrictions for current account transactions asmay be prescribed.Any person may sell or draw foreign exchange to or from anauthorized person for a capital account transaction. The ReserveBank may, in consultation with the Central Government,specify:-a. any class or classes of capital account transactions which are

permissible;b. the limit up to which foreign exchange shall be admissible

for such transactions:However, the Reserve Bank cannot impose any restriction onthe drawal of foreign exchange for payments due on account ofamortization of loans or for depreciation of direct investmentsin the ordinary course of business.The Reserve Bank can, by regulations, prohibit, restrict orregulate the following :-a. transfer or issue of any foreign security by a person resident

in India;b. transfer or issue of any security by a person resident outside

India;

c. transfer or issue of any security or foreign security by anybranch, office or agency in India of a person residentoutside India;

d. any borrowing or lending in foreign exchange in whateverform or by whatever name called;

e. any borrowing or tending in rupees in whatever form or bywhatever name called between a person resident in Indiaand a person resident outside India;

f. deposits between persons resident in India and personsresident outside India;

g. export, import or holding of currency or currency notes;h. transfer of immovable property outside India, other than a

lease not exceeding five years, by a person resident in India;i. acquisition or transfer of immovable property in India,

other than a lease not exceeding five years, by a personresident outside India;

j. giving of a guarantee or surety in respect of any debt,obligation or other liability incurred (i) by a person residentin India and owed to a person resident outside India or (ii)by a person resident outside India.

A person resident in India may hold, own, transfer or invest inforeign currency, foreign security or any immovable propertysituated outside India if such currency, security or property wasacquired, held or owned by such person when he was residentoutside India or inherited from a person who was residentoutside India.A person resident outside India may hold, own, transfer orinvest in Indian currency, security or any immovable propertysituated in India if such currency, security or property wasacquired, held or owned by such person when he was residentin India or inherited from a person who was resident in India.The Reserve Bank may, by regulation, prohibit, restrict, orregulate establishment in India of a branch, office or other placeof business by a person resident outside India, for carrying onany activity relating to such branch, office or other place ofbusiness.Every exporter of goods must :-a. furnish to the Reserve Bank or to such other authority a

declaration in such form and in such manner as may bespecified, containing true and correct material particulars,including the amount representing the full export value or,if the full export value of the goods is not ascertainable atthe time of export, the value which the exporter, havingregard to the prevailing market conditions, expects to receiveon the sale of the goods in a market outside India;

b. furnish to the Reserve Bank such other information as maybe required by the Reserve Bank for the purpose ofensuring the realization of the export proceeds by suchexporter.

The Reserve Bank may, for the purpose of ensuring that thefull export value of the goods or such reduced value of thegoods as the Reserve Bank determines, having regard to theprevailing market-conditions, is received without any delay,direct any exporter to comply with such requirements as itdeems fit.

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Every exporter of services shall furnish to the Reserve Bank orto such other authorities a declaration in such form and in suchmanner as may be specified, containing the true and correctmaterial particulars in relation to payment for such services.Where any amount of foreign exchange is due or has accrued toany person resident in India, such person shall take all reason-able steps to realize and repatriate to India such foreignexchange within such period and in such manner as may bespecified by the Reserve Bank.

Pre-shipment Inspection and Quality Control Act,1963

Export (Quality Control & Inspection) Act, 1963The Export Inspection Council is responsible for the operationof this Act. Under the Act, a large number of exportablecommodities have been notified for compulsory pre-shipmentinspection. The quality control and inspection of various exportproducts is administered through a network of more than fiftyoffices located around major production centres and ports ofshipment. In addition, organizations may be recognized asagencies for inspection and /or quality control. Recently, thegovernment has exempted agriculture and food products, fruitproducts and fish and fishery products from compulsory pre-shipment inspections, provided that the exporter has a firmletter from the overseas buyer stating that the overseas buyerdoes not require pre-shipment inspection from official Indianinspection agencies.In order to promote exports of quality goods as per theinternational standards, the Government of India has intro-duced compulsory Quality Control and Pre-ShipmentInspection for 90% of the items of export under one or theother system as per the Export (Quality Control and Pre-shipmer1t Inspection)’ Act,1963. Some of these items are;- .a. Food and agricultural products;b. Chemicals and allied products;c. Engineering goods;d. Textiles;e. Coir, jute and leather products such as footwear, etc.The Act empowers the Government to :-a. Notify commodities, which shall be subjected to Quality

Control or Inspection or both, prior to the export.b. Specify the type of Quality Control or Inspection, which

will be applied to a notified commodity.c. Establish, adopt or recognise one or more standard

specifications to a “notified commodity..d. Prohibit the export in the. course of international trade of a

notified commodity, unless it is accompanied by a certificateunder Section 7 that the commodity satisfies the conditionsrelated to Quality Control or Inspection or it has affixed orapplied to it a mark or seal accepted by the CentralGovernment that it conforms to the s1andard specificationsapplicable to it.

For carrying out pre-shipment inspection: of various goods anumber of existing agencies, both the Government as well asprivate, have been recognised under the Exports (Quality

Control and Inspection) Act, 1963. To supplement the work ofthe agencies, the Government has also established five ExportInspection Agencies, one each at Mumbai, Kolkata, CochinChennai and Delhi in 1966 exclusively for export inspection.The Export Inspection Agencies (ElAs) has a network of nearly62 offices throughout India. These ElAs have certain specificareas under their jurisdiction. For example, the EIA of Mumbaihas jurisdiction over Maharashtra, Gujarat and Goa. Theseagencies work under the administrative and technical control ofthe Export Inspection Council.

Inspection by Buyer’s AgencySometimes, the. foreign buyers lay down their own standardsand specifications, which mayor may not be equivalent with theIndian standards including stipulations under the. QualityControl Regulations. For this purpose the overseas buyersnominate their own persons or agencies to supervise theproduction of goods and carry out inspection before theshipment.

Customs Act, 1962The Customs Department is vested with the task of carryingout physical as well as documentary check on all the goodscrossing the Indian customs frontier. All export consignmentswill be checked by the customs authorities at port or airportwith a view to. ascertaining that the. goods being shipped arethose which are declared in the documents and that no under orover invoicing is involved.

International Commercial PracticesApart from the Indian laws, import and export contracts arealso subject to the provisions of certain international commer-cial practices. In this connection, the following two documentsprepared by the International Chamber of Commerce (ICC) ,Paris, are widely used in international business:- .a. Uniform Customs and Practice for Documentary

Credits (UCP), 1993 :-In order to ensure uniformity ofinterpretation in international trade, the InternationalChamber of Commerce has worked out the UniformCustoms and Practices for Documentary Credits. These havebeen revised and brought up to date several times.Presently, they are applied in nearly all the countries. Thelatest in the line of revisions is the UCP ,,500 (w.e.f. from1st January 1994), which updates and consolidates theprevious UCP 400. The UCP for documentary credit hasbeen subscribed to by India also.

b. INCOTERMS, 2000 :- In order to have uniform exportterms for delivery of goods and payment, there are severaltrade terms that are used at the international level. Theseterms define the various trade terms like, FOB, C&F, CIF;etc., and codify the respective rights and obligations of thetwo parties under various contract terms. These terms arecodified by the International Chamber of Commerce (ICC)under the title ‘INCOTERMS’. The INCOTERMS werefirst introduced in 1936. These terms were known as“INCOTERMS 1936”. Amendments and additions werelater made in 1953, . 1967, 1980, 1990 and 2000 in order tobring these terms in line with current international tradepractices.

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NAll INCOTERMS must be expressed by the appropriate three-letter code and include the naming of a physical place ofhandover and - in certain cases - the further naming of thecarrier or Vessel. The buyer and seller must use the expressionINCOTERMS 2000 to conclude the term, thereby clearlyindicating INCOTERMS 2000 as the source of reference fordefinition.These conditions are the minimum requirements for the use ofthese terms but the terms can be added to or modified so as toincorporate the buyer and seller’s specific needs, provided thatsuch modification does not contradict the basic INCOTERMitself.Important Note: Certain INCOTERMS are Multimode certainothers are restricted to moves where the main carriage is by seatransport only. The terms must be used for the correct form oftransport if they are to offer any protection to the partiesinvolved.

Article-1Foreign Exchange Management Act

Receipt from and payment to, a person resident outside IndiaNotification No. FEMA/16/RB-2000 dated 3rd May 2000

Reserve Bank of India(Exchange Control Department)

Central OfficeMumbai 400001

Receipt from, and payment to, a person residentoutside IndiaIn pursuance of the provisions of Section 3 of the ForeignExchange Management Act, 1999 (42 of 1999), the ReserveBank is pleased to permit -1. any person, to receive any payment

a. made in rupees by order or on behalf of a personresident outside India during his stay in India out ofrupee funds provided by him by sale of foreignexchange to an authorised dealer or a money changer inIndia;

b. made by means of a cheque drawn on a bank situatedoutside India or a bank draft or travellers cheque issuedoutside India;

c. made in foreign currency notes directly from out ofIndia; subject to the condition that the foreignexchange received pursuant to clauses (b) and (c) shallbe offered for sale or caused to be offered for sale to anauthorised dealer or a money changer within sevendays of receipt thereof;

d. by means of postal order issued by a post officeoutside India or by a postal money order issued bysuch post office.

2. a person resident in India, to make any payment in rupeesi. towards meeting expenses on account of boarding,

lodging and services related thereto or travel to and fromand within India of a person resident outside India whois on a visit to India;

ii. to a person resident outside India, by means of acrossed cheque or a draft as consideration for purchase ofgold or silver in any form imported by such person inaccordance with the terms and conditions imposedunder any order issued by the Central Governmentunder the Foreign Trade (Development and Regulations)Act, 1992 or under any other law, rules or regulations forthe time being in force;

3. a company in or resident in India, to make payment inrupees to its whole time director who is resident outsideIndia and is on a visit to India for the company’s work andis entitled to payment of sitting fees or commission orremuneration, and travel expenses to and from and withinIndia, in accordance with the provisions contained in thecompany’s Memorandum of Association or Articles ofAssociation or in any agreement entered into by it or in anyresolution passed by the company in general meeting or byits Board of Directors, provided the requirements of anylaw, rules, regulations, directions applicable for making suchpayments are duly complied with.

(P.r. Gopala Rao)Executive Director

Note: To obtain an aligned printout please download the PDFor WORD version to your machine and then use respectivesoftware to print the story.

Article-2Committee on Commerce

The Foreign Trade (Development And Regulation)Amendment Bill, 2001The Foreign Trade (Development and Regulation) AmendmentBill, 2001, introduced in the Rajya Sabha on the 24th April, 2001,has been referred to the Department-related ParliamentaryStanding Committee on Commerce, with Shri Sikander Bakht,Member, Rajya Sabha, as its Chairman, for examination andreport.1. In pursuance of the new liberalized economic policy and

with a view to fulfilling international obligations, Indiacontinues to remove quantitative restrictions on imports.

2. The Agreement on Safeguards enables member-countries toimpose quantitative restrictions by way of emergency action,if imports of such articles are in such increased quantities asto cause or threaten to cause serious injury to domesticproducers of like or directly competitive articles, with a moreliberal dispensation for such imports from the developingcountries. The present Bill, therefore, seeks to amendForeign Trade (Development and Regulation) Act, 1992, toenable the Union Government to take corrective stepsthrough imposing quantitative restrictions on imports byway of emergency action, in accordance with the Agreementon Safeguards.

3.1 The proposed Bill further seeks to empower the UnionGovernment to make rules to provide for the manner inwhich articles liable for import restrictions may be identifiedand for the manner in which the causes of serious injury orcauses of threat of serious injury in relation to such articles

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may be determined and for the manner in which importrestrictions may be imposed.

4. The Standing Committee, at its sitting held on the 21st May,2001, decided to invite views/suggestions on theprovisions of the Bill from State Governments/UnionTerritory Administrations and individuals, institutions andorganisations, engaged in import/export of articles and/orinterested in / having knowledge of the subject-matter ofthe Bill, and to hear oral evidence. The individuals,institutions and organisations may send copies ofmemoranda containing their suggestions on the Bill, latestby the 15th June, 2001, indicating whether they would alsobe interested in giving oral evidence before the Committee,to Shri Surinder Kumar Watts, Deputy Secretary, RajyaSabha Secretariat, Room No. 007, Ground Floor, ParliamentHouse Annexe, New Delhi. Copies of the Bill, which waspublished in the Gazette of India (Extraordinary) Part-IIdated 24th April, 2001, can be had on a request made inwriting to the above mentioned officer.

5. The text of the Bill is also available on the official websiteof the Rajya Sabha Secretariat at http://rajyasabha.nic.in

(Surinder Kumar Watts)Deputy secretaryTel. No. 3034262

E-mail: [email protected]: http://rajyasabha.nic.in/<![endif]>

New Delhi22nd May, 2001.

Question BankQ1. Explain the provisions of the Foreign Tracie

(Development & Regulation) Act, 1992.Q2. What do you mean by exchange control? Explain the

provisions of FERA, 1973 with respect to exchangecontrol.

Q3. Why and when was the Pre-,shipment Inspection andQuality Control Act enacted?

Q4. Write a note on UCP 500 and INCOTERMS 2000.

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Introduction

Laws Relating Export Contract

• Meaning• Elements• FOB Contract• CIF Contract

Laws Relating to Export Agency Agreement

• Meaning.• Elements.• Sources of Selecting Overseas Agent.• Remittance of Commission to Overseas Agents.

Laws Relating to Product

• Branding.• Product Liability.• PromotionQuestion Bank:-

IntroductionAn international marketer has to face a number of legal issuesin implementation of the corporate export-marketing plan. Thebasic legal issues can broadly be classified intoa. Those relating to export-import contracts;b. Those relating to the export agency agreement;c. Those relating to products, viz, branding, product liability

and promotion;d. Those relating to credit contracts, i.e. letter of credit.e. Those relating tos settlement of international trade

disputes.

Meaning of Export ContractExport contract can be understood within the framework ofthe definition of the term contract as defined under the contractlaw. generally all export orders, inducing those for long termsupply contracts and project exports, are invariably quoted onthe basis .of detailed documentation and written agreementssigned by both, the importer and exporter. However, a fairlylarge part of India’s exports is carried out without the backingof written export contracts. This is especially true in the case ofexport of products from small scale and cottage industries likehandicrafts, garments, jewellery, etc. However, absence ofwritten contract does not mean that there is no-contract at all.There has to be a contract if exports are to be made. Thereexists, in such cases, what is known as a ‘constructed contract’. Aconstructed contract is one where the existence of a contract canbe inferred from relevant documents, ~iz, telex messages,Performa invoice, commercial invoice or letter of credit. Theexporter must, however, make sure that all the information on

LESSON 8:LEGAL ASPECT OF EXPORT CONTRACT

which agreement is required are available on any or all of thesedocuments.Accordingly, contract is defined as an agreement enforceable bylaw. An agreement would be treated as a contract if it is made bythe free consent of the parties competent to contract, for alawful consideration and with a lawful object and are notexpressly declared to be void. Thus the export would be treatedas an export contract if it meets the essential requirements ofthe contract.

Elements of Export ContractThere is no standard format of export contract as the elementsof export contract may vary from individual to individual,transaction to transaction and country to country. The elementsof an export contract also depend upon the nature of productbeing exported. However, some of the elements of the exportcontract are common. These elements are:-a. Product standards and specifications such as quantity,

quality specifications,price per unit, total contract price;b. Currency, Taxes and Charges;c. Packing specifications and Marking and Labeling;d. Mode of transport and Time and place of delivery;e. Marine insurance;f. Inspection and Documentation;g. Mode of payment, Terms of delivery and Credit period, if

any;h. Warranties and After sales service.i. Provisions relating to export and import licences and

permits;j. Laws governing contract, Jurisdiction and Procedure for

settlement of disputes.

FOB ContractFOB (Free On Board) is one of the commoner trade terms inuse. Yet this ‘common’ aspect of the term has resulted in themyriad definitions found all over the world for FOB.Some of these directly contradict others, and many are sup-ported by domestic legislation making such definitions uniqueto a specific country or port.In defining FOB as an INCOTERM, it is expressed as beingMonomodal and it can only be used for transactions where seafreight is the main carriage. Therefore, as an INCOTERM, thereis no application for FOB in road, rail or air transport.Under INCOTERMS 2000, risk and responsibility pass fromthe seller to the buyer when the goods pass over the (named orunnamed) ship’s rail at the (named) port of loading, cleared forexport by the seller.For FOB to apply, the seller must be in the physical position ofbeing able to load the cargo over the rail under their own direct

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control i.e. the loading is undertaken by the seller’s own labour,or by an agent that is under the contractual control of the seller.Further this process would have to be monitored by both theseller and buyer or their representatives.Generally, from the modern deep-sea export perspective, thiscontrol often cannot be achieved as the seller is either notallowed into the harbour area or, even in those extremecircumstances where they are, they have no influence over theparty loading the vessel.The INCOTERM FOB still has an application in some markets,but these are more and more in the minority. Note that the useof an ‘on-board’ Bill of Lading or mate’s receipt could beappropriate in recording the passage of risks under FOBmaking FOB one of the few terms still unavoidably dependanton such documentsFree on Board (FOB) is the most frequently used price quota-tion in the international market. Under this quotation, theexporter undertakes to pay all expenditure till the loading ofgoods on board the ship, inducing documentation charges. Allexpenditure thereafter, such as ocean freight marine insurance,unloading charges, etc., are borne by the importer.

Buyer’s & Seller’s Obligations

FOB

Free on BoardFree on Board» means that the seller delivers when the goodspass the ship’s rail at the named port of shipment. This meansthat the buyer has to bear all costs and risks of loss of ordamage to the goods from that point. The FOB term requiresthe seller to clear the goods for export. This term can be usedonly for sea or inland waterway transport. If the parties do notintend to deliver the goods across the ship’s rail, the FCA termshould be used.

THE SELLER'S OBLIGATIONS THE BUYER'S OBLIGATIONS

A1 Provision of goods in conformity with the contract

The seller must provide the goods and the commercial invoice, or its equivalent electronic message, in conformity with the contract of sale and any other evidence of conformity, which may be required by the contract.

B1 Payment of the Price The buyer must pay the price as provided in the contract of sale.

A2 Licences, authorisations and formalities The seller must obtain at his own risk

and expense any export licence or other official authorisation and carry out, where applicable (Refer to Introduction paragraph 14) , all customs formalities necessary for the export of the goods.

B2 Licences, Authorisations and Formalities The buyer must obtain at his own risk and expense any import licence or other official authorisation and carry out, where applicable (Refer to Introduction paragraph 14), all customs formalities for the import of the goods and, where necessary, for their transit through any country.

A3 Contracts of carriage and insurance a. Contract of carriage No obligation (Refer to Introduction paragraph 10)

q Contract of insurance No obligation (Refer to

Introduction paragraph 10)

B3 Contracts of carriage and insurance a) Contract of carriage The buyer must contract at his own

expense for the carriage of the goods from the named port of shipment.

b) Contract of insurance No obligation (Refer to Introduction

paragraph 10).

A4 Delivery The seller must deliver the goods on the

date or within the agreed period at the named port of shipment and in the manner customary at the port on board the vessel nominated by the buyer.

B4 Taking delivery The buyer must take delivery of the

goods when they have been delivered in accordance with A4.

A5 Transfer of risks The seller must, subject to the provisions

of B5, bear all risks of loss of or damage to the goods until such time as they have passed the ship's rail at the named port of shipment.

B5 Transfer of risks The buyer must bear all risks of loss of

or damage to the goods q From the time they have passed the

ship's rail at the named port of shipment; and

q From the agreed date or the expiry date of the agreed period for delivery which arise because he fails to give notice in accordance with B7, or because the vessel nominated by him fails to arrive on time, or is unable to take the goods, or closes for cargo earlier than the time notified in accordance with B7, provided, however, that the goods have been duly appropriated to the contract, that is to say, clearly set aside or otherwise identified as the contract goods.

A6 Division of costs The seller must, subject to the provisions

of B6, pay • all costs relating to the goods until

such time as they have passed the ship's rail at the named port of shipment; and

• where applicable (Refer to Introduction paragraph 14) , the costs of customs formalities necessary for export as well as all duties, taxes and other charges payable upon export.

B6 Division of costs The buyer must pay

q All costs relating to the goods from the time they have passed the ship's rail at the named port of shipment; and

q Any additional costs incurred, either because the vessel nominated by him fails to arrive on time, or is unable to take the goods, or closes for cargo earlier than the time notified in accordance with B7, or because the buyer has failed to give appropriate notice in accordance with B7, provided, however, that the goods have been duly appropriated to the contract, that is to say, clearly set aside or otherwise identified as the contract goods; and

q Where applicable (Refer to Introduction paragraph 14), all duties, taxes and other charges as well as the costs of carrying out customs formalities payable upon import of the goods and for their transit through any country.

A7 Notice to the buyer The seller must give the buyer sufficient

notice that the goods have been delivered in accordance with A4.

B7 Notice to the seller The buyer must give the seller sufficient

notice of the vessel name, loading point and required delivery time.

A8 Proof of delivery, transport document or equivalent electronic message

The seller must provide the buyer at the seller's expense with the usual proof of delivery in accordance with A4.

Unless the document referred to in the preceding paragraph is the transport document, the seller must render the buyer, at the latter's request, risk and expense, every assistance in obtaining a transport document for the contract of carriage (for example, a negotiable bill of lading, a non-negotiable sea waybill, an inland waterway document, or a multimodal transport document).

Where the seller and the buyer have agreed to communicate electronically, the document referred to in the preceding paragraph may be replaced by an equivalent electronic data interchange (EDI) message.

B8 Proof of delivery, transport document or equivalent electronic message

The buyer must accept the proof of delivery in accordance with A8.

A9 Checking - packaging - marking The seller must pay the costs of those

checking operations (such as checking quality, measuring, weighing, counting) which are necessary for the purpose of delivering the goods in accordance with A4.

The seller must provide at his own expense packaging (unless it is usual for the particular trade to ship the goods of the contract description unpacked) which is required for the transport of the goods, to the extent that the circumstances relating to the transport (for example modalities, destination) are made known to the seller before the contract of sale is concluded. Packaging is to be marked appropriately.

B9 Inspection of goods The buyer must pay the costs of any

pre-shipment inspection except when such inspection is mandated by the authorities of the country of export.

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CIF ContractTerms beginning ‘C’ are ‘Contracts of Dispatch’. They differfrom other INCOTERMS as they segregate the point at whichrisk and responsibility passes from the point at which costspass.Under all other terms, the point of transferring risk and thepoint at which responsibility for cost is also transferred aresimultaneous. With the ‘C’ terms this is NOT the case.CFR (Cost and Freight) has a long history and outside ofINCOTERMS a definition with consensus is difficult.As an INCOTERM risk passes from the seller to the buyerwhen the cargo crosses the ship’s rail at the origin port. How-ever, the responsibilities for the costs of transit only pass fromthe seller to the buyer at the destination port. CFR and CIF areMonomodal expressions used when the main carriage is by seaand both are suited to the use of Bills of Lading.Because the ship’s rail is seen as triggering these terms, it isoften inappropriate to use either in a modern port and referenceshould be made to the notes on this subject under FOB.Buyers are disadvantaged with contracts of dispatch. The buyermust take risks for a period of carriage during which the buyerhas no means of controlling or limiting those risks. The carrierused; the costs incurred for carriage and the timing of thecarriage are all under the seller’s control. The buyer mustconsider this disparity before accepting a C termed contract.From the seller’s perspective, the C terms represent exceptionalrisk-management opportunities and are actively pursued as aconsequence.CIF (Cost, Insurance and Freight) represents the condition ofCFR with the addition of Insurance. This is the first of onlytwo terms that place a compulsory responsibility for insuranceon the seller. Under all other terms, the buyer considersinsurance as an optional responsibility.Under the Cost, Insurance and Freight (CIF) contract the sellerhas tl1.e same obligations as under C&F contract but with theaddition that he has to procure marine insurance against thebuyer’s risk of loss or damage to the, goods during carriage.The seller contracts for insurance and pays the insurancepremium. The seller is required to obtain insurance on mini-mum coverage only. The CIF term requires the seller to clear thegoods for export. This term can only be used for sea and inlandwaterway transport.’a. To provide goods and the commercial invoice; or its

equivalent electronic message, in conformity with thecontract: of sale.

b. To obtain any export licence or other official authorisationand carry out all the customs formalities necessary life theexportation of the goods.

c. To arrange for the carriage of the goods to the named portof destination by the usual route in a seagoing vessel and topay its costs and freignts.

d. To obtain cargo insurance as agreed In the contract and toprovide the buyer with the insurance’ policy or otherevidence of insurance cover.

e. To deliver the goods on board the vessel at the part Ofshipment on the date or within the period stipulated

f. To give the buyer sufficient notice’ that the goods have,been delivered on board the vessel.

g. To pay the costs, of checking quality, measuring, weighing,counting, packing and marking of the goods.]

Seller’s &Buyer’s Obligations

CIF

Cost, Insurance and FreightCost, Insurance and Freight» means that the seller delivers whenthe goods pass the ship’s rail in the port of shipment.The seller must pay the costs and freight necessary to bring thegoods to the named port of destination BUT the risk of lossof or damage to the goods, as well as any additional costs dueto events occurring after the time of delivery, are transferredfrom the seller to the buyer. However, in CIF the seller also hasto procure marine insurance against the buyer’s risk of loss ofor damage to the goods during the carriage.Consequently, the seller contracts for insurance and pays theinsurance premium. The buyer should note that under the GIFterm the seller is required to obtain insurance only on mini-mum cover (Refer to Introduction paragraph 9.3). Should thebuyer wish to have the protection of greater cover, he wouldeither need to agree as much expressly with the seller or to makehis own extra insurance arrangements.The GIF term requires the seller to clear the goods for export.This term can be used only for sea and inland waterwaytransport. If the parties do not intend to deliver the goodsacross the ship’s rail, the CIP term should be used.

A10 Other obligations The seller must render the buyer at the

latter's request, risk and expense, every assistance in obtaining any documents or equivalent electronic messages (other than those mentioned in A8) issued or transmitted in the country of shipment and/or of origin which the buyer may require for the import of the goods and, where necessary, for their transit through any country. The seller must provide the buyer, upon request, with the necessary information for procuring insurance.

B10 Other obligations The buyer must pay all costs and

charges incurred in obtaining the documents or equivalent electronic messages mentioned in A10 and reimburse those incurred by the seller in rendering his assistance in

THE SELLER'S OBLIGATIONS THE BUYER'S OBLIGATIONS

A1 Provision of goods in conformity with the contract The seller must provide the goods and the commercial invoice, or its equivalent electronic message, in conformity with the contract of sale and any othe r evidence of conformity, which may be required by the contract.

B1 Payment of the price

The buyer must pay the price as provided in the contract of sale.

A2 Licences, authorisations and formalities

The seller must obtain at his own risk and expense any export licence or other official authorisation and carry out, where applicable (Refer to Introduction paragraph 14) , all customs formalities necessary for the export of the goods.

B2 Licences, authorisations and formalities

The buyer must obtain at his own risk and expense any import licence or other official authorisation and carry out, where applicable (Refer to Introduction paragraph 14), all customs formalities for the import of the goods and for their transit through any country.

A3 Contracts of c arriage and insurance a) Contract of carriage

The seller must contract on usual terms at his own expense for the carriage of the goods to the named port of destination by the usual route in a seagoing vessel (or inland waterway vessel as the case may be) of the type normally used for the transport of goods of the contract description. b) Contract of insurance

No obligation (Refer to Introduction paragraph 10)

B3 Contracts of carriage and insurance

a) Contract of carriage

No obligation (Refer to Introduction paragraph 10)

b) Contract of insurance

No obligation (Refer to Introduction paragraph 10).

A4 Delivery

The seller must deliver the goods on board the vessel at the port of shipment on the date or within the agreed period.

B4 Taking delivery

The buyer must accept delivery of the goods when they have been delivered in accordance with A4 and receive them from the carrier at the named port of destination.

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agent abroad who is well versed with the conditions prevailingin the overseas market. Sales agents are of two types :-a. Commission agents;b. Distributors.Difference Between’ a Commission Event and a Distributor

Commission Agent Distributor A. commission agent solicits orders and passes them on to the exporters.

(a) A distributor, himself purchases good from the exporter and sells them on his account

b) A coinmission agent neither takes the title to the. goods nor takes another sort of credit risk.

(b) A distributor purchases goods and therefore takes the title of goods and assumes full credit risk

c) A commission agent. gets an a reed rate of commission.

(c) The distributor earns much hi her

(d) Normally, an agent does not. provide any ,sales services

(d) A distributor mayor may not Provide after sales services

Elements of Export Agency AgreementAn export agency agreement is a legal document, whichestablishes a commercial relationship between the principal andthe agent. It incorporates the conditions mutually agreed uponby the agent and the principal for the conduct of business.While concluding an agency agreement, the Indian firms shouldconsider the following points :-a. Parties to the Contract :..: The identity of the parties must

be made explicit; especially whether the agency is assignableor not, should be made clear.

b. Contracted Territory :- The territory for which the soleagency is being granted should be explicitly mentioned. Thiswould help in preventing inter-,territorial disputes betweenagents in the different areas.

c. Contractual Products :- The agreement should explicitlyindicate the products for which the agency is beingconcluded. Otherwise, it is implied that the agreement is forthe entire product range, both present and future.

d. Customers :- An agent is expected to contact all potentialcustomers. However, if the principal wants to reserve theright of contacting specific groups of buyers, then the sameshould be clearly mentioned in the contract.

e. Acceptance or Rejection of Orders:- The principal mayreserve the right to accept or reject orders secured by theagent by mentioning the fact in the agreement. This is mustwhen the transaction involves credit terms and the principalis not sure of the creditworthiness of the buyer.

f. Settlement of Disputes :~ Generally, no dispute can ariseif the agency agreement is clearly drafted. Still, it is advisableto agree upon the’ mechanism for settling disputes whileentering into the agency agreement., Arbitration is the bestmethod of settling international disputes.

g. Renewal and Termination :- The agency agreementshould also provide for the renewal’ or terminationprocedure. If the agent is sound! Obviously no principal’will think of terminating the agreement. The’ problem of.termination arises only when the agent is not effective.

h. Other Miscellaneous Elements :-• Minimum order size.• Mode of commission payment.

A5 Transfer of risks

The seller must, subject to the provisions of B5, bear all risks of loss of or damage to the goods until such time as they have passed the ship's rail at the port of shipment.

B5 Transfer of risks

The buyer must bear all risks of loss of or damage to the goods from the time they have passed the ship's rail at the port of shipment. The buyer must, should he fail to give notice in accordance with B7, bear all risks of loss of or damage to the goods from the agreed date or the expiry date of the period fixed for shipment provided, however, that the goods have been duly appropriated to the contract, that is to say, clearly set aside or otherwise identified as the contract goods.

A6 Division of costs

The seller must, subject to the provisions of B6. pay • all costs relating to the goods until such time as they have

been delivered in accordance with A4; and

• the freight and all other costs resulting from A3 a), including the costs of loading the goods on board; and

• the costs of insurance resulting from A3 b); and

• any charges for unloading at the agreed port of discharge which were for the seller's account under the contract of carriage; and

• where applicable (Refer to Introduction paragraph 14), the costs of customs formalities necessary for export as well as all duties, taxes and other charges payable upon export, and for their transit through any country if they were for the seller's account under the contract of carriage.

B6 Division of costs

The buyer must, subject to the provisions of A3, pay • all costs relating to the goods from the time

they have been delivered in accordance with A4; and

• all costs and charges relating to the goods whilst in transit until their arrival at the port of destination, unless such costs and charges were for the seller's account under the contract of carriage; and

• unloading costs including lighter age and wharfage charges, unless such costs and charges were for the seller's account under the contract of carriage; and

• all additional costs incurred if he fails to give notice in accordance with B7, for the goods from the agreed date or the expiry date of the period fixed for shipment, provided, however, that the goods have been duly appropriated to the contract, that is to say, clearly set aside or otherwise identified as the contract goods; and

• where applicable (Refer to Introduction paragraph 14), all duties, taxes and other charges as well as the costs of carrying out customs formalities payable upon import of the goods and, where necessary, for their transit through any country unless included within the cost of the contract of carriage.

A7 Notice to the buyer

The seller must give the buyer sufficient notice that the goods have been delivered in accordance with A4 as well as any other notice required in order to allow the buyer to take measures, which are normally necessary to enable him to take the goods.

B7 Notice to the seller

The buyer must, whenever he is entitled to determine the time for shipping the goods and/or the port of destination, give the seller sufficient notice thereof.

A8 Proof of delivery, transport document or equivalent electronic message The seller must, at his own expense, provide the buyer without delay with the usual transport document for the agreed port of destination. This document (for example a negotiable bill of lading, a non-negotiable sea waybill or an inland waterway document) must cover the contract goods, be dated within the period agreed for shipment, enable the buyer to claim the goods from the carrier at the port of destination and, unless otherwise agreed, enable the buyer to sell the goods in transit by the transfer of the document to a subsequent buyer (the negotiable bill of lading) or by notification to the carrier. When such a transport document is issued in several originals, a full set of originals must be presented to the buyer. Where the seller and the buyer have agreed to communicate electronically, the document referred to in the preceding paragraphs may be replaced by an equivalent electronic data interchange (EDI) message.

B8 Pro of of delivery, transport document or equivalent electronic message The buyer must accept the transport document in accordance with A8 if it is in conformity with the contract.

A9 Checking - packaging - marking The seller must pay the costs of those checking operations (such as checking quality, measuring, weighing, counting) which are necessary for the purpose of delivering the goods in accordance with A4. The seller must provide at his own expense packaging (unless it is usual for the particular trade to ship the goods of the contract description unpacked) which is required for the transport of the goods arranged by him. Packaging is to be marked appropriately.

B9 Inspection of goods The buyer must pay the costs of any pre-shipment inspection except when such inspection is mandated by the authorities of the country of export.

A10 Other obligations The seller must render the buyer at the latter's request, risk and expense, every assistance in obtaining any documents or equivalent electronic messages (other than those mentioned in A8) issued or transmitted in the country of shipment and/or of origin which the buyer may require for the import of the goods and, where necessary, for their transit through any country. The seller must provid e the buyer, upon request, with the necessary information for procuring any additional insurance.

B10 Other obligations The buyer must pay all costs and charges incurred in obtaining the documents or equivalent electronic messages mentioned in A10 and reimburse those incurred by the seller in rendering his assistance in accordance therewith. The buyer must provide the seller, upon request, with the necessary information for procuring insurance.

Meaning of Export Agency Agreement‘Products don’t sell themselves, however well designed andcompetitively priced they may be.’

- O. Mary Hill.In the modern competitive~ world, every product requiresextensive sales efforts for the promotion of the product in themarket. Since, it is a very costly affair for an exporter to maintainsales force abroad as well as it’s difficult for him to keep track oflatest trends in overseas market, it is advisable to appoint an.

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N• Rate of commission in case of an agent and rate ‘of

discount in case of distributor.• Sales promotion allowance, if any, to be granted to the

agent or distributor, including advertisement andtraveling allowance.

• Responsibility of the agent in terms of product,installation, stocking, sales promotion, etc.

• Samples of products to be provided to the agent and theconditions- relating thereto.

• Expiration or earlier termination of the agreement

Sources of Selecting Overseas Agents

a. The exporter can gather information about the overseasagents from

b. Export Promotion Councils (EPCs) and CommodityBoards (CBs)

c. Federation of Indian Chambers of Commerce andIndustries (FICCI);

d. Indian trade missions and representatives abroad andforeign countries trade missions and representatives inIndia;

e. Banks dealing in foreign exchange;f. Manufacturer’s and exporter’s associates abroad, if any;g. Advertisements in newspapers, trade magazines and other

similar specialised journals.h. Web sites of various organisations and institutions.

Remittance of Commission to the Overseas Agents

Rules for Remittance of Commission to the Overseas Agents

a. It is obligatory for Indian exporters to declare thecommission to be payable to the overseas agents,distributors and sales representatives to the Customs onthe relative GR/SDF/PP/SOFTEX form.

b. Reserve Bank has delegated powers to authorised dealersfor the remittance of commission to the overseas agents.However, remittance of commission in advance, i.e. beforeshipments of goods, is not permitted.

c. No remittance of commission is allowed in respect ofexports financed under credits extended by the Governmentof India to any foreign government.

d. The exporters are allowed to pay commission either fromtheir Current or Cash Credit account or from EEFC accountmaintained by them with the authorised dealers.

Rate of CommissionUnder the Foreign Exchange Management Act (FEMA),effective from June 2000, there is no longer’- any ceiling as apercentage of FOB value of exports for payment of commis-sion. The erstwhile ceiling of 12.5% of FOB value of exportshas been abolished.

Methods of Payment of Commission to the OverseasAgents

a. EEFC Account: - The exporters are permitted to utilisetheir Exchange Earners Foreign Currency (EEFC) accountfor remittance of commission to the overseas agent.

b. Non-EEFCCases: - Where the exporter does not wish toutilise his EEFC account, the authorised dealers remit thecommission in the usual manner.

Procedure for the Payment of Commission to theOverseas Agents

a. Remittance by Bank: - There is no restriction on paymentof commission to overseas agents and the paymentprocedure for remittance is also quite simple; Reserve Bankhas delegated powers to authorised dealers for theremittance of commission to the overseas agents.

b. Letter to Bank:- The exporter is required to make anapplication (in duplicate) on his letterhead to the bank,which is authorised dealer in foreign exchange, inter alia,giving the following particulars :-• IEC number allotted by the Regional Licensing

Authority.• Customs or Shipping bill no.• Details of commodity exported.’• Full name and address of the agent or distributor.• Total value of export invoice.• The applicants for remittance of commission must

clearly indicate whether the commission is payable onFOB, C&F or CIF value of the export;

c. Documentary Enclosures :- The application submitted tothe bank should be accompanied by the followingdocuments :-• Invoice (attested copy).• Documentary evidence in support of the amount to be

remitted. -d. Payment of Commission :- If the application is found in

order,’ the bank remits the commission. In cases whereexporters desire to deduct commission directly from the billproceeds, the bank may convey instructions to this effect toits foreign correspondent while forwarding the documents.

e. Deduction from Invoice Value :- In the cases where,exporters desire to deduct commission directly from the billproceeds, the bank accepts invoices showing deduction onaccount of commission. However, such bank should beauthorised to remit commission under the delegatedpowers.

Commission on the Project & Service Exports on DeferredPayment Terms Special rules are applicable to remittance ofcommission on exports on-deferred payment terms, turnkeyprojects and construction contracts abroad. The proposal forpayment of commission abroad in above cases requires thesanction of the Working Group consisting of representativesfrom RBI, EXIM Bank and ECGC.

BrandingA brand is a name, term, symbol or design, or a combinationof them, which is intended to identify the goods or services ofthe seller or group of sellers and to differentiate them fromthose of competitors.’ - American Marketing Association.

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Brand PiracyBrand piracy refers to counterfeiting of popular brand names inthe international market. Brand piracy takes place in case ofoutstanding brands where people are brand loyal. It is commonin case of consumer goods and consumer durables.

Reason for the Growth of Brand Piracy

a. The laws in some countries where counterfeiting of brandnames is done are not strict.

b. Popular brands of MNCs from developed countriescommand goodwill in. the market and generally people tendto become brand loyal. Counterfeiters capitalise on suchloyalty by pirating the brand name in one or the other way.

c. Technological know-how required to produce acounterfeited product is easily available.

Forms of Brand Piracy

a. Imitation: Imitation means copying a popular brand. Forexample, many manufacturers produce jeans in India and puta label of Calvin Klien on it.

b. Faking: Faking mean copying a popular brand with minorunnoticeable differences. For example, a Seiko watch may becopied as Reiko watch.

c. Pre-emption: In countries where law permits wholesaleregistration of brand names, a counterfeiter may register alarge number of well-known brands in his name and thensell such brand names to those interested in counterfeiting. .

Consequences of Brand Piracy

a. MNCs are the worst sufferers of brand piracy. But it alsoaffects others, such as consumers, government, etc.

• Causes unfair competition for MNCs.• Loss of market share and profit.• Loss of consumer faith and consumers.• Poor quality.• Loss, of revenue for the. government.

b. The US Supreme Court established the Principal of StrictLiability in 1953 which states that the aggrieved party neednot prove negligence on the part of the manufacturer buthold him strictly liable for any injury resulting from adefective product, irrespective of whether he was negligentor not.

c. Under some contracts of sale, there are express warranties aswell as implied warranties of merchantability. Suchwarranties must be taken into consideration whiledesigning, manufacturing and selling a product.

Legal action may be taken against any or every party involved inthe manufacture and distribution of the products, which proveto be injurious to the welfare-of consumers.The exporter must, therefore, study the relevant laws andregulations of the country and make sure that his productscomply with such laws or carry out necessary modifications inhis products to meet the requirements of the law. Losses arisingout of product liability can be insured by taking appropriate’product liability insurance policy.

Remedies against Brand Piracy

a. The best remedy is to get the brand name registered withappropriate authority.

b. To initiate Legal action against counterfeiters.c. To create awareness among consumers about the

counterfeited brands.d. To introduce some special mark or other distinctive feature

such as packing, protective seal, etc.e. To withdraw the brand from the market. World Trade

Organisation (WTO) is making some efforts to preventinternational brand piracy.

Product’ LiabilityProduct liability can be define4., as the responsibility borne bythe manufacturers; distributors and retailers; for any conse-quent- injuries or damages from products they make or sell.

Recognized Bases of Product Liability

a. Any negligence on the “Part of the manufacturer whilemanufacturing the product or negligence on the part ofseller while selling the product which may cause consumersto suffer injuries or d(Ul1age. Therefore, the manufacturermust exercise. reasonable care in designing and

PromotionMarketing Communication, or promotion, plays a veryimportant role in marketing, both domestic and international.Even if a product is very good, it may not achieve success unlessthe promotion is appropriate and adequate.‘The word communication in marketing simply means thetransaction of a message, to the buyer or the consumer or thechannel of distribution, in which the supplying company aimsto tell each one of these receiver why they should buy or handlethe product.’

- Simon MaJaroPromotion mix consists of different techniques of communica-tion such as advertising, sales promotion, public relations,personal selling, publicity, packaging and trade fairs andexhibitions. These factors must be blended together in order toaccomplish the firm’s promotion objectives. The nature of theexport marketing communication mix is determined by themarketing environment and the company’s objectives andresources.

Various Elements of Promotion Mix

a. Advertising :- It is any paid form of non-personalpresentation and promotion of ideas, goods and ‘servicesby an identified sponsor. The different advertising mediaare newspapers, magazines, radio, television, and so on.However, their relative effectiveness vary from country tocountry and so do their availability and efficiency.Advertising plays an important role in informing,persuading, and educating the present and potentialcustomers. .

b. Sales Promotion :- Sales promotion is defined as short-term incentives offered to encourage purchase or sale of aproduct or service. Sales promotion activities include tradefairs and exhibitions, samples, gifts, contests, games,

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Nlotteries, discounts, etc. Regulations regarding salespromotion differ in different countries. Sales promotionefforts of a firm must be supported or complemented bythe other elements in the promotion mix.

c. Public Relations :- Modern business houses are becomingmore of consumer oriented. They believe in maintaininggood and cordial relations with their consumers, creditors,dealers as well as intermediaries. Through public relations,the firm intends to create a positive impression on thegovernment agencies, employees, shareholders,consumerists, environmentalists, suppliers, and others,which may include present and potential customers.

d. Personal Selling :- Personal selling is defined as oralpresentation in a conversation with one or more prospectiveconsumers for the purpose of effecting sales. Personalselling may be preferable when the product is technical innature, is of high unit value and the number of customersis limited. Effective communication and skilfulsalesmanship is needed to convince and induce the targetcustomers to buy the company’s products.

e. Publicity :- Publicity is unpaid form of advertisingwhereby a news item is carried in the mass media about afirm and its products, policies, personnel or actions. Forexample, a newspaper may publish an article on the companyor its products or activities. It may be favourable orunfavourable. The publicity unit or the public relationsdepartment may influence the media owners to write apositive story about the company and its products.

f. Packaging :- Attractive and durable packing not onlyprotects the product but also acts as a silent salesman. Anattractively designed packaging can attract the attention ofthe prospects and can induce them to act upon their buyingdecisions. While designing the packages, factors such as thesize and shape of the packages, their colours, language used,international packing standards, etc., must be taken intoconsideration.

g. Trade Fairs and Exhibitions:- Trade fairs and exhibitionsplaya leading role in publicising the products of theexporters. Trade fairs and exhibitions, by bringing potentialbuyers and suppliers in contact with each other andimparting information about the relevant developmentsaround the world, play an important role in internationalmarketing. In India, Indian Trade Promotion Organisation(ITPO) looks after trade fairs and exhibitions of Indianproducts.

h. New Information Technologies :- There have beendramatic changes in the information technology over thelast few years. New information technology modes includeelectronic mail, corporate and public databases, applicationsystems, fax, video and computer conferencing, which arewidely used in the field of international marketing. Thesemodes are considered to be some of the driving forces ofinternationalization.

Some Guidelines Governine: International Promotion Mix

a. Prior permission of the Reserve Bank of India is requiredfor advertisement on foreign television by a person whose

export earnings are less than Rs.10 lakhs during each of thepreceding two years, unless the payment is made from theirExchange Earners Foreign Currency (EEFC) Account.

b. Persons with export earnings of more than Rs.10 lakhsduring each of the two preceding years do not require anypermission from the RBI. However, they are required tosubmit to the Authorised Dealers in Foreign Exchange acertificate from a Chartered Accountant certifying that :-

• The applicant exporter satisfies the criteria of havingexport earnings of ore than Rs.1Q lakhs during each ofthe preceding two years, and

• The advertisement for which foreign exchange is beingremitted will be broadcast by, the foreign televisioncompany in foreign countries and not in India alone.

• RBIs prior permission is also required in the followingcases:-

• For remittances exceeding US $ one lakh per project forany consultancy service procured from outside India.

• For use and/or purchase of trade marks/franchise inIndia.

• For royalty and payment of lumpsum fees undertechnical llaborations

Questions

Q1. What do, you mean by export contract? What are itselements?

Q2. Explain the obligations of the buyer and the seller underFOB-& CIF Contract.’

Q3. What are the elements of export agency agreement?Q4. Explain the procedure far remittance of commission to,

an overseas agent.Q5. What do, you mean by brand piracy? What remedies are

available to, prevent it?Q6. What are the recognized bases of product liability?Q7. What are the various elements a promotion mix?

Case Study -1

On Overseas Agent Selection

(Adapted from CBI News Bulletin)Study the letter below. The letter has been sent to potentialagents whose names have been given to the Managing Directorof Garments Company Limited by his country’s trade represen-tative in Turkey.Dear Sirs,Our trade representative in Turkey informs us that yourcompany may be in a position to take up the Turkish agency forour range of leather jackets. We enclose~ illustrations and pricelists of our products and should be grateful if you could let ushave your comments.Please let us have details of your organisation, the agencies youhold at the moment, the area you cover and the commissionrate you would expect on products of this sort.Yours faithfully,Managing DirectorGarments Company Ltd.

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Here are the repliesFirst reply: from the Universal Agency CompanyDear Sirs,Thank you for your letter of November 1st. We are certainlyinterested in the agency for your most attractive range of leathergarments, which we are sure would sell well in Turkey providedthey are introduced by a large, well established, well- knownfirm of agents such as ourselves.We enclose a full list of the 200 firms we represent, and you willsee that they will include well-known names in the field ofclothing, hardware, engineering sup-plies and building equip-ment.We employ 20 salespersons covering the whole of Turkey and50 head office staff. We expect to receive a minimum 10%commission.Yours faithfully,Second reply (handwritten): from Y. EvirgenDear Sir,Thank you for your letter. I am very much interested inbecoming the agent forYour impressive range of leather garments. I have alreadyshown the illustrations to a garment shop in Izhmir and Iexpect they will give me an order in a day or two.I have been an agent for the last six months and I cover Turkeyusing my home as my office. My wife helps with the correspon-dence and we currently represent the ABC Glove Company ofLondon in Turkey. We should be happy to work for a 5%commission.Yours faithfully,Y. EvirgenThird reply: from the Turkish Garment AgencyDear Sir,Thank you for your letter of 1st November. Your agency is ofgreat interest to me as I specialise in leather products. I am sureI can provide your with good business.I have employed one representative to cover eastern Turkey andI will cover the west myself. We have also employed a secretaryat our office in Bursa and we are in close and regular contactwith the wholesale and retail leather - garment distribu-tors,departmental stores, mail-order agents and institutional buyerssuch as the armed forces. We usually work on a 7.5% commis-sion.I represent the Jones Garment Company, the Ahmed GarmentCompany, the Fungko Brush Company and six shoe manufac-turers. I am confident that your excellent products would fit invery well with my programme.Yours faithfully,Fourth reply: fax from QuickworkTo: The Garment Company Limited.From: Quickwork Represent a Tives, IstanbulLetter Received, Agency Accepted With Thanks, Ship 1000Pieces,~Ylli

2a, Assorted Sizes At Once At Your Acc:Ount 60 Days CreditAtPrices.As Per Your List Plus Charges Delivery Our WareagentIstanbul.Now that you have studied the replies, reflect on the additionalinformation you would require on each agent and how youwould try to obtain it. Then list the four potential agents inyour order of preference based on the information given in theletters and explain the reasons for your ranking. You arerequired to draft an agreement with the selected agent.

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Laws Relating to Credit Contracts (Letterof Credit)• Meaning• Parties• Procedure• Types• Advantages

Laws Relating to Settlement ofInternational Trade Disputes• Litigation.• Arbitration.• Enforcement of International Arbitration.• Procedure for Arbitration.

Question Bank

Meaning of Letter of CreditThe D /P and the D / A modes of payment suggest that thereis a certain degree of lack of confidence of the parties in eachother. The exporter is not willing to send the goods on D /P orD / A basis because he is not sure as to whether the importerwould make the payment and if the importer doesn’t pay, thenhe runs the risk of non-payment. Similarly, importer may alsohave the feeling that if he makes advance payment to theexporter and he does not supply the goods of the qualitydesired by him on the due date, then he would also suffer loss.Both the parties would be able to conduct their part of thetransaction smoothly if there is an assurance to them as regardsprotection of their interests. The exporter requires an assurancefor payment of the goods if he has sent the shipment as perexport order. The importer on the other hand, requires anassurance that the payment would be released to the exporteronly when he has supplied the goods as per the terms andconditions stipulated in the export contract. This assurance ispro-vided by the importer’s bank and is known as Letter ofCredit or the Documentary Credit.Letter of Credit refers to a written undertaking made by theimporter’s bank to the exporter that the payment shall be madeto him provided the shipment is sent by him in strict compli-ance with the terms and conditions of the export contract. Theterms and conditions of the export contract form part of theletter of credit and are known as the terms and conditions ofthe letter of credit. The essential characteristic of the Letter ofCredit is that it relies on the doctrine of strict compliance forrelease of payment to the exporter against the draft( s ) drawnby him. The banks do not deal in goods; they deal in docu-ments. As such, the importer has to specify to the bank thedocuments which it should examine as an evidence to the effectthat the exporter has sent the shipment in strict compliancewith the terms and conditions of the export contract.

LESSON 9 & 10:

The operations of Letters of Credit have been regulated and aregoverned by the articles of ‘Uniform .Customs and Practice forDocumentary Credits’ of International Chamber of Commerceadopted by more than 165 countries which were latest revised in1993 for implementation w.e.f. 1st January 1994.The operations of Letters of Credit have been regulated and aregoverned by the articles of ‘Uniform .Customs and Practice forDocumentary Credits’ of International Chamber of Commerceadopted by more than 165 countries which were latest revised in1993 for implementation w.e.f. 1st January 1994.

Procedure for Opening Letter of CreditThe following is the procedure for opening a letter of credit: -a. Importer’s Request: - If the method of payment agreed

between the importer and exporter is through letter ofcredit then the importer requests his bank to open a letterof credit in favour of exporter, either by paying the amountof letter of credit or by requesting credit to that extent.

b. Issue of Letter of Credit: - The issuing bank issues letterof credit in favour of the exporter and sends it to its -branch located in exporter’s country (advising bank). Theissuing bank may also request advising bank to add itsconfirmation, if desired by the beneficiary.

c. Receipt of Letter of Credit: - The exporter takes thepossession of the letter of credit fr6m the advising bank.He should check the relevant details in the letter of creditand in case there is any discrepancy, the same should bebrought to the notice of the advising bank..

d. Shipment of Goods: - The exporter fulfils the shippingand customs procedure and collects the required documentsfrom various authorities for negotiation.

e. Negotiation of Documents: - The exporter submits therequired documents to the negotiating Bank, whichscrutinises the documents and makes payment to theexporter.

f. Re-imbursement of Payment:- The negotiating bank getsthe payment reimbursed from the issuing bank..

g. Documents to Importer :- The documents forwarded tothe issuing bank by the negotiating bank are handed over tothe importer and the amount is debited to his account.

3. 2. 4. Authenticates L/C

& send it to

Importer Approaches bank to

Open to L/C

Importer’s Bank sends

L/C

Advising Bank (in exporter

country)

Exporter

1.

Procedure for the Issue of Letter ofCredit

Contents of Letter of CreditA Letter of Credit generally contains the following information:

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1. Complete and correct name and address of the beneficiaryi.e., the exporter.

2. Complete and correct name and address of the applicanti.e.:, importer

3. Type of the Letter of Credit/Documentary Credit4. Amount of letter of credit5. How the credit shall be available e.g., by payment, deferred

payment, acceptance or negotiation6. The name of the drawee of the draft and the tenor of the

draft.7. Description of goods, quantity of the items and the unit

price.8. List of documents required to be submitted by the

beneficiary.9. Port of discharge and the place of final destination.10. Terms of delivery i.e., FOB, CFR, CIF etc.11. Status of transhipment i.e., whether allowed or not.12. Status of partial shipment i.e., whether allowed or not.13. The last date of sending shipment.14. Time period for the presentation of documents for

negotiation by the beneficiary after the dispatch of theshipment.

15. The date and place of expiry of the Letter of Credit.16. Transfer of the Letter of Credit allowed or not.17. Mode of advice of the Letter of Credit i.e., by mail or

teletransmission.

Documents Required under Letter of CreditAccording to Article 4 of the Uniform Custom and practice fordocumentary credit in credit operations all parties concerned dealin documents and not in goods, services and or other perfor-mances to which the documents may relate. Hence it is necessarythat the beneficiary tenders documents in conformity with therequirements of letter of credit. Usual documents prescribed inletters of credit are discussed below:-1. Bill of exchange:- It is an instrument drawn by one

person(the seller of the goods) on another(the buyer)directing him to pay to or to the order of drawer(i.e. theseller). The person whom payment is to be made is called“payee” who can be either the drawer himself or a thirdperson. most letters of credit require that the exporter willprepare the bill called the draft and submit it to the bankeralong with other documents. It is document through whichpayment is arranged.

2. Commercial invoice:- It is document of content. Itcontains details about the goods sold, the price and anyother charges which may be on account of buyer. It alsocontains information about any discounts, if given by theseller. A correctly completed commercial invoice shouldconform to the sale contract.

3. Packing List:- this gives details of the individual parcelsshipped to the buyer.

4. Transport documents:- As shipment is the most crucialcondition for payment all letter of credit insist on lodgment

of documentary evidence in support of exporter’scontention of having shipped the goods. Bill of Lading isissued by the shipping company in case goods are sent by asea vessels. Airway bill is used in case of air consignment,railway receipt in case the goods are sent by land route.

5. Inspection Certificate:- As the goods must conform toagreed quality standards all letter of credit require anInspection Certificate. The Inspection certificate has to besubmitted as a proof of the goods having been inspectedby a qualified government or private agency.

6. Insurance policy Certificate:- Insurance policy is a legalevidence of contract of insurance showing full details ofrisks covered. Insurance certificate , applicable in case offloating OR open cover contains a declaration regardingvalue of ach shipment and is signed by the exporterhimself. Insurance certificates not normally acceptable unlessspecifically provided in the letter of credit.

Besides some letters of credit require documents such asCertificate of Origin ,Analysis and Weight Certificate, health andSanitary Certificate to be submitted to the negotiating bank.

Precautions to be Taken by the Beneficiary on the Receiptof Letter of CreditAn exporter should scrutinise the Letter of Credit carefullybefore proceeding to execute the export order. He shouldexamine the following points to ensure that:1. The Letter of Credit appears to be a valid Letter of Credit.

He can consult his Banker for this purpose.2. The type of Letter of Credit and its terms and conditions

are as per the agreed terms and conditions of the exportcontract.

3. All the terms and conditions are acceptable and can becomplied with. It should be ensured that the Letter ofCredit does not include any condition that is unaccept-ableor cannot be complied with.

4. The documents required under the Letter of Credit can beobtained and presented for negotiation.

5. The description of the goods, quantity and the unit pricesare as per the export contract.

6. There is no clause in the Letter of Credit that requirespayment of costs or charges not agreed to with theimporter.

7. The last date for sending shipment and the time allowedfor presentation of the documents are acceptable.

The port of loading and the port of discharge are as per theexport contract. The responsibility.

Parties to Letter of CreditThe following parties are involved in the operation of a letterof credit :-a. Applicant or Opener: - The applicant or opener is the

buyer or importer of goods who opens the letter of creditthrough his bank in favour of exporter.

b. Beneficiary: - Beneficiary is the exporter of goods in’whose favour the letter of credit is opened by the importerthrough his bank.

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Nc. Issuing Bank: - Issuing bank is the importer’s bank, who

issues a letter of credit in favour of the exporter on therequest of the importer.

d. Advising Bank: - Advising bank is the branch of issuingbank situated in the exporter’s country. Such branch receivesthe letter of credit and looks after its onward transmissionto the beneficiary.

e. Confirming Bank: - Confirming bank is the bank situatedin the exporter’s country, which guarantees the credit on therequest of the issuing bank. Many times, the advising bankand confirming bank are one and the same.

f. Negotiating Bank: - Negotiating bank is a bank situated inthe exporter’s country through which documents arenegotiated by the exporters, I.e., exporter’s bank.

SSEELLLLEERR

((BBeenneeff ii cc iiaarryy ))

BBUU YYEERR

((AAppppll iiccaanntt)) 1

4

1

1. The buyer and seller enter into a sales contract providing for payment by documentary credit.

2. The buyer instructs his bank theissuing bank to issue a credit in favour of the seller

4. The advising or confirming bank informs the seller that the credit has been issued

AADDVVIISSIINNGG// CCOONNFFIIRRMMIINNGG//NNEEGG OO TTIIAATTII NNGGBBAANNKK

IISSSSUUIINN GG

BBAANN KK 3

2

3. The issuing bank asks another bank, us ually in the country of the seller, to advise or confirm the credit.

Chart on relationship among the parties to the letter of credit

Doctrine of Strict ComplianceThe operation of letter of credit as a mode of payment is basedon the doctrine of strict compliance. This doctrine provides thatissuing bank would make the payment if the documents asspecified under letter of credit appear on their face to be incompliance with the terms and conditions of the Letter ofCredit. Such documents are termed as no discrepant docu-ments. The banks follow the international standard bankingpractices to determine whether the documents stipulated in theLetter of Credit are in compliance with the terms and condi-tions or not. The standard banking practices are given in theUniform Custom and Practices for Documentary Creditsnumber 500 (1993 revision) as published by the InternationalChamber of Commerce. According to these guidelines, theissuing bank would examine only those documents which havebeen stipulated in the Letter of Credit. In case the beneficiaryhas tendered additional documents which are not stipulated inthe Letter of Credit, then the issuing Bank shall not examinethem and return them to the beneficiary without any responsi-bility. The documents are considered dis-crepant if they do notappear on their face to be in compliance with terms andconditions of the Letter of Credit or on their face appear to beinconsistent with one another.

If the documents required are without any discrepancy and areas per requirement in the Letter of Credit, the bank undertakesthat the drafts will be honoured. The only risk under this modeof payment is when the documents submitted have discrep-ancy. Lithe goods are shipped on a date later than stated in theLetter of Credit or any document is missing or there is aspelling mistake in a document, then it amounts to discrepancyin the document.The issuing bank is allowed a reasonable time not exceedingseven banking days following the day of the receipt of docu-ments to examine them and determine whether the documentsare discrepant or not. In case the documents are non-discrepant;the issuing bank makes the payment against the draft / s drawnunder the Letter of CreditIn case the issuing bank comes to the conclusion that thedocuments are discrepant, then it would not make the paymentand return the documents to the beneficiary or the other partythrough whom it had received them. In such an eventuality, theissuing bank must give notice to this effect by telecommunica-tion or by other expeditious means without delay but in anycase before the close of the seventh banking day following theday of receipt of the documents. Such notice should be givento the bank from which it had received the documents or to thebeneficiary if it received the documents directly from him. Suchnotice must state all the discrepancies in the documents. In casethe issuing bank fails to examine and determine whether thedocuments are discrepant or not within the time limit of sevenbanking days, then it shall, thereafter, be precluded from raisingthe issue of discrepancy to reject the documents. In such a case,it will be under an obligation to make the payment against thedraft/ s drawn under Letter of Credit.However, the issuing bank may, in its sole judgment, approachthe applicant to waive of the discrepancy or the discrepanciesand if the applicant agrees to the request t of the issuing bankthen it would make the payment to the beneficiary otherwisethe issuing bank would act according to the decision of theapplicant. It is important to emphasize here that the issuingbank will have the time not later than seven banking days fromthe day following the receipt of documents to approach theapplicant and take the decision accordingly and communicate thesame to the concerned party that is pre-senter of documents orthe beneficiary within the prescribed time limit of maximumseven days.Under this doctrine, the bank has the right to reject anydocument, which is not in strict conformity with what is askedfor in the letter of credit. There is no question of minor ormajor discrepancy in documents. Any discrepancy makes thedocuments liable for non-acceptance.

Form of Documentary Credit or Letter of CreditThe form of documentary credit is the irrevocable documentarycredit or the Letter of Credit.A Letter of Credit is known as irrevocable Letter of Credit if itsterms and conditions can be cancelled/ modified only with theex-consent of the beneficiary, the issuing bank and the confirm-ing bank( if any). Thus, an importer cannot get the terms andcondi-tions of the Letter of Credit modified/cancelled without

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the express consent of the ex-porter. An irrevocable Letter ofCredit gives an assurance to the beneficiary that the issu-ingbank commits itself to honour the draft/s drawn by theexporter under the credit provided that all the stipulateddocuments are presented and these are in strict compli-ance withthe terms and conditions of the Letter of Credit. This meansthat the irrevocable Letter of Credit is an insurance againstcommercial risks to payment. Such risks are bankruptcy of theimporter, dishonest intentions of the importer to make thepayment or the liquidity problems faced by him and would notaffect payment to the exporter.On the other hand, a Letter of Credit is known as revocable ifits terms and condi-tions can be amended, revoked or cancelledwithout the consent of the beneficiary and even without givingprior notice to the beneficiary regarding the likely change in theLetter of Credit. Such a Letter of Credit involves lot of risk tothe beneficiary as its terms and conditions can be modified/cancelled while the goods are in transit or though the docu-ments have been presented but before payment could be made.In such a situation, the exporter will face the problem ofrealising payment directly from the importer.The banks normally do not issue the revocable Letter of Creditunless there is a specific request to this effect from the applicant.A Letter of Credit is deemed to be an irrevocable Letter ofCredit unless it is specifically marked otherwise.A specimen of the letter of credit is given as annexure I to thischapter.

Kinds of Letter of CreditThere are various kinds of Letter of Credit depending upon thefeatures added to it as desired by the applicant. The differentkinds of the Letter of Credit are as follows:1. Sight or Usance Letter of Credit2. Confirmed or Unconfirmed Letter of Credit3. Negotiable Letter of Credit4. Revolving Letter of Credit5. Red clause Letter of Credit6. Green clause Letter of Credit7. Transferable Letter of Credit8. Back to back Letter of Credit9. With recourse or without recourse Letter of Credit10. Standby Letter of Credit11. Revocable and Irrevocable Letter of Credit12. Restricted Credits

Sight or Usance Letter of CreditA Letter of Credit is known as Sight Letter of Credit or theLetter of Credit at sight if it involves payment to the exporteragainst sight draft. On the other hand, if the pay-ment is to bemade against usance draft, then the Letter of Credit is known asUsance Letter of Credit. In this case, the usance draft is acceptedjointly by the issuing bank and the importer. Once, the draft isjointly accepted by the bank and the importer, it becomes thefirst class commercial paper which can be discounted throughany commercial bank before the due date. This enables an

exporter to obtain funds in advance before waiting for the duedate.

Confirmed or Unconfirmed Letter of CreditAn irrevocable Letter of Credit is confirmed when the advisingbank add? its confirmation to the Letter of Credit. This meansthat the advising bank assumes the primary liability for makingpayment to the beneficiary as if it were the issuing bank. Thisarrangement is beneficial for the exporter as it enables him toprotect himself against the political risks involved in transfer offunds from the importer’s country to the exporter’s country.This kind of situation may arise when the importer’s country isat war or is faced with civil/ ethnic disturbances leading to theimposition of financial emergency or temporary financial crisisleading to the ban on the transfer of funds out of the country.It is important to understand that confirmation of Letter ofCredit is possible only if there is a clause in the Letter of Creditwhich permits the advising bank or any other negotiating bankto add its confirmation. Thus; if an exporter wants confirma-tion of Letter of Credit then he must negotiate for this withthe importer so that he can get this clause included in the Letterof Credit. Confirmation of credit, in fact, operates as aninsurance against the political risks to payment.An irrevocable confirmed Letter of Credit is the most beneficialform of credit for the exporter as he has obtained assurance ofpayment from two banks namely, the issuing bank and theconfirming bank. The exporter should take the decisionregarding confirmation carefully as it involves cost in terms ofpayment of confirmation charges to the bank. It is the mostdesirable to opt for confirmation in the case of those countrieswhich are politically unstable or the financial standing of theissuing bank is not very good.Once the payment is made by the confirming bank ( it is usuallylocated in the exporter’s country)/ then it claims the amount ofLetter of Credit from the issuing bank. In case it fails to obtainthe payment from the issuing bank for any reason, then itcannot claim the amount from the exporter, i.e. the beneficiaryunder the Letter of Credit. Confir-mation of Letter of Credit is,thus, without recourse to the beneficiary.On the other hand, if the irrevocable Letter of Credit does notprovide for its confir-mation, then it would be known asunconfirmed Letter of Credit

Negotiable Letter of CreditA Letter of Credit is known as negotiable if the issuing bankauthorises the negotiating bank to honour the draft/s drawnunder the terms of the credit. In such a case, the exporter getsthe payment even before the documents are scrutinised by theissuing bank. The negotiating bank i.e., the bank through whichthe documents are pre-sented for negotiation for realisation ofthe export proceeds, would examine the documents and if thesame are found to be non discrepant, then the it would releasethe payment under the terms of the credit to the exportersubject to an undertaking from the exporter that in case theissuing bank does not release the payment then he wouldrefund the amount to the negotiating bank. Thus, the negotiat-ing bank reserves to itself the right to take recourse to thebeneficiary in the event of non- payment by the issuing bank

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Nunder the credit. This facility of payment would be available tothe exporter only if it is stated in the Letter of Credit that thepayment is allowed by negotiation and the name of the bank(s)allowed to negotiate is also stated in the Letter of Credit. In casethe name of the negotiating bank is stated in the letter of credit,then the negotiation is restricted to the nominated bank and thecredit is then called the restricted credit. In case the issuing bankagrees for negotiation by any bank then the credit would becalled Unrestricted.

Revolving Letter of CreditA revolving letter of credit is one which provides for therenewal of the amount of the credit without any amendmentsto the letter of credit in relation to a given time period or agiven amount. The revolving letter of credit may be revocable orirrevocable. For example, a letter of credit may revolve initiallyfor an amount upto $20,000 per month for a fixed period ofsay, three months. In this case, the amount of credit shall berenewed for $20,000 every month for a period of three monthsirrespective of whether any credit was utilised or not by thebeneficiary during the month. Thus, while the face value of theletter of credit is $20,000, the undertaking of the issuing bank isfor the total amount of $60,000 in revolving periods each for$20,000 for three months:The revolving credits are opened in those cases where theimporter regularly im-ports goods from a certain exporter.Instead of opening letter of credit for each import, theimporter saves on the transaction costs by opening the revolv-ing credit. The disadvan-tage of revolving credit from the pointof view of the importer is that he enters into long termcommitment with a particular supplier and thereby depriveshim of the possible of opportunities of making imports atcompetitive rates in future.The revolving credit may be cumulative or non-cumulative. Thecredit is consid-ered Cumulative if the unutilised amount ofone time period can be carried over to the next period. If theunutilised amount cannot be carried over, then the credit wouldbe called Non- cumulative.

Red Clause and Green Clause Letters of CreditA Red Clause letter of credit is a kind of credit which enablesthe confirming bank or the nominated bank to make advancesto the beneficiary even before the presentation of the docu-ments. Since this clause used to be written customarily in redink hence the name Red Clause letter of credit. This clause statesthe amount that can be advanced to the beneficiary and incertain case it may cover even the full amount of the letter ofcredit. The confirming or the nominated bank recovers theamount of advance with interest out of the payment realisedunder the credit. In case the documents presented by theexporter are found to be discrepant then the bank which hadgiven the advance will have the right to demand repayment ofthe advance amount with interest from the issuing bank. Theissuing bank would have the right of recourse against theapplicant Le., the importer. This means that the liability will fallon the applicant. Whether such a clause would be included inthe letter of credit or not depends upon the agreement betweenthe exporter and the importer. On the other hand, the letter ofcredit is known as Green Clause letter of credit if it provides for

the credit given to the exporter to cover the period of storage ofgoods at the sea port.

Transferable Letter of CreditTransferable letter of credit is a credit which authorises theadvising bank to trans-fer part or full amount of the credit toany other party at the request of the beneficiary. In this case, theimporter runs the risk of accepting the shipment of goodsfrom a party other than with whom the order was placed andthe party supplying the goods may not have had any businessdealings in the past with the importer. However, once the creditis transferred, the transferee gets the right to make presentationof the draft/.s and the docu-ments and claim payment for thegoods supplied. This kind of credit is very useful in those caseswhere the importer is making imports through an agent in theexporting country. Such agents, known as buying agents in theexporting country, maintain the list of reliable exporters for thesupply of goods to their Principals in the foreign country. Thetransferable credits help the buying agents to transfer part of thecredit amount to differ-ent exporters who have been given theorders for the supply of goods to the importer.

Back -to- Back Letter of CreditBack -to- Back letter of credit is a credit which is issued at thestrength of another letter of credit. For example, an exporterwho has received a letter of credit for the export of goods mayhave to import goods from another country for the executionof the order. The foreign supplier may ask for payment againstletter of credit. The exporter can request for the issue of importletter of credit on the strength of the export letter of credit. Thesecond letter of credit is known as the back-to -back letter ofcredit. Thus, the back- to-back letter of credit involves twoseparate letters of credits as follows:1. One opened in favour of the primary beneficiary or the

original exporter.2. The credit opened in favour of the second beneficiary who

would supply goods to the first beneficiary. Thus, the firstbeneficiary becomes the applicant for opening of the secondletter of credit. It is important to ensure that the secondletter of credit specifies all the documents required by thefirst credit and the time limits set for presentation of thedocuments in such a manner that it will enable the primarybeneficiary Le., original exporter to present the documentswithin the time limits set by the primary letter of credit

With Recourse or Without Recourse Letter of CreditA letter of credit is with recourse when under the terms of thecredit, the negotiating bank or the nominated bank cannotapproach the beneficiary for the refund of the payment madeunder the letter of credit. It is without recourse when thenegotiating or the nomi-nated bank cannot approach thebeneficiary to refund the payment under the letter of credit. Aconfirmed letter of credit is without recourse to the beneficiaryand the uncon-firmed or the negotiable credits are always withrecourse to the beneficiary.

Standby Letter of CreditStandby letter of credit is an assurance to the beneficiary that theapplicant shall perform his part of the obligation undertaken byhim under the contract between the applicant and the benefi-

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ciary. It is, in fact, a kind of performance guarantee to supportthe beneficiary in the event of default by the applicant. Thesubject matter of this kind of letter of credit could be :1. Repayment of the money borrowed by the applicant from

the beneficiary or2. Payment on account of any indebtedness undertaken by the

applicant or3. Payment on account of any default by the applicant in the

performance of any obligation undertaken by theapplicant.

Revocable and Irrevocable Letter of CreditUnder the revocable letter of credit, the issuing bank retains theright to cancel or modify the credit. Whereas in an irrevocableletter of credit, the issuing bank gives a binding undertaking tothe beneficiary.

Restricted Letter of CreditThis refers that negotiations under a credit may be restricted bythe issuing bank to a named bank.

Advantages of Letter of Credit

Advantages of Letter of Credit to Exporters

a. Prevents Blockage of Finance: - The letter of creditreceived from the importer can be discounted with theconfirming bank and money can be realised immediately.This prevents blockage of funds. At the same time, afterfulfilling the required formalities the exporter getsimmediate payment.

b. Prevents Bad Debts: - In the case of a letter of credit, thepayment is I guaranteed by the issuing bank and therefore,the risk ‘of bad debts is less. A confirmed letter of credit ismore secured due to double guarantees from the issuingbank and the confirming bank.

c. Fulfilment of Import Regulations: - The letter of credit isissued by the issuing bank after the importer complies withthe import regulations and exchange control regulations inhis country. Thus, after getting letter of credit unnecessarydelays caused by import regulations can be avoided.

d. Importer’s Obligation: - The importer may refuse toaccept goods in the case of other methods of payment. Butin the case of the letter of credit, the importer cannot do sobecause it is obligatory for him to accept goods and makepayment once he gets the documents negotiated in hisfavour.

e. Helps to Procure Pre-shipment Finance: - In India anexporter can obtain pre-shipment finance from commercialbanks on the strength of a letter of, credit issued by theimporter’s bank in his favour.

Advantages of Letter of Credit to Importer

a. Better Terms of Trade :- Since in the case of a letter ofcredit, payment is assured, the importer is in a betterposition to negotiate the terms of trade with foreignsuppliers which otherwise is not possible.

b. Guaranteed Shipment :- Shipment of goods cannot bedelayed once a letter of credit is issued. Therefore, theimporter is assured of the delivery of goods in time.

c. Delivery in Time :- A letter of credit is honoured onlyafter the exporter dispatches. the shipping documents tothe importer. Thus, a letter of credit assumes timely deliveryof goods to the importer.

d. Overdraft Facility ::The importer may also get a letter ofcredit issued in favour of the exporter on the basis ofoverdraft facility extended to him by the issuing bank.Thus, the importer gets possession of goods withoutmaking actual payment.

e. No Advance Payment:- The importer is not required tomake any advance payment to the exporter once a letter ofcredit is issued.

Settlement of Payment under Letter of CreditThe procedure for the settlement of payment against the exportshipment sent under a letter of credit depends upon thepayment mode stated in the letter of credit. Generally, thesequence of steps involved in this procedure is as follows:1. The beneficiary (exporter) sends the shipment as per the

terms and conditions of the credit.2. Exporter collects the required set of documents and draws

the Bill of Exchange as per the requirements of the credit.3. The set of documents as stated in (2) above are presented

by the exporter to his bank, called beneficiary’s bank.4. The beneficiary’s bank forwards these documents to the

issuing bank5. The issuing bank scrutinises the documents and if the same

are found to be non discrepant, then it sends the remittanceto the beneficiary’s bank for its onward credit to thebeneficiary. But in case the documents are found to bediscrepant then the issuing bank may approach the applicantto decide the course of action it would take in regard to thediscrepant set of documents. The possible options arerejection of documents; ignoring the discrepancies andmaking payment to the beneficiary or sending documents tothe beneficiary for removal of the discrepan-cies. Theissuing bank would follow one of the options as desired bythe applicant.

5 A

. Fo

r adv

ise

3. Informs

4B. Documents Released

7. Account Remittance of exporter sent 6. credited

Importer

Discrepant Documents

Security of Documents

Non-Discrepant

Beneficiary (exporter) submits

documents to

Beneficiary (Exporter)

Bank forwards them to

Issuing Bank (L/C opening

Bank)

Rem

ittan

ce

to

Procedure for Settlement of payment Under L/C.

Payment Settlement ProceduresThe above procedure would be changed depending upon thetype of payment settlement procedure specified under L/e. Thevarious types of settlement procedures are as follows:

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N1. Settlement by deferred payment.2. Settlement under negotiable letter of credit.3. Settlement under confirmed L/ e.4. Settlement against acceptance.

Settlement by Deferred PaymentThe procedure for retaliator of payment under deferredpayment arrangement is as follows:1. The beneficiary presents the documents to the nominated

bank for deferred credit and the nominated bank makespayment to the beneficiary at a future date againstpresentation of conforming documents. In this case theexporter is not required to prepare any draft. However, adraft may be prepared by the exporter to be pre-sented tothe nominated bank for acceptance of the liability as regardspayment at a future date. The nominated bank accepts thedraft and returns it the exporter. The dates on whichpayment is made is always defined as a certain number ofdays from the date of presentation of the documents. It isthe responsibility of the issuing bank to make the paymenton due date.

2. The nominated bank which accepted the draft sends thedocuments to the issuing bank informing that it hasaccepted the draft drawn by the beneficiary.

3. The issuing bank scrutinises the documents and if the sameare found to be non discrepant then it reimburses theamount of the draft to the accepting bank/nominatingbank..

4. The issuing bank releases the documents to the importer.5. The accepting bank or the nominating bank releases

payment to the beneficiary.It may however, be noted that in case of negotiable credit or theconfirmed credit the negotiating bank/ confirming bank willrelease the payment to the beneficiary on due date even beforethe reimbursement is received from the issuing bank.

Procedure for Settlement under Negotiable Letter ofCreditThe procedure for settlement of payment under negotiableletter of credit is as follows:1. The basic procedure remains the same as outlined above

with the only difference being that the negotiating bank willrelease the payment to the beneficiary against the draftdrawn under the L/C after satisfying itself that thedocuments presented by the beneficiary are non discrepant.

2. The exporter submits an undertaking to the negotiatingbank that it will refund the amount to the bank if thepayment is not received by the negotiating bank from theissuing bank..

3. The negotiating bank after making payment to thebeneficiary sends the docu-ments to the issuing bank.

4. The issuing bank checks the documents and sendsreimbursement to the negotiate- in bank if the documentsare non discrepant.

5. The issuing bank sends the documents to the buyer.

Procedure for Settlement of Payment in Case ofConfirmed Letter of CreditThe procedure for settlement of payment in the case ofconfirmed letter of credit is explained below:1. The exporter presents the documents to the confirming

bank after sending the shipment as per the terms andconditions of the letter of credit.

2. The confirming bank examines the documents and iffound non discrepant, it releases the payment to thebeneficiary i.e. ,exporter.

3. The confirming bank then sends the documents to theissuing bank for claiming reimbursement for the paymentmade.

4. The issuing bank sends reimbursement to the confirmingbank if the documents are found to be non-discrepant.

5. The issuing bank releases the documents to the applicanti.e. the importer.

In case the documents are found to. be discrepant, the confirm-ing bank will not release payment to the exporter and wouldseek the advise of the issuing bank for taking suitable action inthe matter.In case the confirming bank has released payment to theexporter but it fails to get its reimbursement from the issuingbank then it cannot take recourse to the exporter and in such aneventuality it would be the loss of the confirming bank.

Procedure for Settlement of Payment in the Case ofTransferable Letter of CreditIn case a part or whole amount of the letter of credit has beentransferred then the transferee becomes the beneficiary andwould present the document for negotiation in the samemanner as if he were the original beneficiary.

Procedure for Settlement of Payment by AcceptanceThe procedure for settlement of payment by acceptance is asfollows:1. The beneficiary i.e., exporter tenders documents evidencing

shipment of goods to the bank where credit is available byacceptance (Accepting Bank). The draft is drawn on theAccepting Bank with specified tenure i.e. the time whenpayment is to be made and is also presented along with thedocuments.

2. The Accepting Bank checks the documents and if these areas per the credit require-ments, then it accepts the draft andreturns it to the beneficiary.

3. The Accepting Bank then sends the documents to theIssuing Bank stating that it has accepted the draft.

4. The Issuing Bank checks the documents and if these are asper credit requirements then it makes payment to theAccepting Bank at maturity.

5. The Accepting Bank makes payment to the beneficiary.6. The Issuing Bank sends document to the applicant (i.e.,

importer).

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Law Relating to Settlement of International tradedisputesWritten orders rather than based on verbal orders conveyedpersonally by the importer. The written export orders/agreements/contracts form the basis of exports business. This,in turn, forms the basis of disputes between the parties to atrade transaction. Disputes arise due to the breach of contracteither by exporter or importer. For example dispute may be theresult of the following:1. Non-supply or short supply or delayed supply of goods.2. Non-payment of discounts and commissions by the seller.3. Non-remittance of sale proceeds by the buyer.4. Difference in interpretation of the clauses in the agreement.5. Difference in the interpretation of quality standards.6. Difference due to language problems, commercial practices

etcThere is a need to reduce to the minimum the incidence ofdisputes. If the incidence of disputes is heavy, it not only spoilsthe name and trade prospects of the exporter concerned, butalso the image of the country. One of the ways to minimisetrade disputes is to use standard contract forms. Indian Councilof Arbitration has evolved the contact form, a copy of the sameis given at the end..Inspite of written agreement and all the precautions taken,disputes do arise. How to settle the disputes?

Settlement of Industrial DisputSimilar to domestic trade, disputes are inevitable in internationaltrade. There are a number of alternative ways to settle a disputein international transactions.There are Four ways of settling a dispute, but two are the wellrecognized methods for settlement of dispute, i.e. litigationand arbitration . Litigation is not suitable for settlement oftrade disputes as it is beset with inordinate delays, high costsand uncertainty of the final decision.1. Conciliation2. Mediation3. Litigation4. Arbitration

1.ConciliationAmicable settlement of disputes through the good offices ofan impartial third party is termed as conciliation. Indianexporter can approach Indian Government Trade Representativeabroad for settlement of the dispute through conciliation. Thisis done by persuading the importer directly or through Govern-ment authorities or local chamber of commerce to agree foramicable settlement.The importers can approach the Directorate General ofCommercial Intelli-gence & Statistics, Calcutta, of the Ministryof Commerce in case they have any complaint against theIndian Exporter and want settlement of the dispute throughconciliation. Indian Council of Arbitration, New Delhi has alsobeen endeavoring to conciliate in a large number of complaintsfrom foreign importers and vice versa.

Conciliation refers to a process where parties resolve theirdispute by direct negotiation on a voluntary basis without theassistance of a third party. Conciliation, as a way of disputesettlement, has a number of advantages, including a simpleprocedure, saving on the cost and the possibility of maintainingthe cooperative relationship among the parties involved.However in practice, conciliation often fails to reach a mutuallysatisfactory solution. Furthermore, the agreement reachedthrough conciliation lacks the legal binding effect upon theparties and therefore, if one party withdraws from the agree-ment, new dispute may likely arise. As a consequence, theproportion of disputes settled through conciliation is relativelysmall in international trade. In case the conciliation efforts failthe matter can be settled through arbitration-.

2. MediationMediation is a process where the parties involved in a disputeresolve their dispute with the assistance of a third party (theMediator). The Mediator is mostly a permanent arbitrationinstitute. Many permanent arbitration institutes (e.g. ChinaInternational Economic and Trade Arbitration Commission,International Chamber of Commerce) have their mediationrules or include the rules of meditation in their arbitration rules.Although some arbitration institutes may not have particularmediation rules, it does not mean they will exclude mediationfrom being applied as a form of dispute settlement.Similar to conciliation, mediation is based on the respect for thefree will of the parties and an informal negotiating atmosphere.The advantage of mediation is that, due to the participation ofthe third party, the process of reaching an agreement among theparties will be accelerated. In the meantime, if the arbitrationbody makes an award in accordance with the mediationagreement reached by the parties, the stipulation of theagreement will have a legal binding effect upon all the partiesinvolved. In comparison with litigation and arbitration,mediation requires less cost and is a simpler process.

3. LitigationA controversy before a court or a “lawsuit” is commonlyreferred to as “litigation”. If it is not settled by agreementbetween the parties it would eventually be heard and decided bya judge or jury in a court. Litigation is one way that people andcompanies resolve disputes arising out of an infinite variety offactual circumstances.The term “litigation” is sometimes to distinguish lawsuitsfrom “alternate dispute resolution” methods such as “arbitra-tion” in which a private arbitrator would make the decision, or“mediation” which is a type of structured meeting with theparties and an independent third party who works to help themfashion an agreement among themselves.

Definition of LitigationA dispute is in “litigation” ( or being “litigated”) when it hasbecome the subject of a formal court action or law suit. Alsothe study of court process, both civil and criminal.Using legal action to recover a debt. NRC’s Tandem Programoffers full follow through to litigation forwarding, whenwarranted. Litigation is most often used as the final remedyafter all other collection efforts have failed. Litigation is at NRC’s

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Noption and may not be a cost-effective solution on low-balanceaccounts

Basic Limitations of Litigation

a. Lengthy and Time Consuming :. Court process isgenerally very slow, time-consuming .and’ formalistic. Ittakes years for settlement o f a dispute in a court of law. Atthe same time, longer the time higher is the cost and otherexpenditure.

b. Requires Concrete Evidences :- Generally, judges andlawyers are not well-versed with the practices and proceduresof the international trade. Therefore, such trade practicesand procedures have to be proved before the court by expertwitnesses having knowledge and experience in the field.

c. Inconvenience to the Parties :- Since the litigationprocedure is lengthy and time consuming, it causesinconvenience to the litigants and disturbs their mentalpeace. At the same time, the time, place and date ofhearings in a court of law may not be convenient to partiesto litigation.

d. Adverse Public Image:- The court proceedings are open tothe public and judgments of higher courts are alsopublished. This may cause litigants to expose their internaland private affairs and trade secrets and the reputation ofthe organisation may be affected adversely.

e. Bitterness and Disruption of Trade Relationship :-Acrimony and bitterness usually accompany litigation andirrespective of which party wins, many times it results into abreach or disruption of the long standing traderelationships between the parties.

f. Different Laws and Procedures :- International tradetransactions involve parties from different foreign countrieswhose laws and procedures are not same~ Internationaltrade laws and procedures are rather complicated.

4. ArbitrationAccording to Indian Council of Arbitration (lCA), arbitration isthe voluntary submission of a dispute to one or more impartialpersons for final and binding determination. It is a substitutefor court proceedings, and arranged in two ways, i.e. eitherthrough “future disputes clause” or “submission agreement”.Future disputes clause provides for reference of the dispute forarbitration by the agreed agency. On the other hand, “submis-sion agreement” refers to the agreement between the partiesusually, written, to submit the dispute after it has arisen, to oneor more arbitrators.Arbitration is the reference of a dispute to one or moreindependent third person(s) who act(s) as judge and jury. Inadvance of the arbitration, the parties agree to be bound by thearbitrator’s decision. Cases that are arbitrated are generallyresolved faster than conventional lawsuits because there is lessbureaucracy and court congestion is not a problem. In anarbitration, witnesses are placed under oath and written evidenceis submitted, but the technical rules of procedure followed by acourt do not apply. Due to above limitations arbitration ispreferred to litigation as a method of dispute settlement at the

international level. Arbitration bas certain advantages overlitigation.Future Disputes clause is an insurance of a quick and justsettlement of possible future dispute.The arbitration clause-Future Disputes Clause-must providefor:-a. The nature of questions/matters to be referred to

arbitration.b. Name and rules of procedure of the arbitral body to which

dispute is to be referred.c. An unequivocal statement as to the finality and binding

nature of the award given by the arbitral body., andd. The venue of arbitration and the number of arbitrators

who would hear and decide the dispute.

Basic Steps are Involved in ArbitrationAfter all parties have been informed of the controversy, anagreement can be reached to resolve the matter througharbitration. The parties decide whether the arbitration will bebinding or non-binding and then select the arbitrator. Usuallythe arbitrator is selected from a panel or list of availablearbitrators. Once the matter has been submitted to the arbitra-tor (and when each side has paid his/her respective share of thearbitrator’s fee), the arbitrator will contact all parties. A schedulewill be set, which includes when all documents must beexchanged, when all witnesses must be disclosed, whenarbitration briefs (written statements covering the facts and thelaw of the given controversy) are to be submitted, and whereand when the hearing will be conducted.At the arbitration hearing, each of the respective parties isallowed to present his/her evidence concerning the controversy.Opening statements can be presented, but are usually waivedsince arbitration briefs have been submitted. Witnesses (bothpercipient -those who saw and heard - as well as experts) areexamined and cross-examined. Documents and other evidenceare submitted. Closing arguments may be presented.Once all evidence has been submitted to the arbitrator, thematter is taken under submission. This means that thearbitrator will take some time to consider all of the evidencethat has been presented. After carefully review, the arbitrator willmake an “arbitrator’s award.” After the arbitrator’s award hasbeen issued, the prevailing party often has the ability to have itissued as an enforceable order of a court of law.

Model Arbitration ClauseThe Indian Council of Arbitration has suggested the followingclause for insertion in the agreement.“ All matters of dispute or differences whatsoever arisingbetween the parties out of business transaction or relating tothe construction, meaning and operation or effect of thiscontract or breach thereof shall be settled by arbitration in ac-cordance with Rules of Arbitration of the Indian Council ofArbitration and the award made in pursuance thereof shall bebinding on the parties”

Basic Advantages of Arbitration

a. Quickness: - Arbitration procedure is simpler and muchquicker than litigation. Under the Arbitration Act, the

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arbitrators have to make the award within four monthsfrom the date of entering on the reference. Usually anarbitration case may be settled between four months to oneyear.

b. Inexpensiveness: - The costs and expenses involved inarbitration are much less than in those involved in thelitigation. Apart from the. Arbitration fee, which is just 2percent of the claim value or even less in institutional.Arbitration, the other incidental expenses are rathermoderate and low.

c. Promotes Goodwill: - Arbitration hearing takes place invery friendly and cordial atmosphere and thereby promotesfriendly trade relations between the parties. The arbitrator isa person chosen by the parties themselves on thebasis of their faith and confidence in him.

d. Sound and Cogent Decision: - In arbitration, the partieschoose an arbitrator having knowledge and experience in theline of trade to which the dispute relates. This helps inavoiding unnecessary delay caused due to lack of knowledgeon the part of judges.

e. Privacy: - Arbitration proceedings are not open to publicand arbitrators’ decisions are not published in law reportslike the court decisions. Therefore, arbitration preserves theprivacy and trade secrets of the parties involved in thearbitration.

f. Reducing the Psychological Costs of Litigation: Thespeed of arbitration and the informality of the process,couples with a less-confrontational discovery processminimizes and allows the parties to quickly get on withtheir lives.

g. Confidentiality: Unlike court cases, arbitration proceedingsare not public. The case will not be tried in the newspaper.

h. Quality of the Decision: Arbitrators knowledgeable inemployment law may render more rational andpredictable decisions that juries which may be swayed byemotion.

Disadvantages of arbitration

1. Limited appeal rights: By law, arbitrators’ decisions aremeant to be final, and can be appealed only on limitedgrounds.

2. More frequent utilization: Employees can more easilychallenge personnel decisions. However, employers shouldaccept the possibility of increased challenges, as a tradeoff tothe far greater cost savings which arbitration offers.

Enforcement of International ArbitrationIn the case of international transactions, arbitration becomesinternational when at least one of the parties involved isresident or domiciled outside India or the subject matter of thedispute is abroad. In this case, the law applicable to an arbitra-tion proceeding depends upon the terms and conditions of theexport contract and the rules of conflict of laws. Therefore, it isalways advisable to specify in the export contract as to whichlaws the contract is subject to in case a dispute arises in future.Depending upon the export contract, arbitration can take placeeither in the exporter’s or importer’s .country. The whole

philosophy behind the system of arbitration for settlingcommercial disputes is that the awards should be voluntarilyhonoured by the parties concerned. But, sometimes a partyagainst whom the decision is made, does not either complywith or delays compliance with the award. To overcome thisproblem, a number of countries have provided for legalremedies for the enforcement of awards rendered therein.However, difficulties may arise when an award is to be enforcedin country other than where it is’ given. This is because thereexists a wide disparity and complexity in the laws and proce-dures of different countries in respect of enforcement of suchawards.Releasing these difficulties, several multilateral internationalconventions have been organised for attaining uniformity andcertainty in the enforcement of arbitral awards in differentcountries. These conventions include:a. Geneva Protocol on Arbitration Clauses, 1923,b. Geneva Convention of the Execution of Foreign Arbitral

Awards, 1927.c. New York Convention for the Recognition and

Enforcement of Foreign Arbitral Awards, 1958, andd. European Convention on International Commercial

Arbitration, 1961.Besides, these Conventions, arbitral awards are also enforceableunder bilateral treaties between different countries.

Law for the Enforcement of Foreign Awards in IndiaIndia is one of the parties to the 1927 Geneva and, the 1958New York Convention. As a commitment to the provisions ofthese conferences, India has enacted the Arbitration (Protocoland Convention) Act, 1937 and the Foreign Awards (Recogni-tion and Enforcement) Act, 1961, respectively, giving effect tothe two Conventions.Prior to 1996, statutory provisions on arbitration were con-tained in three different enactments, viz.,a. The Arbitration Act, 1940.b. The Arbitration (Protocol and Convention) Act, 1937, andc. The Foreign Awards (Recognition, and Enforcement) Act,

1961.The Arbitration Act laid down the framework within whichdomestic arbitration was carried in India while the ‘other twoActs dealt with foreign awards. However, the Arbitration andConciliation Act, 1996 has repealed the earlier Acts. The new Acthas strengthened and clarified the provisions relating tointernational commercial arbitration.

Enforcement of Indian Awards in Foreign CountriesSimilarly, awards made in India are also enforceable in foreigncountries, which are parties to any of the international conven-tions relating to the enforcement of foreign awards. However,enforcement of arbitral awards in countries, which do notadhere to either the 1937 or the 1961 Convention or othersimilar international regulations, is somewhat difficult.

Procedure for Arbitration

a. Inclusion of Future Dispute Clause: - If the parties tothe export contract desire to settle all future’ disputes

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Nrelating to the contract through arbitration, then the samecan be done by inclusion of ‘Future Dispute Clause’ in theexport contract. If the export contract does not provide foran arbitration clause then the parties to the contract later byan agreement, usually written,. submit a controversy to oneor more arbitrators for ‘arbitration. This is called a‘Submission Agreement’.

b. Initiation of Arbitration: - The party desirous to ‘applyfor arbitration should make an application to the Secretaryalong with prescribed registration fees and the followingdetails: -

• The names and addresses of the parties to the disputes.• Full details of the applicant’s case.• Original (or duly certified copies) of such documents and

information relevant to the case.c. Fees and Expenses: - The fees and expenses incidental to

the ‘arbitration procedure and the award’ include: -• Registration fee• Administrative fee and• Arbitrator’s feeThe registration fee is fixed while the amount of other two,fees is determined by the ‘Bench’ on the basis of the amountof suit and the time spent an the case. In, addition,traveling expenses incurred by the arbitrator or the Secretaryand applicable stamp duty is also included in the total cost.

d. Constitution of Bench: On receipt of the application, theSecretary constitutes a Bench far the adjudication of the’dispute or difference. The Bench consists of one or threearbitrators selected form a ‘Panel of Arbitrators’ maintainedby’ the Council. The Panel includes qualified andexperienced parsons from various lines of trade and thelegal profession. It also’ includes persons of various f oreignnationalities. The appointment of arbitrator is made inaccordance with the Council’s Rules. “

e. Deciding the Venue: - The arbitration proceedings are heldat such places) in India or abroad as the bench maydetermine taking into, consideration the previsions of theexport contract.

f. Declaration of Awards: - When the Bench of arbitratorssigns the award, the Secretary gives a notice in writing to, theparties to, the arbitration about the amount of fees andcharges payable in respect of the arbitration and the awarddeclared. The Secretary sends a true’ copy o f the ward to, theparties by registered past provided the’ arbitration Costshave been fully paid. The party, which wishes the award to,be f1leq before the court, shall pay the prescribed fee to, theIndian Council o f Arbitration (ICA), in addition to, thecourt fees.

g. Enforcement of Awards: - The whale philosophy and,spirit behind the system of arbitration far settlingcommercial disputes are that the awards are voluntarilycomplied with by the parties concerned. But, sometimes aparty against wham the decision is made, does not either

comply with or delays compliance with the award. To,overcame this problem, a number of countries haveprovided far legal remedies far the enforcement of awardsrendered therein.

Advantages of Arbitration over Litigation

1. Arbitration can be set in two to three weeks or, at most, twoto three months instead of two to three years for a trialsetting.

2. There is little or no “discovery.” Either depostions andinterrogatories will be restricted or else there may be none.

3. Arbitration is private. Court is public. In arbitration, strangersand news media will not be allowed in court.

4. Arbitration is not appealable. It is final. Court cases are alwayssubject to rehearings, new trials, and appeals. Post-trialproceedings can take longer and cost more than the originaltrial. Arbitration generally has no rehearings, new trials, orappeals.

5. Litigation costs in arbitration are substantially less than incourt.

6.Arbitrators are not known for awarding huge amounts forpunitive damages, mental anguish, pain and suffering andother non-economic damages.

7.Arbitration can be done with or without lawyers — yourchoice.

Guidelines for Settlement of Ttrade DisputeExporters should project a good image of the country abroadto promote exports. With this objective in mind, an enduringrelationship with foreign buyers is of the utmost importance,and trade disputes, whenever they arise, should be settled assoon as possible.The majority of complaints from foreign buyers are with regardto qual-ity. Other complaints are usually for unethical commer-cial dealings on the part of Indian exporters and can becategorized as non-supply of goods after confirmation of theorders, non-payment of agreed commission, non-adher-ence tothe delivery schedule etc. The work relating to dealing suchcomplaints oi foreign buyers has been centralised with the‘Nodal Officer’ and its assist-ing cell viz., the Trade DisputesCell in the office of the Director General of Foreign Trades,Ministry of Commerce, Udyog Bhawan, New Delhi.

Action against Erring ExportersA. Enforcement action in the office of Director General ofForeign Trade against erring exporters can be taken under theexisting rules & regulations depending on the offence asfollows:-Non-payment of commission, supply of sub-standard goods,non-adher-ence of delivery schedules, indulgence in unethicalcommercial dealings, amount to breach of contract for whichaction can be taken under clause 7 of the Export(Control)Order, by which the Central Government or Director Generalof Foreign Trade or an authorised officer may debar an exporterfrom export-ing any goods if he commits a willful breach ofcontract. This applies to the cases pertaining to a period prior to19-06-1992. However, cases pertaining to a period on or after,19-6-1992 enforcement action is taken in terms to Foreign

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Trade(Development & Regulation) Act, 1992 and Rules framedthere under namely:a. Section 8 empowers the Director General of Foreign Trade

to suspend or cancel the Importer Exporter Code Numberwhich is a prerequisite for any export or import, where theDirector General of Foreign Trade has inter alia reason tobelieve (a) that the exporter has committed an economicoffence as a specified by the Government or

b. That any per-son has made an export import in a mannergravely prejudicial to the trade relations of India with anyforeign country or to the interests of other persons engagedin imports or exports or has brought disrepute to the creditor the goods of the country.

c. Sector 9(4) empowers the Director General of Foreign Tradeor the of-ficer authorised by him to grant licence, tosuspend or cancel any licence granted under the Act. Rule 10of the Foreign Trade (Regulation) Rules, 1993 lays downthe conditions for such cancellation under Section 9(4) ofthe said Act. This includes cases where the licence has beenobtained by fraud, suppression of facts ormisrepresentation and where the licen-see has contravenedany law relating to Custom or Foreign Trade or the Rules &Regulations relating thereto.

d. Section 11(2) of the Act provides for imposition of fiscalpenalty in cases where a person makes or abets or attemptsto make any import or export in contravention of anyprovisions of the Act, any Rules or Orders made thereunder or the Export-Import Policy. Rule 11 of the ForeignTrade (Regulation) Rules, 1993 requires an exporter to statein the shipping bills or any other documents prescribedunder the Customs Act, 1962, the value, quality anddescription of export goods to the best of his knowledgeand belief and to certify that the quality and specification ofthe goods are in accordance with the terms of the exportcontract and has also to subscribe a declaration at the footof such a document that the statements made by him aretrue.

e. Paragraph 14.6 of the Export-Import Policy AM 1997-2002empowers the Director General of Foreign Trade to takeaction against an exporter, if it comes to his notice or he hasreason to believe, has made an export in a manner gravelyprejudicial to (1) trade relations of India with any foreigncountry; (2) to the interests of other persons engaged inexports or imports and (3) has brought disrepute to thecredit or the goods of the country.

f. The Director General of Foreign Trade has powers underSection 5 of the Foreign Trade (De-velopment &Regulation) Act, 1992, to direct any Registering Authority toregister or deregister an exporter or otherwise issue suchdirections to them consistent with and in order toimplement the provisions of the Act, the Rules & Ordersmade there under, the Policy or the Handbook. Besides, theRegistering Authorities viz. Export Promotion Councils,Commodity Boards etc. may also take appropriate necessaryaction and view on the application furnished by theexporters for registration if, prima facie, there are reasons to

believe that he has indulged i any form of unfair, corrupt orfraudulent practice

Adequate opportunity is to be provided to the exporter toexplain his stand before resorting to penal action by way ofissuance of Show Cause Notice, personal hearing etc., as perrulesB. Certain export products have been notified for CompulsoryQuality Control & Pre-shipment Inspection prior to theirexport. Penal action can be taken under the Export (QualityControl & Inspection) Act, 1963 as amended in 1984, againstexporters who do not conform to the standards and orprovisions of Act as laid down for such products.

Facilities of ArbitrationThe following institutions provide the facilities of arbitration.1. The Indian Council of Arbitration

Federation House,Tansen Marg,New Delhi 110001

2. Directorate General of Commercial Intelligence & Statistics.1/ Council House Street

Calcutta.3. Indo-German Chamber of Commerce

‘Himalaya House’Kasturba Gandhi MargNew Delhi.

A list of other organisations can be obtained from the ICA.Specimen Contract Form for Sale, Purchase Transactions,Export and Imports1. Name and Address of the parties .......................

(state correct name and complete address of the parties).2. Wet the above named parties have entered into this contract

for the sale/purchase etc ...................(state briefly the purpose of the contract) on this ...............(date) at .................... (place), subject to the following termsand conditions:a) Goods ..................................... Quantity [describe thequan-tity/ quality and other specifications of the goodsprecisely as per agreement. An agency for inspection/certification of quality and/ or quantity may also bestipulated.b) Price .........................Mode of Payment .......................[Quote the price, terms, i.e. FOB (free on board)/CFR(Cost and Freight/CIF (Cost insurance, freight) etc. in thecurrency agreed upon and describe the mode of payment i.e.payment against L/C(letter of credit)/DA(documentagainst acceptance)/DP (Document againstPayment) etc. Itis also desirable to mention the exchange rate.]c) Shipment ...............................[Specify date and delivery and maximum period upto whichdeliv-ery could be delayed and for which reasons, Port ofshipment and of delivery should be mentioned.]

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Nd) Packaging and mar king..................................[requirement to be specified precisely.]e) Insurance ...................[state the type of insurance cover required, i.e. FP A(freefrom particular average)/WA (with average)/ All Risks, etc.State also the party responsible for the insurance].f) Brokerage/Commission .........................[If any payable may be mentioned].Passing of the property in goods and of risk.g) [The property or ownership of the goods and the riskshall finally . pass on to the buyer at such stage as the partiesmay agree, i.e. when the goods are delivered at the seller’splace of work/pass the ship’s rails/ are covered by insuranceetc. as per agreed terms.]

ArbitrationArbitration clause recommended by the Indian Council ofArbitration:“All disputes of differences whatsoever arising between theparties out of or relating to the construction, ‘meaning andoperation or effect of this contract or the breach thereof shall besettled by arbitration in accordance with the Rules of Arbitra-tion of the Indian Council of Arbitration and the award madein pursuance thereof shall be binding on the parties”. (or anyother arbitration clause that may be agreed upon between theparties).3. Any other special condition, prevalent in or relevant to the

particular line of trade or transaction, may also be specified.

Annexure I: Specimen of Letter of Credit

Republic National Bank of New YorkINTL DET Renaissance Center Letter of Credit DivisionDLI Nvilleavenue, Newyork, 10467SWIFT: MNBD US 33 MC 2140Fax: (313)222-9115 New York 10467Confirmation of our telecommunication Irrevocable Documen-taryCredit /TransferableDateofissue:November27,1999Credit Number ofIssuing Bank: 62340Applicant:Pra Veena Stores Inc.,1324, Max AvenueBronx, NY 10467Advising Bank:ANZ Grindla YS BankInternational Dept.H Block Connaught CircusNew Delhi, India Beneficiary:

M.N. ExportersE-120, Okhla Industrial AreaNew Delhi, India 110019Amount: 15,000.00 USDFifteen Thousand US Dollars Date of Expiry: January 22, 2000Place of Expiry: India

Gentleme

We hereby open our irrevocable Documentary credit in yourfavour available by your draft(s) at sight drawn on ourselves for100% of invoice value bearing the bearing the clause. “drawnunder Republic National Bank of New York credit no. 62340”.Your draft must be accompanied by the following documents:1. Airways bills consigned to us and marked” freight prepaid”.2. Signed commercial invoices in original and 05 copies.3. Packing list in 06 copies.4. GSP Certificate of Origin (Form A) 01 Copy.5. Commercial visa - 02 CopiesGoods Description: Ladies Coordinate Dress(as per approvedsample). E-UNIT NO.600~0103-001.Quantity: 300 Suits Prices: USD50 per suit CFR, New YorkShipment From: New Delhi, India Partial Shipment .: NotAllowedTransportation to: New York Transhipment: Not AllowedAdditional ConditionsWe are advised insurance will be covered bybuyer.Unless otherwise specified, all charges other than ours are forthe account of credit number of Issuing Bank: 62340A special handling charge of a minimum of USD 40.00, inaddition to telecommu-nication charges, if any, will be deductedfrom the proceeds of each set of documents presented forpayment or negotiation if such documents contain discrepan-cies and we are required to contact our customer for approval ofpayment and! or to communicate with the correspondent bankeffecting negotiation.

Bank of Bank InstructionsWe request you to notify the credit to the beneficiary afteradding your confirmation, if so desired by the beneficiary.Documents must be presented within 005 days after the date ofissuance of the transport document(s) but within the validityof the’ credit.We hereby agree with you and negotiating banks or bankers thatdrafts drawn under and in compliance with the terms of thiscredit will be duly honored upon presen-tationand delivery ofthe documents as specified to the drawee.The amount of each draft negotiated, with date of negotiation,must be endorsed on the reverse of this credit by the negotiat-ing bank.We suggest negotiating bank forward to us all documents inone mailing.

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This credit is subject to the uniform custom and practices fordocumentary credits (1993 revision), International Chamber ofCommerce, Publication No.500.

Annexure 2: Guidelines for Scrutiny of Letter of Credit

The exporter should examine the letter of credit in all its aspectsto ensure that its terms and conditions are acceptable. Thevarious reference points to check the letter of credit are asfollows:1. Is the letter of credit of the type desired by the exporter?2. Is it payable when and where as desired?

• At sight, or• At a later date,• In India with little or no delay or• Abroad

3. Is the value of the Letter of Credit correct? Is it equal to theamount of the export order? Does it cover any extra-agreedcosts, such as freight or inspection fees?

4. Are the terms of delivery the same as quoted (e.g. FOB,CIF) in the offer? And do they and the price matchproperly?

5. Is the price of the product(s) same as agreed?6. Are the names and addresses of the exporter’s firm and

importer’s firm correctly spelt?7. Are partial shipments allowed?8. Is transhipment allowed?9. Can the shipment be sent as per the expiry date? Can the

following functions be• Performed well in time to meet the expiry date?• Production and packing• Inspection, if required• Shipment• Chamber of Commerce and/ or Consular work

Obtaining the inspection certificate• Assembling and checking documents.• Presenting them to the bank.

10. Can the documents as specifies in the letter of credit bepresented within the time mentioned in the Letter ofCredit? It should be remembered that the maximum timelimit for presentation of shipping documents is 21 daysfrom the date of issuance of the transport documentsunder the exchange control regulations in force in India.

11. Is the item of export a restricted item? If so, then it can beexported only against the export license? Would it bepossible to obtain the license?

12. Are the goods described accurately enough to identify themproperly and are the quantities and other units correct ?

13. Can the transport document required in the letter of creditbe obtained?

14.What kind of insurance cover is required to cover the specificrisks? Can the insur-ance cover be obtained?

15.Can the documents called for in the letter of credit beobtained in time? It should be noted that some documentssuch as inspection certificate or the consular invoice may takesome time to arrange.

16.Are there any contradictions in the letter of credit such asrequiring bill of lading for airfreight?

Question BankQ1. Define, Letter of Credit. Why is it considered to, be the

safest method of settling international transactions?Q2. Explain the procedure far opening a letter of credit.Q3. What are the different types of letter of credit? Explain

them,Q4. Why is the arbitration a superior method of settling

international disputes?Q5. What machinery is available far the enforcement of

arbitral awards?Q6. Explain the procedure far arbitration.Q7. Write notes on:-

i. Red Clause Letter of credit.ii. Settlement procedure under Deferred paymentiii. Usance Letter of creditiv. Revolving Letter of Creditv. Doctrine of strict compliance.

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• Introduction• industrial dispute in india• Settlement of international trade Disputes

LitigationArbitrationEnforcement of International Arbitration

• Procedure for arbitration

IntroductionWritten orders rather than based on verbal orders conveyedpersonally by the importer. The written export orders/agreements/contracts form the basis of exports business. This,in turn, forms the basis of disputes between the parties to atrade transaction. Disputes arise due to the breach of contracteither by exporter or importer. For example dispute may be theresult of the following:1. Non-supply or short supply or delayed supply of goods.2. Non-payment of discounts and commissions by the seller.3. Non-remittance of sale proceeds by the buyer.4. Difference in interpretation of the clauses in the agreement.5. Difference in the interpretation of quality standards.6. Difference due to language problems, commercial practices etcThere is a need to reduce to the minimum the incidence ofdisputes. If the incidence of disputes is heavy, it not only spoilsthe name and trade prospects of the exporter concerned, butalso the image of the country. One of the ways to minimisetrade disputes is to use standard contract forms. Indian Councilof Arbitration has evolved the contact form, a copy of the sameis given at the end.Inspite of written agreement and all the precautions taken,disputes do arise. How to settle the disputes?

Industrial Disputes in IndiaThere are conflicts between employers and workers. Theseconflicts take various forms of protest. From the side of theworkers, the forms of protest are strikes, go- slow, gheraos,demonstrations etc. From the side of employers, these disputestake the form of retrenchment, dismissals, lockouts, etc. Butthe two most prominent forms of protest are strikes andlockouts. Whether a strike is a success or a failure, tension iscreated between the employers and the employees. This resultsin loss of production and decline in national income. It is,therefore, essential to know the nature and trends of industrialdisputes, the factors responsible for their occurrence and themethods used to remove them.

Trends in Industrial Disputes and their NatureA close perusal of the table 3 reveals the following:i. Increasing trend of mandays lost. There has been a

growing trend in terms of workers involved and mandays

LESSON 11:LAW RELATING TO SETTLEMENT OF INTERNATIONAL TRADE DISPUTES

lost in industrial disputes. As against a total loss of 38 lakhmandays in 1951, the loss was of the order of about 70lakh mandays in 1956. It jumped to 138 lakh mandays in1966 and further to 206 lakh mandays in 1970. The positiondeteriorated further during 1973-74 on account of a rapidrise in prices and during 1974, a record of 4021akh mandayswere lost. With the declaration of emergency in 1975, thefear of MIS A (Maintenance of Internal Security Act) andDIR (Defence ofIndia Rules) were responsible for thereduction in industrial disputes. However, with the liftingof the emergency, labour urnest again manifested itself. Asagainst a loss of 127 lakh mandays during 1976, the totalnumber of mandays lost during 1977 was 2531akhs. Thesituation slightly improved during 1978 but deterioratedfurther in 1979 and nearly 439 lakh mandays were lostduring 1979. It appeared as if the trade unions were on thewar path. However, soon after the installation of theCongress (I) government in 1980, the employers too startedflexing their muscles. The total time loss due to strikes andlock-outs during 1110 was 219 lakh mandays. It stood at366 lakh mandays during 1981. Strikes accounted for 58 percent of the ..a time loss during 1981 and lock-outsaccounted for 42 per cent. The number of mandays lostduring 1982 (including those due to Bombay Textile Strike)was 748 lakhs. The mandays lost due to Bombay textilestrike are estimated be 548 lakhs-414 lakhs during 1982 and1341akhs during 1983. The share of lock-outs for the years1985811i 1987 was 65 per cent and 60 per cent respectivelyof the total mandays lost.In other words, there is a marked increase in the number ofmandays lost due to lock-outs. In fact, this trend hadstarted since 1971, particularly since 1976. This is a seriousmatter and should be probed in greater depth because thisreverses ,the trend of mandays lost due 10 strikes and lock-outs during fifties and sixties. Obviously, here i~ a need toprobe the factors leading to strikes and lock-outs.The main factors responsible for the spreading of industrialunrest are: (a) the discredited trade union leadership wholost their image during emergency as champions of .labourwere out to build their image through strikes; politicalinstability in the country had its impact on the attitude oftrade union leadership. The rival factions tried eke outconcessions from the Governments which were eitherunstable or on their way out; (c) growing indiscipline Dongthe workers on account of irresponsible trade lionleadership; and (d) more frequent use of lock-outs I theemployers to punish the workers emboldened by e NewEconomic Policy since 1984 in favour of private sector.

ii. Rise In the share of lock-outs In Manday lost it wouldbe of interest to study the relative share of strikes and lock-outs in industrial disputes. the share of lock -outs in total

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mandays :t has been on the increase. In 1951, only 26percent of , man-days lost was through lock-outs. By 1961,this risen to 40 per cent and by 1971 it rose up to 47 perent.The culmination of this trend was witnessed during theemergency. During 1976,78 percent of the man-days t wasthrough lock-outs. The authoritarian forces m e toruthlessly muzzle the voice of the working class. : loss ofmandays due to lockouts was’ of the order of percent in1989. Since lock-out is a form of punishment : thecapitalists inflict on the workers, it would be of interest tostudy the average number of days a worker was involved ina strike or a lock-out.During 1961 the average number of I a worker wasinvolved in strikes and lock-outs was lays and 11 daysrespectively; but in 1971 this had changed to 8 days and 34days respectively. However, during 1976, the averagenumber of days a worker was involved in strike was 5 days,but the involvement of workers in lock-outs on the averagewas for a period of 53 days. A trend analysis from 1961 to1981 reveals that where as average life of the strike hasremained between 8 113 days, the average life of the lock-outs has shown a continuously growing trend. From a lowfigure of II mandays in 1961, the average life of the lock-out went up to 53 in 1976. This figure further shot up to107 and 92 days in 1989. This clearly points out to the factthat State gave unbridled power to the business andindustrial magnates to punish the workers, whenever theytried to raise their head against exploitation, oppression andmisery. Mandays lost due to lock-outs were 78 per cent oftotal mandays lost during 1976-a record achievement againstworking class. The same situation prevailed in 1994, whenlock-outs accounted for 68 per cent of total mandays lost.Even during 1997, lockouts accounted for 66% of mandayslost. Even during 1998 and 1999, the share of lockouts intotal mandays lost was 58 per cent and 60 per centrespectively.The relatively high share of lock-outs in mandays lostsuggests that whereas the State has been emphasizingmeasures for settlement of industrial disputes holdinglabour responsible for strikes, there is a strong need tomake an analysis of the phenomenon of lock-outs so as tocontrol their repeated use against the working class.

Settlement of Industrial DisputeSimilar to domestic trade, disputes are inevitable in internationaltrade. There are a number of alternative ways to settle a disputein international transactions.There are Four ways of settling a dispute, but two are the wellrecognized methods for settlement of dispute, i.e. litigationand arbitration . Litigation is not suitable for settlement oftrade disputes as it is beset with inordinate delays, high costsand uncertainty of the final decision.1. Conciliation2. Mediation3. Litigation4. Arbitration

1.ConciliationAmicable settlement of disputes through the good offices ofan impartial third party is termed as conciliation. Indianexporter can approach Indian Government Trade Representativeabroad for settlement of the dispute through conciliation. Thisis done by persuading the importer directly or through Govern-ment authorities or local chamber of commerce to agree foramicable settlement.The importers can approach the Directorate General ofCommercial Intelli-gence & Statistics, Calcutta, of the Ministryof Commerce in case they have any complaint against theIndian Exporter and want settlement of the dispute throughconciliation. Indian Council of Arbitration, New Delhi has alsobeen endeavoring to conciliate in a large number of complaintsfrom foreign importers and vice versa.Conciliation refers to a process where parties resolve theirdispute by direct negotiation on a voluntary basis without theassistance of a third party. Conciliation, as a way of disputesettlement, has a number of advantages, including a simpleprocedure, saving on the cost and the possibility of maintainingthe cooperative relationship among the parties involved.However in practice, conciliation often fails to reach a mutuallysatisfactory solution. Furthermore, the agreement reachedthrough conciliation lacks the legal binding effect upon theparties and therefore, if one party withdraws from the agree-ment, new dispute may likely arise. As a consequence, theproportion of disputes settled through conciliation is relativelysmall in international trade. In case the conciliation efforts failthe matter can be settled through arbitration-.2. MediationMediation is a process where the parties involved in a disputeresolve their dispute with the assistance of a third party (theMediator). The Mediator is mostly a permanent arbitrationinstitute. Many permanent arbitration institutes (e.g. ChinaInternational Economic and Trade Arbitration Commission,International Chamber of Commerce) have their mediationrules or include the rules of meditation in their arbitration rules.Although some arbitration institutes may not have particularmediation rules, it does not mean they will exclude mediationfrom being applied as a form of dispute settlement.Similar to conciliation, mediation is based on the respect for thefree will of the parties and an informal negotiating atmosphere.The advantage of mediation is that, due to the participation ofthe third party, the process of reaching an agreement among theparties will be accelerated. In the meantime, if the arbitrationbody makes an award in accordance with the mediationagreement reached by the parties, the stipulation of theagreement will have a legal binding effect upon all the partiesinvolved. In comparison with litigation and arbitration,mediation requires less cost and is a simpler process.3. LitigationA controversy before a court or a “lawsuit” is commonlyreferred to as “litigation”. If it is not settled by agreementbetween the parties it would eventually be heard and decided bya judge or jury in a court. Litigation is one way that people andcompanies resolve disputes arising out of an infinite variety of

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Nfactual circumstances.The term “litigation” is sometimes to distinguish lawsuitsfrom “alternate dispute resolution” methods such as “arbitra-tion” in which a private arbitrator would make the decision, or“mediation” which is a type of structured meeting with theparties and an independent third party who works to help themfashion an agreement among themselves.

Definition of LitigationA dispute is in “litigation” ( or being “litigated”) when it hasbecome the subject of a formal court action or law suit. Alsothe study of court process, both civil and criminal.Using legal action to recover a debt. NRC’s Tandem Programoffers full follow through to litigation forwarding, whenwarranted. Litigation is most often used as the final remedyafter all other collection efforts have failed. Litigation is at NRC’soption and may not be a cost-effective solution on low-balanceaccounts

Basic Limitations of Litigation

a. Lengthy and Time Consuming :. Court process isgenerally very slow, time-consuming .and’ formalistic. Ittakes years for settlement o f a dispute in a court of law. Atthe same time, longer the time higher is the cost and otherexpenditure.

b. Requires Concrete Evidences :- Generally, judges andlawyers are not well-versed with the practices and proceduresof the international trade. Therefore, such trade practicesand procedures have to be proved before the court by expertwitnesses having knowledge and experience in the field.

c. Inconvenience to the Parties :- Since the litigationprocedure is lengthy and time consuming, it causesinconvenience to the litigants and disturbs their mentalpeace. At the same time, the time, place and date ofhearings in a court of law may not be convenient to partiesto litigation.

d. Adverse Public Image:- The court proceedings are open tothe public and judgments of higher courts are alsopublished. This may cause litigants to expose their internaland private affairs and trade secrets and the reputation ofthe organisation may be affected adversely.

e. Bitterness and Disruption of Trade Relationship :-Acrimony and bitterness usually accompany litigation andirrespective of which party wins, many times it results into abreach or disruption of the long standing traderelationships between the parties.

f. Different Laws and Procedures :- International tradetransactions involve parties from different foreign countrieswhose laws and procedures are not same~ Internationaltrade laws and procedures are rather complicated.

4.ArbitrationAccording to Indian Council of Arbitration (lCA), arbitration isthe voluntary submission of a dispute to one or more impartialpersons for final and binding determination. It is a substitutefor court proceedings, and arranged in two ways, i.e. eitherthrough “future disputes clause” or “submission agreement”.Future disputes clause provides for reference of the dispute for

arbitration by the agreed agency. On the other hand, “submis-sion agreement” refers to the agreement between the partiesusually, written, to submit the dispute after it has arisen, to oneor more arbitrators.Arbitration is the reference of a dispute to one or moreindependent third person(s) who act(s) as judge and jury. Inadvance of the arbitration, the parties agree to be bound by thearbitrator’s decision. Cases that are arbitrated are generallyresolved faster than conventional lawsuits because there is lessbureaucracy and court congestion is not a problem. In anarbitration, witnesses are placed under oath and written evidenceis submitted, but the technical rules of procedure followed by acourt do not apply. Due to above limitations arbitration ispreferred to litigation as a method of dispute settlement at theinternational level. Arbitration bas certain advantages overlitigation.Future Disputes clause is an insurance of a quick and justsettlement of possible future dispute.The arbitration clause-Future Disputes Clause-must providefor:-a. The nature of questions/matters to be referred to

arbitration.b. Name and rules of procedure of the arbitral body to which

dispute is to be referred.c. An unequivocal statement as to the finality and binding

nature of the award given by the arbitral body., andd. The venue of arbitration and the number of arbitrators

who would hear and decide the dispute.

Basic Steps are involved in ArbitrationAfter all parties have been informed of the controversy, anagreement can be reached to resolve the matter througharbitration. The parties decide whether the arbitration will bebinding or non-binding and then select the arbitrator. Usuallythe arbitrator is selected from a panel or list of availablearbitrators. Once the matter has been submitted to the arbitra-tor (and when each side has paid his/her respective share of thearbitrator’s fee), the arbitrator will contact all parties. A schedulewill be set, which includes when all documents must beexchanged, when all witnesses must be disclosed, whenarbitration briefs (written statements covering the facts and thelaw of the given controversy) are to be submitted, and whereand when the hearing will be conducted.At the arbitration hearing, each of the respective parties isallowed to present his/her evidence concerning the controversy.Opening statements can be presented, but are usually waivedsince arbitration briefs have been submitted. Witnesses (bothpercipient -those who saw and heard - as well as experts) areexamined and cross-examined. Documents and other evidenceare submitted. Closing arguments may be presented.Once all evidence has been submitted to the arbitrator, thematter is taken under submission. This means that thearbitrator will take some time to consider all of the evidencethat has been presented. After carefully review, the arbitrator willmake an “arbitrator’s award.” After the arbitrator’s award hasbeen issued, the prevailing party often has the ability to have itissued as an enforceable order of a court of law.

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Model Arbitration ClauseThe Indian Council of Arbitration has suggested the followingclause for insertion in the agreement.“All matters of dispute or differences whatsoever arisingbetween the parties out of business transaction or relating tothe construction, meaning and operation or effect of thiscontract or breach thereof shall be settled by arbitration in ac-cordance with Rules of Arbitration of the Indian Council ofArbitration and the award made in pursuance thereof shall bebinding on the parties”

Basic Advantages of Arbitration

a. Quickness: - Arbitration procedure is simpler and muchquicker than litigation. Under the Arbitration Act, thearbitrators have to make the award within four monthsfrom the date of entering on the reference. Usually anarbitration case may be settled between four months to oneyear.

b. Inexpensiveness: - The costs and expenses involved inarbitration are much less than in those involved in thelitigation. Apart from the. Arbitration fee, which is just 2percent of the claim value or even less in institutional.Arbitration, the other incidental expenses are rathermoderate and low.

c. Promotes Goodwill: - Arbitration hearing takes place invery friendly and cordial atmosphere and thereby promotesfriendly trade relations between the parties. The arbitrator isa person chosen by the parties themselves on thebasis of their faith and confidence in him.

d. Sound and Cogent Decision: - In arbitration, the partieschoose an arbitrator having knowledge and experience in theline of trade to which the dispute relates. This helps inavoiding unnecessary delay caused due to lack of knowledgeon the part of judges.

e. Privacy: - Arbitration proceedings are not open to publicand arbitrators’ decisions are not published in law reportslike the court decisions. Therefore, arbitration preserves theprivacy and trade secrets of the parties involved in thearbitration.

f. Reducing the Psychological Costs of Litigation: Thespeed of arbitration and the informality of the process,couples with a less-confrontational discovery processminimizes and allows the parties to quickly get on withtheir lives.

g. Confidentiality: Unlike court cases, arbitration proceedingsare not public. The case will not be tried in the newspaper.

h. Quality of the Decision: Arbitrators knowledgeable inemployment law may render more rational andpredictable decisions that juries which may be swayed byemotion.

Disadvantages of arbitration

1. Limited appeal rights: By law, arbitrators’ decisions aremeant to be final, and can be appealed only on limitedgrounds.

2. More frequent utilization: Employees can more easilychallenge personnel decisions. However, employers should

accept the possibility of increased challenges, as a tradeoff tothe far greater cost savings which arbitration offers.

Enforcement of international arbitrationIn the case of international transactions, arbitration becomesinternational when at least one of the parties involved isresident or domiciled outside India or the subject matter of thedispute is abroad. In this case, the law applicable to an arbitra-tion proceeding depends upon the terms and conditions of theexport contract and the rules of conflict of laws. Therefore, it isalways advisable to specify in the export contract as to whichlaws the contract is subject to in case a dispute arises in future.Depending upon the export contract, arbitration can take placeeither in the exporter’s or importer’s .country. The wholephilosophy behind the system of arbitration for settlingcommercial disputes is that the awards should be voluntarilyhonoured by the parties concerned. But, sometimes a partyagainst whom the decision is made, does not either complywith or delays compliance with the award. To overcome thisproblem, a number of countries have provided for legalremedies for the enforcement of awards rendered therein.However, difficulties may arise when an award is to be enforcedin country other than where it is’ given. This is because thereexists a wide disparity and complexity in the laws and proce-dures of different countries in respect of enforcement of suchawards.Releasing these difficulties, several multilateral internationalconventions have been organised for attaining uniformity andcertainty in the enforcement of arbitral awards in differentcountries. These conventions include:-a. Geneva Protocol on Arbitration Clauses, 1923,b. Geneva Convention of the Execution of Foreign Arbitral

Awards, 1927.c. New York Convention for the Recognition and

Enforcement of Foreign Arbitral Awards, 1958, andd. European Convention on International Commercial

Arbitration, 1961.Besides, these Conventions, arbitral awards are also enforceableunder bilateral treaties between different countries.

Law for the Enforcement of Foreign Awards in IndiaIndia is one of the parties to the 1927 Geneva and, the 1958New York Convention. As a commitment to the provisions ofthese conferences, India has enacted the Arbitration (Protocoland Convention) Act, 1937 and the Foreign Awards (Recogni-tion and Enforcement) Act, 1961, respectively, giving effect tothe two Conventions.Prior to 1996, statutory provisions on arbitration were con-tained in three different enactments, viz.,a. The Arbitration Act, 1940.b. The Arbitration (Protocol and Convention) Act, 1937, andc. The Foreign Awards (Recognition, and Enforcement) Act,

1961.The Arbitration Act laid down the framework within whichdomestic arbitration was carried in India while the ‘other twoActs dealt with foreign awards. However, the Arbitration andConciliation Act, 1996 has repealed the earlier Acts. The new Act

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Nhas strengthened and clarified the provisions relating tointernational commercial arbitration.

Enforcement of Indian Awards in Foreign CountriesSimilarly, awards made in India are also enforceable in foreigncountries, which are parties to any of the international conven-tions relating to the enforcement of foreign awards. However,enforcement of arbitral awards in countries, which do notadhere to either the 1937 or the 1961 Convention or othersimilar international regulations, is somewhat difficult.

Procedure for Arbitrationa. Inclusion of Future Dispute Clause: - If the parties to

the export contract desire to settle all future’ disputesrelating to the contract through arbitration, then the samecan be done by inclusion of ‘Future Dispute Clause’ in theexport contract. If the export contract does not provide foran arbitration clause then the parties to the contract later byan agreement, usually written,. submit a controversy to oneor more arbitrators for ‘arbitration. This is called a‘Submission Agreement’.

b. Initiation of Arbitration: - The party desirous to ‘applyfor arbitration should make an application to the Secretaryalong with prescribed registration fees and the followingdetails: -• The names and addresses of the parties to the

disputes.• Full details of the applicant’s case.• Original (or duly certified copies) of such documents

and information relevant to the case.c. Fees and Expenses: - The fees and expenses incidental to

the ‘arbitration procedure and the award’ include: -• Registration fee• Administrative fee and• Arbitrator’s feeThe registration fee is fixed while the amount of other two,fees is determined by the ‘Bench’ on the basis of theamount of suit and the time spent an the case. In, addition,traveling expenses incurred by the arbitrator or the Secretaryand applicable stamp duty is also included in the total cost.

d. Constitution of Bench: On receipt of the application, theSecretary constitutes a Bench far the adjudication of the’dispute or difference. The Bench consists of one or threearbitrators selected form a ‘Panel of Arbitrators’ maintainedby’ the Council. The Panel includes qualified andexperienced parsons from various lines of trade and thelegal profession. It also’ includes persons of various f oreignnationalities. The appointment of arbitrator is made inaccordance with the Council’s Rules. “

e. Deciding the Venue: - The arbitration proceedings are heldat such places) in India or abroad as the bench maydetermine taking into, consideration the previsions of theexport contract.

f. Declaration of Awards: - When the Bench of arbitratorssigns the award, the Secretary gives a notice in writing to, the

parties to, the arbitration about the amount of fees andcharges payable in respect of the arbitration and the awarddeclared. The Secretary sends a true’ copy of the ward to, theparties by registered past provided the’ arbitration Costshave been fully paid. The party, which wishes the award to,be f1leq before the court, shall pay the prescribed fee to, theIndian Council of Arbitration (ICA), in addition to, thecourt fees.

g. Enforcement of Awards: - The whale philosophy and,spirit behind the system of arbitration far settlingcommercial disputes are that the awards are voluntarilycomplied with by the parties concerned. But, sometimes aparty against wham the decision is made, does not eithercomply with or delays compliance with the award. To,overcame this problem, a number of countries haveprovided far legal remedies far the enforcement of awardsrendered therein.

Advantages of Arbitration over Litigation1. Arbitration can be set in two to three weeks or, at most,

two to three months instead of two to three years for a trialsetting.

2. There is little or no “discovery.” Either depositions andinterrogatories will be restricted or else there may be none.

3. Arbitration is private. Court is public. In arbitration,strangers and news media will not be allowed in court.

4. Arbitration is not appealable. It is final. Court cases arealways subject to rehearings, new trials, and appeals. Post-trial proceedings can take longer and cost more than theoriginal trial. Arbitration generally has no rehearings, newtrials, or appeals.

5. Litigation costs in arbitration are substantially less than incourt.

6. Arbitrators are not known for awarding huge amounts forpunitive damages, mental anguish, pain and suffering andother non-economic damages.

7. Arbitration can be done with or without lawyers — yourchoice.

Guidelines for Settlement of TradeDisputeExporters should project a good image of the country abroadto promote exports. With this objective in mind, an enduringrelationship with foreign buyers is of the utmost importance,and trade disputes, whenever they arise, should be settled assoon as possible.The majority of complaints from foreign buyers are with regardto qual-ity. Other complaints are usually for unethical commer-cial dealings on the part of Indian exporters and can becategorized as non-supply of goods after confirmation of theorders, non-payment of agreed commission, non-adher-ence tothe delivery schedule etc. The work relating to dealing suchcomplaints oi foreign buyers has been centralised with the‘Nodal Officer’ and its assist-ing cell viz., the Trade DisputesCell in the office of the Director General of Foreign Trades,Ministry of Commerce, Udyog Bhawan, New Delhi.

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Action against erring exportersA. Enforcement action in the office of Director General ofForeign Trade against erring exporters can be taken under theexisting rules & regulations depending on the offence asfollows:-Non-payment of commission, supply of sub-standard goods,non-adher-ence of delivery schedules, indulgence in unethicalcommercial dealings, amount to breach of contract for whichaction can be taken under clause 7 of the Export(Control)Order, by which the Central Government or Director Generalof Foreign Trade or an authorised officer may debar an exporterfrom export-ing any goods if he commits a willful breach ofcontract. This applies to the cases pertaining to a period prior to19-06-1992. However, cases pertaining to a period on or after,19-6-1992 enforcement action is taken in terms to ForeignTrade(Development & Regulation) Act, 1992 and Rules framedthere under namely:a. Section 8 empowers the Director General of Foreign Trade

to suspend or cancel the Importer Exporter CodeNumber which is a prerequisite for any export or import,where the Director General of Foreign Trade has inter aliareason to believe (a) that the exporter has committed aneconomic offence as a specified by the Government or

b. That any per-son has made an export import in a mannergravely prejudicial to the trade relations of India with anyforeign country or to the interests of other persons engagedin imports or exports or has brought disrepute to the creditor the goods of the country.

c. Sector 9(4) empowers the Director General of Foreign Tradeor the of-ficer authorised by him to grant licence, tosuspend or cancel any licence granted under the Act. Rule 10of the Foreign Trade (Regulation) Rules, 1993 lays downthe conditions for such cancellation under Section 9(4) ofthe said Act. This includes cases where the licence has beenobtained by fraud, suppression of facts ormisrepresentation and where the licen-see has contravenedany law relating to Custom or Foreign Trade or the Rules &Regulations relating thereto.

d. Section 11(2) of the Act provides for imposition of fiscalpenalty in cases where a person makes or abets or attemptsto make any import or export in contravention of anyprovisions of the Act, any Rules or Orders made thereunder or the Export-Import Policy. Rule 11 of the ForeignTrade (Regulation) Rules, 1993 requires an exporter to statein the shipping bills or any other documents prescribedunder the Customs Act, 1962, the value, quality anddescription of export goods to the best of his knowledgeand belief and to certify that the quality and specification ofthe goods are in accordance with the terms of the exportcontract and has also to subscribe a declaration at the footof such a document that the statements made by him aretrue.

e. Paragraph 14.6 of the Export-Import Policy AM 1997-2002empowers the Director General of Foreign Trade to takeaction against an exporter, if it comes to his notice or he hasreason to believe, has made an export in a manner gravelyprejudicial to (1) trade relations of India with any foreign

country; (2) to the interests of other persons engaged inexports or imports and (3) has brought disrepute to thecredit or the goods of the country.

f. The Director General of Foreign Trade has powers underSection 5 of the Foreign Trade (De-velopment &Regulation) Act, 1992, to direct any Registering Authority toregister or deregister an exporter or otherwise issue suchdirections to them consistent with and in order toimplement the provisions of the Act, the Rules & Ordersmade there under, the Policy or the Handbook. Besides, theRegistering Authorities viz. Export Promotion Councils,Commodity Boards etc. may also take appropriate necessaryaction and view on the application furnished by theexporters for registration if, prima facie, there are reasons tobelieve that he has indulged i any form of unfair, corrupt orfraudulent practice

Adequate opportunity is to be provided to the exporter toexplain his stand before resorting to penal action by way ofissuance of Show Cause Notice, personal hearing etc., as perrulesB. Certain export products have been notified for CompulsoryQuality Control & Pre-shipment Inspection prior to theirexport. Penal action can be taken under the Export (QualityControl & Inspection) Act, 1963 as amended in 1984, againstexporters who do not conform to the standards and orprovisions of Act as laid down for such products.

Facilities of ArbitrationThe following institutions provide the facilities of arbitration.1. The Indian Council of Arbitration Federation House,

Tansen Marg,New Delhi 110001

2. Directorate General of Commercial Intelligence & Statistics. 1/ Council House Street Calcutta.3. Indo-German Chamber of Commerce ‘Himalaya House’ Kasturba Gandhi Marg New Delhi.A list of other organisations can be obtained from the ICA.Specimen Contract Form for Sale, Purchase Transactions,Export and Imports1. Name and Address of the parties .......................

(state correct name and complete address of the parties).2. Wet the above named parties have entered into this contract

for the sale/purchase etc ....................... (state briefly thepurpose of the contract) on this ....................... (date) at....................... (place), subject to the following terms andconditions:a) Goods ....................... Quantity [describe the

quan-tity/ quality and other specifications of thegoods precisely as per agreement. An agency for

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Ninspection/certification of quality and/ or quantitymay also be stipulated.

b. Price .......................Mode of Payment .......................[Quote the price, terms, i.e. FOB (free on board)/CFR(Cost and Freight/CIF (Cost insurance, freight) etc. inthe currency agreed upon and describe the mode ofpayment i.e. payment against L/C(letter of credit)/DA(document against acceptance)/DP (DocumentagainstPayment) etc. It is also desirable to mention theexchange rate.]

c. Shipment .......................[Specify date and delivery and maximum period uptowhich deliv-ery could be delayed and for which reasons,Port of shipment and of delivery should bementioned.]

d. Packaging and mar king..................................[requirement to be specified precisely.]

e. Insurance .......................[state the type of insurance cover required, i.e. FPA(free from particular average)/WA (with average)/ AllRisks, etc. State also the party responsible for theinsurance].

f. Brokerage/Commission .......................[If any payable may be mentioned].Passing of the property in goods and of risk.

g. [The property or ownership of the goods and the riskshall finally . pass on to the buyer at such stage as theparties may agree, i.e. when the goods are delivered atthe seller’s place of work/pass the ship’s rails/ arecovered by insurance etc. as per agreed terms.]

ArbitrationArbitration clause recommended by the Indian Council ofArbitration:“All disputes of differences whatsoever arising between theparties out of orrelating to the construction, ‘meaning and operation or effect ofthis contract or the breach thereof shall be settled by arbitrationin accordance with the Rules of Arbitration of the IndianCouncil of Arbitration and the award made in pursuancethereof shall be binding on the parties”. (or any other arbitra-tion clause that may be agreed upon between the parties).3. Any other special condition, prevalent in or relevant to theparticular line of trade or transaction, may also be specified.

Question BankQ1. Why is the arbitration a superior method of settling

international disputes?Q2. What machinery is available far the enforcement of arbitral

awards?Q3. Explain the procedure far arbitration.

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• Export-Import policy of India• Introduction• Meaning• General Objectives.

• Export-Import Policy 1997-2000• Objective.• Highlights.• Implications.

• Export-Import Policy 2002-2007• Objective.• Highlights.• Implications.

IntroductionTrade policy governs exports from and imports into a country.It is one of the various policy instruments used by a country toattain her goals of economic develop-ment. This policy is thus,formulated keeping in view, the national priorities for economicdevelopment and the international commitments made by thecountry. It is essential that the entrepreneurs and the exportmanagers understand the trade policy as it provides the vitalinputs for the formulation of their business growth strategies.In India, the trade policy Le., export-import policy is formu-lated by the Ministry of Commerce, Government of India interms of section 5 of the Foreign Trade (Development andRegulation) Act,1992Besides, the Government of India alsoannounced on January 30,2002 a Medium Term Exportstrategy, to guide the formulation the Export-Import Policy:2002 - 07 with the, objective of achieving a share of 1 % inworld trade by the end of 2006 - 07 from the present I share of0.6% (2000 - 01). The text of this strategy is given as AppendixVII at the end of the book. The present Export - Import Policywas announced on 31.3.2002 for a period of 5 years with effectfrom 1.4.2002 to 31.3.2007 co-terminus with Tenth Five YearPlan. It covers both the trade in merchandise and services. Thepresent chapter explains legal framework affecting foreign tradeof India particularly with reference to Export-Import Policy;2002 - 2007. It also discusses the preferential trading arrange-ments affecting exports and imports of India.

MeaningThe foreign trade of India is guided by the Export-Import(EXIM) Policy of the government of India arid is regulated bythe Foreign Trade (Development and Regulation) Act, 1992.EXIM Policy contains various policy decisions taken by thegovernment in the sphere of foreign trade, i.e., with respect toimports and exports from the country and more especiallyexport promotion measures, policies and procedures relatedthereto. It is prepared and announced by the Central Govern-ment (Ministry of Commerce). India’s EXIM policy, in general,

LESSON 12:EXPORT- IMPORT POLICY OF INDIA

aims at developing export potential, improving export perfor-mance, encouraging foreign trade and creating favourablebalance of payments position.

Legal Framework for Foreign Trade ofIndiaIn India, the legal framework for the regulation of foreign tradeis mainly provided by the Foreign Trade (Development andRegulation) Act, 1992, Garments Export Entitle-ment Policy:2000-2004, Export (Quality Control and Inspection) Act, 1963,Customs and Central Excise Duties Drawback Rules, 1995,Foreign Exchange Management Act, 1999 --and the Customsand Central Excise Regulations.The main objective of the Foreign Trade (Development andRegulation) Act is to provide for the development and regula-tion of foreign trade by facilitating imports into, andaugmenting exports from India. This Act has replaced theearlier law namely, the imports and Exports (Control) Act1947.A comparison of the nomenclature of the two Acts makes itvery dear that there is a shift in the focus of the law fromcontrol to development of foreign trade. This shift in the focusis the outcome of the emphasis on liberalisation andglobalisation as a part of the process of economic reformsinitiated in India since June 1991.The application of the provisions of the Foreign Trade(Development & Regulation) Act 1992 has been exempted forcertain trade transactions vide Foreign Trade (Exemption fromapplication of Rules in certain cases) Order 1993

General Objectives of the Exim PolicyGovernment control import of non-essential items through animport policy. At the same time, all-out efforts are made topromote exports. Thus, there are two aspects of trade policy;the import policy which is concerned with regulation andmanagement of imports and the export policy which isconcerned with exports not only promotion but also regula-tion. The main objective of the Government policy is topromote exports to the maximum extent. Exports should bepromoted in such a manner that the economy of the country isnot affected by unregulated exports of items specially neededwithin the country. Export control is, therefore, exercised inrespect of a limited number of items whose supply positiondemands that their exports should be regulated in the largerinterests of the country. In other words, the policy Aims ati. Promoting exports and augmenting foreign exchange

earnings; andii. Regulating exports wherever it is necessary for the purposes

of either avoiding competition among the Indian exportersor ensuring domestic availability of essential items of massconsumption at reasonable prices.

The government of India announced sweeping changes in thetrade policy during the year 1991. As a result, the new Export-

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NImport policy came into force from April I, 1992. This was animportant step towards the economic reforms of India. Inorder to bring stability and continuity, the policy was made forthe duration of 5 years. In this policy import was liberalised andexport promotion measures were strengthened. The steps werealso taken to boost the domestic industrial production. Themore aspects of the export-import policy (1992-97) include:introduction of the duty-free Export Promotion CapitalGoods (EPCG) scheme, strengthening of the AdvanceLicensing System, waiving of the condition on export proceedsrealisation, rationalisation of schemes related to ExportOriented Units and units in the Export Processing Zones. Thethrust area of this policy was to liberalise imports and boostexports.The need for further liberalisation of imports and promotionof exports was felt and the Government of India announcedthe new Export-Import Policy (1997, 2002). This policy hasfurther simplified the procedures and reduced the interfacebetween exporters and the Director General of foreign Trade(DGFT) by reducing the number of documents required forexport by half. Import has been further liberalised and effortshave been made to promote exports.The new EXIM Policy 1997-2002 aims at consolidating thegains made so far, restructuring the schemes to achieve furtherliberalisation and increased transparency in the changed tradingenvironment. It focusses on the strengthening the domesticindustrial growth and exports and enabling higher level ofemployment with due recognition of the key role played by theSSI sector. It recognises the fact that there is no substitute forgrowth, which creates jobs and generates income. Such tradeactivities also help in stimulating expansion and diversificationof production in the country. The policy has focussed on theneed to let exporters concentrate on the manufacturing andmarketing of their products globally and operate in a hassle freeenvironment. The effort has been made to simplify andstreamline the procedure.The objectives will be achieved through the coordinated effortsof all the departments of the government in general and thety1inistry of Commerce and the Directorate General of ForeignTrade and its network of Regional Offices in particular. Furtherit will be achieved with a shared vision and commitment and inthe, best spirit of facilitation in the interest of export.

Objectives of the Exim Policy 1997 -2002

The principal objectives of the EXIM Policy 1997 -2002 are asunder: -a. To accelerate the economy from low level of economic

activities to high level of economic activities by making ita globally oriented vibrant economy and to derivemaximum benefits fro~ expanding global marketopportunities.

b. To stimulate sustained economic growth by providingaccess to essential raw materials, intermediates,components,’ consumables and capital goods required foraugmenting production.

c. To enhance the technoloca1 strength and efficiency ofIndian agriculture, industry and services, thereby, improvingtheir competitiveness.

d. To generate new employment. Opportunities and encouragethe attainment of internationally accepted standards ofquality.

e. To provide quality consumer products at reasonable prices.

Highlights of the Exim Policy 1997-2002a. Period of the Policy

• This policy is valid for five years instead of t}:1ree yearsas in the case of earlier policies. It is effective from 1stApril 1997 to.31st March 2002.

b. Liberalisation• A very important feature of the policy is liberalisation.• It has substantially eliminated licensing, quantitative

restrictions and other regulatory and discretionarycontrols. All goods, except those coming undernegative list, may be freely imported or exported.

c. Imports Liberalisation• Of 542 items from the restricted list 150 items have

been transferred to Special Import Licence (SIL) listand remaining 392 items have been transferred toOpen General Licence (OGL) List.

d. Export Promotion Capital Goods (EPCG) Scheme• The duty on imported capital goods under EPCG

scheme has been reduced from 15% to 10%.• Under the zero duty EPCG Scheme, the threshold limit

has been reduced from Rs. 20 crore to Rs. 5 crore foragricultural and allied! Sectors

e. Advance Licence Scheme• Under Advance License Scheme, the period for export

obligation has been extended from 12 months to 18months.

• A further extension for six months can be given onpayment of 1 % of the- value of unfulfilled exports.

f. Duty Entitlement Pass Book (DEPB) Scheme• Under the DEPB, an exporter may apply for credit, as a

specified percentage of FOB value of exports, made infreely convertible currency.

• Such credit can be can be utilised for import of rawmaterials, intermediates, components, parts, packagingmaterials, etc. for export purpose.

g. Special Import Licence (SIL)• 150 items from the restricted list have been transferred

to SIL.• SIL on exports from SSIs has been increased from 1 %

to 2%.• Export houses and all forms of trading houses are

eligible for additional SIL of 1 % on exports ofproducts from SSIs from North Eastern States.

• Additional SIL has been declared for exploration ofnew markets and for export of agro products.

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• The SIL entitlement of exporters holding ISO 9000certification has been? Increased from 2% to 5% of theFOB value of exports.

h. Export Houses and Trading Houses :-The criteria for recognition of export houses and all formsof trading houses has been modified.

i. Deemed Exports :-• Deemed exports facilities have been extended to oil

and gas sectors in addition to power sector.j. Software:-

• Software units can undertake exports using datacommunication links or through courier service.

• Import of computer systems has been brought underthe purview of EPCG scheme. .

k. Computerisation of DGFT Offices :-• By 1998, most DGFT transactions will be on line so as

reduce paper work and avoid delay in disposal ofapplications.

l. SSI Units :• SIL on exports from ‘SSls has been increased from 1 %

to 2%.• ‘Export houses and all forms of trading houses are

eligible for additional SIL of 1 % on exports ofproducts from SSls from North eastern States.

• Reduction of threshold level to Rs. 5 crore from Rs. 20crore under EPCG scheme will benefit SSls.

m. Agriculture Sector :• Double weightage ‘will be given for agro exports in

calculating the eligibility for export houses and allforms of trading houses.

• Additional SIL of 1 % has been declared for export ofagro products.

• EOUs and units in EPZs in agriculture and alliedsectors can sell 50% of their output in the domestictariff area (DT1) on payment of duty.

• Under the zero duty EPCG Scheme, the threshold levelhas been reduced from Rs. 20 crore to Rs. 5 crore foragriculture and allied sectors.

Implications of the Exim Policy 1997–2002The major implications of the EXIM Policy 1997-2002 are :-a. Globalisation of Indian Economy :-

• The EXIM policy 1997-02 proposed to prepare aframework for globalisation of Indian economy.

(AMOUNT IN RS. CRORES) FOR 2000-01 PERIOD FOB Criterion NFE Criterion Annual Average

FOB value of export made during

preceding 3 licensing

FOB value of export made

during preceding

licensing years

Annual Average FOB value of export made

during preceding 3 licensing years

FOB value of export made

during preceding

licensing years EH 15 22 12 18 TH 75 112 62 90 STH 375 560 312 450 SSTH 1125 1680 937 1350

• This is evident from the very first objective of thepolicy, which states. “To accelerate the economy fromlow level of economic activities to- high level ofeconomic activities by making it a globally orientedvibrant economy and to derive maximum benefitsfrom expanding global market opportunities.”

• The Indian economy has been exposed to moreforeign competition. The regime of high protection isgradually’ vanishing.

• It means, in order to survive, Indian companies willhave to pay due attention to cost reduction,improvement in quality, delivery schedules and aftersales service.

• At the same time, Indian industry’s have also beengiven an opportunity to globalise their business byallowing them to import machineries and rawmaterials from abroad on liberal terms.

b. Impact on the Indian Industry :-• In the EXIM policy 1997-02, a series of reform

measures have been introduced in order to give boostto India’s industrial growth and generate employmentopportunities in non-agricultural sector.

• The reduction of duty from 15% to 10% under EPCGscheme will enable Indian firms to import capitalgoods. This will improve the quality and productivityof the Indian industry.

• However, liberalisation of imports by transferring 542'items from restricted list to OGL and SIL list wouldadversely affect the growth of , consumergoods industry in India, as most of .these items areconsumer goods items.

c. Impact on Agriculture :- Many encouraging steps havebeen taken in order to give a boost to Indian agriculturalsector.• Double weightage for agro exports while calculating the

eligibility for export houses and all forms of tradinghouses.

• Additional SIL of 1 % for export of agro products.• EOUs’ and units in EPZs in agriculture and allied

sectors can sell 50% of their output in the domestictariff area (DTA) on payment of duty.

• Under .the zero duty EPCG Scheme, the thresholdlevel has been reduced from Rs. 20 crore to Rs.. 5 crorefor agriculture and allied sectors.

d. Impact on. Foreign Investment• In order to encourage foreign investment in India, the

EXIM policy 1997-02 has permitted 100% foreignequity participation in the case of 100% EOUs, andunits set up in EPZs.

• Due to liberalisation of procedural formalities, foreigncompanies may bee attracted to set up manufacturingunits in India.

• Full Convertibility of Indian Rupee on revenueaccount would also give a fillip to foreign investmentin India.

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Ne. Impact on Quality Upgradation :-

• The SIL entitlement of exporters holding ISO 9000certification has been increased from 2% to 5% of theFOB value of exports.

• This would encourage Indian industries to undertakeresearch and development programmers and upgradethe quality of their products.

• Liberalisation of EPCG scheme would encourageIndian industries to import capital goods and improvequality and increase productivity of goods.

f. Impact on Self-reliance:-• One of the long-term objectives of the Indian

planning is to become self-reliant. This objective is wellreflected in the EXIM Policy 1997-02.

• The policy aims at encouraging domestic sourcing ofraw materials, so as to build up a strong domesticproduction base.

• In order to achieve this the policy has also extended thebenefits given to exporters to deemed exporters. Thiswould lead to import substitution.

• Oil, power and natural gas sectors have also beenbrought under the purview of deemed exports.

However, the globalisation policy of the government may harmthe interests of SSls and cottage industries, as they may not beable to compete with MNCs.

Export-Import Policy 2002 – 2007The Export- Import Policy: 2002 - 2007 deals with both theexport and import of merchandise and services. It is worthmentioning here that the Export -Import Policy: 1997 - 2002had accorded a status of exporter to the business firm export-ing services with effect from1.4.1999. Such business firms areknown as Service Providers.The Export-Import Policy has been described in the followingdocuments:• Export- Import Policy: 2002- 2007• Handbook of Procedures Volume I• Handbook of Procedures Volume II• ITC(HS) Classification of Export- Import ItemsThe main policy provisions are given in the policy documententitled “Export -Import Policy 2002-2007”. An exporter willhave to refer to the Handbook of Procedures Volume-I toknow the procedures, the agencies and the documentationrequired to take advantage of a certain provision of the policy.There is a para-by-para correspondence between the Policy andthe Handbook of Procedures Volume-I. Thus, if an exporterfinds that para 6.2 of the policy is relevant for his businessenterprise then he should also refer to the corresponding paraof the Handbook of Procedures Volume- I to know preciselywhat is to be done t01ake advantage of the policy provision.The Handbook of Proce-dures Volume-II provides a very vitalinformation as regards the standard input-output norms inregard to items of export from India. Based on these norms,exporters are provided the facility to make duty-free import ofinputs required for manufacture of export products under the

Duty Exemption Scheme/Duty Remission Scheme. The policyregarding import or export of a specific item is given in thedocument entitled “ITC (HS) Classifications of Export -Import Items”.In addition to these policy documents, an export enterpriseshould also refer to the various policy circulars and trade noticesissued by various regulatory authorities deal-ing with differentaspects of foreign trade. One can refer to these notices either byvisiting the relevant web site of the authority concerned or byreferring to various trade magazines which circulate them.

Objectives of the Export-Import Policy:2002 - 2007The export-import policy 1997-2002 carried forward the processof liberalization and globalization set in motion by the processof economic reforms initiated since June, 1991. These reformshad aimed at restructuring the Indian economy to increase theproductivity and competitiveness of foreign trade enterprises inorder to achieve a higher rate of growth in exports. It alsoenabled the foreign trade grow in an environment of liberaliza-tion from licensing procedures, quantitative restrictions,discretionary bureau-cratic controls and cumbersome documen-tation procedures. The present Export-Import-Policy:2002-2007 aims at facilitating the growth in exports to attain ashare of at least 1 % of global merchandise trade by the end of2006-07. Specifically, main objectives of the present policy are asfollows:1. To stimulate sustained economic growth by providing

access to essential raw ma- terials,intermediates,components, consumables and capital goods required foraugmenting production and providing services.

2. To enhance the technological strength and efficiency ofIndian agriculture, indus-try and services, therebyimproving their competitive strength while generating newemployment opportunities and encourage the attainmentof internationally accepted standards of quality; and

3. To provide consumers with good quality products andservices at internationally competitive prices while at thesame time creating a level playing field for the domesticproducers

Features of Exim PolicyUnion Commerce and Industry Minister Mr. Murasoli Maranannounced the Exim policy for the 5 year period (2002-07) onMarch 31, 2002. The main thrust of the policy is to push India’sexports aggressively by undertaking several measures aimed ataugmenting exports of farm goods, the small scale sector,textiles, gems and jewellery, electronic hardware etc. Besidesthese, the policy aims to reduce transaction cost to tradethrough a number of measures to bring about proceduralsimplifications. In addition, the Exim policy removes quantita-tive restrictions (QRs) on exports, except a few sensitive items.1. Special Economic Zones (SEZs):-

a. Offshore Banking Units (OBUs) shall be permitted inSpecial Economic Zones (SEZs).

b. Units in SEZ would be permitted to undertake hedgingof commodity price-risks, provided such transactionsare undertaken by the units ‘on stand- alone basis.

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c. Units in SEZ shall be permitted External CommercialBorrowings (ECBs) for a tenure of less than three years.

d. Four existing EPZs have been converted into SEZs and13 New SEZs have already been given approval.

2. Employment Oriented Measures:- Exim (2002-07) policyinitiated a number of measures which would helpemployment orientation. Among them were the following:

a. Agriculture :-• Removal of quantitative and packaging restrictions on

wheat and its products, butter, pulses, grain and flourof barley, maize, bajra, ragi and jowar.

• Removal of restrictions on export of all cultivated(other than wild) varieties of seed, except jute andonion.

• 20 Agricultural Export Zones have been notified.• Transport subsidy for export of fruits, vegetables,

floriculture, poultry and dairy products.• 3% special DEPB rate for primary and processed

foods exported in retail packaging of 1 kg. or less.b. Cottage Sector and Handicrafts :-

• An amount of Rs. 5 crore under Market AccessInitiative (MAl) has been earmarked for promotingcottage sector exports coming under the Khadi andVillage Industries Commission (KVIC).

• Market Access Initiative (MAI) scheme for thedevelopment of website for virtual exhibition ofproducts from the handicrafts sector.

• Entitlement for Export House Status at Rs. 5 croreinstead of Rs.15 crore for others.

• Entitlement to duty free imports of an enlarged listof items as embellishments upto3% of FOB valueof exports.

c. Small Scale Industry :-With a view to encouraging further development ofcentres of economic and export excellence such as Tirpurfor hosiery, woollen blankets in Panipat, woollen knitearin Ludhiana, following benefits would be available tosmall-scale sector.• EPCG facility for the common service providers in

these areas.• Market Access Initiative (MAl) for creating focused

technological services and marketing abroad to therecognised associations of units in SSI.

• Entitlement for Export House Status at Rs. 5 croreinstead of Rs.15 crore for others.

d. Leather:-Duty free imports upto 3% of f.o.b. value combined toleather garments has been extended to all leatherproducts.

e. Textiles :-• Sample fabrics permitted duty free within the 3%

limit for trimmings and embellishments.

• Additional items such as zip fasteners, inlay cards,eyelets, rivets, toggles, Velcro tape, cord and cordstopper included in input output norms.

• Duty Entitlement Passbook (DEPB) rates for allkinds of blended fabrics permitted.

f. Gem and Jewellery :-• Import of rough diamonds is allowed freely at 0%

customs duty.• Licensing regime for rough diamond is being

abolished.• Value addition norms for export of plain jewellery

reduced to 7% and for all merchandised unstuddedjewellery to 3%.

• Personal carriage of jewellery allowed throughHyderabad and Jaipur airport as well.

Technology Orienteda. Electronic Hardware :-

• Conversion of the Electronic Hardware Technology Park(EHTP) into zero duty regime under the ITA(Information Technology Agreement)-I

• Net Foreign Exchange as Percentage of Exports (NEEP)to be made positive in 5 years.

• No other export obligation for units in EHTP.b. Chemicals and Pharmaceuticals :-

• 65% of DEPB rate for pesticides formulations.• No limit on export of samples.• Reimbursement of 50% of registration fees on

registration of drugs.c. Projects:

• Free import of equipment and other goods used abroadfor more than one year.

Growth Orienteda. Strategic Package for Status Holders:

• Licence, certificate, permissions. and customs clearancesfor both imports and exports on self-declaration basis.

• Priority finance for medium and long term capitalrequirement as per conditions notified by the RBI.

• Exemption from compulsory negotiation ofdocuments through banks, However, the remittancewould continue to be received through bankingchannels.

• 100% retention of foreign exchange in ExchangeEarner’s Foreign Currency 1EEFC) account.

• Enhancement in normal repatriation period from 180days to 360 days,

b. Diversification of Markets :-• Setting up of “Business Centre” in Indian missions

abroad for visiting Indian exporters/businessmen.• ITPO portal to host a permanent virtual exhibition of

Indian export products.

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N• Focus Latin American Countries (LAC) has been

extended upto March 2003.• Focus Africa has been launched for developing trade

relations with the Sub-Saharan African region. Theexporters exporting to these markets shall be givenExport House Status. on export of Rs. 5 crore.

• Links with the Commonwealth of Independent States(CIS) countries to be revived.

c. North Eastern States, Sikkim and Jammu andKashmir:-• Transport subsidy for exports to be given to units

located in North East, Sikkim and-Jammu andKashmir so as to offset the disadvantage of being farfrom ports.

d. Neutralising High Fuel Cost:-• Fuel costs to be rebated for all export products. This

would enhance the cost competitiveness of our exportproducts.

Procedural reforms

a. Dgft:-• The new 8 digit commodity classification for imports

introduced by the Director General of Foreign Trade(DGFT) would also be adopted by the Customs andDirector: General of Commercial Intelligence andStatistics (DGCI&S) shortly. This will eliminate theclassification disputes and hence reduce transactioncosts and time.

• The maximum fee limit for electronic application undervarious schemes has been reduced from Rs. 1.5 lakh toRs. 1.00 lakh.

• Same day licensing introduced in all regional offices.b. Customs :-

• Adoption and harmonisation of the 8 digit IndianTrade Classification (ITC) Harmonised System (HS)code.

• The percentage of physical examination of exportcargo has already been reduced to less than 10% exceptfor a few sensitive destinations.

• Fixation of special brand rate of drawback within 15days.

c. Banks :-• Direct negotiation of export documents to be

permitted.• 100% retention in Exchange Earners Foreign Currency

(EEFC) accounts.• Enhancement in normal repatriation period from 180

days to 360 days.’

Trust based

a. Import and export of samples to be liberalised forencouraging product up gradation

b. Penal interest rate for bonafide defaults to be broughtdown from 24% to 15%.

c. No penalty for non-realisation of export proceeds in respectof cases covered. by ECGC insurance package.

d. No seizure of stock in trade so as to disrupt themanufacturing process affecting delivery schedule ofexporters.

e. Foreign Inward Remittance Certificate (FIRC) to be acceptedin lieu of Bank Realisation Certificate for documentsnegotiated directly.

f. Optional facility to convert from one scheme to anotherscheme. In case the exporter is denied the benefit under onescheme, he shall be entitled to claim benefit under someother scheme.

g. Newcomers. to be entitled for licences without anyverification against execution of Bank Guarantee.

Duty Neutralisation Instrumentsa. Advance Licence:-

• Duty Exemption Entitlement Certificate (DEEC) bookto be abolished. Redemption on the basis of ShippingBill and Bank Realisation Certificate.

• Withdrawal of Advance Licence for AnnualRequirement (AAL) scheme. The exporters can availAdvance Licence for any value.

b. Duty Entitlement Passbook (DEPB) Scheme :-• Value cap exemption granted on 429 items to continue.• DEPB rates slashed on 8 out of 10 items.• Reduction in rates only after due notice.• No Present Market Value (PMV) verification except on

specific intelligence’• Same DEPB rate for exports whether as CBUs or in

CKD/SKD form. .• DEPB for transport vehicles to Nepal in free foreign

exchange.c. Export Promotion Capital Goods (EPCG):-

• EPCG licences ‘of Rs. 100 crore or more to have 12 yearexport obligation period with 5 year moratoriumperiod.

• Export obligation fulfillment period extended from 8years to 12 years in respect of units in AgriculturalExport Zones and in respect of companies under therevival plan of BIFR. .

• Supplies under Deemed Exports to be eligible forexport obligation fulfilment along with deemed exportbenefit

Implications of the Exim Policy 2002-07The implications of the EXIM Policy 2002-07 are as follows :-a. All-round Development of Indian Economy:. The EXIM

2002-07emphasises all-round development of Indianeconomy by giving due weightage to different sectors of theeconomy. That is why. the policy has been described as :-• Employment Oriented.• Technology Oriented.• Growth Oriented.

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• This has also been reflected in its objectives :-• To facilitate sustained growth in exports.• To stimulate sustained economic growth.• To enhance the technological strength and efficiency of

Indian agriculture, industry and services.• To generate new employment opportunities• To attain internationally accepted standards of quality.• To provide consumers with good quality goods and

services at internationally competitive prices.b. Implications on Agricultural Sector :- Agriculture being

the backbone of Indian economy, the EXIM policy hasinitiated a series of measures for its growth anddevelopment, especially for promotion of exports fromagricultural sector.• Removal ‘of quantitative and packaging restrictions on

certain agricultural products and on export of allcultivated varieties of seed would give a major boost tothe export of these items.

• Identification of 20 “Agricultural Export Zones wouldhelp in development of specific geographical areas forexport of specific products.

• Extension of export obligation fulfilment period from 8years to 12 years in respect of units in AgriculturalExport Zones.

• Other measures such as transport subsidy, 3% specialDEPB rate, would definitely give a fillip to exports fromagricultural sector.

c. Implications on Development of Cottage Industries :The small scale sector, alongwith the cottage and handicraftsector, has been contributing to more than half of the totalexports of the country. In recognition of the exportperformance of these sectors and to further increase theircompetitiveness, the following facilities have been extendedto this sector :-• Incentives such as Market Access Initiative (MAl), duty

free imports upto 3% of FOB value of exports, EPCGfacility, etc.

• Entitlement for Export House Status at Rs. 5 croreinstead of Rs.15crore for others. These steps wouldencourage units in cottage industries to develop theirexport potentiality.

d. Implications on Small Scale Industry :- With a view toencourage further development of centres of economic andexport excellence as Tripura for hosiery, woollen blankets inPanipat, woollen knitwear in Ludhiana, the followingbenefits have been made available to the small scale sector :-• Common service providers in these areas shall be

entitled for facility of EPGC Scheme.• Availability of Market Access Initiative Scheme for

creating focused technological services and marketingabroad.

• Entitlement for Export House Status at Rs. 5 croreinstead of Rs.15 crore for others.

These steps would lead to development of new centres ofeconomic and export excellence.

e. Implications on Gem and Jewellery Industry : Havingalready achieved leadership position in diamonds, theEXIM. Policy 2002-07 aims at achieving a quantum jumpon jewellery exports as well. In order to achieve this, thefollowing steps have been taken in the new EXIM Policy :-• Import of rough diamonds is allowed freely at 0%

custom duty.• Abolition of licensing regime for rough diamonds

would help the country emerge as a major internationalcentre for diamonds.

• Value addition norms for export of plain jewelleryreduced to 7% and for all merchandised unstuddedjewellery to 3%

• Personal carriage of jewellery allowed through Hyderabadand Jaipur airports as well.

f. Implications on Industrial Sector :--• Liberalisation of EPCG scheme would help Indian

industries to promote. quality up gradation and wouldalso enable sick units to revive.

• Extension of repatriation period for realisation ofexport proceeds from180 days to 360' days -would helpIndian industries to be more competitive in offeringliberal payment terms to foreign importers.

• Licence, certificate, permissions and customs clearancesfor both imports and exports on self-declaration basis,priority finance for medium and long term capital’requirement and 100% retention of foreign exchange inExchange Earner’s Foreign Currency (EEFC) accountwould definitely benefit Indian industries and wouldencourage Indian producers to enter the export field.

• Exemption from compulsory negotiation of documentsthrough banks would help exporters to save bankcharges.

• Transport subsidy for exports from units located inNorth East, Sikkim and Jammu and Kashmir wouldoffset the disadvantage of being far from ports.

g. Diversification of Indian Industrial Sector :- In order topromote Indian industries to diversify their business andmarkets, the following measures have been taken in theEXIM Policy 2002-07:--• Setting up of “Business Centre” in Indian missions

abroad would enable India exporters and businessmento visit abroad.

• Launching of Focus LAC (Latin American Countries) inNovernber 1997 has greatly accelerated Indian trade withLatin American countries. Extension of this programmeupto March 2003 would enable Indian exporters toconsolidate the gains of this programme.

• There is a tremendous potential for trade with the Sub-Saharan African region. Launching of Focus Africaprogramme would help exporters to diversify theirexports to these markets.

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N• Permission granted to External. Commercial Borrowings

(ECBs) for tenure of less than three years in SEZswould provide opportunities for accessing workingcapital loan for these units at internationally competitiverates.

h. Implications on Technology Upgradation :-• Conversion of Electronic Hardware Technology Park

(EHTP) into zero duty regime under the ITA(Information Technology Agreement)- I would giveencouragement to setting up of more units in EHTP.

• Liberalisation of import and export of samples wouldencourage product upgradation.

• Liberalisation of EPCG scheme would encourage Indianindustries to import capital goods and improve qualityand increase productivity of goods.

• This would also encourage Indian industries toundertake research and development programmes andupgrade the quality of their products.

i. Implications on Procedural Formalities :- Variousprocedural simplifications would reduce transaction costsand save time. Some of such steps include :-• Adoption of a new 8 digit commodity classification for

imports by Customs and Director General ofCommercial Intelligence and Statistics (DGCI&S) wouldeliminate the classification disputes and hence reducetransaction costs and time.

• Reduction of the maximum fee limit for electronicapplication under various schemes from Rs. 1.51akh toRs. 1.00 lakh.

• Foreign Inward Remittance Certificate (FIRC) to beaccepted in lieu of Bank Realisation Certificate fordocuments negotiated directly.

• Fixation of special brand rate of drawback within 15days.

• Reduction. in percentage of physical examination ofexport cargo to 10%.

• Penal interest rate for bonafide defaults to be broughtdown to 15%.

• No penalty for default where payment is covered byECGC policy.

• No seizure of stock in trade.• Same day licensing introduced in all regional offices.• Newcomers to be entitled for ljcences against execution

of Bank Guarantee.• Optional facility to convert from one scheme to another

scheme.

Questions BankQ1. What is an EXIM Policy? What are its objectives?Q2. What are the objectives of EXIM policy 1997-02 ?Q3. Explain the major highlights of EXIM policy 1997-02.

Q4. Explain the effect of EXIM Policy 1992-97 on thefollowing:-(i) Foreign Exchange. (ii) Technology Upgradation. (iii)Export Promotion.

Q5. What are the objectives of EXIM policy 2002-07 ?Q6. Explain the major highlights of EXIM policy 2002-07.Q.7 Explain the implications of the EXIM Policy 2002-07.

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LESSON 13:TERMS USED IN EXIM POLICY

Notes• Special Economic zones (SEZs)• Agriculture Export zones. (AEZs)• Negative List for Exports.• Open general Licence.• Export Obligations.• Counter Trade.

Note On Special Economic Zones (SEZS)Special Economic Zones (SEZs) Scheme in India was conceivedby the Commerce and Industries Minister Murosoli Maranduring a visit to Special Economic Zones in China in 1999. Thescheme was announced at the time of annual review of EXIMPolicy effective from 1.4.2000. The basic idea is to establish thezones as areas where export production could take place freefrom all roles and regulations governing imports and exportsand to give them operational flexibility.Special Economic Zone (SEZ) is a specifically delineated dutyfree enclave, which shall be deemed to be a foreign territory forthe purposes of trade operations and duties and tariffs. .

Features of Special Economic Zones(SEZS)a. Goods going into the SEZ area from DTA shall be treated

as. deemed exports and the domestic suppliers are. eligiblefor deemed export benefits. Similarly, goods coming fromthe SEZ area into DTA shall be treated as if the goods arebeing imported.

b. SEZ units may be set up (or manufacture of goods andrendering of services, production, processing,c:l.8sembling, trading, repair, remaking, reconditioning, re-engineering including making of gold, silver or platinumjewellery and articles thereof.

c. Foreign Direct Investment (FDI) upto 100% is allowedthrough automatic I route for all manufacturing activitiesexcept arms and ammunition, items of defenseequipments, narcotic. And psychotropic substances,hazardous chemicals, brewing of alcoholic drinks, cigarettesand tobacco.

d. Procurement of raw materials and exports of finishedproducts are exempted from central levies

e. The entire production of the units in the SEZs must be.exported and DTA sales is permitted only on the paymentof full applicable customs duties.

e. SEZ units are eligible for a corporate tax holiday upto 2010,under the I . provisions of section 10A of the Income TaxAct.

f. SEZ units can retain 100% of their exports proceeds inExchange Earner’s Foreign Currency (EEFC) account.

g. Realisation of exports proceeds extended to 12 monthsfrom the date of export.

h. State Trading Enterprises Policy will not apply to SEZmanufacturing units.

i. Creating special windows under existing rules andregulations of the Central Govt. and State Govt. for SEZ isdeveloping a framework

j. State Government have a lead role in the setting up ofSEZ.

Special Package’s for SEZs in the EximPolicy 2002-07a. Offshore Banking Units (OBUs) shall be per1Ilitted in

Special Economic Zones (SEZs).b. Units in SEZ would be permitted to undertake hedging of

commodity price-risks, provided such transactions areundertaken by the units on stand- alone basis..

c. Units in SEZ shall be permitted External CommercialBorrowings (ECBs) for a tenure of less than three years.

d. Four existing EPZs namely, Kandla, Santacruz, Kochin andSurat have been converted SEZs and 13 New SEZs havealready been given approval.

Export performance of the four functional SEZ

Export performance of the four functional SEZ are as givenbelow;-

Special Economic Zones- LegalProspectiveEligibility

a. Special Economic Zone (SEZ) is a specifically delineatedduty free enclave and shall be deemed to be foreign territoryfor the purposes of trade operations and duties and tariffs

b. Goods and services going into the SEZ area from DTAshall be treated as exports and goods coming from the SEZarea into DTA shall be treated as if these are beingimported

c. SEZ units may be set up for manufacture of goods andrendering of services

Zone 2000-2001 (Rs millions)

2001-2002 (Rs millions)

2002-2003 (Rs. millions)

Kandla SEZ 5278.90 4759.80 7292.90

SEEPZ, SEZ 51937.00 52256.00 60830.20

Cochin SEZ 3043.00 2585.00 2704.20 Surat SEZ 622.80 3118.60 2807.10 Noida SEZ 10342.00 9804.10 10011.70 Madras SEZ 6908.40 7625.90 8191

Vishakhapatnam SEZ 2190.80 2530.20 3572.7 Faltz SEZ 5199.70 9236.30 5123.90

Total : 85523.00 91895.50 100533.70

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NExport and Import of Goods

a. SEZ units may export goods and services including agro-products, partly processed goods, sub-assemblies andcomponents except prohibited items of exports in ITC(HS). The units may also export by-products, rejects, wastescrap arising out of the production process. Export ofSpecial Chemicals, Organisms, Materials, Equipment andTechnologies (SCOMET) shall be subject to fulfillment ofthe conditions indicated in the ITC (HS) Classification ofExport and Import Items. SEZ units, other than trading/service unit, may also export to Russian Federation inIndian Rupees against repayment of State Credit/EscrowRupee Account of the buyer, subject to RBI clearance, ifany.

b. SEZ unit may import/procure from the DTA withoutpayment of duty all types of goods and services, includingcapital goods, whether new or second hand, required by itfor its activities or in connection therewith, provided theyare not prohibited items of imports in the ITC(HS).However, any permission required for import under anyother law shall be applicable. Goods shall include rawmaterial for making capital goods for use within the unit.The units shall also be permitted to import goods requiredfor the approved activity, including capital goods, free ofcost or on loan from clients.

c. SEZ units may procure goods required by it withoutpayment of duty, from bonded warehouses in the DTA setup under the Policy and/or under Section 65 of theCustoms Act and from International Exhibitions held inIndia.

d. SEZ units, may import/procure from DTA, withoutpayment of duty, all types of goods for creating a centralfacility for use by units in SEZ. The Central facility forsoftware development can also be accessed by units in theDTA for export of software

e. Gem & Jewellery units may also source gold/ silver/platinum through the nominated agencies

f. SEZ units may import/procure goods and services fromDTA without payment of duty for setting up, operationand maintenance of units in the Zone

Leasing of Capital Goods

a. SEZ unit may, on the basis of a firm contract between theparties, source the capital goods from a domestic/foreignleasing company. In such a case the SEZ unit and thedomestic/ foreign leasing company shall jointly file thedocuments to enable import/ procurement of the capitalgoods without payment of duty.

Net Foreign Exchange Earning (NFE)SEZ unit shall be a positive Net Foreign exchange Earner. NetForeign Exchange Earning (NFE) shall be calculated cumula-tively for a period of five years from the commencement ofproduction according to the formula given in Appendix -14-IIof the Handbook (Vol-I)

Monitoring of performance

a. The performance of SEZ units shall be monitored by theUnit Approval Committee

b. The performance of SEZ units shall be monitored as per theguidelines given in Appendix 14-II of Handbook (Vol-I).

Legal UndertakingThe unit shall execute a legal undertaking with the Develop-ment Commissioner concerned and in the event of failure toachieve positive foreign exchange earning it shall be liable topenalty in terms of the legal undertaking or under any other lawfor the time being in force.

Approvals and Applications

a. Applications for setting up a unit in SEZ other thanproposals for setting up of unit in the services sector(except software and IT enabled services, trading or anyother service activity as may be delegated by the BOA), shallbe approved or rejected by the Units Approval Committeewithin 15 days as per procedure indicated in Annexure toAppendix 14-II of Handbook (Vol-I) . In other casesapproval may be granted by the Board of Approval.

b. Proposals for setting up units in SEZ requiring IndustrialLicence may be granted approval by the DevelopmentCommissioner after clearance of the proposal by the SEZBoard of Approval and Department of Industrial Policyand Promotion within 45 days on merits.

Dta Sales and Supplies

a. SEZ unit may sell goods, including by-products, andservices in DTA in accordance with the import policy inforce, on payment of applicable duty.

b. DTA sale by service/trading unit shall be subject toachievement of positive NFE cumulatively. Similarly forunits undertaking manufacturing and services/ tradingactivities against a single LOP, DTA sale shall be subject toachievement of NFE cumulatively.

c. The following supplies effected in DTA by SEZ units willbe counted for the purpose of fulfilment of positive NFE:

i. Supplies made to bonded warehouses set up under thePolicy and/or under Section 65 of the Customs Act.

ii. Supplies to other EOU/SEZ/ EHTP/ STP unitsprovided that such goods are permissible forprocurement by units

iii. Supplies against special entitlement of duty free importof goods.

iv. Supplies of goods and services to such organizationswhich are entitled for duty free import of such items interms of general exemption notification issued by theMinistry of Finance.

v. Supply of services (by services units) relating to exportspaid for in free foreign exchange or for such servicesrendered in Indian Rupees which are otherwiseconsidered as having been paid for in free foreignexchange by RBI.

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vi. Supplies of Information Technology Agreement (ITA-1) items and notified zero duty telecom/electronic itemsindicated in the Appendix 14-II of Handbook.

Export through Status HolderSEZ unit may also export goods manufactured/softwaredeveloped by it through a merchant exporter/ status holderrecognized under this Policy or any other EOU/SEZ/ EHTP/STP unit.

Inter-unit Transfer

a. SEZ units may transfer manufactured goods, includingpartly processed/semi-finished goods and services fromone SEZ unit to another SEZ/EOU/ EHTP/STP unit.

b. Goods imported/procured by a SEZ unit may betransferred or given on loan to another unit within thesame SEZ which shall be duly accounted for, but notcounted towards discharge of export performance

c. Capital goods imported/procured may be transferred orgiven on loan to another SEZ/EOU/ EHTP/ STP unitwith prior permission of the Development Commissionerand Customs authorities concerned.

d. Transfer of goods in terms of sub-paras (a) and (b) abovewithin the same SEZ shall not require any permission butthe units shall maintain proper accounts of the transaction.

Sub-contracting

a. SEZ unit, may subcontract a part of their production orproduction process through units in the DTA or throughother SEZ/EOU/ EHTP/ STP, with the annualpermission of Customs authorities. Subcontracting of partof production process may also be permitted abroad withthe approval of the Development Commissioner.

b. Sub-contracting by SEZ gems and jewellery units throughother SEZ units or EOUs or units in DTA shall be subjectto following conditions.

i. Goods, finished or semi finished, including studdedjewellery, taken outside the zone for sub- contractingshall be brought back to the unit within 30 days. No cutand polished diamonds, precious and semi-preciousstones (except precious and semi precious stone havingzero duty) shall be allowed to be taken outside the zonefor sub-contracting.

ii. Receive plain gold/silver/platinum jewellery from DTAin exchange of equivalent quantity of gold/silver/platinum, as the case may be, contained in the saidjewellery.

iii. SEZ units shall be eligible for wastage as applicable forsub-contracting and against exchange

iv. The DTA unit undertaking job work or supplyingjewellery against exchange of gold/silver/platinum shallnot be entitled to export benefits.

c. All units, including gem and jewellery, may sub-contract partof the production or production process through otherunits in the same SEZ without permission of Customsauthorities subject to records being maintained by both thesupplying and receiving units.

a. SEZ units other than gems and jewellery units may beallowed to undertake job-work for export, on behalf ofDTA exporter, provided the finished goods are exporteddirectly from SEZ units. For such exports, the DTAunits will be entitled for refund of duty paid on theinputs by way of Brand Rate of duty drawback.

b. Scrap/waste/remnants generated through job work mayeither be cleared from the job worker’s premises onpayment of applicable duty or returned to the unit.

c. SEZ units engaged in production/processing ofagriculture/horticulture products, may on the basis ofannual permission from the Customs authorities takeout inputs and equipments to the DTA farm subject tothe procedure indicated in

Appendix 14-II of the Handbook (Vol-I)

Exit from SEZ scheme

a. SEZ unit may opt out of the scheme with the approval ofthe Development Commissioner. Such exit from thescheme shall be subject to payment of applicable Customsand Excise duties on the imported and indigenous capitalgoods, raw materials etc. and finished goods in stock. Incase the unit has not achieved positive NFE, the exit shallbe subject to penalty, that may be imposed by theadjudicating authority under Foreign Trade (Developmentand Regulation) Act, 1992.

b. SEZ unit may also be permitted by the DevelopmentCommissioner, as one time option, to exit from SEZscheme on payment of duty on capital goods under theprevailing EPCG Scheme, subject to the unit satisfying theeligibility criteria of that Scheme and standard conditionsfor exit indicated in Appendix 14-II of Handbook (Vol-I).

Export through Exhibitions/Export Promotion Tours/Export through Show Rooms Abroad/Duty FreeShops

Sez, Units May

a. Export goods for holding/ participating in exhibitionsabroad with the permission of DevelopmentCommissioner.

b. Personal carriage of gold/ silver/ platinum jewellery,precious, semi-precious stones, beads and articles.

c. Export of jewellery is also permitted for display/ sale in thepermitted shops set up abroad

d. Display/sell in the permitted shops set up abroad or in theshow rooms of their distributors/agents

e. Set up show rooms/retail outlets at the InternationalAirports.

Personal Carriage of Export/Import ParcelImport/ export through personal carriage of gem and jewelleryitems may be under-taken as per the procedure prescribed byCustoms. Import/export through personal carriage for units,other than gem and jewellery unit , shall be allowed providedthe goods are not in commercial quantity.

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NExport /Import By Post/ CourierGoods including free samples, may be exported/imported byairfreight or through Foreign Post Office or through courier,subject to the procedure prescribed by Customs.

Disposal of Rejects/Scrap/ Waste/RemnantsRejects/scrap/waste/remnants arising out of productionprocess or in connection therewith may be sold in the DTA onpayment of applicable duty. No duty shall be payable in casescrap/waste/ remnants/ rejects are destroyed within the Zoneafter intimation to the Custom authorities or destroyed outsidethe SEZ with the permission of Custom authorities. Destruc-tion as stated above shall not apply to gold, silver, platinum,diamond, and precious and semi precious stones.

Replacement/repair of Goods

a. The general provisions of Policy relating to export ofreplacement/ repaired goods shall apply equally to SEZunits, save that, cases not covered by these provisions shallbe considered on merits by the DevelopmentCommissioner.

b. The goods sold in the DTA and found to be defective maybe brought back for repair/ replacement under intimationto Development Commissioner.

c. Goods or parts thereof, including gem stones and preciousmetal components for jewellery making, on beingimported/ indigenously procured and found defective orotherwise unfit for use or which have been damaged orbecome defective after import/ procurement may bereturned and replacement obtained or destroyed. In theevent of replacement, the goods may be brought back fromthe foreign suppliers or their authorised agents in India orthe indigenous suppliers. Destruction shall however notapply to gem stones and precious metals.

d. Goods may be transferred to DTA/abroad for repair/replacement, testing or calibration, quality testing and R & Dpurpose under intimation to Customs authorities andsubject to maintenance of records.

Management of SEZ

a. SEZ will be under the administrative control of theDevelopment Commissioner.

b. All activities of SEZ units within the Zone, unlessotherwise specified, including export and re-import ofgoods shall be through self certification procedure

Setting up of SEZ in Private/Joint/ State SectorA SEZ may be set up in the public, private, joint sector or bystate Government as per details indicated in Appendix 14-II ofthe Handbook(Vol-I).Samples:-SEZ units may, on the basis of records maintainedby them, and on prior intimation to Customs authorities:-a. supply or sell samples in the DTA for display/ market

promotion on payment of applicable duties;b. Remove samples without payment of duty, on furnishing a

suitable undertaking to Customs authorities for bringingthe goods back within a stipulated period

c. Export free samples, without any limit, including samplesmade in wax moulds, silver mould and rubber mouldsthrough all permissible mode of export including throughcouriers agencies/post

Sale of Un-utilised Material/ Obsolete goods

a. In case an SEZ unit is unable, for valid reasons, to utilizethe goods, including capital goods and spares, it maydispose them in the DTA in accordance with the importpolicy in force and on payment of applicable duties orexport them

b. Capital goods and spares that have become obsolete/surplus may either be exported or disposed of in the DTAon payment of applicable duties. The benefit ofdepreciation, as applicable, will be available in case ofdisposal in DTA.

c. No duty shall be payable in case capital goods, raw material,consumables, spares, goods manufactured, processed orpackaged and scrap/waste/ remnants/rejects are destroyedwithin the Zone after intimation to the Custom authoritiesor destroyed outside the Zone with the permission ofCustom authorities. However destruction shall not apply toprecious and semi precious and precious metals

d. SEZ unit may be allowed by Customs authorities concernedto donate imported/ indigenously procured computer andcomputer peripherals without payment of duty, two yearsafter their import/procurement and use by the units, torecognized non-commercial educational institutions,registered charitable hospitals etc as per the details given inAppendix 14-II in Handbook (Vol-I)

Entitlement for SEZ Developer : - For development,operation and maintenance of infrastructure facilities in SEZs,the developer shall be eligible for the following entitlementsa. Income tax exemption as per 80 IA of the Income Tax Act.b. Import/ procure goods without payment of Customs/

Excise dutyc. Exemption from Service taxd. Exemption from CST.

Difference between SEZS and EPZSThe main difference between the SEZ and the EPZ is that theSEZ is an integrated township with fully developed infrastruc-ture on international standards whereas EPZ is just anindustrial part. In fact, all existing EPZs have been asked toconvert themselves into SEZs. However, some units are notinterested in the conversion on account of the sale into DTA atconcessional rate of duty is not available in SEZs. The Govern-ment has asked such units to move out to the Domestic TariffArea (DTA).

A note on Agriculture Export Zones (AEZS)Agricultural. Export Zones (AEZs) have been set up by. theMinistry of Commerce, GOI, with a view to promote agricul-tural exports from the country and provide remunerativereturns to the farming community in a substantial manner.Further, with the intention to give primacy to promotion ofagricultural exports, it has been decided to identify product

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specific Agricultural Export Zone from geographically contigu-ous area.State Governments may identify product specific Agri exportzone for end to end development for export of specificproducts from a geographically contiguous area. State Govern-ment may evolve a comprehensive package of services providedby all State Government Agencies, State Agricultural Universitiesand all institutions and agencies of the Union Government forintensive delivery in these zonesSuch services which would bemanaged and co-ordinated by State Government would includeprovision of pre/post harvest treatment and operations, plantprotection, processing, packaging, storage and related research &development, etc. APEDA will supplement, within itsschemes and provisions, efforts of State Governments forfacilitating such exports.

ObjectiveIn a fast changing international trade environment and with aview to providing remunerative returns to the farming commu-nity in a sustained manner, efforts will be made to provideimproved access to the produce/ products of the Agricultureand Allied sectors in the international market.

EPCG SchemeAgriculture exporters shall be eligible for the facility of EPCGscheme as described in Chapter-6 of the Policy. The exportobligation shall be determined in accordance with paragraph 6.2of the Policy but the licence holder shall not be required tomaintain the average level of exports as specified in subparagraph 6.5(v) of the Policy.Such exporter shall have the facility to move or to shift thecapital goods within the zone provided he maintains accuraterecord of such movements. However such equipments shallnot be sold or leased by the licence holder. This facility shall alsobe available to service providers, setting up commoninfrastructural facilities such as sorting, grading, polishing,packaging, cold storage, transport equipment/ refrigerated vans,vapour treatment heat treatment plant, X-ray screening facilityetc.The units setup in the notified Agriculture Export Zone shallbe entitled to the benefits available under the scheme. A serviceprovider in the Agriculture Export Zone may import equip-ment under the EPCG scheme for supplying services toagriculture exports. The export obligation may be offset by theservice provider by earning foreign exchange in lieu of servicesrendered.

Duty Exemption/remission Scheme

a. The agriculture exporter shall be entitled to the facility forimport of inputs like fertilizers, pesticides, insecticides,packing material etc. under Advance Licence/DFRC/DEPBscheme as given in Chapter-7 of the Policy subject to theeligibility criteria and conditions enumerated under thescheme.

b. The agriculture exporter shall be eligible for recognition asExport House/Trading House/Star Trading House/ Super

Category Average FOB value during the preceding three licensing years, in Rupees

FOB value during the preceding licensing year, in Rupees

Average NFE earnings made during the preceding three licensing years, in Rupees

NFE earned during the preceding licensing year, in Rupees

(1) (2) (3) (4) (5) EXPORT HOUSE 4 crores 6 crores 3 crores 5 crores

TRADING HOUSE

20 crores 30 crores 15 crores 25 crores

STAR TRADING HOUSE

100 crores 150 crores 75 crores 125 crores

SUPER STAR TRADING

HOUSE

300 crores 450 crores 225 crores 375 crores

Star Trading House on achieving the performance level asmentioned below.

In addition to the double weightage available under paragraph12.7, the double weightage on FOB or NFE on the export ofagriculture product for recognition as status holders shall beavailable.

Information RequirementsA database on agricultural products and markets includingaspects of commercial intelligence relevant to exports will beestablished. Assistance shall be provided to the exporters,growers’ organisations, trade association for conductingsurveys/feasibility studies, market studies etc.Some Important Agricultural Export Zones

AEZ would be identified by the State Government, who mayevolve a comprehensive ‘package of services provided by allState Government agencies, State agricultural universities and. allinstitutions and agencies of the Union Government forintensive delivery in these zones.Such services, which would be managed and co-ordinated bythe State Government, would include provision of pre-harvestand post-harvest treatment and operations; plant protection,processing, packaging, storage and related research and develop-ment, etc. Agricultural and Processed Food Products ExportDevelopment Authority (APEDA) will supplement, within itsschemes and provisions, efforts of the State Governments forfacilitating such exports.

Facilities for Units Located in AEZS

a. The agriculture .exporters are entitled to import of capitalgoods under EPCG Scheme.

b. The agricultural exporters are entitled to imports of inputslike, fertilizers, pesticides, insecticides; packing materials, etc.,under Advance Licence, Duty Free Replenishment Certificate(DFRC) and Duty entitlement Passbook (DEPB) Schemes.

A note on Negative List of Exports 2002-07The negative list consists of goods the import or export ofwhich is either .prohibited, restricted through licensing orotherwise to be canalised through a designated governmentagency. The negative list of exports, as per the EXIM Policy

Location Name of product (s) Location Name of Product (s) West Bengal Pineapple Maharashtra Grapes & Grape Wine Karnataka Gherkins Tripura Pineapple Uttaranchal Lychee Uttar Pradesh Mangoes Punjab Vegetables Maharashtra Mangoes Uttar Pradesh Potatoes Jammu

&Kashmir Apple

Punjab Potatoes Tamil Nadu Flowers Andhra pradesh Mangopulp & Fresh

Vegetables Madhya Pradesh

Potatoes, Onions & Garlic

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N2002-07, contains the following four categories of exportitems:-a. Prohibited Items :- The prohibited items are completely

banned from exports. The following categories of. items arebanned from exports :-• All forms of wild animals including their parts and

products.• Special chemicals as notified by the DGFT.• Exotic birds as notified by the DGFT.• Beef.• Sea shells, as specified.• Human skeleton.• Peacock tail feathers including handicrafts and articles

made there of.• Manufactured articles and shavings of Shed Antlers of

Chital and Sambhar.• All items of plants as specified by the DGFT.• Tallow, fat and/or oils of any animal origin excluding

fish oil.• Sandalwood items as notified by the DGFT.• Red sanders wood in any form.

b. Restricted Items :- The restricted items are allowed forexports under special licence issued by the DGFT. Some ofrestricted export items are as follows:-• Dress materials, ready-made garments, fables or textile

it’s wit imprints of excerpts or verses of the HolyQuran.

• Horses - Kathiawadi, Marwari and Manipuri breeds. ,• Fresh and frozen silver prom frets of weight less than

300 gms.• Paddy (Rice in husk).• Seaweeds of all types. ,• Fodder including wheat and rice straw.• Chemical fertilizer of all types.• Whole human blood and all products derived from it.• Silkworm, silkworm seeds and silkworm cocoons.• Deoiled groundnut cakes containing more than 1% oil.

c. Canalised Items :- The canalised items can be, exportedwithout an export licence through designated State’ TradingEnterprises (STEs). Some of the canalised items are :-

Item Description Procedures or Conditions

Military stores as notified by DGFT 'No objection certificate from the Department of Defence Production and supplies.

Exotic birds, Such as bangali finches, White finches and Zebra finches.

Subject to Pre-shipment inspection;

Bones and bone products Subject to a certificate from Chemicals and Allied Products' Export ,Promotion Council

Basmati Rice Subject to registration of contracts with the Agricultural and processed Food products export Development Authority (APEDA)

Items Canalising Agency Onions (Except Banglore Rose onion and Krishnapuram onion)

Export permitted through Specified STEs

Niger Seeds Tribal Cooperative Marketing Federation of India(TRIFED), NEW Delhi. National Agriculture Coopertive Marketing Federation Of India (NAFED)

Gum Karaya Tribal Coopertives Marketing Federation of India (TRIFED), New Delhi.

Iron ore, manganese ore, and Chrome ore.

Metals and Minerals Trading Corporation (MMTC)

Crude oil Indian Oil Corporation Limited.

d. Freely Exportable Items :- The freely exportable items,can be exported without an export licence or permissionfrom the DGFT. However, export of such items is subjectto certain procedures or conditions.

A note on Open General Licence (OGL) ListOpen General Licence (OGL) list contains those items, whichcan be exported without any restrictions or licensing formalitiesto all permitted destinations. The following four OGLs are inoperation :-a. OGL No.1 :- Applies to export by land to any country

adjacent to India and having no sea port of its own.b. OGL No.2 :- Applies to export of bonafide samples.c. OGL No.3 :- Applies to the items that can be exported on

fulfilment of the conditions against each of the items.

d. OOL No.4:. Applies to items that can be exported directlyby the canalising agency mentioned against each items.

A note on Export ObligationExport obligation means the obligatioI1 of the importer toundertake export of product or products in term of quantity,value or both, as may be prescribed or specified by the licensingor competent authority in order to compensate for the importsundertaken.

Objectives of Export Ob1igation

a. The main objective of export obligation is to compensatefor the outflow of foreign currency due to importsundertaken under certain schemes such as EPCG scheme.

b. The EPCG scheme enables the Indian exporters to importcapital goods at 5% customs duty subject to exportobligation.

Advantages of Export Obligations

a. Accessibility to imported raw materials and capital goodssubject to export obligation would enhance thecompetitiveness of Indian exporters in terms of quality upgradation.

b. Due to, export obligation, importers will be required toexport compulsorily. This would increase exports andwould generate foreign exchange for the economy.

A note on Counter TradeCounter trade is a form of international trade in which certainexport and import transactions are directly linked with eachother and in which import of goods are paid for by export ofgoods, instead of money payments;

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In the modern economies, most transactions involve monetarypayments and receipts, either immediate or deferred. As againstthis, counter trade refers to a variety of unconventionalinternational trade practices which link exchange of goods,directly or indirectly, in an attempt to dispense -with currencytransactions.The Philippine International Trade Corporation (PITC) istasked with countertrade, an international transaction premisedon some form of reciprocity. It is used to leverage governmentimportation with trade and investments to be provided byforeign suppliers.Counter trade helps government offices or other local institu-tions by facilitating the introduction of investments, technologytransfer, research and development, donations, specializedtraining/skills and related activities without additional cost tothe government.

Forms of Counter Trade

a. Barter: Barter refers to direct exchange of goods againstgoods of equal value, with no money and no third partyinvolved in it.

b. Compensation Deal: Under this arrangement, the sellerreceives a part of the payment in cash and the .rest inproducts.

c. Buy Back: Under the buy back agreement, the supplier ofplant, equipment or technology agrees to purchase goodsmanufactured with that equipment or technology.

d. Counter purchase : Under the counter purchase agreement,the seller receives the full payment in cash but agrees tospend an equivalent amount of money in that countrywithin a specified period.

d. Trade-for-Debt or Debt-for-Goods. A loan or creditobtained by the government is paid for (fully or partially) ingoods or services of the debtor country.

e. Offset. Foreign suppliers commit to introduce investments,technology transfer, training and skills upgrade, research anddevelopment, donation or other similar products that willpromote the industrial and economic growth of the countryas well as provide employment opportunities, supportsocial and civic programs, generate/save foreign exchange,and fund and support environmental projects forsustainable growth.

Checklist for Counter-tradeCounter-trade and barter are trading techniques used bycountries with a limited supply of foreign currency, but whichneed to import goods. Instead of paying in precious hardcurrency, the customer asks to pay in goods. In many cases thesewill not be goods for which there are already established tradingpatterns, rather they will be goods that would not otherwise beexported. This will mean that there is unlikely to be a means ofpricing them (as there would be, for example, for a fixed gradeof a mineral).• Use a lawyer to write the agreements• Use a counter-trade specialist (e.g a commodity trader with

counter-trade expertise)

• Insure the risk of the trader’s insolvency• Arrange payment for sales of the customer’s (exported)

product before you lose control of your goods• Use an escrow account for receipts, and export goods to the

value of the amount of hard currency in escrow (foreignexchange permission for the escrow account may be neededfrom the buyer’s country)

• Ask the customer to provide a government guarantee forany shortfall of the amounts expected from the proceeds ofsale counter-traded goods, especially if you are committingresources to make goods to order

• Insure the risk of non-honoring of the governmentguarantee

• Obtain political risk cover on the buyers country in relationto the risk of frustration of your export contract and on thefrustration of the import contract.

Question BankQ1. Write a note on the Negative List of Export.Q2. Write a brief note on canalisation of exports.Q3. Explain Niche Marketing as an export strategy.Q4. Write note on the Open General Licence (OGL).Q5. Write note on the Special Economic Zones.Q6. Write note on the Agriculture Export Zones.

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LESSON 14:EXPORT PROCEDURE

Introduction

Export Procedure

• Registration’ Stage.• Shipment Stage.• Pre-shipment Stage• Post-shipment Stage.

Quality Control and Pre-shipment Inspection

• Introduction.• Concept of quality• Need of Inspection• Types of Inspection• Procedure.• Methods

Sales Tax Exemption

• Procedure for Registration.• Procedure for Exemption.

Procedure for Excise Clearance

• Introduction.• Conditions• Procedure.

Shipping and Customs Formalities

Procedure for Realisation of Export Proceeds

Question Bank

IntroductionExport procedure consists of several commercial and regulatoryformalities, which an exporter is required to complete duringthe course of export trade transactions. These formalities arevery complex and time-consuming and involve considerabledocumentation. Hence, the exporters must possess adequateknowledge of such formalities. At the same time, it should beensured that the rules- and regulations. of not only exportingcountry but also of importing Country are duly complied with.Last but not least, it should be ensured that all the requireddocuments, whether commercial or regulatory, are prepare andfiled with the appropriate authorities.

Registration StagesThe exporter is required -to register his organisation with anumber of institutions and authorities, which directly orindirectly help him in the smooth conduct of export, trade. Theregistration stage includes: -a. Registration of the Organisation: - The form of

organisation selected by the exporter must. Be registeredunder the appropriate Act of. the country.)

• A joint stock company under the Companies Act, 1956.);

• A partnership firm under the Indian Partnership Act,1932.);

• A sale trader should seek permission from the localauthorities, as required.

b. Opening-Bank Account: - The’ exporter should open acurrent account in the name of the firm or company with acommercial bank which is authorised by the Reserve Bankof India (RBI) to deal in foreign exchange. Such bank alsoserves as a source of pre-shipment and post-shipmentfinance for the exporter.

c. Obtaining Importer-Exporter Code Number (lECNo.): - Prior to 1.1.1997, it was obligatory for every exporterto obtain CNX number from the RBI. However, since then,IEC number issued by the Director General for ForeignTrade (DGFT) has replaced the CNX number. Theapplication form for obtaining IEC number should beaccompanied by fee of Rs. 1000.

d. Obtaining Permanent Account Number- (PAN):Export income is subject to a number of exemptions anddeductions under different sections of the Income Tax Act.For claiming such exemptions and deductions, the exportershould register his organisation with the Income TaxAuthorities and obtain the Permanent Account Number(PAN).

e. Obtaining Sales Tax Number: - Exportable goods areexempted from sales tax, provided, the ‘exporter or his firmis registered with the Sales Tax Authorities. , For thispurpose, the exporter is required to make an application inthe prescribed form to the’ Sales Tax Office (STO) in whosejurisdiction his {exporter’s). Office is situated

f. Registration with, Export Promotion Council (EPC) ::It is obligatory for every exporter to ,register with theappropriate Export Promotion Council (EPC) and obtainthe ‘Registration-cum-Membership Certificate’ (RCMC).The benefits provided in the current EXIM Policy areextended only to the registered exporters having validRCMC.

g. Registration with ECGC : - The exporter should alsoregister with the Export Credit and Guarantee Corporationof India (ECGC) in order to secure overseas paymentsagainst political and commercial risks. It also helps theexporters in obtaining the financial assistance fromcommercial banks and other financial institutions.

h. Registration with other Authorities: - The exportershould also register with various other authorities, such as: -

• Federation of Indian Export Organisation (FIEO),• Indian Trade Promotion Organisation (ITPO),• Chambers of Commerce (COC),• Productivity Councils, etc.

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Shipment StagesExport, cargo can be exported to the overseas buyer by sea, airor land. However, shipment by sea is the most popular andgenerally resorted to, as it is comparatively cheaper. Besides, theship’s capacity is far greater than other modes of transportation.Nevertheless, transportation by air is utilized for export ofexpensive items like, diamonds, gold, etc. The shipment stageincludes the following steps.:-a. Reservation of Shipping Space: - Once the export

contract is finalised, the I exporter reserves the requiredspace in the vessel for shipment. On accepting the exporter’srequest, the shipping company issues a Shipping Order. Theoriginal copy of the shipping order as given to the exporterand the duplicate instruction by the shipping company tothe commanding officer of the ship that the goods as perthe details given should be received on board.

b. Arrangement of Internal Transportation up to the Portof Shipment :-The exporter makes necessary arrangementsfor transportation of goods to the port either by road orrailways. On loading goods into the railway wagon, therailway authorities issue a ‘Railway Receipt’, which may beeither ‘freight paid’ or ‘freight to pay’. It serves as a title tothe goods. The exporter doses the railway receipt in favourof his agent to enable him to take delivery of the goods atthe port of shipment.

c. Preparation and Processing of Shipping Documents :-As the goods reaches the port of shipment, the exportershould issue detailed instructions to the C&F agent for theshipment of cargo along with a complete set of thedocuments listed below:-

• Letter of Credit along with the export contract or exportorder.

• Commercial Invoice (2 copies)• Packing List or Packing Note.• Certificate of Origin.• GR Form (original and duplicate)• ARE-I Form.• Certificate of Inspection, where necessary (original copy)• Marine Insurance Policy.

d. Customs Clearance: - The cargo must be cleared from theCustoms before it is loaded on the ship. For this, the abovementioned documents, along with five copies of shippingbill, are to be submitted to the Customs Appraiser at theCustoms House. The Customs Appraiser ensures that allthe formalities relating to exchange control, quality control,pre-shipment inspection and licensing have been compliedwith by the exporter. After verification, all documents,except the original GR, original copy of Shipping Bill andone copy of Commercial Invoice, are returned to the C&Fagent.

e. Obtaining ‘Carting Order’ from the Port TrustAuthorities: - The C&F agent, then, approaches theSuperintendent of the concerned Port Trust for obtainingthe ‘Carting Order’ for moving the cargo inside the dock.After obtaining the Carting Order, the cargo is physically

moved into the port area and stored in the appropriateshed.

f. Customs Examination and Issue of ‘Let Export Order’:- The Customs Examiner at the port of shipment physicallyexamines the goods and seals the packages in his presence.The same can be arranged for at the factory or warehouse ofthe exporter by making an application to the AssistantCollector of Customs. The Customs Examiner, if satisfied,issues a formal permission I’ for the loading of cargo onthe ship in the form of a ‘Let Export Order’.

g. Obtaining ‘Let Ship Order’ from the CustomsPreventive Officer : - ‘Let Export Order’ must besupplemented by a ‘Let Ship Order’ issued by the CustomsPreventive Officer. The C&F agent submits the duplicatecopy of Shipping Bill, duly endorsed by the CustomsExaminer, to the Customs Preventive Officer who endorsesit with the ‘Let Ship Order’.

h. Obtaining Mate’s Receipt and Bill of Lading: - Thegoods are then loaded on board the ship for which the Mateor the Captain of the ship issues Mate’s Receipt to the PortSuperintendent The Port Superintendent, on receipt of portdues, hands over the Mate’s Receipt to the C&F Agent. TheC&F Agent surrenders the Mate’s Receipt to the ShippingCompany for obtaining the Bill of Lading. The ShippingCompany issues two to three negotiable and two to threenon-negotiable copies of Bill of Lading.

Pre-shipment StagePre-shipment stage consists of the following steps:a. Approaching Foreign Buyers: - In order to secure an

export order, a new exporter can make use of one or more.of the techniques, such as,’ advertising in internationalmedia, sales promotion, public relation, personal selling,publicity and participation in trade fairs and exhibitions.

b. Inquiry and Offer : - An inquiry is a request from aprospective importer about description of goods, theirstandard or grade, size, weight or quantity, terms ofpayments, etc. On getting an inquiry, the exporter mustprocess it immediately by making an offer in the form of aPerforma invoice.

c. Confirmation of Order : - Once the negotiations arecompleted and the terms and conditions are finalised, theexporter sends three copies of Performa Invoice to theimporter for the confirmation of order. The importer signsthese copies and sends back two copies to the exporter.

d. Opening Letter of Credit:- The documentary credit orletter of credit is the most appropriate and secured methodof payment adopted to settle international transactions. Onfinalization of the export. Contract, the importer opens aletter of credit in favour of the exporter, if agreed upon inthe contract.

e. Arrangement of Pre-shipment Finance: On securing theletter of credit, the exporter procures a pre-shipment financefrom his bank for procuring raw materials and othercomponents, processing and packing of goods and transferof goods to the port of shipment.

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Nf. Production or Procurement of Goods: - On securing the

pre-shipment finance from the bank, the exporter eitherarranges for the production of the required goods. orprocures them from the domestic market as per thespecifications of the importer.

g. Packing and Marking: - Then the goods should beproperly packed and JXl8.rkedwith necessary details such asport of shipment and destination, country of origin, grossand net weight, etc. If required, assistance can be taken fromthe Indian Institute of Packing (IIP).

h. Pre-shipment ‘Inspection’ - If the goods to be exportedare subject to compulsory quality control and pre-shipmentinspection then the exporter should contact the ExportInspection Agency (EIA). For obtaining an inspectioncertificate.

i. Central Excise Clearance: - The exporters are totallyexempted from the payment of central excise duty.However, the exemption should be* claimed in one of thefollowing ways: -

• Export under Rebate.• Export under bond.

j. Obtaining Insurance Cover : - The exporter must takeappropriate policies in order to insure risks: -

• ECGE policy in order to cover credit risks.• Marine policy, if the price quotation agreed upon is CIF.

k. Appointment of C&F Agent: - Since exporting is acomplex and time- consuming process, the exporter shouldappoint a Clearing and Forwarding (C&F) agent for thesmooth clearance of goods from the customs andpreparation and submission of various export documents.

Post Shipment StageThe post-shipment stage consists of the following steps: -a. Submission of Documents by the C&F Agent to the

Exporter : - On the completion of the shipping procedure,the C&F agent submits the following documents to theexporter:-

• A copy of invoice duly attested by the Customs.• Drawback copy of the shipping bill.• Export promotion copy of the shipping bill.• A full set of negotiable and non-negotiable copies of bill

of lading.• The original L/C, export order or contract.• Duplicate copy of the ARE-I form.

b. Shipment Advice to Importer : - After the shipment ofgoods, the exporter intimates the importer about theshipment of goods giving him details about the date ofshipment, the name of the vessel, the destination, etc. Heshould also send one copy of non-negotiable bill of ladingto the importer.

c. Presentation of Documents to Bank for Negotiation: -Submission of relevant documents to the bank and theprocess of getting the payment from the bank is called“Negotiation of the Documents” and tile documents are

called ‘Negotiable Set of Documents’. The set normallycontains: -• Bill of Exchange, Sight Draft or Usance Draft.• Full set of Bill of Lading or Airway Bill.• Original Letter of Credit.• Customs Invoice.• Commercial Invoice including one copy duly certified

by the Customs.• Packing List.• Foreign exchange declaration forms, GR/SOFTEX/PP

forms in duplicate.• Exchange control copy of the Shipping Bill.• Certificate of Origin, GSP or APR Certificate, etc.• Marine Insurance Policy, in duplicate.

d. Dispatch of Documents :- The bank -negotiates thesedocuments to the importer’s bank in the manner asspecified in the L/C. Before negotiating documents, theexporter’s bank scrutinises them in order to ensure that allformalities have been complied with and all documents arein order. The bank then sends the Bank Certificate andattested copies of commercial invoice to the exporter.

e. Acceptance of the bill of exchange: - Bill of Exchangeaccompanied by the above documents is known as theDocumentary Bill of Exchange. It is of two types:• Documents against Payment (Sight Drafts): - In

case of sight draft, the drawer instructs the bank tohand over the relevant documents to the importer onlyagainst payment.

• Documents against Acceptance (Usance Draft): -In case of usance draft, the drawer instructs the bankto hand over the relevant documents to the importeragainst his ‘acceptance’ of the bill of exchange.

d. Letter of Indemnity: - The exporter can get immediatepayment from his bank on the submission of documentsby signing a letter of indemnity. By signing the letter ofindemnity the exporter undertakes to indemnify the bank inthe event of non-receipt of payment from the importeralong with accrued interests.

e. Realisation of Export Proceeds :- On receiving thedocumentary bill of exchange, the importer releasespayment in case of sight draft or accepts the usance draftundertaking to pay on maturity of the bill of exchange. Theexporter’s bank receives the payment through importer’s’bank and is credited to exporter’s account.

f. Processing of GR Form: - On receiving the exportproceeds, the exporter’s bank intimates the same to the RBIby recording the fact on the duplicate copy of GR. The RBIverifies the details in duplicate copy of GR with, the,original copy of GR received from the Customs. If thedetails are found to be I in order then the export transactionis treated to be completed.

g. Realisation, of Export” Incentives: - If the exporter iseligible for export incentives, then he should submit claim

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for the same accompanied by the bank certificate to theappropriate authority.

Quality Control and Pre-shipmentInspectionConcept of QualityQuality of a product is defined as a set of attributes or specifica-tions including packaging specifications in relation to a givenproduct. It is the manufacturer who first decides the quality of aproduct before introducing it in the market. This may be donekeeping in view the national or the inter~ national standards ofquality as laid down by the respective national or internationalstandards bodies. The level of quality - high medium or low--depends upon how rich or poor these specifications are. It thespecifica- tions are of very high order, the level of quality wouldbe high; on the other hand, if the specifications are poor orweak, then the quality would be termed as low quality. Betweenthe high and low quality lies the medium range of the quality.These quality specifications may then be modified duringnegotiations with the foreign buyer to suit his/ her require-ments. Finally, the quality of the export product is determinedwith reference to the specifications as laid down by the buyer.Thus, quality should be understood in its relative sense and notin the absolute sense of the term.

Need for Pre-shipment InspectionAn exporter faces competition not only from the fellowexporters from his own country but also from other Countries.He should formulate a proper quality strategy to gain a competi-tive edge over others in the market. The goods should beproperly inspected to ensure that the quality of the exportgoods is maintained as desired by the buyer. Goods of poorquality spoil not only their own market but also bring badname to the image of the country itself. I t is, thus, in thebusiness interest of the exporter to send shipment of the rightquality to the buyer. This would also facilitate effective penetra-tion and sustenance in the export markets by improving thebrand image of the goods. The Government of India had alsorecognised the need for effective pre-ship-ment inspection longback in 1963 itself when the Export (Quality Control andInspection) Act, 1963 was enacted to provide for sounddevelopment of the export trade through quality control andpre-shipment inspection.

Types of Pre-shipment InspectionThere are primarily two different types of pre-shipmentinspection namely: I. Voluntary InspectionII. Compulsory Inspection1. Voluntary Inspection

The following are the different forms of voluntary pre-shipment inspection of the export shipments:1. By the exporter himself2. By the buyer’s representative3. By the buying agent in the exporter’s country4. By the inspection agencies in the private sector

2 Compulsory InspectionCompulsory pre-shipment inspection is conducted by thefollowing agencies of the Government of India:

• Export Inspection Council through its Export InspectionAgencies

• Textile Committee• Development Commissioner (Handicrafts)• Central Silk Board

Voluntary Inspection

1. Inspection by the exporter himselfThe primary responsibility for inspection of the goods restswith the exporter himself. He should conduct theinspection of the goods during the process ofmanufacturing, at the stage of finished product and also inregard to the packaging and packing materials. It is essentialthat the manufacturer should install proper quality controlsystem in the factory to check the quality at all stages ofmanufac-ture of the goods. The merchant exporter shouldenter into an arrangement with the supplier of goods toprovide for inspection during the process of manu-factureas well as for the finished product. If needed, the servicesof qualified quality control personnel should be taken forthis purpose.

2. Inspection by buyer’s representativeMany a time, the foreign buyer may arrange for inspectionof goods through his own representative in the exportercountry before the goods are dispatched by the exporter.The exporter can send the shipment only when the buyer’srepresentative issues a satisfaction report to the exporter.The advantage to the exporter is that the buyer cannot raisethe question of substandard quality or the poor quality ofthe goods once his representative clears the shipment of thegoods.

3. Inspection by buying agentIn cases where the export order is placed with the exporterthrough a buy-ing agent in his country, the goods can bedispatched only after the buying agent has issued thesatisfaction report to the exporter. Buying agents conductinspec-tion at different stages to ensure the shipmentconforms to the quality requirements of the exporter. Thebuying agent conducts inspection of the quality at the timeof purchase of the raw materials, during the manufacturingprocess; at the finished product stage and finally beforepackaging and packing of the goods. The exporter can sendthe shipment only after getting this certification ofinspection from the buying agent.

4. Inspection by private sector agenciesSometimes, the buyer may specify an inspection agency inthe exporter’s country to satisfy himself as regards qualityof the goods. In such a case, the exporter should approachthat agency in his country and get the pre-shipmentinspection completed. In India, one of the leading agenciesin the private sector is the SGS India Ltd. with its headoffice in Mumbai. The exporter should ascertain theprocedure and documentation formalities of the agency

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Nconcerned so that the inspection of goods can be arrangedto ensure timely shipment of goods.

Compulsory InspectionCompulsory pre shipment inspection is carried out by variousagencies of the Government in accordance with the regulationsframed by the Government of India from time to time. Themost significant legislation to provide for sound envelopmentof the export trade through quality control and pre shipmentinspection is the Export (Quality Control and Inspection) Act1963. Under this Act, the Central Govern-ment is empoweredto• notify commodities which shall be subject to quality control

or inspection or both prior to export;• specify the type of quality control or i(inspection which shall

be applied to a notified commodity;• establish, adopt or recognise one or more standard

specifications for a notified commodity; and• prohibit the export in the course of International Trade of

a notified com-modity unless it is accompanied by acertificate issued under Section 7 that the commoditysatisfied the condition relating to quality control or inspec-tion, or it has affixed or applied to it a mark or sealrecognized by the Central Government as indicating that itconforms to the standard specifications applicable to itunder clause ( c )

Under this Act, the Government of India have established theExport Inspec-tion Council to advise the Governmentregarding measures for the enforcement of Quality Control andInspection in relation to commodities intended for export. TheCouncil, established on 1.1.1964, is a statutory body corporatewith its own seal.The Government of India has established five Export Inspec-tion Agencies one each at Bombay, Calcutta, Cochin, Delhi andChennai under section 7 of the Export (Quality Control andInspection) Act 1963 w.e.f. 1.2.1966. These agencies work underthe administrative and technical control of the Export Inspec-tion Council. Besides, the Export Inspection Council has alsorecognized number of private agencies to act as inspectionagencies to issue pre shipment inspection certificate”In order to promote exports of quality goods as per theinternational standards, the Government of India has’introduced compulsory Quality Control and’ Pre--ShipmentInspection for 90% of the items of export under one or theother system as per the Export (Quality Control and Pre-shipment Inspection) Act, 1963. Some of these items are:a. Food and agricultural products;b. Chemicals and allied ,products;c. Engineering ‘goods;d. Textiles;e. Coir, jute and leather products such as footwear, etc.The Government of India has set up Export InspectionCouncil (EIC) to monitor the, quality of goods meant forexports. The EIC has set up five Export Inspection Agencies(EIA) at Mumbai, Kolkata, Cochin, Delhi and Chennai. TheEIAs has a network of nearly 62 offices throughout India.

These EIAs have certain specific areas under their jurisdiction.For example, the EIA of Mumbai has jutsdiction overMaharashtra, Gujarat and Goa. ‘

Procedure for Pre-shipment InspectionThose exporters, who are approved under Self-Certification andIPQC, have to submit their applications in a prescribed‘Intimation for Inspection’ form to the Export InspectionAgency The Export Inspection. Agency issues the* InspectionCertificate on the basis of their performance reports as submit-ted by the EIA’s officials during the checks at all levels ofproduction carried out by them. Spot checks may also be’ carriedout whenever required. However, the units not approved underSelf-certification or IPQC systems are required to undergo thefollowing procedure :-a. Application to EIA :- The exporter has to apply in the

prescribed Intimation for Inspection’ form (in duplicate) toEIA at least 7 days. before the expected date of shipmentalong with the following documents:-• Copy of export contract;• Copy’ of letter of credit;• Details of packing specifications;• Commercial invoice giving evidence of FOB value of

export consignment;• Crossed cheque/D.D. in favour of EIA towards

inspection fees;• Declaration regarding importer’s technical specifications.

b. Deputation of Inspector :. After getting the ‘Intimationfor. Inspection’, the EIA deputes an inspector to conductthe pre-shipment inspection at the exporter’s factory orwarehouse. The exporter should keep goods ready forinspection on the day: and time allotted for inspection.

c. Inspection and Testing :- The inspector conductsinspection randomly and prepares the report to besubmitted to EIA. The exporter is required to arrange forfacilities required for the inspection. Where such facilities arenot available, inspection may be carried out at privateindependent laboratories.

d. Packing and Sealing of Goods :- If the inspector issatisfied with the quality of goods, he issues order forpacking of goods in his presence. After packing, theconsignment is marked and sealed with the official seal ofthe Export Inspection Agency (EIA).

e. Submission of the Report to EIA and Issue ofInspection Certificate :. The report prepared by the-inspector is submitted to the Deputy Director of .EIA. If.the report is favourable, the Deputy Director of EIAissues’ an inspection certificate in triplicate.• The original copy is required to be submitted to the

Customs.• The duplicate copy is dispatched to the importer.• The triplicate copy to be retained by the exporter for his

record.f. Issue of Rejection Note:- If the report submitted by the

inspector is not favourable, the Deputy Director of EIAissues a rejectioI1 note.

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g. Appeal against Rejection. Note :- The exporter can file anappeal against the rejection note within 10 days from thedate of the receipt of such note. On receiving the appeal,the EIA convenes a meeting of the Appellate Panel. Thepanel reviews the inspection report and if necessaryexamines the consignment again. The decision of theAppellate Panel is final and is binding on both the parties,the exporter and the ,Export Inspection Agency.

Units Exempted from the Inspection Procedure

a. Export Houses, Trading Houses, Star Trading Houses andSuper star Trading Houses.

b. Approved 100% EOUs and EPZ units.a. Exporters who are registered with the Textile Committee.b. Goods marked with ISI, AGMARK, BIS-14000, ISO-

9000.Items notified under the Export(Quality Control & Inspection)Act 1963 have also been exempted from compulsory pre-shipment inspection provided the exporter produce a firm letterfrom the overseas buyer to the effect that he does not want pre-shipment inspection from any official Indian inspection agency.However this exemption would not be available if the itemhappens to be a potential health hazard or safety hazard.

Methods of Quality Control and Pre-shipmentAccording to the prevailing law in India, a fairly large number ofexport goods are sub-jected to compulsory quality control and /or inspection by the agencies authorized by the Government ofIndia before being allowed to be exported from the country. In1965, the Government enacted the Export (Quality Control andInspection) Act as a single compre-hensive legislation toprovide for the sound development of export trade of India.Accord-ingly, the Export Inspection Council was set up toformulate and supervise the inspection schemes with the helpof Export Inspection Agencies, which have a network of officesspread all over the country. These agencies have trained man-power and are equipped with laboratory facilities to carry outinspection tests and issue inspection certificates.There are three systems for quality control and inspection. Theseare:i. Consignment-wise Inspection;ii. Inprocess Quality Control; andiii. Self-certification.

Consignment-wise InspectionUnder this system, each arid every export consignment issubjected to a detailed inspection by the Export InspectionAgencies based on a financial sampling plan. If the sample isfound to conform to the recognised specifications/standard , aninspection certificate for export is issued to the exporter. TheInspection Certificates carry a specific validity period withinwhich the export consignment must be shipped.This system is applicable to all the notified products by theExport Inspection Council other than those for which the Inprocess Quality Control system is applicable. Procedurally, forobtaining the Inspection certificate, the exporter has to apply tothe Export Inspection Agency well in advance to avoid ship-

ment delays. The application is to be made on pre-scribed formknown as Notice of Intimation along with:i. Crossed cheque or Demand Draft for the inspection feeii. Copy of Commercial Invoiceiii. Copy of Export Contractiv. Importer’s Technical SpecificationsThis application will be registered in the office of Agency, whichwill appoint an Inspector for carrying out physical examinationof the goods.The Inspector will examine the goods in the exporter’s premiseswith reference to the agreed specifications, which should not beinferior to the notified specifications. Samples may be drawnand sent to the laboratory, if required. Thereafter, the Inspectorprepares the Field Inspection Report, which becomes the basisfor the issuance of the Inspection Certifi-cate. The original ofthe certificate is to be submitted to the customs authorities forclear-ance of goods for export.

Inprocess Quality ControlUnder this system, export-oriented manufacturing /processingunits are approved as “export- worthy” units because theypossess the requisite infrastructure for manufacturing/ process-ing products of standard quality. Such a unit is allowed toinspect and clear goods for export without-an inspection by theExport Inspection Agency. The Agency will issue certificate ofinspection ‘on the declaration by the unit. ‘For the approval of aunit, it is to apply to the Export Inspection Agency on theprescribed Performa, After a preliminary visit by the officer ofthe agency, a panel of experts will be appointed. This panelthoroughly, investigates the quality control facilities of the unitright from the raw material stage to packing. It submits itsreport to the, agency with its recom-mendations. On the basisof these recommendations, the unit is accorded the status of anexport-worthy unit.For obtaining the inspection certificate under this system, theexporter submits the following documents to the ExportInspection Agency:i. Application (Notice of Intimation)ii. Crossed Cheque/Demand Draft for feeiii. A Copy of Commercial Invoiceiv. Importer’s Technical Specifications.On receipt of these “document(s, the Agency will issueinspection certificate in triplicate. The original certificate is for thecustoms authorities,

Self-certificationWith the experience gained over the years in operating theCompulsory Quality Control and Pre-shipment InspectionScheme in India, there has been a qualitative change in theinspection system also. Recently, self-certification system hasbeen introduced which is based on the concept that a manufac-turing unit having established reputation for its products withsufficient in-built responsibility for quality assurance, could bepermitted to certify its own products for export. For thepurpose of operating this system, a manufactur-ing unit foundqualifying against the prescribed norms, which amongst otherinclude the following:

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Na. Product Qualityb. Design and Developmentc. Raw Materials /Bought out Componentsd. Organisation and personnel for Quality Controle. Process Controlf. Laboratoryg. Quality Audith. Packagingi. After-sales-service; andj. House-keeping and MaintenanceThe unit approved under this system is recognised by notifica-tion under section 7 of the Act as the Agency for QualityControl and Inspection of specific products manufactured inthe unit. The system removed the need for the manufacturingunit to seek certificate of inspec-tion from an outside Agencywhich provides an added advantage in the mechanism ofexportation.

Procedure for Registration with the STOSales tax is a tax imposed by the State government on goodssold in or outside India. However, exportable goods areexempted from sales tax, provided the exporter or his firm isregistered with the Sales Tax Authorities. Such exemption isgranted on both ;-a. Goods exported.b. Goods purchased from the local market for export purpose.The following is the procedure for registration with the SalesTax Authorities ;-a. Application to STO :- The exporter is required to make an

application in the prescribed form to the Sales Tax Office(STO) in ‘whose jurisdiction his (exporter’s) office issituated. The application should be accompanied by thefollowing documents; -• Statement of Sales and Purchase.• Partnership deed or Memorandum and Article of

Association in original.• Xerox copy of the first and last page of the rationing

card of proprietor or partners or directors.• Two latest passport size photograph of the applicant.• Certificate under Municipal Act, Factory Act, Shop and

Establishment Act and other licences.• Required court fee stamps.• On receiving the application, STO deputes an inspector

to visit the office of the exporter.b. Inspection of Documents: - The inspector inspects

relevant books and documents such as;-• Sales and purchase register.• House rent or tax receipt.• Memorandum and Article of Association, in the case

of a company.• Certificate of Incorporation, in the case of a company• Partnership deed, in: the case of a partnership firm.

• Ration card.• Any other relevant documents.

c. Report by the Inspector :- The inspector drafts a report’and submits it to the STO. The STO verifies the report andmay call the exporter personally if certain clarifications arerequired.

d. Submission of a Security Bond:- The exporter is requiredto submit a security bond to the STO before getting thesales tax registration number. such security bond should besupported by another firm registered with the STO.

e. Granting Sales Tax Number:- On receiving the securitybond the STO grants sales Tax Registration number to theexporter.

Procedure for Exemption from Sales TaxOn getting the sales tax registration number the exporter iseligible for sales tax exemption. But for claiming this exemptionhe is required to apply in “H” form to the concerned STO.a. Obtaining “H” Form:- The registered exporter is required

to apply to the concerned STO for obtaining H form. Heshould submit the following documents.• A copy of letter of credit or confirmed export order.• A copy of invoice where goods are purchased from the

local market for export purpose.• A copy of the shipping bill duly certified by the

customs authority.The exporter has to affix required court fee stamp on each Hform issued to him.

b. Processing of ‘H’ Forms :- After shipment of goods theexporter is required to fill up necessary details in ‘H’ formwhich is prepared in triplicate. The exporter retains one copywith himself and gives the other two to the seller/manufacturer from whom he had purchased goods forexport purpose.

c. Sales Tax Claim:- The manufacturer submits ‘Sales taxreturn’ with one copy of “H” form to the STO and othercopy is retained by him for reference. On receiving sales taxreturn the STO issues refund order for the refund of salestax already paid.

Central Excise FormalitiesIt is common practice all over world that the exports are not tobear the burden of indirect taxes. export goods are eitherexempted from such taxes or these taxes are levied at the central,state and local levels on the inputs as well as on the finalproducts. Import and excise duties levied on production andpacking inputs are refunded under the Drawback Rules. CentralExcise duties on the inputs used in manufacturing exportproducts as well as on final export products is either exemptedthrough production under bond or is refunded after export.The Government of India has laid down procedure for eithergetting the duty refunded or exemption from payment of duty.

Excise Duty RefundExcise duty is a tax imposed by the Central gO\1ermnent ongoods manufactured in India. This duty is collected at source,Le., before removal of goods from the factory premises. The’exporters are totally exempted from the central excise duty.

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However, necessary clearance must be obtained by the exporterin one of the following ways:-a. Export under Rebate :- Under this system, an exporter is

required to pay excise initially and can claim it from theCentral Excise department after the shipment of goods.However, this leads to blockage of finance.

b. Export under Bond :- Under this system, an exporter isrequired to execute a bond, in favour of excise authorities,for a sum equivalent to the amount of excise chargeable onsuch goods. Such bond should be supported by anappropriate bank guarantee to safeguard excise department’sfinancial . interest against non-sanctioning of excise refund.

Procedural FormalitiesLet us now discuss various procedural formalities of exciserebate.Refund Procedure under Rule 12: The authorities involved inthe Rule are: i) Jurisdic-tional Central Excise Authority knownas Central Excise Range Superintendent under whose jurisdic-tion the manufacturing unit is located; ii) Maritime CentralExcise Authority located at the port. Rebate may be eitherclaimed from Jurisdictional Assistant Collector of CentralExcise or Maritime collector.The documents required under Rule 12 are:1. Invoices to be filled in four copies.2. AR 4/AR 5 Form to be filled in six copies.The procedure followed is as under:i. The exporters prepare four copies of Invoices giving all

detail of the consignment.ii. The excisable goods, which are to be exported under claim

for rebate, are to be marked as export cargo ‘in individualpackages.

iii. These marks and numbers are to be specified on AR4/AR5Forms, all the 6 copies. Personal Ledger Account (PLA) is tobe filled in specifying the amount of duty applicable to theexport consignment as debit. In PLA the credit balance ofthe deposit account spent by the individual manufacturerwith the central excise authority is shown. Each time whengoods are cleared, the amount of duty applicable to thegoods to be cleared is debited and the balance is shown inthe balance column

iv. All 6 copies of AR4/ AR5 Form are to be presented to theRange Superintendent before clearance of the cargo. Underthe Self-Removal Procedure (SRP) Presence of the centralexcise officer at the factory at the time of clearance is notnecessary. But in those cases where physical examination bythe central excise officer is solicited before the clearance ofthe cargo, 6 copies of AR4/AR5 Forms should bepresented to the Range Superintendent at least 24 hoursbefore the goods are to be removed from the factory.

vii. After verifying the details given in the afore-mentioneddocuments, the Range superintendent allows clearance ofthe cargo from the factory for onward transmission to theport of shipment. Following endorsement are to be givenin all the 6 copies of AR4/ AR5 Forms.“Allowed to export under claim for Central Excise Rebate”.

vii. The original and duplicate copies of AR4/ AR5 Forms arehanded over to the exporter; the triplicate copy is sent to theMaritime Central Excise Collectorate-Refund section, havingjurisdiction over the port wherefrom the goods are to beshipped; the fourth copy is sent to the Chief Accountsofficer (CAD) of the Maritime Central Excise Collectorateconcerned; the 5th copy is retained by Range Superintendentfor his record and future reference. The sixth copy is also tobe given to exporter or his authorised agent.

viii.The original, duplicate. and sixtuplicate copies of AR4/AR5Forms are to be submitted to the Export Department ofCustoms House alongwith other shipping documents toprove that formal central excise clearance has been obtainedfrom the jurisdictional Central Excise Authority.

ix. If custom officer is satisfied, he would make endorsementsin the original, duplicate and sixtuplicate copies of AR4/AR5 Forms. The officer returns original and sixtuplicatecopies to the exporter and sends duplicate copy to theRebate sanctioning Authority.

x. Rebate claim may be filed either from Maritime Collector orJurisdictional Assistant Collector of Central Excise.

xi. Following documents should be filed for claiming rebate:a. Application in prescribed form.b. Original copy of AR4/AR5 Form.c. Duplicate copy of AR4 in sealed cover received from

customs officer, if requiredd. Duly attested (copy of Bill of ladinge. Duly attested copy of shipping Bill (Export

promotion copy)f. Disclaimer certificate in case where claimant is other

than exporter.

Conditions for Central Excise ClearanceAs a part of further simplifications and rationalisation of exciserules announced by the Finance Minister, a new set of CentralExcise Rules, 2001 has come into effect from 1 st March 2002.The procedure for export of excisable goods (Except to Nepaland Bhutan) is subject to certaiI1) conditions and limitations :-

Conditions and Limitations :- (under Payment of ExciseDuty)

a. The excisable goods can be exported directly from a factoryor warehouse after the payment of excise duty.

b. The excisable goods must be exported within 6 monthsfrom the date on which they were cleared for export fromthe factory of manufacturer or his warehouse.

c. The market price of the excisable goods at the time ofexportation is not less than the amount of rebate of dutyclaimed.The amount of rebate of duty admissible is not less-thanRs. 500.

Conditions and Limitations :- (without Payment of ExciseDuty)

a. The exporter is required to furnish a General Bond (Suretyor Security) to the Assistant Commissioner of Central

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NExcise or the Maritime Commissioner for a sum equivalentto the duty chargeable on the goods.

b. The excisable goods must be exported within 6 monthsfrom the date on which they were cleared for export fromthe factory of manufacturer or his warehouse.

Procedure for Central Excise ClearanceThe following is the procedure for obtaining central exciseclearance :-a. Application to the Assistant Collector of Central Excise

(ACCE) :- .” The exporter is required to make anapplication to the Superintendent or the Inspector ofCentral Excise, having jurisdiction over the factory ofproduction or warehouse of the exporter, by filling up fourcopies of ARE-I form having the following distinctivecolours for easy verification and processing :-1.Original-White.2.Duplicate-Buff.

ARE-I ARE-I ARE-I ARE-I ARE-I (Original) (Duplicate) (Triplicate) (Quadruplicate) (Quintuplicate)

retained by the Retained by the exporter for Return to the exporter Range claiming other export incentives Superintendent

Submitted to he Commissioner of Custom at the port of shipment Sent to the Maritime Commission Returned to the Returned to or Exporter The Exporter sent to the excise Rebate Audit Section In case rebate is to be claimed by EDI Claim of Excise refund

3. Triplicate - Pink.4.Quadruplicate - Green.5. Extra Copy - Blue.

b. Information to the Range Superintendent :- The ACCEinforms the. range superintendent, in whose area theexporter’s factory or warehouse is located. On receivinginstructions from the ACCE the range superintendentdeputes an inspector for clearance of goods for exports.

c. Sealing of Goods :- The inspector verifies the goodsmentioned in the application and the particulars of dutypaid or payable. If satisfied, he seals each package or thecontainer in the manner as m9:Y be specified by theCommissioner of Central Excise and endorses each copy ofthe application.

d. Processing of ARE-I Forms:- ARE-I as endorsed by theinspector are processed as under:-

ARE-I (Original) ARE-I (Duplicate)

The superintendent or Inspector of Central Excise returns the original and duplicate copy of ARE-I to the exporter.

ARE-I (Triplicate) The triplicate copy of ARE-I is sent to the Maritime Commissioner at the port of shipment or to the excise Rebate Audit section in case rebate is to be claimed by electronic declaration on Electronic data Inter-change (EDI) system of customs.

ARE-I (Quadruplicate) The quaruplicate copy of ARE-I is retained by the superintendent or Inspector of Central Excise.

ARE-I (quintuplicate) Th quintuplicate copy of ARE-I is returned to the exporter for claiming any other incentive.

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e. Examination of Goods at the place of Export:- At theport of shipment the exporter presents goods togetherwith original ,duplicate and quintuplicate copy of the ARE-I to the Commissioner of Customs. The Commissioner ofCustom examines the Consignments. If satisfied hecertifies the goods for export by an endorsement on all thecopies of ARE-I. The original and quintuplicate copies arereturned to the exporter while the duplicate copy is sent tothe Maritime Commissioner.

a. Submission of the claim :- For claiming rebate, theexporter is required to submit the following documentsalong with the prescribed application in form “C” to theassistant or Dupty Commissioner of Central Excise orMaritime Commission of Central excise:-• Original copy of ARE-I duly endorsed by the

Customs officer;• Duplicate copy of ARE-I received from the custom

officer in a sealed cover;• Duly attested copy of Shipping bill.• Duly attested copy of Bill of Lending or Airway Bill;• Duplicate copy of Central Excise Invoice under which

Central Excise was paid on goods cleared for exports.f. Verification of the Application :- Assistant or

Deputy.Commissioner of Central Excise compares detailslisted in the different copies of ARE-I• The original copy received from the exporter;• The duplicate copy received from the Customs officer;• The triplicate copy received from the Central Excise

officer.If he is satisfied that the exports are not under claim forduty drawback, he sanctions the rebate.

g. Refund of Duty:- lf any refundable amount is not paid tothe applicant within three months from the date of filingthe claim, interest at a rate of 20% p.a. is paid for the periodbetween the expiry of three months and date of refund.

1. Under rebate on excise duty, the Chief Excise AccountsOfficer issues a cheque.

2. When export is under bond, the Chief Excise AccountsOfficer issues a letter Confirming credit given in theexporter’s bond account.

The rebate claim can also’ be claimed by electronicdeclaration on Electronic Data’ Inter-change (EDI) System.

h. Cancellation of Documents :- If the excisable goods arenot exported, the Assistant Commissioner of CentralExcise or Deputy Commissioner of Central Excise cancelsthe export documents on request of the exporter.

Customs Clearance FormalitiesAccording the Section 40 of, the Customs Act, the person in-charge of the conveyance vessel, vehicle, aircraft, etc., cannotpermit loading of export cargo at the Customs Station unlessand until a. formal permission to the export given by theauthorised Customs Officer is presented.

Before granting the permission, ‘the Customs Officer ensuresthat the goods being exported are in accordance with differentregulations, particularly in terms of the following :-a. The goods are of the same type, sort and value as have been

declared by the exporter.b. The duty or success leviable thereon has been properly

determined and paidc. Provisions of Export (Control) .Order, Export . (Quality \

Control and Inspection) Act and Foreign Exchange(Regulation) ‘Act are complied with.

Legal FrameworkSection 50 of the Indian Customs Act requires the exporter tofile a declaration in a prescribed form and submit supportingdocuments to enable the customs authorities to check declara-tions made by the exporter. The objectives of the customscontrol are:i. to ensure that nothing goes out of the country against the

laws of the land and that prohibitions and restrictionsregarding outward cargo are duly enforced by the. customs-authorities;

ii. to ensure authenticity of the value of outward cargoaccording to the customs valuation rules to check over andunder invoicing;

iii. to assess and realise export duty/cess/charge according tothe customs Tariff Act and any other fiscal legislation;

iv. to check that all the relevant regulatory provisions enforcedby various authorities in the country have been dulycomplied with in respect of export; and

v. to provide export data through the customs returns.

Customs Clearance StagesThere are four stages of customs involvement. These are:1. Processing of documents at the Customs House i.e. die

main office. This stage involves: i) checking up ofdocuments to ensure that all relevant documents have beensubmitted; ii) verification of quantity and value of goods;iii) verification and determination of rate of duty andcollection of the duty amount; (iv) direction for thecustoms officer in the docks for physical examination ofgoods;

2. Physical examination of goods in the docks in accordancewith the examination’ order given at the Customs House;

3. Supervision of loading by the Customs Preventive Officer;and

4. Post-shipment endorsements by the Customs PreventiveOfficer.

Documentary RequirementsFor movement of goods by air or by sea, the customs permis-sion for shipment is given on a prescribed document, known asShipping Bill. In other cases (Le. by road/rail) the document isknown as Bill of Export. There are four types of Shipping Bill/Bill of export.These are:i. Dutiable Shipping Bill/Bill of Export for those goods

which attract export duty/cess;

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Nii. Drawback Shipping Bill/Bill of Export for those goods

which are covered by the Duty Drawback scheme;iii. Free Shipping Bill/Bill of Export for those goods which

neither attract export duty/ cess nor are covered by the DutyDrawback scheme;

iv. EX-bond Shipping Bill/Bill of Export for those goods,which are shipped from ,the customs, bonded warehouse.

Exporter or his agent submits the following documents to thecustoms department.i. Shipping Bill (in duplicate, triplicate or quadruplicate) duly

filled in and signed.ii. Declaration regarding truth of statement made in the

Shipping Billiii. Invoice copy Giv. R Formv. Export Licence (wherever required)vi. Quality Control Inspection Certificate (wherever required)vii. Original Contract wherever available or correspondence

leading to contractviii. Contract registration certificate (wherever applicable)ix. Letter of credit (wherever applicable)x. Packing Listxi. AR4/AR5 Forms (original and Duplicate)xii. Any other documents

Shipping and Customs FormalitiesThe following is the procedure for shipping and customsclearancea. Preparation and Submission of Export Documents :-

For the clearance of cargo from customs, the exporter 01'his agent is required to submit the following set ofdocuments alol1gwithwith five copies of shipping bill tothe Customs Appraiser at the Custom House• Letter of Credit along with the export contract or

export order• Commercial Invoice (2 copies• Packing List or Packing Note• Certificate of Origin.• GR Form (original and duplicate)• ARE-I Form.• Original copy of Certificate of Inspection, where

necessary.• Marine Insurance Policy.

b. Verification of Documents :- The Customs Appraiserverifies the details listed in each document and ensures thatall the formalities relating to exchange control, qualitycontrol, pre-shipment inspection and licensing have beencomplied with by the exporter. If satisfied, he issues a‘Shipping Bill Number’, which is very important fromexporter’s point of view.

c. Valuation of the Goods :- The Customs Appraiserassesses the shipping bill and values the goods. The valueof goods as determined by the Customs

Appraiser is considered for all future transactions, especiallyfor the claim of incentives. All documents are returned tothe exporter or his agent, except :• Original copy of GR to be forwarded to the RBI.• Original copy of Shipping Bill.• One copy of Commercial Invoice:The validity of assessed shipping bill is for one monthonly. If the exporter fails to deliver the goods in thatperiod; he will have to undergo the above procedure again.

d. Obtaining ‘Carting Order’ from the Port TrustAuthorities :- The C&F agent, then, approaches theSuperintendent of the concerned Port Trust for obtainingthe ‘Carting Order’ for moving the cargo inside the dock.After obtaining the Carting Order, the cargo is physicallymoved into the port area and stored in the appropriateshed.

e. Customs Examination and Issue of’ Let Export Order’:-The Customs Examiner at the port of shipment physicallyexamines the goods and seals the packages in his presence.The same can be arranged for at the factory or warehouse ofthe exporter by making an application to the. AssistantCollector of Customs. The Customs Examiner, if satisfied,issues a formal permission for the loading of cargo on theship in the form of a ‘Let Export Order’. The aboveprocedure is now processed through Electronic DataInterchange (EDI) System.

f. Obtaining ‘Let Ship Order’ from the CustomsPreventive Officer :- ‘Let Export Order’ must besupplemented by a ‘Let Ship Order’ issued by the CustomsPreventive Officer. The C&F agent submits the duplicatecopy of Shipping Bill, duly endorsed by the CustomsExaminer, to the Customs Preventive Officer who endorsesit with the’ ‘Let Ship Order’.

g. Obtaining Mate’s Receipt and Bill of Lading :- Thegoods are then loaded on board the ship for which the Mateor the Captain of the ship issues Mate’s Receipt to the PortSuperintendent. The Port Superintendent, on receipt ofport dues, hands over the Mate’s Receipt to the C&F Agent.The II C&F Agent surrenders the Mate’s Receipt to theShipping Company for obtaining the Bill of Lading. TheShipping Company issues two to three negotiable and twoto three non-negotiable copies of Bill of Lading.

Procedure for Realisation of Export ProceedsThe following is the procedure for the realisation of exportproceeds :-a. Presentation o/Documents to the Bank for Negotiation :-

After shipment of goods, the exporter is required tosubmit the shipping documents to an authoiised dealerwithin 21 days of the date of shipment for negotiation.Submission of relevant documents to the bank and theprocess of getting the payment frain the bank is called“Negotiation of the Documents” and the documents arecalled ‘Negotiable Set of Documents’. The set normallycontains :-• Bill of Exchange, Sight Draft or Usance Draft.

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• Full set of Bill of Lading or Airway Bill.• Original Letter of Credit.• Customs Invoice.• Commercial. Invoice including one copy duly certified

by the Customs.• Packing List.• Foreign exchange declaration forms, GR/SOFTEX/PP

forms in duplicate.• Exchange control copy of the Shipping Bill.• Certificate of Origin, GSP or APR Certificate, etc.• Marine Insurance Policy, in duplicate.

b. Despatch of Documents :- The bank negotiates thesedocuments to the importer’s bank in the manner asspecified in the L/C. Before negotiating documents, theexporter’s bank scrutinises them in order to ensure that allformalities have been complied with and all documents arein order. The bank then sends the Bank Certificate andattested copies of commercial invoice to the exporter.• Acceptance of the Bill of Exchange :- Bill of

Exchange accompanied by the above documents isknown as d1e Documentary Bill of Exchange. It is of’two types :-

• Documents against Payment (Sight Drafts) :- Incase of sight draft, the drawer instructs the bank tohand over the relevant documents to the importer onlyagainst payment.

• Documents against Acceptance (Usance Draft) :-{p case of usance draft, the drawer instructs the bankto hand over the relevant documents to the importeragainst his ‘acceptance’ of the bill of exchange.

c. Letter of Indemnity :- The exporter can get immediatepayment from his ‘bank on the submission of documentsby signing a letter of indemnity. By signing the letter ofindemnity the exporter undertakes to indemnify the bank inthe event of non-receipt of payment from the importeralong with accrued interests.

d. Realisation of Export Proceeds :- On receiving thedocumentary bill of exchange, the importer releasespayment in case of sight draft or accepts the usance draftundertaking to pay on maturity of the bill of exchange. Theexporter’s bank receives the payment through importer’sbank and is credited to exporter’s account.

e. Processing of GR form:- On receiving the export proceedsthe exporter’s bank intimates the same to the RBI byrecording the fact on the duplicate copy of GR. The RBIverifies the details in duplicate copy of GR with the originalcopy of GR received from the Customs. If the details arefound to be in order then the export transaction is treatedto be completed .

Questions BankQ1. List the authorities with which an exporter is required to

register before exporting.Q2. Explain the procedure involved in pre-shipment stage of

export.

Q3. Explain the procedure involved in shipment stage ofexport.

Q4. Explain the procedure involved in post-shipment stageof export.

Q5. What are the different methods of Quality Control andPre-shipment Inspection?

Q6. Explain the procedure for pre-shipment inspection.

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LESSON 15:PROCEDURES FOR CLAIMING EXPORT INCENTIVES

• Objectives• Introduction• Need for Procedural Formalities• Duty Drawback Scheme

Drawback RatesProcedure for Claiming Duty Drawback

• Refund of Central ExciseExport Under Claim of Rebate Under Rule 12 (i) (A)Export Under Claim for Rebate of Duty on ExcisableMaterials used in the Manufacture of Export GoodsRule 12 (i)(B)Export of Goods Under Bond Under Rule 13

• Duty Exemption/Remission SchemeDuty Exemption SchemeDuty Remission Scheme

• Tax ExemptionIncome Tax ExemptionSales Tax Exemption

• Let Us Sum Up• Terminal Questions

Objectives

• After studying this unit, you should be able to:• explain the need for procedural formalities of export

incentives• describe the process of claiming duty drawback• explain the methods of claiming excise incentives under

various schemes of central excise rules• describe various facilities of duty exemption scheme• describe the procedure of exemption under income-tax,

sales tax, etc.

IntroductionYou have learnt about the infrastructure and various exportincentives provided by Govern-ment of India in previouschapter. These incentives are instrumental for the exportpromotion in India. Moreover, exporters are required to complyvarious procedural formalities for fuller realisation of exportincentives on a regular basis. In this Unit, you will learn theprocedure of claiming incentives under duty drawback rules andcentral excise rules. You will also be acquainted with variousfacilities of duty exemption scheme and tax exemption scheme.

Need for Procedural FormalitiesProcedural formalities prescribed for claiming various export-incentives need timely and proper compliance on the part ofexporters. This alone will ensure fuller realisation of exportincentives on a regular basis. Delays and cuts in the realisation

of export incentives will upset the fund-flow position of theexport firm on the one hand, and will render the export effortunremunerative on the other. It is therefore, essential for theexporters to develop a complete understanding about theprocedural and documentary formalities for timely prepa-rationand submission of claims of export incentives to the appropri-ate authorities on a regular basis. It may be desirable to preparean action plan by the export department of the firm for filingclaims of export incentives to different authorities on a plannedbasis.Unfortunately, exporters in India are required to approach anumber of authorities for realisation of export incentivesagainst each export transaction. The task of the exporters hasbeen rendered further difficult and complicated because of thefact that each incentive- disbursement authority has prescribedits own exclusive procedure and documentary requirements forprocessing claims of export incentives. Thus, besides multiplic-ity of authori-ties to be approached for realising claims ofexport incentives, exporters are also required to follow differentprocedural and documentary formalities in each case.Moreover, as per the existing rules, export incentives are to beclaimed on post- export ,basis, i.e., after effecting exports.However, the basic documents required for filing these claimsemanate from the process of physical shipment of export cargo.Hence, exporters have to take necessary care and precautions atthe time and stage of export-shipment to claim the exportincentives. Exporters have to see, that the claims of exportincentives after the shipment are not adversely affected due toincomplete or inadequate information in the documentssupporting the fact of actual shipment of export cargo. Thiscalls for the need for a total plan of action from factory torealisation of incentives against each export transaction.

Duty Drawback SchemeThe scheme of Duty Drawback is governed by the ‘Customsand Central Excise Duties Drawback Rules’ compiled andnotified by ‘Drawback Directorate’ of the Department ofRevenue, Ministry of Finance of the Government of India.Under these rules, customs duties and central excise duties onraw materials, components and packing materials used in exportproducts are refunded back to the exporter, on post-exportbasis. In other words, import duties and central excise duties onmaterial inputs for export products are allowed to be , drawn-back (i.e. refund) under the incentive scheme of duty drawback.Thus the drawback refers to the rebate of duty chargeable onany imported or excisable material used in the manufacture ofgoods exported from India. According to the Drawback Rules1995, draw-back has been permitted not only on materials/inputs used in the manufacture but also processed or subjectedto any other operation for export of goods from India.Drawback is given both to the manufacturers, exporters ormerchant-exporters and export/trading houses, etc. Levy of

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interest on delayed payment of drawback has also beenpermitted. Interest at such rate as may be fixed by the Boardwould be leviable in case payment against a claim for drawbackis not made within three months of filing the claim in theprescribed manner. Drawback will not be allowed if the totalforeign exchange spent on inputs used in the goods exported ismore than the FOB value of the exports or the value additionis negative. Draw-back will also not be allowed if the exportvalue of goods is less than the value of the im-ported materialused in the manufacture of the export goods or where the saleproceeds of the exported goods are not received within thespecified limit. Drawback will also not be admis-sible if MODVAT is availed of.

Drawback RatesTwo types of drawback rates are available. They are:i. All Industry Rates: These are published in the form of

notification by the government every year and are normallyvalid for one year.

ii. Brand Rates or Special Brand Rates: These are fixed onthe individual request of an exporter/manufacturer.

The rates at which the incentive of duty drawback will begranted to individual exporter have been specified product-wisein the drawback schedule specified under the drawback rules. -Sometime the amount or rate of drawback are not determinedin respect of export goods. In such cases the manufacturer orexporter of such goods may apply in the prescribed form .Application for Fixation of Drawbacks Rates’. The applicationshould be submitted to the Department of Revenue, Ministryof Finance or with the Customs House/Central ExciseCollector ate in whose jurisdiction their manufacturing unit islocated. The application must be submitted within 60 daysfrom the date of export.The documents prescribed for such application are as under:i. Application for Fixation of Drawback Ratesii. OBI Statement Iiii. DBK Statement IIiv. DBK Statement IIIv. Relevant facts including the proportion in which the

material or components are used in the production ormanufacture of goods and duties paid on such material orcomponents.

A copy of such application should be sent directly to theDirector (Drawback), Ministry of Finance, New Delhi. Onreceipt of the application, the customs/central excise officer willverify the application and forward to the Director (Drawback),Ministry of Finance, Govern-ment of India, New Delhi forfixation of Brand Rate. If satisfied, he will determine theamount or rate of drawback in respect of such goods. TheGovernment have also provided simplified procedure of brandrate fixation without insisting on pre-verification of data by theDrawback Department.

Procedure for Claiming Duty DrawbackThe claim of Duty Drawback (DBK) is processed and passedfor payment, primarily on the basis of the relevant informationgiven in the drawback copy of shipping bill. The exporters are

required to file the drawback copy of shipping bill in triplicate,in quadruplicate if any export assistance is applicable, well inadvance in the Export Department or Central Registra-tion Unitat the port or ICD Container Freight Station/Air CargoComplex, etc. The DBK Shipping Bill must indicate the DBKSchedule No. of the export product, product description, DBKrate and total amount of drawback claim. In addition, it shouldalso have a declaration that exports are being made under aclaim of duty drawback. At the same time, there should also bea declaration that the duties of customs and central excise havebeen paid in respect of the material inputs used in manufactureof export goods as also in respect of container or packingmaterials. Exporters have to make sure that no separate claim isbeing made for rebate of central excise duties under the CentralExcise Rules.The Shipping Bills and other documents are scrutinised andexamined by the concerned customs officer. Duplicate andTriplicate copies of the Shipping. Bills with suitable examina-tion order are returned to the exporters for presenting them tothe Docks Appraising Officer. The Custom Officer givesexamination report on both the copies of shipping bills andreturns duplicate and triplicate copies to the exporters andoriginal copy is retained. Exporters present duplicate andtriplicate copy of shipping bills duly examined by the customsoffice to the Docks Appraising Officer alongwith the exportgoods. If the officer finds it in order, he endorses ‘Let Export’order on both copies of the shipping bills. Triplicate copy ofthe shipping bill is deemed to be a claim for the drawback. Ifclaims are found admissible and in order, are sanctioned. Theamount is credited in the ledger account of the exportermaintained in the Drawback section.Documents: The claim for duty drawback is filed alongwith thefollowing documents:i. Copy of export contract or letter of credit, as the case may

be.ii. Copy of packing list.iii. Copy of AR4 form, wherever applicable.iv. Insurance certificate whenerever necessary.v. Copy of communication regarding rate of drawback (if

applicable)vi. Copy of Test Report (if required)vii. Declarations (if required)viii. Declaration regarding not availing MODV ATix. Certificate from the Jurisdictional Excise Superintendent (if

applicable)x. Any other documents.Where an exporter desires that he may be granted the incentivesof drawback provisionally, he may, after making the application,apply in writing to the Drawback Directorate. He may requestthat a provisional amount be granted to him towards on exportof such goods, pending determination of the amount or rateof drawback. However, for making provisional claims of dutydrawback an exporter may be required to execute a general bondfor the amount of drawback claim, with the Collector ofCustoms at the port from which the said goods are exported.

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NIf the rate of drawback is less than three- fourth of the dutiespaid on the materials or compo-nents used in the productionor manufacture of the said goods, he may within sixty daysfrom the date of export, make an application in writing to theDrawback Directorate for fixation of appropriate amount orrate of drawback. The procedure and documents required forsuch application is the same mentioned earlier for fixation ofdrawback rates.Duty Drawback Credit Scheme: As an export promotionalmeasure, the Government of India have authorised the ReserveBank of India to instruct the commercial banks (AuthorisedDealers in Foreign Exchange) to grant interest-free credit to theexporters. The credit is given against their Duty Drawbackentitlements pending scrutiny, sanction and payment by theCustom House. Such interest-free credit is being made availableto exporters in India for a period of90 days. However, thescheme is applicable only for export of such products for whichDrawback rates have already been determined either on all-industry rate basis or on brand-rate basis.Drawback on export by post: Where goods are to be exportedby post under a claim of drawback, the outer surface of thepacking must be marked as ‘DRA WBACK- EXPORT’.In such cases, the exporters will submit to the postal Authori-ties a Drawback Claim Form instead of a shipping bill givingdetails regarding drawback schedule number, product descrip-tion, drawback rate and amount.

Refund of Central ExciseRefund of central excise is an important fiscal incentive forexport promotion. As you know, exports should not bear theburden of indirect taxes. Hence, exportable goods are eitherexempted from such taxes or these taxes are refunded, ifexemption is not possible. In India, excisable goods are freefrom the incidence of excise duty levied by the central govern-ment, both on finished product and raw materials. The schemeis governed by the section, 37 of the Central Excise and Salt Act,1944 as amended from time to time. It has been amended onSeptember 22, 1995 . In lieu of the Rules 12, 12A and 191A ofthe Central Excise Rules, only one Rules 12 operates for exportsunder claim for rebate of duty. The rebate is granted on theduty levied at finished product and on inputs for this finishedproduct. Rule 13, 191-B, and 91-BB of Central Excise Ruleshave been integrated into Rule 13. This rule is applied forexports of goods in bond and utilisation of non- duty paidraw material for manufacture and exp0l1 of excisable goods.Manufacturer’s of export product are required to register theirfactories with the local Central Excise Authorities, by openingPersonal Ledger Account (PLA). In PLA, the credit balance ofthe deposit account opened by individual manufacturers withthe Central Excise Authority is shown. At the time of removalof a consignment, the amount of duty actually levied on theconsignment is shown as debit entry. After the proof ofexportation, the equivalent amount is again entered on thecredit side. PLA is not needed in case of exporters under bondbecause the duty has not been actually paid.Documents: The major excise document are:Invoices: Invoices are prepared in four copies. The original copyis for the buyer, duplicate for the transporter, triplicate for the

Central Excise Officer and fourth copy for manufacturer’srecord.AR4/ AR5 Forms: It is prepared in sixtuplicate. Both AR4 andARS forms can be used for export in Bond or under Rebate ofCentral Excise duty. Let us first learn how they are used.AR4 form is to be used where either finished stage duty is notpaid or its rebate is to be claimed later on. It can be elaborated asunder:i. Form A R4 is to be used in case of exports in Bond, of all

goods without payment of duty on finished item (not oninputs).

ii. AR4 Form is also used where finished stage duty is paidand a rebate thereof is to be claimed after export.

Form AR5 is used where goods are manufactured/exportedwithout the payment of duty or inputs (input stage duty). Itcan be elaborated as under:i. AR5 form is used where no duty is paid on production

inputs and the finished stage duty is also not paid onaccount of their export being made in bond.

ii. AR5 form is also used where inputs stage duty is not paidbut duty on finished goods is paid and the rebate thereof isto be claimed after export.

Form C: It is an application for refund of excise duty. Itcontains details like AR4 Form No. and date of Shipping bill,name and address of the factory and its licence number, tariffclassification of the goods exported and shipment details.

Export under Claim of Rebate under Rule 12(I)(A)Under the Central Excise Rule 12(i)(A), rebate of duty paid onexport of duty paid goods shall be granted. The rule permits togrant rebate on all excisable goods except mineral oil and goodssupplied as ship stores. The facility is available on export ofgoods to all countries other than Nepal and Bhutan. Let usdiscuss the procedure in detail.Removal of Goods Without Examination: Exporters areallowed to remove the goods for export without getting thegoods examined by the Central Excise Officers. AR4 Forms areprepared in sixtuplicate. The exporter retains the original andduplicate copies of AR4 Forms for presenting along with theconsignment to the customs officer. The exporter deliverstriplicate, quadruplicate, quintuplicate and sixtuplicate copies toSuperintendent of Central Excise having jurisdiction over thefactory or the warehouse. These forms should be deliv-eredwithin twenty-four hours of the removal of the consignment.The jurisdictional superintendent shall examine the informationand verify the facts of payment of duty. If the is satisfied withthe information, he will sign and put stamp on R4 Forms. Hesends the triplicate copy to the rebate sanctioning authority,quadruplicate to the chief accounts officer in the collectorateheadquarters, the quintuplicate to the office copy, retained by thecentral excise officer and sixtuplicate to the exporter.Exports under Central Excise Seal (After Examination):Exporters are allowed to remove the goods for export in a seal.The sealing of goods is done by the Central Excise Officers.The. sealed exportable goods are not examined by the customsofficers at the port. For this purpose, exporters are required to

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submit 6 copies of AR4 forms to the superintendent of centralexcise having jurisdiction over the factory or warehouse. Thesefor, should be submitted at least twenty four hours before theremoval of the exportable goods. The superin-tendent ofcentral excise or his inspector may go for sealing of goods. Heexamines the goods, relevant information and verifies thefactors of payment of duty. He may also draw samples, ifnecessary, in triplicate. Two sets of the sealed samples arehanded over to the exporters for delivering to the customsofficer at the port. The officer retains third set for his record. Ifthe officer is satisfied with the details of exportable goods, hewould sign on all six copies of AR4 forms and allow theclearance of goods. He returns original, duplicate andsixtuplicate copies to the exporter for presenting to the customsofficer at the port. The officer sends triplicate copy to the rebatesanctioning authority, quadruplicate to the chief accounts officerat his collectorate headquarters and retains the quintuplicate copyfor records. The exporter shall use the sixtuplicate copy for thepurposes of claiming drawback.Submission of Forms at the Customs Officers: Theexporters present the original, duplicate and sixtuplicate copiesof AR4 forms to the customs officer at the port alongwith thecon-signment. The custom officer examines and verifies thegoods and other relevant facts. In case of export under seal, heensures that it is not broken. If he is satisfied, he allows theexport of the goods.The custom officer makes endorsement on the original,duplicate and sixtuplicate copies of AR4 forms. He returnsoriginal and sixtuplicate copies to the exporter, and sendsduplicate copy to the rebate sanctioning authority.Filing Claim for Rebate: Exporters have been granted optionof claiming rebate either from Maritime Collector or Jurisdic-tional Assistant Collector of Central Excise. The exporters arerequired to tile the claim within six months from the date ofexport. The claim should be f1iled in the prescribed formalongwith original copy of the AR4 form duly endorsed by thecustom officer certifying the export of the goods. MaritimeCollector of Central Excise or Jurisdic-tional Assistant Collectorwill compare the original AR4 form with the triplicate copy ofAR4 form received from the Superintendent, Central Excise. Ifhe is satisfied he shall sanction the rebate either in whole or inpart as the case may be.Documents: Following documents are required to be tiled forclaiming rebate:i. Application in prescribed formii. Original copy of AR4 formiii. Duplicate copy of AR4 form in sealed cover received from

custom officer, if required.iv. Duly attested copy of Bill of Ladingv. Duly attested copy of Shipping Bill (Export Promotion

Copy)vi. Disclaimer Certificate in case claimant is other than exporter.

Export under Claim for Rebate of Duty on ExcisableMaterials used in the Manufacture of Export Goods (Rule12(i)(b)

Under Central Excise Rule 12(i)(B) rebate has been granted onthe duty paid on raw materials inputs used in the manufactureof the finished goods exported from India’ except to Nepal orBhutan. Rebate may be granted on any excisable materials usedin the manufacture and packing of the goods exported. Therebate of input stage may be claimed on the export pf allfinished goods whether excisable or not. In order to claim thisrebate on the input stage, the export must be in the name ofthe exporter. The rebate may be granted on the duty paid onraw materials, consumab1es, components, semi- finishedgoods, assemblies, sub-assemblies, intermediate goods,accessories, parts and packing materials required for manufactureof export goods.The rebate on input stage can not be claimed where:i. the finished goods are exported under claim for duty

drawback.ii. The finished goods are exported in discharge of export

obligation under a Value Based Advance Licence or aQuantity Based Advanced Licence issued before 31 -03--1995.

iii. The facility of input stage credit is availed under MODV AT provisions under Chapter V AA of Central Excise Rule,1944.

The manufacturer of finished goods are required to file adeclaration in quintuplicate to the Collector of Central Excisehaving jurisdiction over the factory. The declaration shall containdetails of finished goods to be exported, the details ofmaterials required and their consump-tion ratios. The Collectorof Central Excise may nominate suitable officer for verifying thedeclaration. The officer shall examine and verify the informationfurnished by the manufac-turer. If the officer is satisfied, hemay grant permission to the applicant for manufacture andexport of finished goods under claim for Rebate of CentralExcise duties paid on materials/ inputs used in the manufac-ture of finished goods.Procedural Formalities: The manufacturers are required toprepare ARS Forms in Sixtuplicate. He shall submit them to theJurisdictional Superintendent of Central Excise atleast 24 hoursbefore the removal of the goods for export from the factory.Where export goods are dutiable, the manufacturer may availthe facility of export, without payment of Central Excise dutyon finished goods under Central Excise Bond (Rule l3(i)(a).Finished goods may also be exported after payment of CentralExcise duty leviable on finished goods under claim of Rebate(Rule 12(i) (a)).The exportable goods under AR5 form will be moved directlyfrom the place of manufacture to the place of export. Thepackages are required to be marked legibly in ink or oil colour ina durable manner with progressive number. The Superinten-dent of Central Excise shall examine and verify the facts,certificates and declaration made by the manufacturer. If theSuperinten-dent is satisfied, he will allow the clearances forexports by signing and putting stamp on AR5 forms. TheSuperintendent shall draw samples wherever feasible intriplicate. He would hand over two sealed samples to themanufacturer or his authorised agent for delivering to thecustom officer at the point of export. He would retain the third

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Nset for record. The export consignment shall be sealed by theSuperintendent of Central Excise before permitting clearances.The Superintendent of Central Excise will hand over original,duplicate and sixtuplicate copies of AR5 forms to the exporter.Triplicate copy will be sent to the Jurisdic-tional AssistantCollector of Excise. Quadruplicate copy to be given to ChiefAccounts Officer at the Collectorate headquarter.The original, duplicate and sixtuplicate copies of the AR5 formsshall be presented by the exporter or his agent to the customsofficer at the point of export alongwith the goods, ShippingBill and sealed samples. The custom officer shall examine themcarefully. If he is satisfied, he may clear the goods for shipment.After the shipment of the goods, the custom officer wouldmake endorsements in the original, duplicate and sixtuplicatecopies of the AR5 forms by putting his signature and stamp.He would give the original and sixtuplicate copies to theexporter. The duplicate copy will be sent to the AssistantCollector of Central Excise.The exporter will use the original copy of AR5 form forclaiming rebate from the Jurisdictional Assistant Collector ofCentral Excise. Sixtuplicate copy will be presented in the customhouse for record.Claiming of Rebate: The application for rebate is made to theJurisdictional Assistant Collector of Central Excise. Whereexports are under claim for rebate under Rule 12(i) (a), the sameshould be claimed in the combined application for rebate.Documents: Following documents should be submitted forfiling claims:i. Original copy of AR5 form duly endorsed by the custom

officer.ii. Duly attested copy of Shipping Bill (Export Promotion

Copy).iii. Duly attested copy of Bill of Lading! Airway Bill.iv. Duplicate copy of Central Excise Invoice (Where rebate

under Rule 12(i) (a) is also being claimed).v. Duplicate copy of the AR5 form received from the custom

officer in a sealed cover (if obtained).If the Assistant Collector is satisfied, he will sanction the rebate.

Export of Goods under Bond under Rule 13The exporters have been permitted to export the excisablegoods without the payment of central excise duty. Exporters ~erequired to execute a bond with the Central Excise Authorityequivalent to the amount of excise duty on the basis of theirestimate. A II the excisable items and the raw materials requiredfor their production are covered under this scheme.There are also provisions for export under bond on a regularbasis. This is covered under Rule 14. For this purpose, RunningBond Account is maintained. In this case, the amount of bondis determined on the basis of the excise duty involved in exporttransaction over a period of time, generally regarded as transitperiod. Exporters are required to maintain a bond account ofrequisite value with the Central Excise Authority of the region,whenever ‘any block transfer are made in favour of other centralexcise authority, debit shall be made in the account. Suitable

debit shall also be made whenever exports are allowed againstthe bond.On acceptance of the proof of export the bond account shall becredited to the extent the debit was made while permitting theexports. The running bond account shall be credited after theblock transfer is returned by the other authorityThere are six types of bonds. These are: Bl (Surity) and BI(Security), Bl (General Surity), and B1 (General Security), B 16(General Surety) and B 16 (General Security). B 1 (Surety) and B1 (Security) bonds are to be executed for an individual excisableconsignment. The export-ers can execute a consolidated B 1general bonds to cover a series of export from his factory or B16 bonds with the prescribed excise authority. Manufacturerexporters who have executed B 16 bond are not required toexecute separate bond to cover duty on goods exported withoutpayment of duty.Manufacturer-exporters other than those registered with EPCsand Central Excise, Export Houses, etc., are required to executeB 1/B 16 bond with 100% security/bank guarantee. Merchantexporters other than registered exporters shall execute B I bondwith 25% security/ bank guarantee.Procedure: Packages in which goods to be exported are packed,shall be legibly marked in ink or oil colour or in such otherdurable manner as the Commissioner of Central Excise mayallow. Exporters shall prepare Invoices, AR4/AR5 forms andexecute the relevant bond for this purpose.Removal of Goods Without the examination of CentralExcise Authority: As you have learnt, exporters are allowed toremove the goods without the examination of Central ExciseAuthor-ity. Exporters shall prepare AR4/AR5 Forms insixtuplicate. They will deliver triplicate, quadruplicate, quintupli-cate and sixtuplicate copies of AR4/AR5 forms to-theJurisdictional Superintendent of Central Excise. The formsshould be submitted within twenty four hours of the removalof goods. The exporters shall retain the original and duplicatecopies for present-ing to the custom officer at the point ofexport alongwith the consignment. The Jurisdictional Superin-tendent of Central Excise shall examine the consignment andrelevant information. If he is satisfied, he would a How theclearance of goods. He would send the triplicate copy to theauthority before whom the bond is executed. He would sendquadruplicate copy to the Chief Account Officer and retain thequintuplicate copy for his record. Sixtuplicate copy will bereturned to the exporter.Removal of goods after the examination of Central ExciseAuthority: In this case, the exporter shall submit AR4/AR5forms in sixtuplicate to the Jurisdictional Superintendent ofCentral Excise. Exporters are required to submit the applicationforms twenty four hours before the removal of goods. TheExcise Authority shall examine the goods and relevantinformation. He may draw the samples in triplicate Whennecessary. Two sets of sealed sample will be returned to theexporter for delivering to the customs officer at the point ofexport. The third set will be retained for his record. If theExcise Officer is satisfied, he would a How the clearance ofgoods. He shall return original and duplicate copies of AR4/

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AR5 forms to the exporter for presenting to the CustomOfficer at the point of export. The sixtuplicate copy shall begiven to the exporter in a sealed cover for handing over to theCustom Officer. The triplicate copy shall be sent to the authoritywith whom the exporters have signed the bond. Quadruplicatecopy will be sent to the Chief Account Officer at the headquar-ter. Quintuplicate copy shall be retained for records.The exporters shall present original, duplicate and sixtuplicatecopies of AR4/AR5 forms to the custom authority at the pointof export alongwith the consignment. The custom officer willcheck the consignment and verify the relevant information. Ifhe is satisfied, he would clear the goods for shipment. After theshipment of the goods, the custom officer would makeendorsements on original, duplicate and sixtuplicate copies ofAR4/AR5 forms. He would return original and sixtuplicatecopies to exporters. The duplicate copy will be sent to theauthority before whom the bond was executed.Documents: Following documents shall be filed by theexporter as a proof of export of goodsi. Original copy of AR4/AR5 forms.ii. Duplicate copy of AR4/AR5 forms in a sealed cover

received from Custom Officer.iii. Duly attested copy of Bill of Lading.iv. Duly attested copy of Shipping Bill (Export Promotion

Copy).

Duty Exemption SechemeRegistered exporters are eligible for the facility of duty freeimport of raw materials, compo-nents, packing materials, etc.,required for manufacture of the product for executing exportorders. Duty Exemption Scheme enables import of inputsrequired for export production. Duty Remission Schemeenables post export replenishment/remission of duty oninputs used in the export product. Let us discuss them in detail.

Duty Exemption SchemeAn advance licence is issued under duty exemption scheme toallow import of inputs, which are physically incorporated in theexport product. Let us learn them in detail.Advance Licence: An advance licence is issued for duty freeimport of inputs subject to actual user condition according tothe EXIM Policy. Such licences other than the advance licence fordeemed export, are exempted from payment of basic customsduty, surcharge, additional customs duty, anti-dumping dutyand safeguard duty, if any. Advance licence can be issued for: i)physical exports ii) Intermediate supply and iii) Deemed exportsThe licences are issued to the manufacturer exporter or themerchant exporter. The licences and/or materials importedthere under sha1l not be transferable even after completion ofexport obligation. The licences are issued to make a positivevalue addition. The licences are subject. to the fulfillment of atime bound export obligation as specified in the policy.Advance Licence for Intermediate supply: Advance licencemay be issued for intermediate supply to a manufacturer-exporter for the import of inputs required in the manufactureof goods to be supplied to the ultimate exporter/deemedexporter holding another advance licence.

Advance licence for deemed export: Advance licence can beissued for deemed export to the main contractor for import ofinputs required in the manufacture of goods to be supplied tothe categories mentioned in the policy. An advance licence fordeemed export can also be availed by the sub-contractor of themain contractor to such project. The licences sha1l be exemptedfrom basic customs duty, surcharge and additional customsduty only.

Duty Remission SchemeDuty Remission Scheme consists of Duty Free ReplenishmentCertificate and Duty Entitlement Passbook Scheme. Thescheme allows drawback of import charges on inputs used inthe export product. Let us learn them in detail.Duty Free Replenishment Certificate (DFRC): Thiscertificate is issued to a merchant exporter or manufacturerexporter for the import of inputs used in the manufacturer ofgoods without payment of basic customs duty, surcharge andspecial additional duty. Such inputs shall be subject to thepayment of additional customs duty equal to the excise duty atthe time of import.Duty Free Replenishment certificate shall be issued only inrespect of export products covered under the Standard InputOutput Norms (SIONS) as notified by DGFT. This certifi-cateshall be issued for import of inputs, as per SION, having samequality, technical charac-teristics and specifications as used in theend product indicated in the shipping’ bill. The validity periodof this licence shall be 12 months. DFRC and the materialimported against it shall be freely transferable. The certificateshall be subject to a minimum value addition of 33%. Theother provisions under DFRC are as follow:Jobbing, repairing etc. for re-export: Import of goodsincluding restricted items, supplied free of cost may be permit-ted for the purpose of jobbing without a licence as per theterms of notification issued by Department of Revenue .Export Obligation: The Period for fulfillment of exportobligation shall be as prescribed in the policy.Advance Release Orders: An advance licence holder exceptadvance licence for intermediate supply and the holder of DFRCintending to source the inputs from indigenous sources/cenalising agencies / EOU/ EPZ/ SEZ/ EHTP/ STP units inlieu of direct import has the option to source them againstadvance release orders denominated in foreign exchange/Indian rupees.Back to Back Inland Letter of Credit: An advance licenceholder except advance licence for intermediate supply and theholder of DFRC may avail the facility of back to back inlandletter of credit instead of Advance Release order.Prohibited Items: Prohibited items shall not be importedunder this scheme.Compliance with Export Policy: The restricted goods may beexported without specific export licence under advance licenceissued with prior import condition. In such case, the exportedproduct shall be manufactured only out of the imported inputsunder advance licence.

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NRe-import of exported goods under advance licence:Goods exported under advance licence/ DFRC/DEPB may bere-imported in the same or substantially the same form subjectto the specified condition.Admissibility of drawback: In case of advance licence, thedrawback shall be available in respect of any of the duty paidmaterials, whether imported or indigenous, used in the goodsexported.Value addition: The following formula is used for valueaddition.Value addition = A-B/Bx 100A = FOB value of the export realised /FOR value of supplyreceivedB = CIF value of the in ported inputs covered by the licence,plus any other imported materials used on which the benefit ofduty drawback is being claimed.Duty Entitlement Passbook Scheme (DEPB): The exporters,who are not desirous of availing the licensing facility, may availthe facility of DEPS. The objective of this scheme is toneutralise the incidence of customs duty on the import contentof export product. The neutralisation is provided by way ofgrant of duty credit against the export goods.Under this scheme, an exporter may apply for credit as aspecified percentage of FOB value of exports made in freelyconvertible currency.This credit is made available for the import of raw materialsintermediates components, parts, packing material etc. Theholder of DEPB shall have the option to pay additionalcustoms duty, if any, in cash as well. The other provisions are asfollow:Validity: DEPB shall be valid for a period of 12 months fromthe date of issue.Transferability: DEPB and / or the items imported against itare freely transferable.Applicability of drawback: The exports made under theDEPB scheme shall not be entitled for drawback.

Tax Exemption:In order to promote export, various taxes and duties have beenexempted. Let us now discuss them.

Income Tax ExemptionAs a measure of export promotion, various tax incentives aregranted under the incomtax act. The major incentives are:i. The part of the profits derived from export of specified

goods or merchandise of exporters and/or the supportingmanufacturers is deducted from the total profit.

ii. A’ specified amount of profits of companies engaged in thebusiness of hotel or of a tour operate or a travel agent isdeducted from the total profit.

iii. There is a provision for the tax relief on export ofcomputer software and for the import of system.

iv. The profits from export or transfer of film NT software,TV news software, telecast rights are partially deducted.

v. There is a provision for tax relief to an Indian Company orresident taxpayer by giving a specified deduction of 50% of

the profits from project exports in computing the taxableincome.

vi. There is a provision for ten year tax holiday to units inFTZ/EPZ/1 00% EOU ending with the year 20 I 0-20 11.

vii. There is a provision for tax exemption of plantationsubsidy.

viii. Rebate on royalties, commissions, dividends etc .fromcertain foreign enterprises are granted.

ix. Tax relief is provided on remuneration received fromabroad by teachers. Professors, etc.

x. Tax relief is provided to playwrights, artiste, sportsman, etc.xi. Tax rebate is given on remuneration received on services

rendered outside India.xii. There is a Provision for deduction of the profit from

business of export or transfer of film software, televisionsoftware, etc.

Sales Tax ExemptionPurchase of goods meant for exports are exempted from salestax. However, the purchaser of goods has to be a registereddealer for the class of goods meant for exports: He is allowedto furnish a satisfactory proof of export of goods to the sellerof goods, along with Form-H. Proof of export can be in theform of export-invoice and Bill of Lading (non-negotiablecopy) or Airways Bill or postal receipt etc. The seller will thensubmit the proof of export along with Form-H to the sales taxAuthorities.The exporter has to fill-in Form-H in triplicate and issueoriginal and duplicate copies to the supplier and retain thetriplicate copy for his own record. The supplier submits originalof Form-H and proof of export to the Sales Tax Authority.Thus for availing the benefit of sales tax exemption, theexporter should first get the items concerned covered under hislocal sales tax registration certificate and apply for issuance ofForm-H. The exporter should enclose the following documentsfor issuance of Form-H.i. Copy of shipping bill, duly certified by the customs

authority.ii. Copy of Invoice duly certified.iii. Copy of letter of credit.iv. Copy of confirmed export order.

Let us sum upExporters are required to comply various procedural formalitiesfor fuller realisation of export incentives on a regular basis.Export incentives are to be claimed on post-export basis.Therefore exporters have to take necessary care and precautionsat the time and stage of export shipment. Exporters have tofurnish adequate information in the documents support-ingthe fact of actual shipment of cargo for the export claims.Government of India have provided various schemes ofexport incentives.Under the scheme of duty drawback customs and central exciseduties on raw materials, components and packing materialsused in export product are refunded to the exporters on post-export basis. Duty drawback can be claimed by the exporter at

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the all industry rates as specified in drawback rules or at thebrand rates as determined separately on the request of theexporter. The scheme is governed by the customs and centralexcise duties drawback rules.Excisable goods are free from the incidence of excise duty leviedby the central government both on finished product and rawmaterials. Rule 12(i)(A) of Central Excise permits rebate ofduty paid on export of duty paid on finished goods. Rule12(i)(B) permits rebate on the duty paid on raw materials/inputs used in the manufacture of the finished goods exportedfrom India. Rule 13 permits the export of goods under bond.The major documents are Invoices andAR4/ARS Forms.Registered exporters are eligible for the facility of duty freeimport of raw materials, compo-nents, packing materials etc.,required for the manufacture of the product for executingexport orders. Duty Exemption Scheme enables imports ofinputs required for export peoduction. Duty Remission Schemeenables post export replenishment/remission of duty oninputs used in the export product.

Terminal questions

1. Analyse the need for action-plan by an exporter for timelyand proper compliance with different formalities forclaiming export incentives.

2. Explain the procedure for:a. fixation of brand-rate for duty drawback.b. making a claim of duty drawback on exports.c. claim of duty drawback under ‘duty drawback credit

scheme’.3. Discuss the formalities prescribed under Central Excise

Rules for:a. claiming rebate of central excise under Ruleb. export under central excise bond under Rule 13

4. Discuss the procedure for obtaining Advance Licence underDuty Exemption Scheme.

5. What is duty remission scheme? Explain various provisionsfor duty remission scheme?

6. Explain the formalities claiming sales tax exemption.

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• Introduction• Meaning• Principle• Features• Types of Marine Insurance• Insurance Claim• Procedure for Filling Marine Insurance• Documents for claim• ISO-9000• ISO-14000

IntroductionMarine Insurance is a contract under which the insurer under-takes to indemnify the insured against losses, caused due toperils of the sea. Here perils of the sea include :-a. Sinking of ship.b. Damage to the ship and cargo due to dashing of the waves.c. Dashing of the ships on the rocks.d. Fire or explosion on the ship.e. Spoilage of cargo due to sea water.f. Destruction of the ship and cargo by the crew or captain of

the ship, piracy and such other risks.Section 3 of the Marine Insurance Act, 1963 defines a contractof marine insurance as an insurance cover for marine cargo, aircargo and post parcels. Thus, marine insurance is used to covertransportation by any of the following modes of transit singlyor jointly: -a. Sea, air or land.b. Inland water voyages.e. Rail/road.d. Air.e. Post.It provides insurance or protection to goods in ‘transit’ and alsoextends to storage of goods provided such storage is incidentalto transportation.

Meaning of Marine InsuranceCargo (Marine) insurance is governed by the Marine InsuranceAct, 1963, the Insurance Act, cargo or marine insurance is aninsurance cover for marine Insurance Act, cargo or marineinsurance is an insurance cover for marine cargo, air cargo andpost cargo parcels. The purpose of cargo insurance is to protectgoods against physical loss or damage during transit.All export consignments should preferably be insured even ifthe terms of sale do not provide for it. All goods on consign-ment basis must be insured by the exporter only.

LESSON 16:MARINE INSURANCE

Marine Insurance Contract is an agreement where by theinsurance company (insurer) undertakes to indemnify the owner(insured) of a ship or cargo against risks which are incidental tomarine adventure. (Section 3 of the Marine Insurance Act,1963).The parties to a contract of insurance of follows:1. The insurance company also known as underwriters who

assume the liability when the loss takes place.2. The insured, i.e. the on who either procures an insurance

policy or becomes beneficiary thought the insurance.

Principles Governing the Contract ofInsuranceThe contracts or insurance are based on the following principles:1. Principle of utmost good faith i.e. the insured must

disclose to the insurer all the material facts or circumstanceswhich are known to him or which ought to be known tohim in the ordinary course of business.

2. Principle of insurable interest i.e. no person can enter into avalid contract of insurance unless he has insurable interestin the object or the life insured. Insurable interest isunderstood as an interest in the preservation of a thing orcontinuance of a life, recognized by law. Thus one can havean insurable interest only when one would stand to benefitfinancially by the continuance of the life or object insuredotherwise financial loss would result.Thus,a person can takepolicy on his ship an owner of the goods can take policy oncargo and person entitled to receive freight can take policy onfreight. All such persons have insurable interest in thesubject matter. Without insurable interest such contracts aremerely wagering agreements which are not valid contracts.

3. Principle of indemnity i.e. the contracts of insurance onlyindemnify a loss resulting from risk covered under thepolicy. However the cargo owner are usually allowed areasonable anticipated profit. In other words we can say thatthe marine insurance policy provides a commercialindemnity rather than indemnity in a strict legal sense.

4. Causal proxima: This principle implies that the insurerbecomes liable to pay for loss if the insured peril or risk isthe proximate cause of loss. Thus the insurer would notpay for the loss to the goods if they are stolen because ofunworthy packing in case the policy covers the risk theft,pilferage and non delivery. In this case the proximate causeof loss is the faulty packing which facilitated the goods tobe stolen. Since this is not covered under the risks specifiedin the policy the insurer would not indemnify the loss.

Contents of an Insurance PolicyAccording to section 25 of the Act, a marine insurance policymust specify:

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i. The name insured, or of some person who effects theinsurance on behalf of the insured.

ii. The subject matter insured and the risk insured againstlosses.

iii. The voyage or period of time or both, as the case may,covered by the insurance,

iv. The sum or sums insured.v. The name or names of the insurer or insurers.

Who can Insure?The shippers/exporters have an insurable interest by virtue oftheir ownership of goods and they can insure. Similarly thebuyer to whom the goods are sent can also insure by virtue ofhis acquiring an interest in the goods at a later date. In practiceinsurance is effected either by shippers/exporters or buyerdepending upon their contract of sale of goods. There aremainly three types of sales of goods in the overseas trade asfollows:1. CIF (Cost, Insurance and Freight)2. CFR(Cost and Freight)3. FOB(Free on board)These terms of sale are agreed upon mutually by both theparties to the contract. It is recommended by the Reserve Bankof India that the exporter should obtain the seller’s contingencyinsurance to protect himself against the possible loss to thegoods taking place before the insurable interest passes on to thebuyer. This policy is not negotiable to the overseas buyers andthe claims under the his policy are paid in India in rupees.In case the exporter is paying insurance premium on behalf ofthe foreign buyer, then he is required to declare that:a. insurance charges on the shipment have to be borne by him

in terms of his contract with the overseas buyer and that heis not making payment on behalf of any non resident.

b. He is defraying the insurance charges in respect of theshipment in question on account of the overseas buyer andhe undertakes to add the amount on the invoice and recoverthe same from the buyer in an approved manner.

Features of Marine Insurance PolicyThe basic features of marine policies are as follows:1. The marine cargo insurance policies are freely assignable as

the consignee finally takes the goods pass through varioushands before the consignee finally takes their delivery. Theassignment of insurance policy is allowed in terms ofsection 52 and 53 of the Marine Insurance Act 1963.AMarine Insurance Policy can be assigned either before orafter the loss.

2. The assignment is done by endorsement and delivery.3. Insurable interest of the claimant must exist at the time of

loss of the cargo.4. The value of the insurance policy is the sum agreed between

the insured and the insurer. Thus these policies are alwayson agreed value basis. Since contracts of insurance providefor indemnity the loss suffered by the insured is not justthe loss suffered by the insured is not just the lossrepresented by the value of the goods but also the

amount of profit that the parties would have earned fromthe sale of those goods. That is why the marine insurancepolicies are taken for a value equal to 110% of the CIF valueof the goods i.e. 10% more than the CIF value to accountfor the anticipated profits.

5. The contract of marine insurance is a contract of commercialindemnity and not pure indemnity because this insuranceprovides for indemnity against the loss of profits as well.

6. The duration of the marine insurance policy is based on theinstitute cargo clause yet it is provided to include the periodof transit, the time of discharge of the goods and the timeof arrival of the goods. Generally the duration of the policycovers time upto 30 days after arrival of the goods in caseof air shipments and 60 days after the arrival of shipmentsby sea to allow for the transportation of cargo from thefinal port of discharge to the warehouse of the importer.

Types of Marine Insurance PoliciesThe contract of cargo insurance in international trade transac-tions takes three forms. It comes into being when either aspecific Voyage (and time) policy or an open cover or an openpolicy is procured.1. Specific Voyage Policy2. Open Cover3. Floating Policy3. Time Policy4. Mixed Policy5. Valued Policy6. Unvalued Policy7. Fleet Policy8. Specific Cover Policy1. Specific Voyage Policy

A Voyage policy covers the risks that may arise during ajourney from specific place to another.The terms and conditions of the insurance are set out in theappropriate I.L.U. (Institute of London Underwrites) andother clauses. The clauses cover mainly the perils and riskcovered under the policy as well as conditions related to theinsurable value and claims.According to the Indian Stamp Act, each policy must bestamped. The stamp duty is recoverable from the insured.For creating transferability, the policy is required to beassigned by blank endorsement by writing “for and onbehalf of” followed by the name of the insured (e.g.,exporting firm) and the signature of the director or partner.The insurance policy comprises “MAR” Policy form, whichcontains no insurance condi-tions. And the Institute clauses(A, B or C and War and Strike Clauses) which containinsurance conditions. It must be noted that DurationClauses, which provide warehouse-to-warehouse cover, arepart of the Institute Cargo Clauses. Hence, unlessspecifically deleted, the warehouse-to-warehouse cover isdeemed to be effective. In this way, voyage policy alsobecomes a Time policy.

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N2. Open Cover

Open cover is an insurance arrangement designed specificallyto the need of those firms, which have substantial importexport turnover and frequent transactions. Such firms arespared the inconvenience of negotiating insurance contractsevery time the transaction is to be made. Main features ofan open cover arrangement are as follows:i. Unlike an insurance policy, open cover is not an

enforceable contract. Instead it is an agreement underwhich the insurance company would honour andaccept declarations of shipment of cargos and issuestamped specific certificate of insurance against eachdeclaration.

ii. Under an open cover arrangement, agreement betweenthe insured and the insurer is reached about the subjectmatter (e.g., goods) insured, packing conditions,voyages, risks covered, rates and other conditions ofthe cover. The insured can obtain’ insurance coverwithin these agreed conditions.

iii. No premium is charged when an open cover is issued,but the insurance companies usually require theinsured to furnish either a bank guarantee or cashdeposits towards payment of premium against eachdeclaration, as declarations are made.

vi. The validity period of an open cover is twelve months.v. It is customary to make an open cover agreement

subject to two limitation clauses--Par Bottom and ParPlace clauses. The effect of these clauses is to limit theliability of the insurance company to an agreedamount. Thus, if the loss in an accident is more thanthis amount, the loss will be partly recoverable uptothe agreed amount. For example, in an open cover, ifthe limitation clause was for Rs. 10 lakhs and the losswere Rs. 20 lakhs, the insurance company will pay onlyRs. 10 lakhs.

vi. An open cover may be cancelled by either party bygiving 30 days notice in writing. This stipulation doesnot cover war and strikes risks for ocean voyage. Forocean voyages other than from/to USA, the noticeperiod for cancellation of War and strikes risks is sevendays and for shipments from/to USA it is 48 hours.

vii. When the loss takes place, claim will be awarded withreference to insurable value calculated on the basis ofc.i.f. plus 10 per cent.

viii. The duty of the insured is to declare each and everyshipment as soon as known. Unintentional failure toreport shipment will be condoned by the insurancecompany. However, if the insured does not willfullyreport shipments, the insurance company may holdthe open cover null and void for all subsequentshipments.

3. Floating PolicyAlso known’ as open policy, it has much in a common withthe open cover. This policy benefits clients with substantialturnover and a large number of dispatches. Thus, it covers a

series of consignments with all stipulations of the opencover, except that:i. Open policy is an enforceable contract of insurance and

is hence, duly stamped; andii. Open policy is for an agreed amount, against which a

series of consignments may be dispatched and declaredas a result of which the sum insured will graduallydiminish by the amount of each declaration until it isfinally exhausted.

iii. Even though the open policy ceases on expiry of oneyear from the date of. its issue, the sum insured is ofparamount importance. Therefore, the sum insuredmay exhaust prior to the expiry of the policy.

iv. Open policy is subject to cancellation by either partyafter giving 15 days notice of cancellation in writing.

3. Time Policy :- Under this policy, the subject matter ofinsurance, i.e ship and/or cargo, is insured for a specificperiod of time. It is taken in case of hull insurance, i.e.insurance of the ship.

4. Mixed Policy :- This type of policy is taken for a specificperiod and for a definite voyage. For example, a policy can betaken for two months for the voyage starting on 2nd June2001 from Bombay to Singapore.

5. Valued Policy :- In this case, the value of subject matter isagreed upon between the insured and the insurer at thetime of taking out the policy. This facilitates easy settlementof claims in the event of loss.

6. Unvalued Policy :- In this case, the value of subject matteris not agreed upon at the time of taking out the policy. It isdetermined only in the event of loss. It is also called as‘Open Policy.

7. Fleet Policy :- This policy is taken for a fleet of ships orvessels belonging to the same company. It is suitable forthose companies, which own a number of vessels.

8. Specific Cover Policy :- This policy is taken to coverdifferent risks for a single shipment. This policy is notadvisable for a regular exporter, as he will have to take aseparate policy every time he exports.

Insurance ClaimWhen there is a loss, the insured is to proceed to claim the lossrecovery from the insurer. The cardinal principle about insuranceclaims is that the insured has to fulfil the clearly definedresponsibilities.lf he does not fulfill these responsibilities, theinsurer can refuse to pay.

Procedure for Obtaining Marine Insurance PolicyThe following is the procedure for obtaining marine insurancepolicy :-a. Selecting the Insurance Comp. :- General insurance

business in India is, the monopoly of General InsuranceCorporation ((TIC) of India and its four subsidiaries.However, if an exporter intends to insure with a foreigncompany, then prior permission of the RBI must beobtained.

b. Deciding the Appropriate Type of Policy :- There arevarious types of, marine insurance policies issued by the

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GIC to suit the requirements of the exporters. The exportershould decide the appropriate type of policy tailing intoconsideration his requirements.

c. Application to the Insurance Company :- When thegoods are ready for . despatch the exporter’ should apply tothe insurance company in the’ prescribed ‘Declaration Form’giving the following details :-• Address of the exporter and importer.• Description of goods;• Marks, ,numbers and kind of packages.• Value of packages.• Transportation from the warehouse to its final

destination.• Risk to be- covered for insurance.• Any other information as required:d. Payment of Premium. :. The insurance premiumcharges may vary from company’ to company and country tocountry. Payment on marine insurance. policy’ call . be madein rupees’ provided exporter. certifies that insurance chargesop the shipment in question have to be borne by him.

e. Issue of the Insurance Policy :- After the completion ofall the formalities the exporter has to produce the Bill ofLading and the name, of the ,ship ~ the insurancecompany. The insurance company issues the insurancecertificate (in triplicate) as per the declaration given by theexporter policy generally contains the following details :-• Name and address of the exporter.• Type of policy and description of the risks covered.• Description of the goods insured.• Amount of sum assured and premium paid.• Date of issue and the period of policy.• Special conditions and warranties.• Special instructions regarding the procedure to be

followed in the event of loss.f. Processing of the Policy :- The exporter submits the

original policy to the bank with his other documents. Thesecond copy of the policy is sent to the importer and thethird copy is retained ,by the exporter for his owninformation

Procedure for Filing Marine Insurance ClaimThe following procedure should be followed in the event of/occurrence of marine loss :-a. Intimation of Loss :- In the event of claim arising, the

marine insurance company or its nearest office or itsoverseas agent as mentioned’ in the policy should beintimated’ about the loss without delay The claim oncarriers, customs and -bailees should be filed within theprescribed time limit under registered post with anacknowledgement due.

b. Appointment of the Surveyor:- On receiving theintimation, the insurance company appoints a surveyor todetermine the cause and extent of loss. The followingdetails are necessary in the Survey Report :

• Whether the packing was sufficient ?If not,• What improvements are recommended ?• How claim could have ‘been minimised ?• Was’ there failure of jnsured to protect interest by not

taking measures to avoid or ‘minimise loss or notprotecting the rights of recovery ,from carriers Port,etc.?

c. Landing Remarks :- The insured should also obtainlanding remarks from the Port Authorities.

d. Submission of Claim :-” The insured should submit thefollowing documents to finalise claim properly :-• Original policy.• Original invoice and packing list.The following documents, inter alia, are required to besubmitted by the exporter to the insurance company:-• Claim billon duplicate.• Original’ Insurance Policy duly discharged.• Original Invoice.• Copy of Bill of Lading.• Copy of packing list showing weight specification.• Ship Survey Report.• Insurance Survey Report.• Port trust Landing Remark Certificate.• Copy of claim lodged with carriers, customs and

bailees.• Reply received. from carriers or Port Trust Authorities

and/or correspondence exchanged.• Any other documents required by the Insurance

Companye. Finalisation of the Claim :- On verification, if the insurer

is satisfied with the claim, it pays the amount of claim tothe insured or the person authorised to ‘receive the claim asper the policy. If the claimant is of Indian origin, the claimis paid in Indian rupees irrespective of the currency in whichrelative policies have been issued. Where the claimant is notthe resident of India, the insurer may settle the claim inforeign currency.

Responsibilities of the InsuredIt is the duty of the insured or his agents, in all cases, to takesuch measures as may be reasonable to avert or minimise a loss.Further, it is also his duty to protect rights of the insurer ofrecovery from the carriers, port authority and others. Inparticular, the duties of the insured or his agent are:i. Lodge claim on the carriers, port authorities and other

intermediaries for any missing packages;ii. If the loss or damage is apparent or visible, make an

application to the agents of the carriers, port authority,customs authority and the insurer (or agent) to arrangejoint survey within 3 days of discharge of cargo from thevessel (7 days in case of air consignment);

iii. If the loss was not apparent at the time of taking deliveryof cargo, give notice in writing to the carriers and other

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Nparties within 3 days of delivery of cargo (7 days in case ofair consignment);

iv. Lodge a proper monetary claim on carriers, port authorityand customs authority;

v. In case of any missing package, get a log entry made withthe port authority and lodge a claim on carrier and portauthority;

vi. If missing packages are traced subsequently, clearance maybe made only after a joint survey;

vii. The claims on carriers,. customs and port authoritiesshould be filed within the time-limits prescribed under therelevant laws

Documents for ClaimsThe claims on the insurers should be submitted duly sup-ported by the following documents:i. Original insurance policy or certificate of insurance duly

endorsed by the insured;ii. Full set of Bill of Lading in respect of total loss claims.

Otherwise non-negotiating copy of the Bill of Lading,Airway Bill, Railway, etc., as applicable;

iii. Copy of invoice with packing/weight list;iv. Insurance survey Report or other documentary evidence to

substantiate cause and extent of loss;v. Joint ship survey Discrepancy Certificate issued by the

carriers; Port authority Landing Remarks certificate;vii. Casualty report when a vessel is missing or lost;viii. Ship Master’s protest or an authenticated copy of extract

from ship’s Log book in case vessel encountered heavyweather or other casualty during the voyage;

ix. In case of short landing claims, a Short Landing Certificateissued by the carrier or port authority;

x. A landed but Missing Certificate from port authority incase where package has landed but is missing;

xi. In the event of General Average claim for refund of GADeposit; the GA Deposit Receipt and GA Counter-Guarantee;

xii. Triplicate copy of Bill of Entry (in case of India) ;xiii. Copies of Letter lodging claims on the carriers, port

authority, etc;xiv. Copies of correspondence exchanged with carriers to

examine whether the claimant has taken necessarymeasures;

xv. Letter of subrogation duly stamped and signed; andxvi. Any other document as may be asked for by the insurers.

A Note on Clearing and Forwarding AgentsExport-import procedures are very complex and time-consum-ing. Therefore, every exporter should avail services of Clearingand Forwarding (C&F) agents who are expert and well versedwith the customs-and shipment procedures. For smooth andtimely shipment of goods, ,the exporter’ must appoint acompetent C&F agent who is able to, inter alia, provide thefollowing services.

Essential Services

a. Transportation of goods to docks and arrangement ofwarehousing at port.

b. Warehousing facilities before the goods are transported todocks.

c. Booking of shipping space or air freighting and advice onrelative cost of sending goods by sea and air.

d. Arrangement for loading of goods on the board.e. Equipped with information on shipping lines and freight

to different destinations, and various charges payable byexporters.

f. Obtaining marine insurance policies.g. Preparation and processing of shipping documents, Bills of

Lading, Dock Receipt, Export Declarations, ConsularInvoice, Certificate of Origin, etc

h. Forwarding of banking collection papers.

Optional ServicesThe following services are provided by the leading C&F agentsat the specific requst of the exporter:1. providing warehousing facilities abroad atleast in some of

the major international markets in case the importer refusesto take delivery of the goods for any reason.

2. providing assistance to bring the goods back to India if thesituation so demands.

3. Providing assistance to locate the goods in case theshipment is misplaced or the cargo is stranded at someport.

4. Making arrangements for assessment of damage to thegods t file claim with the insurance company.

Thus, the C&F agent offers various services to the exporter.While planning for distribution logistics the exporters shouldin the first instance, appoint C&F agent to provide him therequired services. There are no standaredised rates of chargestaken by these agents . The exporter should negotiate with theseagents the amount of fees payable to them in relation t thedesired services. The selection of a good and reliable agentshould be made keeping in view the agency commission theservices offered and his experience in the product/country fortransportation.

A note on ISO 9000The discussion on quality control or pre-shipment inspectionwill remain incomplete if due consideration is not given to ISO9000.The International Standards Organisation (ISO) is a non-governmental organisation established in 1947. The objectivesof ISO are :-a. To promote the development of standardisation ,and

related activities in the world with a view to facilitating theinternational exchange of goods and services, and

b. To develop cooperation in the sphere of intellectual,scientific, technologically and economic activity.

The ISO-9000 Series of Standards evolved by the InternationalStandards Organisation has been accepted worldwide as the

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norm assuring high quality of goods. The ISO-9000 is also thehallmark of a good quality oriented system for suppliers andmanufacturers.The ISO-9000 Series of Standards are generic and not specific toany particular product. They can be used by manufacturing andservice industries alike. They spell out how a company canestablish, document and maintain an effective and economicquality control system, which will demonstrate to the customersthat the company is committed to quality.

Objectives of ISO-9000

a. Increased customer confidence in the company.b. A shift from a system of inspection, to one of quality

management.e. Removing the need for multiple assessments of suppliers.d. Gaining management commitment.e. Linking quality to cost-effectiveness.d. Giving customers what they need.

Methods of Implementation of ISO-9000a. Management education.b. Writing a quality policy.e. Writing a quality manual.d. Nominating a quality representative.e. Identifying responsibilities.f. Identifying business procedures.g. Listing down procedures.h. Writing work instructions.It is thus clear that the ISO-9000 Series of Standards constitutethe concept of Total Quality Management (TQM).The ISO-9000 Series is a set of five individual, but related,international standards on quality management and qualityassurance.

ISO-9000 It contains basic definitions, concepts and guidelines for the series.

ISO-9001 It covers design, development, production, installation and servicing systems.

ISO-9002 It covers production and installation system. ISO-9003 . It covers only final product inspection and test. ISO-9004 It provides guidelines for internal use by a producer

developing its own Quality opportunities System to meet business needs and take

advantage of

A Note on ISO- 14000180-14000 is a series of standards on environmental manage-ment tools and systems. It deals with a company’s system formanaging its day-to-day operations as they have an impact onthe environment.a. Environmental Management System.b. Conducting audits of the environmental management

system.c. Top management’s commitment to-continuous

improvement, compliance and pollution prevention.

d. Creating and ‘implementing environmental policies.e. Integrating environmental considerations in operating

procedures.f. Training employees in regard to their environmental

obligations.

Let us Sum UpMarine insurance or Cargo is the practice of providing risk coverto the cargo-owners against loss or damage that the cargo maysuffer in transit due to accidents and mishaps. The perils, whichcause loss or damage may be due to natural calamities (Act ofGod) as well as man, made accidents. Traders obtain insurancecovers in international business because of two reasons - legaland commercial. Since law protects the intermediaries whohandle and transport cargo, the cargo-owners will be able torecover loss from the insurance company, when such loss can’tbe legally recovered from the intermediaries. Commercially,insurance cover is essential to be obtained by the exporter whenit is the requirement under an export contract, as in the case ofc.i.f. contract.A marine insurance contract is between the insured and theinsurance company; which is in the nature of a financialindemnity. The insurance company undertakes to make goodthe loss to the maximum value as agreed with the insured perilsor risks. Loss is payable only when it has been proximatelycaused by the insured peril. The insurance value is agreed on thebasis of the c.i.f. value of goods plus a percentage (generally, tenpercent). Insurance policies to cover the payable customs dutiesare also issued in case of import cargo.The cargo insurance policy can have a very wide scope to cover allpossible perils and losses. It provides protection against totalloss (actual and constructive) and partial loss (general averageand particular average) against maritime, extraneous, war andstrike perils. The policies are generally fixed on the basis ofstandard terms and conditions stated in the Institute Clauses -Institute cargo, war and strike clauses. The Institute cargoclauses fall under three kinds A, Band C. Clause ‘c’ gives theleast and Clause’ A’ provides the maximum covers. Cargoclauses also provide warehouse-to-warehouse cover.The insured has certain responsibilities to fulfil, if he is torecover the loss from the insur-ance company without a hitch.Not only should he perform his duty to protect his directinterest but also that of the insurance company by lodgingclaims against the third parties. Further, he should follow thelaid-down procedure and file the claim with necessary docu-ments.

Questions BankQ1. What are the methods of realising various export

incentives?Q2. Explain the different types of marine insurance policies.Q3. Explain the procedure for obtainiI1g marine insurance

policy.Q4. What are the steps involved in filing marine insurance

claim?Q5. Write a note on Clearing and Forwarding agents and ISO

9000.

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1. Introduction2. Master Documents and Aligned documentation System3. Proforma Invoice.4. Commercial Invoice5. Packing List6. Mate’s Receipt7. Bill of Lading8. Certificate of Origin9. Shipping Bill10. Consular Invoice11 Bill of Entry12. Airway Bill13. GR Form14. Distinguish Between:-

• Commercial Invoice and Consular Invoice.• Certificate of Origin and consular Invoice• Mate’s receipts and Bill of Lading.

IntroductionAt the outset it must be mentioned that improved system ofdocumentation for exports announced by the government ofIndia on 31 March , 1991 is fine and should be adopted by theexporters as far as possible. However a word of caution wouldbe in order. To date we have arrangements with only 80countries around the word where UN key Layout(Masterdocuments) are followed. With these countries Indian exportercould jolly well use the improved version of documentsannounced by the government of India as per the New Eximpolicy 1992-97.For the remaining countries (other than 80 countries where UNkey Layout (Master Documents) is not in use, the Indianexporter has to ascertain from the importer of his requirementsand must comply to his dictates for documentation. The basicdictum for the exporter’s comply 100% the Letter of Creditrequirements for Documentation, otherwise exporter could bein problem and his payment may be stopped. Moreoverexporter prepares export documents not for his own conve-nience but largely to meet the requirements of the overseasimporter who largely conveys it through the Letter of Credit.Treatment in this chapter is therefore slightly exhaustive ofdocuments where the old requirements have also been kept inview while introducing master documents.Export documentation work constitutes a heavy charge on ourexport activity. It is complex cumbersome and costly. This ispartly due to the nature of export trade itself involving as itdoes a number of intermediary organizations and authorities atdifferent stages of export activity between the seller and thebuyer. All these, in turn, generate a lot of paperwork and

LESSON 17:EXPORT DOCUMENTATION

procedural formalities. The documents material to an exportsales contract are not many in number. However the problem iscomplicated due to the heavy paper work and the proceduralformalities that are required to be complied with before theessential documents can be procured.The procedural and documentary formalities associated withexports have been evolved and practiced over the years bydifferent authorities/organizations to suit their own conve-nience without much regard to the repercussions they mighthave on the total export activity. The resultant mass of paper-work caused much inconvenience and inordinately long delay inthe movement of goods. There was a need for a total approachto the problem. This meant evolving not only simple exportdocuments and procedures in each of the individual areas ofexport activity but also ensure their compatibility and harmonyin the totality of export operation.Notwithstanding the need for such an approach to the proce-dure generated problems, it has been appreciated that the taskof procedural simplification is a containing an long-term onerequiring. In some cases prior amendment of the statutes,policies and regulations they stem from One of the ways inwhich this has been done is through the use of standardizeddocument in our export trade.The documents use differed in size and layout, despite the factthat most of the information requirements are common to anumber of them Because of the difference in their sizes anddesigns, these documents has to be completed individually.This method of preparation of documents was susceptible toerrors and discrepancies, which, even through minor, causeddelays at different stages in the processing of documents, costly,hold up of consignments at checkpoints and terminals, andultimately in the realization of export proceeds.

Legal ProvisionAccording to the Customs Act (Section 40), the person inchargeof a Convey-ance-vessel, vehicle, Aircraft, etc., cannot permitloading of export Cargo at the Customs Station unless anduntil the formal permission to export given by the properCustoms Officer, is presented. Before granting the permission,the Cus-toms Officer, however ensures that the goods beingexported are in accordance with the different regulations,particularly in terms of the following:a. The goods are of the same type, sort and value as have been

declared by the exporter,b. The Duty or Cess leviable thereon has been properly

determined and paid,c. Provisions of Export (Control) Order, Export (Quality

Control and Inspection) Act and Foreign Exchange(Regulation) Act are complied with.

The Customs Act (Section 50) further states that the exporter,in case of goods to be exported in a vessel or aircraft, has to

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present the Shipment Bill and other connected documents tothe proper officer. Any export ship-ment therefore, involves thepreparation of several document declarations and certificates, onthe basis of which the Customs Authorities grant neces-sarypermission. There are also several documents required forsubmission to the Port Authorities. In addition, a few moredocuments are required if the export product(s) fall(s) withinthe purview of the Export Assistance Schemes and Facilities.

Export DocumentationOnce the goods are ready, an exporter has to prepare and executevarious documents at different tages of sending the shipmentof goods to the im-porter. These documents are important fortwo reasons:a. as an evidence of shipment and title of goods andb. for obtaining paymentThe various documents are therefore, of vital interest to theexporter and the Bank which is the usual media of payment.The documentary require-ments are both regulatory andoperational in nature and have to comply with the Rules andRegulations of the Indian Government as well as the import-ing country for different types of products. These requirementsare different for different types of products. When exportingfor the first time, exporters should, always find out from theirbuyers the documents required for the product concerned.Accuracy and completeness are a prime necessity in documentscovering export shipments. Whether two or twenty copies ofthe Invoice are required by the buyer, the same should besupplied as, the buyer probably has some reasons for it. Minordiscrepancies of any kind either in the date itself or in the typingin the documents, which look harmless sometimes assume amen. acing form. Erasures and strike over in typing or changesor additions made in ink must never be indulged as these onlyarouse the suspicion that the documents have been tamperedwith. Any alteration or addition made by an Authority issuingthe documents must be endorsed properly, with the signa-turesof the person issuing the documents only. If the documentsare not the correct ones or if they are not filled in correctly to thelast, the importer may not be able to get the goods when theship carrying them arrives. This may seem obvious but it bearsemphasis since both the requirements and penal-ties are greaterbeyond comparison in export than in domestic trade.The main purpose of the documents accompanying a shipmentis to pro-vide a specific and complete description of the goodsso that they can be assessed correctly for Duty purpose and meetthe Import Licensing require-ments or Import Quota Restric-tions imposed on the goods for clearance pur-pose. If there areany discrepancies in the documents and or if the requireddocuments are not produced, the shipment may not be allowedfor import or may even be confiscated by the Customs of theimporting country. There is a plethora of documents in exporttrade - different forms, applications and documents are requiredto be filled in for obtaining Export Licences, complet-ing Pre-shipment Inspection, for Customs Clearance and shipping, forob-taining payment and export finance and for claiming exportbenefits like Duty Drawback, etc.

The experienced exporter, because of the complexity ofdocumentation, will find it a good idea to have the variousdocuments prepared for him by a Shipping and ForwardingAgent or should take advice from a fellow exporter. TheExporter should also develop a habit of thoroughly scrutinis-ing the docu-ments for any possible errors or discrepancies andif any errors or discrepan-cies are found, must rectify themimmediately before dispatching them to the Bank of buyer.

Standarised Pre-shipment Export DocumentsThe Government of India has made it mandatory for everyexporter to use standardised preshipment export documentsw.e.f September 1, 1991. This is popularly known as AlignedDocumentation System (ADS), based on UN Layout Key. TheADS Methodology involves the preparation of documents on auniform and standardA4 size of paper. The documents arealigned to one another in such a way that, the common itemsof information are given the same relative slots in each of thedocuments included in the System. This makes it possible toprepare one Master document embodying the informa-tioncommon to all the documents included in the aligned series andto run off all the aligned documents from the same Masterdocument with the help of suitable marking reproductiontechniques. The Pre-shipment documents on a Standard Layoutwere first introduced by Sweden in 1956 followed by Denmark,Finland and Norway. It was later that most of the Europeancoun-tries, USA, Australia, etc, have adopted this ADS system.Advantages:- The ADS system offers the following advantages:1. Dispenses with the conventional documentation practices.2. Brings in uniformity in documentation.3. Ensures economy, speed, accuracy and convenience.4. Facilitates expeditious checking and processing of

documents at dif-ferent stages.5. Generates as many copies as required of Commercial and

Regulatory Documents from their respective Master Copiesthrough Photo-copying Machines.

Documentation Practices in IndiaIn India, on an average, about 25 documents are associated withthe Preshipment stage to export transaction. These documentsare classified into two categories namely, Commercial andRegulatory. The Commercial documents are those which, byCustoms of Trade, are required for effecting physical transfer ofgoods and their ‘title’ from the exporter to the importer.Regulatory Preshipment documents are those which have beenprescribed by different Government Departments/Bodies incompliance of the require-ments of various Rules and Regula-tions under relevant laws like Exchange Control Regulations,Export Trade Control, Customs, etc.The Government of India, therefore identified some exportdocuments for standardization with the help of the concernedofficial and commercial interests in the country. The documentstaken up for standardization include: Invoice, Certificate ofOrigin, Packing List, Bill of Lading, mate’s receipts, ShippingBill. Different forms in respect of each of these documentsused in the country were examined from the point of view ofstandardization and putting them in to an aligned system. The

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Ncommon items of information appearing in each of thesedocuments were recorded to develop a common denominator amaster documents- from which the repetitive informationcould be reproduced in one run on all the documents leavingonly the information specific to individual documents to befilled in separately. Any information on the master which is notrequired on a particular document can be omitted by differentmasking techniques at the reproduction stage

Master DocumentsAll these problems of late have been avoided by following asystem which provides an alternative to the repetitive, unpro-ductive and time consuming work necessitated by the exporter’compulsion to prepare separately a number of documents allcontaining practically the same information. This system isknown as the’ Aligned Documentation System’. Already in usein a number of countries, this system is reported to have madefor simplicity, convenience, speed, accuracy and economy indocumentation work.United nations key Layout has mace it possible to manycountries to reproduce in one run the repetitive information onall the export documents from just one document called the‘Master Document’. As a result, exports in these countries havebeen able to reduce the documentation costs by 50 to 70%.The documentation of simplified export documents hasreduced the burden of the exporters and has given a push tothe country’s ongoing export drive. The exporters now can saveatleast 50% of the time and cost on documentation. It will thushelp in expediting decision-making process. Virtually eliminatethe chances of errors and facilitate electronic transmission ofexport documentation and data. Therefore simplification ofexport documentation and procedures are key measures topromote exports.Earlier Indian exporters were required to submit 25 documentsto various agencies and authorities merely to ship the goods.Each document had to be individually prepared. The newssystem standardized these document and aligned then to eachother on basis of united nations key layout which has alreadybeen adopted by most of Indians trading partners. Thus nowinstead of typing out 25 documents, exporters prepare onlytwo master documents.The new system also includes simplification and relaxation ofrelated procedures, which will further reduce the delays and timecomponent currently involved in export effort. It is expectedthat as fallout of the introduction of the new system, a selfpropelling process towards further rationalization of documen-tation and procedural requirements would get in motion in allthe conceived organizations. And at the end of it the exportershould be able to spend his resource and energy more onexport production and marketing than on meeting the de-mands of archaic export procedures.In the new set up attempts have been made first to standardizeand simplify each document and secondly to align them to eachother using as far as possible the UN Key Layout. These aligneddocuments are in time with the proforma used by countrieswith whom more than 80% of India’s foreign trade is trans-acted.

The two master documents- one for commercial use andthe other for regulatory documents meant for customs, RBIand port trust-have maximum advantage of alignment andminimum cost and time for preparing individual documents.The two- master documents contain all the information thatwas common to individual documents. Earlier, there were aplethora, of commercial document which include amongothers, invoice, packing, list intimation for inspection insurancedeclaration form, shipment advice and the exchange controldeclaration form.Thus the one run method of preparation of Documentsinvolves the use of standardized and aligned documents.Aligned Documentation System (ADS) is based on the UNlayout key. Under this system, different forms used in theinternational trade transaction are printed on paper of the samesize and in such way that the. Common items of informationare given .the, same relative slots in each of the documents.For the purpose of Aligned Documentation System docu-ments, have been, classified as undera. Commercial Documents :- Commercial .documents are

required for effecting physical transfer of goods and theirtitle from the exporter to the importer and the realisation’Of export sale proceeds. Out of the 16 commercedocuments in the export documentation framework asmany as ‘14 have been standardised and aligned to oneanother. These are performance invoice, commercial invoice,packing list, shipping instructions, intimation for,inspection, certificate, of inspection of quality control,insurance declaration, certificate of insurance, mate’s receipt,bill of lading or, combined transport document, applicationfor certificate origin, certificate of origin, shipment adviceand letter to the bank for collection or negotiationHowever, shipping order and bill of exchange could not bebrought within the fold of the Aligned DocumentationSystem.The following are the 16 Commercial documents generallyinvolved at the pre- shipment stage:-1. Proforma invoice2. Commercial Invoice3. packing List4. Shipping Instruction5. intimation of Inspection6. certificate of Inspection7. Insurance Declaration8. Certificate of Insurance9. Shipping Order10. Mate’s Receipt11. Bill of Lading/Combined Transport Document12. Application for Certificate of Origin13. Certificate of Origin14. Bill of Exchange15. Shipment Advice

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16. Letter to the Bank for Collection/Negotiation of -Documents

b. Regulatory Documents: - Regulatory pre-shipment exportdocuments are prescribed by the different governmentdepartments and bodies in order to comply with variousrules and regulations under the relevant laws governingexport trade such as export inspection, foreign exchangeregulation, ex port trade control, customs, etc. Out of 9regulatory documents four have been standardised andaligned. These are shipping bill or bill of export, exchangecontrol declaration (GR from), export application dockchallan or port trust copy of shipping bill and receipt forpayment of port charges.

It is proposed to conduct training and orientation programmesat all export centers to familiarize the exporting communitywith the new system.The regulatory documents associated with the pre- shipmentstage of an Export Transaction are given below:-1. Gate Pass-I/Gate Pass-II (now deleted)2. AR-4 Form3. Shipping Bill/Bill of Export4. Export Application/Dock Challan/Port Trust Copy of

Shipping Bill5. Receipt for Payment of Port charges6. Vehicle Chit7. Exchange Control Declaration (GRIPP) Forms8. Freight Payment Certificate’9. Insurance Premium Payment CertificateOut of the above 9 Regulatory documents, four have beenstandardised.In fact, these four documents have been reducedto only three. The receipt for payment of Port Charges has beenincorporated in the Export Application/ Dock Challan/PortTrust Copy of Shipping Bill, thus one document has beencompletely eliminated.

Guidelines for Commercial Documents and MasterDocument 1Paper size and specifications The ADS, as discussed earlier,involves the use of standardised trade documents aligned toone another. All the docu-ments under the system are to beprepared onA4 size of paper, measuring 297mm * 210mmwith standard margins - 10mm top, 20mm left, 6mm widthand 180mm in length. The size of the individual boxes shouldbe strictly as per specifications. Maximum tolerance is 1 mm.The captions inside boxes should be printed in 6 points, sans-serif face and should be located as near to the top left of theboxes as possible. As the documents are to be generatedmechanically, it is important for the paper to be of a consistentspecification, with grammage of 70 to 85 gm, by all users. Thepaper should be stable in conditions of 50 to 60% relativehumidity. Needless to emphasis that accu-racy in layout andprinting is an essential requirement.Master document I :-The Master document will be. typed on asheet of paper in light blue ink. The mask for the photocopiermay be made of a transparent polyester film (of 0.004 in. or

0.005 in. thickness) with white opaque patches to blank outunwanted information from the Master document or it mayalso be cut from an opaque white plastic sheet. After the’desired information is typed on Master document - I, therelevant mask is laid over it. Both the Master document and themask over it are then fed to the photocopying machine. Thedesired information is then automatically reproduced on therelevant document through transparent or open portion of themask. Any additional information, which is specially required tobe given in any par-ticular documents, can be either pre-printedor inserted in the relevant box as and when required.

Guidelines for Regulatory Documents and MasterDocument IIPaper size and specification As against the Commercialdocuments which are designed onA4 size of paper, Regulatorydocuments are to be prepared on foolscap size of papermeasuring 34.5 cms * 21.5 cms, The margins are, top 1.5cms,bottom 1.5 cms, left 1.8 cms and right 0.5 cms. The insidemeasure-ment are 31.5 cms * 19.2 cms. The measurements ofindividual boxes, as indicated in the Master document - II,should be strictly adhered to. The paper to be used for thesedocuments should be of consistent specifications.Reproduction technique The three Regulatory documentsunder reference have been so aligned that their respectivecommon data requirements have been accommodated on thefront side of each of these documents. This makes it possibleto prepare a single Master document (as illustrated in Masterdocument - II) from which the front side of all the threedocuments can be run off at one go without/using any mask.The caption Master document – II would, however need to beblanked out to prevent its reproduction on the blank forms ofthe Regulatory documents with pre-printed titles. The blankforms of shipping Bills/Bills of Export, GR Forms and thePort Trust docu -ments will have a common pre-printedDeclaration, as to the correctness of the particulars furnished inthese documents. Besides, the exporters will also attach otherrelevant Declaration(s) with the Shipping Bill/Bills of Ex-port,as per the printed statement to this effect on these documents.The Master document in respect of the Standardised Forms ofShipping Bill/Bill of Export, Exchange Control Declaration(GR) Form and the Port Trust documentis a sort of three- in-one, as it seeks to present the common requirements on thefront side of each of these documents. The form of ShippingBill, however, does incorporate several pieces of informationwhich are not required by the Customs but are required by theReserve Bank of India under the Foreign Exchange RegulationsAct.Conversely, these are some details which are required by theCustoms Authorities but not required by the RBI. Similarly, thePort Trust document may also have on its face some informa-tion with which Port Authorities are hardly concerned. In theinterest of alleviating the burden of the Exporter in thepreparation of these documents individually and to facilitatepreparation of these three documents from a single Masterdocument, this minor conces-sion on the part of each of theseauthorisation is not only desirable but also necessary. While thefront side of these three Regulatory documents can be prepared

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Nfrom Master Document - I, necessary provision has been madeon the reverse side of these documents. It will be useful if thefollowing points are kept in view while completing the MasterDocument-II from which the Regulatory documents are to begenerated:i. All the columns in Master document- II should be

completed and nec-essary information typed within therelevant boxes or columns with-out any overlapping. TheCaption Master document-II should be suit-ably covered toprevent its impression on the documents to be gener-atedthrough the Master.

ii. With a view to achieving total legibility, and having dueregard to the layout of the documents, it is necessary thattypewriter and not a fountain pen should be used by theexporters.

iii. As the Master document II embodies all the informationwhich is common to the front side of the three RegulatoryDocuments it would need to be prepared separately. Thethree documents with the requi-site number of copies maybe photocopies from the Master Document- II on Bankforms of the documents with pre-printed captions. Nomasks need to be used. .

iv. Each copy of the three documents should be signed in inkby the exporter Forwarding Agent, as the case may be, sothat it becomes a legally valid document.

v. Six versions of Master document-II have been designedand Forward-ingAgentsExporters should use the relevantMaster document-II, depending upon the type of ShippingBill of Export required to be filled.Master Document-II (A): For shipping Bill for Export

of Duti-able goods andShipping Bills of Ex-portgoods under Claim for DutyDrawback.

Master Document-II (B): For Shipping Bills for Exportof Duty Free Goods.

Master Document-II (E): For Shipping Bills for exportof Goods Ex-bond.

Master Document-II (E): For Bills of Export of DutyFree Goods

Master Document-II (F): For Bills of Export ofGoods Ex-bond.

vi. As regards Shipping Bills different forms have been designedfor different types of Shipping Bills, namely, Shipping Billsfor Duty Free goods, Shipping Bill for Duty Free goods Ex-bond, Shipping Bill for Dutiable goods and Shipping Billfor goods under Claim for Duty Drawback. A separateForm exists for Bill of Export. Appropriate Form shouldbe used depending upon the type of goods to be ex-ported.

vii. As the Port Trust document incorporated the receipt forpayment of port charges (called Export Application atBombay Port), it may be necessary for the Exporters/Forwarding Agents to prepare this docu-ment in triplicate.While the original of the Port Trust document is meant for

keeping record of receipt and shipment of goods, thedupli-cate copy is to be used as the receipt for payment ofPort charges. The triplicate copy of this document will servethe purpose of the Shipper’s copy as record of shipmentand payment of Port charges in respect to the goodshandled by the Port Trust.

viii. On the reverse of the Port Trust document ExportApplication/Dock Challan/Port Trust copy of ShippingBill- space has been provided for completion of cartingpermission and Customs formalities. Par-ticulars have alsobeen made for acknowledgement of goods ‘on Board’ bythe Master of Vessel. This seeks to do away with the practicefor Kacha Notes of any interim document required to beissued by the Master of Vessel prior to the issue of ‘Mate’sReceipt’ in respect of consignments shipped on-board.

With the adoption of the Aligned Documentation Systeminvolving the use of two Master documents, it will be possiblefor the exporters and other concerned agencies bodies to availthe advantages of ‘System approach’ to Export documentation.

Need for Preparing Export DocumentsExport documents have to be prepared for various purposes,viz.1. Declaration of Exports as per Exchange Control

Regulations of the country.2. Transportation of the goods.3. Customs clearance of the goods.4. Other purposes.Some of the forms for preparing documents have beenstandardised under the Aligned Documentation Systemintroduced w.e.f. 1.10.1991.Declaration forms :-There are four main declaration formswhich are pre. scribed. These are called GR, PP, VP/COD andSoftex Forms. All exports to which the requirement ofdeclaration applies must be declared on appropriate forms asindicated below:GR Form: Used for exports to all countries made

otherwise than by Post.PP Form Used for exports to all countries by Parcel

Post, except when made On ‘’Value Payble”or “Cash on Deliv-ery” basis

VP COD FORM Used for exports to all countries by ParcelPost under arrangements to realise proceedsthrough Postal channels on “ValuePayable” or Cash on Delivery” basis. Usedfor export of Computer Software in non-physical form.

SOFTEX While Export Declaration are to be made ina set of to copies (original and duplicate) ofGR or PP form, VP/COD forms are to besubmitted in a single copy.

GRIPP forms are printed in distinctive colours and each setbears a printed number which appears on both copies of theForm. They are avail. able for sale with Reserve Bank of India.However, exporters can get these forms through Authorised

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Dealers also. VP/COD Forms are sold directly to exporters byReserve Bank of India.Export Declaration Forms have utmost importance and arebinding on the exporter. It is therefore necessary, that enoughcare is taken while de-claring exports on these forms with specialreference on the following points:i. Name and address of Authorised Dealer through whom

proceeds of exports have been or will be realised should bespecified in the rel-evant column of the form.

ii. Details of commission and discount due to foreign agentor buyer should be correctly declared otherwise difficultiesmay arise at the time of remittance of such commission.

iii. It should be clearly indicated in the form whether the exportis on ‘Outright sale basis’ or ‘on Consignment basis’ andirrelevant clauses must be struck out.

iv. Under the item ‘Analysis of Full Export value’, a break upof the full export value of goods under FOB value, freightand insurance should be furnished in all cases, irrespectiveof the terms of the contract.

Disposal of Copies of Export Documentation Form

i. GR Forms covering export of goods other than jewelleryshould be completed by the exporter in duplicate and boththe copies should be submitted to Customs at the Port ofShipment. Customs will give their running Serial numberon both the copies of the GR Forms after verifying theparticulars and admitting the corresponding Ship-ping Bill.The value declared by exporter will also be verified byCustoms and they will also record the assessed value.Duplicate copy of GR Form will again be presented toCustoms at the time of actual shipment .After examinationof goods and certifying the quantity passed for shipment,the duplicate copy will again be returned to exporter forsubmission to an Authorised Dealer. However, an excep-tion to submission of GR forms to the CustomsAuthorities has been made in case of deep Sea fishing.

ii. a. PP Forms are to be first presented to an AuthorisedDealer for counter signature. The Form will becountersigned by the Au-thorised Dealer only if thePost Parcel is addressed to his Branch orCorrespondent Bank in the country of import. Theconcerned Overseas Branch or Correspondent Bank isto be instructed to deliver the Post Parcel againstpayment or acceptance of relevant Bill, as the case maybe.

b. For Post Parcel addressed directly to the consignee, theAuthor-ised Dealer will countersign the Form,provided1. an irrevocable Letter of Credit for the full value of

export has been opened in favour of exporter andhas been advised through Authorised Dealerconcerned; or

2. the full value of the shipment has been received inadvance by the exporter through an AuthorisedDealer, or

3. the Authorised Dealer is satisfied on the basis ofstanding and track record of the exporter andarrangements made for re-alisation of the exportproceeds that he could do so. If the AuthorisedDealer is not satisfied about the standing, etc., ofthe exporter, the application is rejected. Noreference is en-tertained by the Reserve Bank insuch cases.

4. In the case of VP/COD Forms only one copy isrequired to be com-pleted and submitted to PostOffice along with the relative parcel at the time ofdispatch.

The export of computer software may be undertaken inphysical form i.e. software prepared on magnetic tape and papermedia as well as in non-physi-cal form by direct data transmis-sion through dedicated earth stations/satel-lite links. Theexport of computer software in physical form is subject tonormal declaration on GRIPP Form and regulations applicablethereto will also be applicable to such exports. However, exportof software in non-physi-cal form is fraught with many risksand special guidelines have been framed for handling suchexports.

Export InvoiceInvoice is a document of content. It’s the exporter’s bill forgoods and sets forth the terms of sale. The invoice is a basicdocument. As a document of contents it must fully identifythe overseas shipment and serve as a basis for the preparationof all other documents, which in greater or lesser detailreproduce information from it. The exporter should strictlyfollow the requirements of the importer in regard to invoicing. The standard document in respect of the invoice based on theUnited Nations Key Layout, which has been accepted as thebasis of this document in many entries. The informationrequirements of the document have been determined afterexamining a number of forms of invoices used by leadingexport organizations and after series of discussions with therepresentatives of the Department of Customs and CentralExcise and the Federation of Custom House Agents’ Associa-tions in India.Invoices based on the suggested design will be acceptable notonly in many countries but will also help facilitate processing ofdocuments at various stages. The Declaration given at thebottom (left hand) of the Invoice follows the UN recommen-dation. The standard Invoice can be reproduced from themaster by masking only three columns, i.e. Notify Party,Insured Value and No. of Original Bs/L No, and Date on theinvoices. But under the present procedure for customs clearanceand shipment of export cargo, this information, and particularlyin respect of the B/L No. and Date, will be available toexporters only after shipment has been effected. Where requiredunder letter of credit, such information will need to the banksfor negotiation. But for this, the rest of the information can bereproduced from the masterThe information referred to in the preceding lines can be givenabove the columns for Country of Origin and Final Destina-tion in the order of name of shipping line, ETD (port of

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Nshipment), ETA (destination port) and B/L No. and Date.Unused space, in the Buyer’s column and below the Consignee’sColumn can be utilised for incorporation of any other informa-tion which may be special to a transaction. Value and OriginClauses can be printed on the back side of the Standard Invoice.There may be cases when exports are required to give detaileddescriptions or specifications of the various items forming partof the consignment exported in one lot. In such cases,exporters are advised to use Continuation sheets’ to theInvoice.

Proforma InvoiceThe starting point of the export contract is in the form of offermade ‘by the exporter to the foreign customer. The offer madeby the exporter is in the form of a proforma invoice. It is aquotation given as a reply to an inquiry. It normally forms thebasis of all trade transactions.It is proposed to conduct training and orientation programmesat all export centers to familiarize the exporting communitywith the new system.

Contents of Proforma Invoice

a. Name and address of the exporter.b. Name and address of the importer.c. Mode of transportation, such as Sea or Air or Multimodal

transport.d. Name of the port of loading,e. Name of the port of discharge and final destination.f. Provisional invoice number and date.g. Exporter’s reference number.h. Buyer’s reference number and date.i. Name of the country of origin of goods.j. Name of the country of final destination.k. Marks and container number.l. Number of packing descriptions.m. Description if goods given details terms of internationally

accepted price quotation,n. Signature of the exporter with date.

Importance of Proforma Invoice

a. It forms the basis of all trade transactions.b. It may be useful for the importer in obtaining import

licence or foreign exchange.

Commercial InvoiceCommercial invoice is an important and basic export docu-ment. It is also known as a Document of Contents as itcontains all the information required for the preparation ofother documents. It is actually a seller’s bill of merchandise. It isactually a seller’s bill of merchandise. It is prepared by theexporter after the execution of export order giving details aboutthe goods shipped. It is essential that the invoice is prepared inthe name of the buyer or the consignee mentioned in the letterof credit.This is the first basic and the only complete document amongall commercial documents for the shipment. Besides fulfilling

the obligation under the export contract, the exporter needs thisdocument for a number of other purposes including: i)obtaining export inspection certificate ii) getting excise clearanceiii) getting customs clearance and iv)securing incentives. Thus,this document is prepared at both the pre- shipment and postshipment stages.In the first place, Commercial Invoice is a document ofcontents that describes details of goods sent by exporter. It isthe statement of account, which must contain identificationmarks and numbers, description of goods and quantity ofgoods.Every shipment has identification marks, which identify thecargo with various documents. These are private marks. whichare made on the packages. These marks could be either in theform of symbols (say, a star, triangle. rectangle, etc.) or numeri-cal. Similarly. Every package under a shipment is numbered,usually written serially. The commercial invoice must specify theserial numbers given in a particular consignment.Commercial invoice must describe the goods shipped by theexporter. The description of goods must correspond exactlywith the description given in the contract or the letter of creditIt means that there should not be any difference (includingspelling) between these descriptions. Thus. if a contractdescribes the goods as “Ten Thousand Pairs of Blouses andSkirts”. the exporter should not describe them as ‘’Ten Thou-sand Blouses and Ten Thou-sand Skirts”. though logically boththe descriptions mean the same.Sometimes description of the goods includes the number ofpackages and the type of packing material. Thus. if the contractspecifies shipment to be made in “ten new gunny bags’” theexporter should send the contracted goods and describe themas needed. If the commercial invoice wrongly describes theshipment as “ten gunny bags” instead of “ten new gunnybags’” the bank may refuse to honour shipping documents andnot pay for them.The quantity described on the commercial invoice shouldneither be less or more than the contracted quantity. In otherwords. the exporter should not ship less than contractedquantity, unless the contract permits part shipment. However, ifthe goods are being shipped under a letter of credit. partshipment is permitted, unless it is specifically prohibited. Onthe other hand. quantity shipped should not be more than thecontracted quantity. This is so even if the exporter may not becharging for the additional quantity.Second function of the commercial invoice is that it is theseller’s bill given to the buyer. As a bill, it must contain thename and address of the buyer, unit price, amount andauthorised signatures with designation. Unless required by thebuyer, the total invoiced value should be net of any commis-sion or discount; in other words, it should be the realisableamount of goods as per the trade terms. Sometimes a contractrequires a detailed I breakup of the amount to be recorded onthe invoice for enabling the customs authority in the importingcountry to calculate import duty.The name and address given in the commercial invoice shouldbe the same as given in the export contract or the letter of credit.

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as the case may be. Under a letter of credit, unless otherwisespecified the commercial invoice must be made out in the nameof the applicant I of the credit. As in the case of quantity to berecorded on the invoice, the amount should neither be less normore than the stipulated amount in the contract or the letter ofcredit. The only exception is that if the contract or the letter ofcredit permits part-shipment, an individual invoice can be lessthan the total amount.The commercial invoice also sets forth the terms of sale ( i. e.fob/cif /c&f),etc. mode and date of shipment and terms ofpayment. It can also serve as a packing list and a certificate oforigin. A packing list shows details of goods contained in eachpack of shipment. When the law in an importing country doesnot specifically require a separate certificate of origin issued by athird party. it can be self- certified by the exporter on thecommercial invoice. Exporters themselves according to therequirements of their business devise the format of Commer-cial invoice. Look at Annexure I where the format ofCommercial invoice has been given.

Contents of Commercial Invoice

a. Name and address of the exporter.b. Name and address of the consignee.c. Name and the number of Vessel or Flight.d. Name of the port of loading.e. Name of the port of discharge and final destination. ‘f. Invoice number and date.g. Exporter’s reference number.h. Buyer’s reference number and date.i. Name of the country of origin of goods.j. Name of the country of final destination.k. Terms of delivery and payment.l. Marks and container number.m. Number and packing description. ,n. Description of goods giving details of quantity, rate and

total amount in terms of internationally accepted pricequotation.

o. Signature of the exporter with date.

Significance of Commercial Invoice

a. It is the basic document useful in preparation of variousother shipping documents.

b. It is used in various export formalities such as quality andpre;:-8hipment inspection, excise and customs procedureetc. -

c. It is also useful in negotiation of ~documents forcollection and claim of incentives.

d. It is useful for accounting .purposes to both exporters aswell as importers.

Packing ListThis may be shown on invoice or separately, and should containitem by item, the contents of cases or containers or of ashipment with its weight and description set forth in such a

manner as to permit checks of the contents by the customs onarrival at the port of destination as well as by the recipient.The packing list is a relatively simpler document and the wholeof the information can be reproduced from the master bymasking information not desired on the packing list. Specialinformation, if any, can be given in the blank space in the lowerthird portion of the document.The exporter prepares the packing list to facilitate the buyer tocheck the shipment. It contains the detailed description of thegoods packed in each case, their gross and net weight, etc. Thedifference between a packing note and a packing list is that thepacking note contains the particulars of the contents of anindividual pack, while the packing list is a consolidated state-ment of the contents of a number of cases or packs.

Contents of Commercial Invoice

a. Name and address of the exporter.b. Name ‘and address of, the consignee.e. Name and the number of Vessel or Flight.d. Name of the port of loading.e. Name of the port of discharge and final destination.f. Invoice number and date.g. Name of the country of origin of goods.h. Name of the country of final destination.i. Marks and container number.j. Number and packing description.k. Description of goods in terms of quantity and special

remarks, if any.l. Signature of the exporter with date.Normally, ten copies of the packing note/list should beprepared. The first is to be sent with the shipping documents,two copies in advance to the buyer, one to the shipping agentand the remaining retained by the exporter.

Mate’s ReceiptMate’s receipt is a receipt issued by the Commanding Officer ofthe ship when the cargo is loaded on the ship. The mate’sreceipt is a prima fade evidence that Igoods are loaded in the vessel. The mate’s receipt is first handedover to the f Port Trust Authorities. After making payment ofall port dues, the exporter or his agent collects the mate’s receiptfrom the Port Trust Authorities. The mate’s, receipt is freelytransferable. It must be handed over to the shipping companyin order to get the’ bill of lading. Bill of lading is prepared onthe basis of the mate’s receipt.Types of mate’s receiptsa. Clean Mate’s Receipt :- The Commanding Officer of the

ship issues a clean mate’s receipt; if he is satisfied that thegoods are .packed properly and there is no defect in thepacking of the cargo or package.

b. Qualified Mate’s Receipt :- The Commanding Officer ofthe ship issues a qualified mate’s receipt, when the goods arenot packed properly and the shipping company does nottake any responsibility of damage to the goods duringtransit.

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NContents of Mate’s Receipt

a. Name and logo of the shipping line.b. Name and address of the shipper.c. Name and the number of vessel.d. Name of the port of loading.e. Name of the port of discharge and place of delivery.f. Marks and container number.g. Packing and Container description.h. Total number of containers and packages.i. Description of goods in terms of quantity.j. Container status and seal number.k. Gross weight in kg. and volume in terms of cubic meters.l. Shipping bill number and date.m. Signature and initials of the Chief Officer.

Significance of Mate’s Receipt

a. It is an acknowledgement of goods received for export onboard the ship.

b. It is a transferable document. It must be handed over to theshipping company in order to get the bill of lading.

c. Bill of lading, which is the title of goods, is prepared on thebasis of the mate’s receipt.

d. It enables the exporter to clear port trust dues to the PortTrust Authorities.

Bill of LadingBill of lading is issued by the shipping company or its agentsstating that goods are either being shipped or have beenshipped. Essentially a transport document. it serves manypurposes in international commerce.The bill of lading is a document issued by the shippingcompany or its agent acknowledging the receipt of goods onboard the vessel, and undertaking to deliver the goods in thelike order and condition as received, to the consignee or hisorder, provided the freight and other charges as specified in thebill have been duly paid. It is also a document of title to thegoods and, as such, is freely transferable by endorsement anddelivery. A bill of lading serves three main purposes:-i. This document evidences the contract of affieightment

(transport) between the shipping company and the shipper(exporter or importer).

ii. It is a receipt given by the shipping company for cargoreceived by it.

iii. It is a document of title (This is the most significantfunction of the bill of lading).

Let us first understand the meaning of the term “evidence ofthe contract of affreightment”. When goods are to be carried byany carrier (say. a ship), the contract of affreightment willcontains terms and conditions of carriage. In particular, thiscontract will mention the responsibility of the carrier (e.g..shipowner) in providing space. receiving. loading carrying andunloading of the cargo. Thus. if there is any loss or damage tothe cargo when it is in the custody of the carrier. the contract willprovide for the circumstances in which the carrier can be held

liable for the loss or damage. Further, in case the carrier is to be Iliable for loss or damage. the contract will provide for theamount of claim which carrier will be required to pay to thecargo owner. A bill of lading also contains printed terms andconditions of the contract of affreightment on it However. it isnot considered as a Conrad by itself; instead it is the mostimportant evidence of the contract. Law courts all over theworld have held that in case of a dispute, the aggrieved partymay produce any other evidence, which may controvert a printedclause in the bill of lading. Any other evidence could be a specificagreement in which for example, the ship owner may haveagreed to a higher amount of liability than the standardamount. Thus, in such cases, the ship owner does not have adefence that his maximum liability is as printed in the bill oflading.Bill of lading is a receipt issued by the shipping company on itsagents. Law requires that as a receipt, it must contain leadingidentification marks, number of packages or quantity or weightor any other unit of account, and apparent order and conditionof the goods.Bill of lading is the only evidence to file a claim against theshipping company in the event of non-delivery, defectivedelivery or short-delivery of the cargo at the destina-tion. As aresult, this document indicates that the contracted goods havebeen either given into the charge of the shipping companies orshipped by the exporter by the named ship on the date specifiedon the bill of lading. If shipment is according to the contractterms, the exporter gets the right to demand the sale amountfrom the importer while the importer is entitled to get deliveryof the goods at the destination. Look at Annexure 2 where aspeci-men of bill of lading has been given.For the bill of lading to be negotiable in fact three requirementsmust be fulfilled:1. it must be made out to the order to the shipper.2. It must be signed by the steamship company.3. It must be endorsed in blank by the shipper.

Types of bill of lading

a. Clean Bill of Lading :- A bill of lading acknowledgingreceipt of the goods apparently in good order andcondition and without any qualification is termed as a cleanbill of lading.

b. Claused Bill of Lading :- A bill of lading qualified withcertain adverse remarks such as, “goods insufficiently packedin accordance with the Carriage of Goods by Sea Act,” istermed as a claused bill of lading.

c. Through Bill of Lading :- It covers goods beingtranshipped enroute but where the first carrier has theresponsibility as the principal carrier for all stages of thejourney. For example, goods may be shipped from Bombayto Dubai and transhipped from Dubai to a port in LatinAmerica.

d. Trans-shipment B/L: It has similar characteristic as theThrough B/L except that in this case the first carrier actsonly as an agent for effecting Trans-shipment of cargo.

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e. Stale Bill of Lading :- A bill of lading that has been heldtoo long before it is passed on to a bank for negotiation orto the consignee is called a stale bill of lading.

f. Freight Paid Bill of Lading :- When freight is paid at thetime of shipment or in advance, the bill of landing ismarked, freight paid. Such bill of lading is known as freightbill of lading.

g. Freight Collect Bill of lading: - When the freight is notpaid and is to be collected from the consignee on the arrivalof the goods, the bill of lading is marked, freight collectand is known as freight collect bill of lading.

The Design of Bill of LadingThe design for the bill of lading is based on the Standard Billof Lading recommended by the International Chamber ofshipping. A number of shipping lines in India’s overseas tradeare already issuing bills of lading on the ISO A4 size paper.However. In some case, these bills of lading are based on theold pattern.The Standard Bill of Lading included in the aligned series can bereproduced from the master by using the relevant mask. TheChief Officer of the ship through the port trust issues bankforms of bills of lading are supplied by shipping companies toshippers who prepare these documents and present them forsignature at the shipping to the shipper. While preparing “ToOrder Bills of Lading care should be taken to mask theConsignee box also. The words Unto Order May be typed inthe Consignee box and the name and address of the Consigneegiven in the box for the Notify Party. The other details on thebill of lading will be completed by the office of the shippingcompany before the document is signed and handed over to theshipper in exchange for the mate’s receipt.Bill of lading is a document of title that will enable the lawfulholder of any of the original Bill to take delivery of the goodsat the stipulated port of destination. Thus, a claimant of title togoods is required to surrender an original BIL (also popularlyknown as negotiable copy of B/L) for claiming goods from theshipping company or its agents. A bill of lading is not anegotiable instrument, though it is transferable by endorsementand delivery. What is the purpose of transferability of the billof lading? Transferability enables the banks to pay money to theexporter against surrender of shipping documents, includingB/L, even before the goods reach the destination. Similarly, itenables the goods to be resold by the importer before goodsreach the destination. For creating transferability, the bill oflading has to be made in such a way that the’ goods areconsigned to the ‘order of a party. The party could be either theexporter himself, or a negotiating or paying, bank or any otherparty as provided in the contract or letter of credit. For example,if B/L is prepared in the following way, it can be transferredthrough endorsement in the same manner as in a cheque. Thereare three main columns in B/L. These are Consignor (Shipper);Consignee or Order of and Notifying party. Notifying party isthe party to whom the shipping company is to send “notice ofarrival”. Transferability can be created by filling- up thesecolumns in the following manner:Consignor: ABC Company, New Delhi

Consignee: (Or Order of) Bank of XYZ, New DelhiNotifying party: KNM, LondonBy not striking-off the words “Or Order Of “and. writing thename of the negotiating bank, the bank becomes the firstendorsee. Title to goods will be transferred from the negotiat-ing bank to the paying bank to importer on endorsements bythe negotiating and the paying banks in succession.In contrast to the “Order BIL” is the consignee-named B/LThe consignee-named B/L is made out in the name of aspecific party. Hence, title to goods cannot be transferred to athird party. The exporter should not ship goods under thiskind of B/L as goods can be released by the shipping companyat the destination without the presentation of the ‘original ‘B/L. Thus, if payment from the importer has not been secured,the exporter may lose hold over goods and may not get paid.However, if payment in advance has been received or if goodsare being shipped under irrevocable letter of credit, the con-signee named B/L is a valid document.According to international commercial practice, BIL along withother shipping documents must be presented to the bank notlater than twenty- one days of the date of shipment as given inBIL. Sometimes the buyers may also specify the last date or thenumber of days after shipment by which the documents mustbe submitted to the bank. Where the exporter does not followthis stipula-tion, the documents are said to have become “stale”and B/L in such case will be known as Stale B/L A State B/L isone which is tendered to the paying bank at so late a date that itis impossible for it to be dispatched to the consignee in time toreach him before the goods themselves arrive at the destinationport.Example An exporter sent off his goods but forgot to sendthe Bill of Lading to the customer. Without this document thecustomer was unable to obtain the goods at the Port ofdestination, so the goods had to be stored at the docks untilthe Bill arrived. The customer sent the storage charges to theexporter, maintaining that because the exporter’s fault, thecharges had been incurred. He sued the exporter for the costs ofthe storage, and won.

Contents of Bill of Lading

a. Name and logo of the shipping line.b. Name and address .of the shipper.c. Name and the number of vessel.d. Name of the port of loading.e. Name of the port of discharge and place of delivery.f. Marks and container number.g. Packing and container description.h. Total number of containers and packages.i. Description of goods in terms of quantity.j. Container status and seal number.k. Gross weight in kg. and volume in terms of cubic metres.1. Amount of freight paid or payable.m. Shipping bill number and date.n. Signature and initials of the Chief Officer.

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NEndorsement on Bill of LadingBy practice and custom he bill of lading has been transferable.If however, the bill requires the goods to be delivered to aparticular named person and does not include a reference to hisassignees, the bill of lading is not transferable. It is only rarelythat a bill of lading would be drawn this way.The consignee or consignor as the case may be, can transfer theB/L either by a special endorsement, i.e. an endorsement whichnames the transferee to whom delivery is to be made or by anendorsement in blank to be bearer. The holder may, however,convert the blank endorsement into a special endorsement byinserting, the name of a person to whom delivery is to bemade. It is then called the “endorsement in full”

Sending of Bill of Lading to ImporterB/L are mad out in sets and any number of copies mayconstitute the set according to the requirements of the particulartransaction and the importer. The number of copies to bemade out will be indicated by the importer before the shipmenttakes place. In case there is no such indication, normally, twocopies. One set of documents is sent by the first class airmailand the second by the following mail, so that if one is lost.Delivery of the goods can be taken by the importer because ofthe second set.

Significance of Bill of Lading for Exporters

a. It is a contract between the shipper and the shippingcompany for the carriage of the goods to the port ofdestination.

b. It is ari acknowledgement indicating that the goodsmentioned in the document have been received on boardfor the purpose of shipment.

c. A clean bill of lading certifies that the goods received onboard the ship are in order and good condition.

d. It is useful for claiming incentives offered by thegovernment to exporters.

e. The exporter can claim damages from the shippingcompany if the goods are lost or damaged after the issue ofa clean bill of lading.

Significance of Bill of Lading for Importers

a. It acts as a document of title to goods, .which istransferable by endorsement and delivery.

b. The exporter sends the bill of lading to use bank of theimporter so as to enable him to take the delivery of goods.

c. The exporter can give an advance intimation to the foreignbuyer about the’ shipment of goods by sending him a non-negotiable copy of bill of lading.

Significance of Bill of Lading for Shipping Companya. It is useful to the shipping company for collection of

transport charges from the importer if not collected fromthe exporter.

Certificate of OriginThe importers in several countries require a certificate of originwithout which clearance to import is refused. The certificate oforigin states that the goods exported are originally manufactured

in the country whose name is mentioned in the certificate. Certificateof origin is required when :-a. The goods produced in a particular country are subject to

preferential tariff rates in the foreign market at the timeimportation.

b. The goods produced in a particular country are banned forimport in the foreign market.

Types of the Certificate of Origin

a. Non preferential Certificate of Origin :- Non-preferential certificate of origin is required in general by allcountries for clearance of goods by the importer, on whichno preferential tariff is given. It is issued by :-• The authorised Chamber of Commerce of the

exporting country.• Trade Association of the exporting country.

b. Certificate of Origin for availing Concessions underGSP:- Certificate. of origin required for availing ofconcessions under Generalised System of Preferences (GSP)extended by certain countries such as France, Germany, Italy,BENELUX countries, UK, Australia, Japan, USA, etc. Thiscertificate can be obtained from specialised agencies, namely;• Export Inspection Agencies.• It. Director General of Foreign Trade.• Commodity Boards and their regional offices.• Development Commissioner, Handicrafts.• Textile Committees for textile products.• Marine Products Export Development Authority for

marine products.• Development Commissioners of EPZs.

c. Certificate for availing Concessions underCommonwealth Preferences (CWP) :- Certificate oforigin for the purpose of Commonwealth Preference is alsoknown as ‘Combined Certificate of Origin and Value’. Twomember countries, Le, require it. Canada and New Zealandof the Commonwealth. For concession underCommonwealth preferences, the certificates or origin haveto be submitted in special forms obtainable from the HighCommission of the country concerned.

d. Certificate for availing Concessions under otherSystems of Preference :- Certificate of origin is alsorequired for tariff concessions under the Global System ofTrade Preferences (GSTP), Bangkok Agreement (BA) andSAARC Preferential Trading Arrangement (SAPTA) underwhich India grants and receives tariff concessions onimports and exports. Export Inspection Council (EIC) isthe sole authority to print blank Certificates of . Originunder BA, SAARC and SAPTA which can be issued by suchagencies as EPCs, DCs of EPZs, EIC, APEDA, MPEDA,FIEO, etc.

Contents of Certificate of Origin

a. Name and logo of chamber of commerce.b. Name and address of the exporter.e. Name and address of the consignee.

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d. Name and the number of Vessel of Flight.

e. Name of the port of loading.

t. Name of the port of discharge and place of delivery.g. Marks and container number.h. Packing and container description.i. Total number of containers and packages.j. Description of goods in terms of quantity.k. Signature and initials of the concerned officer of the issuing

authrity.l. Seal of the issuing authority.

Significance of the Certificate of Origina. Certificate of origin is required for availing of concessions

under Generalised System of Preferences (GSP) as well asunder Commonwealth Preferences (CWP). ‘

b. It is to be submitted to the customs for the assessment ofduty and clearance of goods with concessional duty.

c. It is required when the goods produced in a. particularcountry are banned for import in the foreign market.

e. It helps the buyer in adhering to the import regulations ofthe country.

f. Sometimes, in order to ensures that goods bought fromsome other country have not been reshipped by a seller, acertificate of origin is required.

Shipping BillShipping bill is the main customs document, required by thecustoms authorities for granting permission for the shipmentof goods. The cargo is moved inside the dock area only after theshipping bill is duly stamped, i.e., certified by the customs.Shipping bill is normally prepared in five copies :-a. Customs copy.b. Drawback copy.c. Export promotion copy.d. Port trust copy.e. Exporter’s copy.Free Shipping Bill is used for export of goods which neitherattracts any Duty/Cess nor is entitled to Duty Drawback ontheir exportation. Dutiable Shipping bill is used in case ofgoods subject to Export Duty/Cess but mayor may not beentitled to Duty Drawback. Drawback Shipping Bill or Bill ofExports is used in the case of goods which are entitled toDrawback. Ship. ping Bill for Shipment Ex-bond is for use incase of imported goods for Re. exports and which are kept inBond.Following documents are required for the processing of aShipping Bill:a. GR Forms in duplicate for shipments to all countries.b. Four copies of Packing list giving contents, quantity, gross

and net weight of each Package.c. Four copies of Invoices indicating all relevant particulars

such as no. of packages, quantity, unit rate, total FOB/CIFvalue, correct and full description of goods, etc. (One copy

of this Invoice is to be pasted on the duplicate copy ofShipping Bill).

d. Contract, Letter of Credit, Purchase Ordere. Inspection/Examination Certificate.The Formats presented for the Shipping Bill are as under:1. White Shipping Bill for export of Duty Free goods

prepared in tripli-cate in the Standardised Format.2. Green Shipping Bill for export of goods under claim for

Duty Draw- back prepared in quadruplicate in the prescribedForm.

3. Yellow Shipping Bill for export of Dutiable goods preparedin triplicate in the prescribed Form.

4. Pink Shipping Bill for export of Duty Free goods ex-Bondprepared in triplicate in the prescribed Form.

Where the goods are to be cleared by the Land Customs, Bill ofexport is prepared instead of Shipping Bill. Bill of Exports arealso of four types i.e. white, green, yellow and pink for thepurpose stated above. Standardised Formats of the Bill ofExport are also available with the booksellers who deal withExim publications.

Types of Shipping BillBased on the incentives offered by the government, customsauthorities have introduced three types of shipping bills:-a. Drawback Shipping Bill :- Drawback shipping bill is

useful for claiming the customs drawback against goodsexported.

b. Dutiable Shipping Bill :- Dutiable shipping bill isrequired for goods which are subject to export duty.

c. Duty-free Shipping Bill :- Duty-free shipping bill is usefulfor exporting the goods on which there is no export duty.

Application for export is used for seeking customs permis-sion of export goods to the neighboring countries likeBangladesh by road, river or rail. This is of Three Types, namely,for export of “Free”, “Dutiable” and “Drawback” cargos.Customs declaration form for goods sent by post parcel is astandard form for all types of cargo. However, for claim-ingduty drawback, the exporter has also to file another documentknown as “Form D”. Port authorities in India have specifieddocuments for bringing the cargo into the shed for shipment aswell as for payment of port charges. This document is calledport - trust copy of shipping bill in Bombay dock challan inCalcutta and Export application in Madras and Cochin. Like theshipping bill, the clearing and forwarding agent of the exporterprepare this document.In order to facilitate easy recognition and quick processing,following colours have been provided to different kinds ofshipping bills

Types of goods By Sea By Air Drawback Shipping Bill Green Green Dutiable shipping Bill Yellow Pink Duty free Shipping Bill White Pink

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NContents of shippining bill

a. Name and address of the exporter.b. Name and address of the importer.c. Name of the vessel, master or agents and flag.d. Name of the port at which goods are to be discharged.e. Country of final destination.f. Details about packages, description of goods, marks and

numbers, quantity and details of each case.g. FOB price and real value of goods as defined in the Sea

Customs Act.h. Whether Indian or foreign merchandise to be re-exportedi. Total number of packages with total weight and value.

Significance of shipping bill

a. Shipping bill is the main customs. document, required bythe customs authorities for granting permission for theshipment of goods.

b. The cargo is moved inside the dock area only after theshipping bill is duly stamped, i.e., certified by the customs.

c. Duly endorsed shipping ,bill is also necessary for thecollection of export incentives offered by the government.

d. It is useful to the Customs Appraiser while determining theactual value of goods exported.

Consular InvoiceConsular invoice is a document required mainly by the LatinAmerican countries like Kenya, Uganda, Tanzania, Mauritius,New Zealand, Myanmar, Iraq, Australia, Fiji, Cyprus, Nigeria,Ghana, Guinea, Zanzibar, etc. This invoice is the most impor-tant document, which needs to be submitted for certification tothe Embassy of the importing country concerned. The mainpurpose of the consular invoice is to enable the authorities ofthe importing country to collect accurate information about thevolume, value, quality, grade, source, etc., of the goods im-ported for the purpose of assessing import duties and also forstatistical purposes.In order to obtain consular invoice, the exporter is required tosubmit three copies of invoice to the Consulate of theimporting country concerned. The Consulate of the importingcountry certifies them in return for fees. One copy of the invoiceis given to the exporter while the other two are dispatched tothe customs office of the importer’s country for the calculationof the import duty. The exporter negotiates a copy of theconsular invoice to the importer alongwith other shippingdocuments.

Significance of Consular Invoice for the Exporter

a. It facilitates quick clearance of goods from the customs inexporter’s as well as importer’ country.

b. Certification of goods by the Consulate of the importingcountry indicates that the importer has fulfilled allprocedural and licensing formalities for import of goods.

c. It also assures the exporter of the payment from theimporting country.

Significance of Consular Invoice for the Importer

a. It facilitates quick clearance of goods from the customs atthe port of destination and therefore, the importer getsquick delivery of goods.

b. The importer is assured that the goods imported are notbanned for imports in his country.

Significance of Consular Invoice for the CustomsOfficea. It makes the task of the customs authorities easy.b. It facilitates quick calculation of duties as the value of goods

as determined by the Consulate is considered for thepurpose.

Bill of EntryThe bill of entry is a document, prepared by the importer or hisclearing agent in the prescribed form under Bill of EntryRegulations, 1971, on the strength of which clearance ofimported goods can be made.When goods are imported is a particular country, the importerhas to pay the necessary import duty. For this purpose,necessary information about the goods imported must be givento the customs authorities “in a prescribed form called bill ofentry form. Bill of entry is. a document, which states that. thegoods of the stated values and description in the specifiedquantity have entered into the country from abroad. The bill ofentry is drawn in triplicate. The customs authorities may ask theimporter to supply other documents like invoice, broker’s noteand insurance policy, etc. in order to verify the correctness of theinformation supplied in the bill of entry form.For the purpose of giving information in the bill of entryform, goods are classified into three categories namely :-1. Bill of entry for home consumption (white in colour ):

where an importer wants to get his goods cleared in one lot,he has to present the Bill of entry for home consumption.

2. Bill of entry for warehousing (into bond, yellow incolour): Where an importer wants to shift goods to awarehouse and thereafter gets his goods.cleared in small lots, he has to present ‘into bond’ bill ofentry. Reason may be that he is unable to pay duty leviableon all goods at one instance or may be because of storageproblem.

3. Ex-Bond Bill of Entry (Green in Colour ): When animporter wants to remove goods from the warehouse, hehas to present an Ex-bond bill of entry which is green incolour.

Bill of Entry is not required in the following cases:a. passengers baggageb. favour parcelsc. mail box and post parcels.d. boxes, kennels of cargos containing live animals or birds.e. unserviceable stores, e.g. dunnage wood, empty bottles,

drums etc. of reasonable value .f. ship’s stores in small quantities for personal use.

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g. cargo by sailing vessels from customs ports when landed atopen bundles only

The importer has to fill up a separate bill- of entry form fordifferent classes of goods. In India, separate forms are not usedbut all the entries are made in one form. The free goods aremarked as free in the entry form itself. The importer has to paythe duty before securing the possession of the goods.

Contents of Bill of Entry

a. Name and address of the importer.b. Name and address of the exporter.c. Import licence number of the importer.d. Name of the port/ dock where goods are to be cleared.e. Description of goods.f. Value of goods.g. Rate and amount of import duty payable.h. Other relevant documents.

Airway BillAn airway bill, also called an air consignment note, is a receiptissued by an airline for the carriage of goods. As each shippingcompany has its own bill of lading, so each airline has its ownairway bill. .Airway Bill or Air Consignment Note is not treated as adocument of title and is not issued in negotiable form.

Contents of Airway Bill

a. Name of the airport of departure and destination.b. The names and addresses of the consignor, consignee and

the first carrier.c. Marks and container number.d. Packing and container description.e. Total number of containers and packages.f. Description of goods in terms of quantity.g. Container status and seal number.h. Amount of freight paid or payable.i. Signature and initials of the issuing carrier or his agent.

Importance of Airway Bill

a. It is a contract between the airlines or his agent to carrygoods to the destination.

b. It is the document” of instructions for the airline handlingstaff.

c. It acts as a customs declaration form.d. Since, it contains details about freight it also represents

freight bill.

Gr FormGR Form is an exchange control document required by theReserve Bank of India (RBI). As per the exchange controlregulations, an exporter has to realise the proceeds of the goodshe has exported within 180 days of their shipment from India.In order to ensure this, the RBI has introduced the GRprocedure.

GR form is to be submitted in duplicate to the Customs at theport of shipment along with the shipping bill. Customs willgive their running serial number on both the copies afteradmitting the customs shipping bill. Customs authorities. willcertify the value declared by the exporter on both the copies ofthe GR form at the space earmarked and will also record theassessed value. They will then return the duplicate copy of theform to the exporter and retain the original for transmission tothe RBI. Within 21 days from the shipment of goods, exportermust lodge the duplicate copy of GR together with relativeshipping documents with the authorised dealer named in theGR form for negotiation of export bills.After the documents have been negotiated, the authoriseddealer will report the transaction to the RBI. The duplicate- copy‘of GR form together with a copy of invoice will be retained bythe authorised dealer till full export proceeds have been realisedand thereafter submitted to the RBI.On account of introduction of Electronic Data Interchange(EDI) System at certain customs offices where shipping bills areprocessed electronically, the existing declaration in GR form hasbeen replaced by a declaration in form SDF (Statutory Declara-tion Form).

Other DocumentsCustoms Invoice Countries like U.S.A., Canada, etc., needCustoms’s In-voice. It is generally made out on a special formprescribed by the Customs Authorities of the importingcountry and helps for allowing entry of goods in the importingcountry at preferential tariff rates. The Invoice Forms aregenerally available at the Consular Officer of the importingcountry and are required to be signed and witnessed after dulyfilling out the same.Legalised/visaed Invoice These are the Invoices sworn fortheir genuine-ness by the seller as being correct, before theappropriate Consulate/Cham-ber of Commerce Embassy asthe case may be, and they bear the stamp and authentication ofthe Consulate/Chamber of Commerce Embassy as being inorder. A nominal charge is collected by them from the seller fordoing this. These Invoices are required by some of the LatinAmerican Countries. There is no prescribed form of thisInvoice.Certified invoice At times the exporter is called upon to certifyon the Invoice, that the goods are of particular origin ormanufactured/packed at a particular place and in accordance withspecific contract. When Certificates as such appear on theInvoice, it is called as a Certified Invoice.Bill of exchange/draft A Bill of Exchange also known asDraft contains an order from the credit to the debtor to pay aspecified amount to a person mentioned therein. The maker ofa Bill is called the “Drawer”, the person who is directed to pay iscalled the “Drawee” and the person who is entitled to receivepayment is called the “Payee.”When it is drawn on a foreign firm it is termed as a ForeignDraft or Bill of Exchange. It is prepared either in an interna-tional currency or Indian Rupees depending on the terms of thecontract. Accordingly, the Bill is known by the name of currencyin which it is drawn. For example, a Bill drawn in US dollars is

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Nknown as ‘Dollar Bill’ and when prepared in rupees, beingtermed as ‘Rupees Bill’.When the goods are shipped by Sea, the bills are drawn in setsand two sets of documents, including drafts are mailed to theforeign correspondent through an authorised dealer forpresentation to the Drawee (importer). Each one bears areference to the other.A Bill of Exchange or Draft is of two types: (I) ‘Sight Draft’ or‘Draft at Sight’ and (ii) “Usance Draft” or “Usance Bill”.When the Drawer i.e. exporter expects the Drawee i.e. importerto make ; payment immediately after the Draft is presented tohim, it is called a ‘Sight : Draft’. Unless and until the Draft isreceived, the Negotiating/Collecting Bank does not hand overthe Shipping documents and the buyer cannot take delivery ofgoods.As there is no Aligned document for Draft the same can beprepared by the Exporter in the usual formatCertificate of inspection Inspection Certificate, indicatingthat goods have been inspected before shipment, is neededunder some contracts or by some countries. This Certificate isgenerally required to be issued by one of the authorisedindependent Inspection Agencies/Surveyors in the exporter’scoun-try. The Certificate is issued in the Aligned documentForm.Black list certificate This is to certify that the ship/aircraftcarrying the goods has not touched a particular country on itsjourney or that the goods are not of a particular country. Thiscertificate is usually called for when countries have strainedpolitical relations with another.Weight note This document is used to confirm that thePackets/Bales, etc., are of a particular weight and not more thanthe stipulated weight as per contract. It may at times give grossweight and net weight of the whole consignment.Manufacturer’s/supplier’s quality/inspection certificateThis is a Certifi-cate to the effect that the goods which have beenmanufactured/supplied are as per the requirement of theContract of Sale.Languages certificate Importers in the European EconomicCommunity Countries require Languages Certificate along withthe GSP Certificate in respect of hand loom cotton fabricsclassifiable under NEMEX Code 55.09. Indian exportersshould apply for this certificate simultaneously or sepa-rately.The Language Certificate is issued in quadruplicate, three copiesof which are given to the exporter. He should transit one copyto his overseas importer, along with other documents, forrealisation of export proceeds.The Languages Certificate is issued by the Textile Committeeagainst a small fee.Manufacturer’s certificate In addition to the Certificate ofOrigin, some countries require a Manufacturer’s Certificate to theeffect that goods shipped have actually been manufactured andare available.Certificate of chemical analysis To ensure that the qualityand grade of items like metallic ores, pigments, etc., is the sameas specified in the Sale Contract, importers may require the

exporter to send a Certificate of Chemical Analysis from arecognised analyst.Certificate of shipment This Certificate is issued by theShipping Agent and ensures that a certain lot of goods havebeen shipped.Health/veterinary/sanitary certificates When the goodsthat are exported are foodstuffs, marine products, hides, livestocks, etc., usually depending upon the goods which are beingimported, a certificate from the Health /veterinary/ SanitaryAuthorities is called for by the overseas buyers. This is becausethe importer desires to know if the goods are fit for humanconsumption.Certificate of conditioning Certificate issued by a CompetentOffice in which, on the basis of the ascertained humidity factor,the dry weight of wool or silk is reckoned and certified. .Antiquity certificate This Certificate is required in the case ofexport of antiques. It is issued by the Archaeological Survey ofIndia.Certiflcate of measurement Freight can be charged either onthe basis of weight or measurement. When it is charged onweight basis, the weight declared by exporter is accepted.However, Certificate of measurement from the Indian Cham-ber of Commerce or any other approved organisation may beobtained by the exporter and given to the shipping companyfor calculation of necessary freight. This Certificate contains thename of vessel, the Port of destination, description of goods,quantity, length, breadth, depth, etc. of packages.Car/Lorry ticket This Ticket is prepared for admittance ofcargo through the Port gate. This is also known as ‘VehicleTicket or Gate Pass’. This includes the details of export cargo,i.e. shipper’s name, car/lorry numbers, marks on packages,quantity and description.Shut out advice It is a statement o(packages shut out by a shipand is prepared by the shed concerned and sent to the exportershowing the particu-lars of packages, for disposal arrangement.Short shipment form Short Shipment Form is an applicationto the Cus-toms Authorities at Port advising the shortshipment of goods and for claim-ing the return of the Dutyand/or Cess paid on such short shipping goods.Shipping advice A Shipping Advice is used to inform theoverseas customer about the shipment of goods. The ShippingAdvice is prepared in Aligned docu-ment. The Exporter onlyadvises );his importer about the Invoice number, Bill ofLading/Airway Bill number and date, name of the vessel withdate, the port ,of export, description of goods and quantityand the date of sailing of the vessel.

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Distinction between - Mate’s Receipt and Bill of Lading

Mate’s Receipt Bill of lading 1. Meaning:- Mate’s is a receipt by the Commanding Officer of the ship when the cargo is loaded on the ship.

Bill of lading is the Official document issued by the shipping company acknowledging the receipt of goods on board the vessel.

2. Purpose:-It is issued in order to enable the exporter or his agent to secure bill of lading from the shipping company.

It is issued in order to enable the importer to take the delivery of goods at the port of destination.

3. Evidence:- It is an evidence of goods having been loaded on board the ship

It is a contract between the shipper and the shipping company for the carriage of goods from the port of loading to the port of destination.

4. Types:- It is of two types : ~ Clean mate's receipt. ~ Qualified mate's receipt

It is of several types : ~ Clean and claused bill of lading, ~ Transhipment bill of lading. ~ Stale bill of lading. ~ Freight Paid & Collect bill of lading

5.Details of Fright:-It does not specify whether the fright is paid on goods on not.

It does specify whether bill of lading is freight paid or not.

6. Issuing Authority:- It is issued by the Commanding Officer of the ship or his mate.

It is issued by the shipping company or its agent.

7. Title of Goods:- It is not a title of goods.

It is a document of title of goods

8. Negotiability:- It is not a negotiable document.

It is a negotiable instrument

9. Sequence:- It is prepared before the bill of lading.

I t is prepared on the basis of the mate's receipt.

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Certificate of Origin Consular Invoice 1. Meaning:- The certificate of origin states that. The goods exported are originally manufactured in the country whose name is mentioned in the certificate

Consular invoice is a certificate issued by the Consulate of the importer's country situated in the exporter's country certifying the volume, value, quality, grade, source, etc., of the goods imported.

2. purpose:-Certificate of origin is required q For claiming the benefit preferential

tariff rates. q In case goods' produced in a

particular country are banned for import in the foreign market.

Consular invoice is required in order to provide accurate information about the volume, value, quality, etc." of the goods imported to the authories of the importing country for the purpose of assessing import duties.

3. Legislation :-It does not require any legislation from the Consulate of the importing country situated in the exporting country.

It does require legislation from the Consulate of the importing country situated in the exporting county.

4.Issuing Authority : It is issued by the Chambers of Commerce, Export Promotion Councils or Authorised Trade Associations.

It is issued only by the Consulate of the. importer's country situated in the exporter's country.

Commercial Invoice Consular Invoice 1. Meaning:- Commercial invoice is the statement of account of sale prepared by the exporter after the execution of export order giving details about the goods shipped.

Consular invoice is a certificate issued by the Consulate of the importers country situated in the exporters country certifying the volume, value, quality,grade,source, etc. of the goods imported.

2. purpose:- It is required : ~ In preparation of various shipping documents. ~ In pre-shipment inspection, excise and customs procedures. ~ In negotiation of documents for collection and claim of incentives.

It is required in order to provide accurate information about the volume, value, quality, grade, source, etc., of the goods imported to the authorities of the importing country for the purpose of assessing import duties.

3. Significance:- It is a primary document and is required for the preparation of various other shipping documents

. It is a secondary document and as such is required when desired by the importer

4. Contents:- It contains the terms and conditions of sale as well as detailed description of the goods to be exported

It contains accurate information about the volume, value, quality, grade, source, etc., of the goods exported

5. Cost:- since, it is prepared by the exporter himself he needs not to pay any charges for the same.

Distinction Between - Certificate of Origin and Consular Invoice

Distinction Between - Commercial Invoice and Consular Invoice

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Lets Sum UpDocumentation in export business is complex but .not difficultto understand if one knows the reasons of making documentsat different stages of export transactions. Some of thesedocuments are made or secured at the preshipment stage whileothers are made or secured after the shipment has been made.The need for export documents arises due to commer-cial, legaland incentive perspectives. Commercial perspective helps inprotecting the respective interests of the exporter and importer.Regulatory perspective emphasises to follow the regulatoryprovisions of that particular country. Incentive perspective helpsin getting various incentives according to the prevailing policy ofthe government.Main commercial documents in C.l.F. contract are: Commercialinvoice, Bill of lading! Airway bill, Post parcel receipt, Insurancepolicy/Certificate and bill of exchange. The details required tobe mentioned in these documents will depend upon the termsand conditions of the export contract/letter of credit.Commercial invoice performs many functions. It is a documentof contents and a bill. It gives information about the shipmentand payment terms and also acts as a certificate of origin. Bill oflading and airway bill are transport documents and act mainly asreceipt of cargo given by the carrier. Bill of lading, in particular,is also a document oftitle and for this reason it acquires thetransferability. Insurance policy/certificate will enable the assured(exporter/importer/bank, etc.) to claim compensation from theinsurance company for loss or damage to the goods caused bythe perils insured against. Bill of exchange protects the interestsof the exporter by linking the payment for goods with theother documents. In other words, the banking channel willensure that the importer does not get the charge of goodsunless he has either paid for the goods or has obligated himselfto make the payment after the expiry of an agreed period. Thisis to be done by accepting and honouring of the Bill ofExchange by the importer.The legal regulatory documents fulfil the legal requirements ofthe concerned countries. In India, law stipulates that for anyoneto be in the export business, registration with the licensingauthorities (Importer- Exporter code No.) is essential. But ifsuch exporter also wants to claim certain specified exportincentives, he will have to get the Registration-Cum-Member-ship Certificates from the concerned export promotionorganization. In addition, the exporter has to follow documen-tation and procedural formalities for any consignment that isshipped. Main documents for these purposes are GR/PPVP/COD/SOFTEX FORM (under Foreign Exchange ManagementAct). Export Licence/Permit. Export Inspection Certificate,Shipping Bill (customs clearance) and port Trust Copy ofShipping Bill Dock Challan/Export Application (Port Clear-ance). In addition to docu-ments needed in exporting countrythe importing country may also specify documents to beobtained by the exporter. These documents are generally in thenature of certificates of . origin and quality. Documents are alsoneeded for claiming export incentives; some of the maindocuments are Invoice and AR41 AR5 Forms (excise rebate).Drawback Copy of Shipping Bill (Duty Drawback)

Faced with the problem of the non- standardized documenta-tion’ Aligned Documentation System’ has been developed. Inline with system. Government of India has also developedStandardized Pre- shipment Export Documents. With the helpof this system. Several documents can be prepared from aMaster document. Import documents include IEC No and Billof Entry.

Questions, BankQl. What is the significance of the Aligned Documentation

System?Q2. What are the contents of Commercial Invoice?Q3. Explain the components of Mate’s Receipt.Q4. What are the different types of Bill of Lading?Q5. What is the significance of Certificate of Origin?Q6. What is the significance of Consular Invoice?Q7. Distinguish between Mate’s Receipt and Bill of Lading.Q8. Distinguish between certificate of Origin and Consular

Invoice.Q9. Distinguish between Commercial Invoice and Consular

Invoice.Q10. What do you mean by “Application for export .Q11. State whether the following Statements are True or False.

i. GR Form is required to be filled in duplicate for allexports in physical form other than by post.

ii. RBI Code Number is required for the purpose ofmonitoring the flow of foreign exchange againstexport of goods by a firm.

iii. Softex form is required to be prepared in duplicate forexport of computer software in non-physical form.

iv. When goods are exported by road or by rail, thedocument used for this purpose is called shipping bill.

v. Drawback shipping bill is used for export of goodsentitled to duty drawback.

Fill in the Blanks

i. Under the Foreign Exchange Regulations, exporters fromIndia have to declare exports on... form for all exports inphysical form other than by post.

ii. The application for getting the Export Inspection Certificateis the... ............

iii. Shipping Bill is prescribed by... authority.iv. Customs Invoice is prescribed by the………country.v. The document prescribed for obtaining GSP facility is

called................vi. ………….. is the document prescribed by the Indian

Railways for getting a priority in the allotment of wagonsfor movement of export consignments.

vii. Main documents for claiming rebate in central excise duty are……….. and………….

Ans.11 (i) True (ii) false (iii) True (iv) True (v) False.Ans:12 I) CNX From and GR form ii) Intimation for inspec-tion iii) Customs iv) Importing v) GSP Certificate of Origin vi)Forwarding note. vi) Invoice and Ar4/AR5 Forms.

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LESSON 18:EXPORT FINANCE

• Objectives• Introduction• Institutional framework• Pre-shipment finance

• Packing Credit• Advance against Incentives• Pre-shipment Credit in Foreign Currency

• Post shipment finance• Negotiation of Export Documents Under Letters of

Credit• Purchase/ Discount of Foreign Bills• Advance against Bills Sent on Collection• Advance against Goods Sent on Consignment• Advance against Export Incentives• Advance against Undrawn Balances• Advance against Retention Money• Post-shipment Export Credit Guarantee and Export

Finance Guarantee• Post-shipment Credit in Foreign Currency

• Export under deffered payment• Deferred credit facilities• Role of export import bank of india.• Recent development in export financing• Lets sum up

• Answers to Check Your Progress• Terminal Questions

ObjectivesAfter studying this unit, you should be able to:1. describe the procedure of pre-shipment credit2. explain various types and procedure of post-shipment

credit .3. explain the role of Export Import Bank of India.4. describe the recent development in export finance.

IntroductionYou have learnt various provisions of Exchange Regulations inUnit 6. Export financing is another important area of exportbusiness. Export finance refers to the credit facilities ex-tendedto the exporters at pre-shipment and post-shipment stages. Itincludes any loan to an exporter for financing the purchase,processing, manufacturing or packing of goods meant foroverseas markets. Credit is also extended after the shipment ofgoods to the date of realisation of export proceeds. In thisunit, you will learn various schemes of finance avail-able toexporters at pre-shipment and post-shipment stages. You will

also be acquainted with the role of EXIM Bank in exportfinance.

Institutional FrameworkInstitutional framework for providing finance comprisesReserve Bank of lndia, Commercia1 Banks, Export ImportBank of India and Export Credit and Guarantee Corporation.Reserve Bank of India, being the central bank of country, laysdown the policy frame work and pro-vides guidelines forimplementation.Finance short or medium term, is provided exclusively by theIndian and foreign commercial banks which are members ofthe Foreign Exchange Dealer’s Association. The Reserve Bankof India function as refinancing institutions for short andmedium term loans respectively, Provided by commercial banks.Export Import Bank of India, in certain cases, participates withcommercial bank in extending medium term loans to exporters.Commercial banks provide finance at a concessional rate ofinterest and in turn are refinanced by the Reserve Bank! ExportImport Bank of India at concessional rate. In case they do notwish to avail refinance, they are entitled for an interest ratesubsidy. Export Credit & Guarantee Corporation (ECGC) alsoplays an important role through its various policies andguarantees providing cover for commercial and political risksinvolved in export trade.

Pre-shipment FinancePre-shipment finance is provided to the exporters for thepurchase of raw materials, process-ing them and convertingthem into finished goods for the purpose of export. Let usdiscuss various pre-shipment advances available to the export-ers.

Packing CreditThe basic purpose of packing credit is to enable the eligibleexporters to procure, process, manufacture or store the goodsmeant for export. Packing credit refers to any loan to an exporterfor financing the purchase, processing, manufacturing orpacking of goods as defamed by the Reserve Bank of India. Itis a short-term credit against exportable goods.Packing credit is normally granted on secured basis. Sometimesclear advance may also be granted. Many advances are clean attheir initial stage when goods are not yet acquired. Once thegoods are acquired and are in the custody of the exporter banksusually convert the clean advance into hypothecation! pledge. Letus first discuss the detail procedure of packing credit.Eligibility: Packing credit is available to all exporters whethermerchant exporter, Export/ Trading/ Star Trading/ Super StarTrading Houses and manufacturer exporter. Manufacturers ofgoods supplying to Export/ Trading/ ST/ SST Houses andMerchant exporters are eligible for packing credit. The-foreignbuyer through the medium of a reputed bank gives the creditto eligible exporters, for specified purposes against irrevocable

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letter of credit. It is also available against a confirmed or firmexport order/contract placed by the buyer for export of goodsfrom India.Running Account Facility: The RBI has permitted banks togrant packing credit advances even without lodgement of-L/ Cor firm-order/ contract under the scheme of Running Ac-countFacility subject to, the fol1owing.conditions .

i. The facility may be extended, J1rcwid.ed the need forRunning Account facility has been established by theexporters to the’ satisfaction of the bank.

ii. The bank may extend this facility only to those exporterswhose track record has been good.

iii. L/C or firm order is produced within a reasonable periodof time. For Commodities under selective credit control,banks should insist on production of LlCs or firm orderswithin one month from the date of sanction.

iv. The concessive credit available ~in respect of individualpre-shipment credit should not go beyond 180 days.

Packing credit may also be given under the Red Clause letter ofcredit. In this method, credit’ is given at the instance andresponsibility of the foreign bank establishing the LlC. Here,the packing credit advance is made against a simple receipt and isunsecured.Amount:- The loan amount is decided on the basis of exportorder and the credit rating of the exporter by the bank. Gener-ally the amount of packing credit will not exceed FOB value ofthe export goods or their domestic value whichever is less. Itcan be to the extent of domestic value of the goods eventhough such value is higher than their FOB value provided thegoods are entitled to duty draw back and also covered by theExport Production Finance Guarantee of the ECGC.Period:- The packing credit can be granted for a maximumperiod of 180 days from the date of disbursement. The banksare authorised by RBI to extend this period. This period can beextended for a further period of 90 days, in case of non-shipment of goods within 180 days. The extension can be doneprovided the banks are satisfied that the reasons for extensionare due to circumstances beyond the control of the exporters.Pre-shipment credit may be given for a longer period upto amaximum of270 days, if the banks are satisfied about the needfor longer duration of credit.Rate of Interest:-The interest payable on pre-shipment financeis usually lower than the normal rate, provided the credit isextinguished by lodging the export bills on remittances fromabroad. If the exporter fails to do so they would not be able toavail concessional rate of interest.In order to avail the packing credit; exporters are expected tomake a formal application to the bank giving details of creditrequirements along with the required documents.

Advance Against IncentivesWhen the value of the materials to be procured for export ismore than FOB value of the contract, the exporters may getpacking credit advance more than the FOB value of the goods.The excess of cost of production over the FOB value of thecontract represents incentives receivables. For example, when the

domestic price of goods exceeds the value of export orders, thedifference represents duty drawback entitlement. Banks cangrant ad-vances against duty drawback at pre-shipment stagesubject to the condition that the loan is covered by ExportProduction Finance Guarantee of Export Credit GuaranteeCorporation (ECGC). This guarantee enables banks to sanctionadvances at the pre-shipment stage to the full extent of cost ofproduction. The extent of cover and the premium are the, sameas for packing credit guarantee.

Pre-shipment Credit in Foreign CurrencyThis is an additional window to rupee packing credit scheme.This credit is available to cover both the domestic and importedinputs of the goods exported from India. The facility isavailable in any of the convertible currencies. The credit will beself-liquidating in nature and accordingly after the shipment ofgoods the bills will be eligible for discounting/ rediscount-ingor for post-shipment credit in foreign currency. The exporterscan avail this finance under the following two options.i. the exporters may avail pre-shipment credit in rupees and,

then, the post-shipment credit either in rupees or in foreigncurrency denominated credit or discounting/ rediscountingof export bills.

ii. The exporters may avail pre-shipment credit in foreigncurrency and discounting/ rediscounting of the export billsin foreign currency.

PCFC credit will also be available both to the supplier units ofEPZ/ EOU and the receiver units of EPZ/ EOU. The credit inforeign currency shall also be available on exports to AsianClearing Union (ACU) Countries. This will be extended only °!lthe basis of confirmed! firm export orders or confirmed L/Cs.The Running Account facility will not be available under thescheme.

Post-shipment FinanceIt may be defined as “any loan or advance granted or any othercredit provided by a bank to an exporter of goods from Indiafrom the date of extending the credit after shipment of goodsto the date of realisation ion of export proceeds. It includes anyloan or advance granted to an exporter on consideration of oron the security of, any duty drawback or any cash receiv-ables byway of incentive from the government.While granting post-shipment finance, banks are governed bythe guidelines issued by the RBI, the rules of the ForeignExchange Dealers Association of India (FEDAI), the TradeControl and Exchange Control Regulations and the Interna-tional Conventions and Codes of the International Chambersof Commerce. The exporters are required to obtain credit limitssuitable to their needs. The quantum of credit depends onexport sales and receivables.Post shipment finance is granted under various methods. Theexporter may choose the type of facility as per his requirement.The Banks scrutinise the documents submitted for complianceof exchange control provisions like:i. the documents are drawn in permitted currencies and

payment receivable as permitted method of payment;ii. the relevant GR/PP form duly certified by the customs is

submitted and particulars as stated in the GR/PP form are

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Nconsistent with the documents tendered as well as the salecontract! firm order etc./ letter of credit;

iii. the documents are submitted within the time limitstipulated and in case of delay suitable explanation is made;

iv. the period of usance is in consonance with the time limitprescribed for realisation of export proceeds.

Let us now discuss various types of post-shipment finance.1. Negotiation of Export Documents Under Letters of Credit

Where the exports are under letter of credit arrangements,the banks will negotiate the export bills provided it is drawnin conformity with the letter of credit. When documents arepre-sented to the bank for negotiation under L/C, theyshould be scrutinized carefully taking into account all theterms and conditions of the credit. All the documentstendered should be strictly in accordance with the L/Cterms. It is to be noted that the L/C issuing bank under-takes to honour its commitment only if the beneficiarysubmits the stipulated documents. Even the slightestdeviation from those specified in the L/C can give an excuseto the issuing bank of refusing the reimbursement of thepayment that might have been already made by thenegotiating bank.

2. Purchase/Discount of Foreign BillsPurchase or discount facilities in respect of export billsdrawn under confirmed export contracts are generallygranted to exporters who enjoy bill purchase/discountinglimits sanctioned by the bank. As the security offered by theissuing bank under letter of credit arrangement is notavailable, the financing bank is totally dependent upon thecredit worthi-ness of the foreign buyer. The documents,under the Documents against Payment (DIP) arrangements,are released through foreign correspondent only whenpayment is received. Whereas in the case of Documentsagainst Acceptance (D/A) bills, documents are delivered tothe overseas importers against acceptance of the draft tomake payment on maturity. Since the financing banks areopen to the risk of non-payment, ECGC policies issued infavour of exporters and assigned to banks are insistedupon.Under the policy, ECGC fixes limits and payment terms forindividual buyers and the financ-ing bank has to ensure thatthe limit is not exceeded so that the benefits of policy areavail-able. Banks also secure a guarantee from ECGC on thepost-shipment finance extended by them either on aselective or whole turnover basis. Banks sometimes doobtain credit reports on foreign buyers before they purchasethe export bills drawn on the foreign buyer.

3. Advance against Bills Sent on CollectionPost-shipment finance is granted against bills sent oncollection basis in the following situations:i. when the accommodation available under the foreign

bills purchase limit is exhaustedii. when some export bills drawn under L/ C have

discrepancies.

iii. where it is customary practice in the particular line oftrade and in the case of exports to countries wherethere are problems of externalisation.

Under the above situation, the bank may send the bill oncollection basis and finance the exporter to some extent outof the total bill amount. The amount advanced will beliquidated out of the export proceeds of the export bill andthe balance paid to the exporter.Exporters may avail themselves on the forward exchangefacility where they do not wish to be subjected to exchangerisk on account of the new procedures for overdue exportbills.

4. Advance against Goods Sent on ConsignmentSometimes exports are effected on consignment basis. Insuch condition payment is receiv-able to sale of goods.Goods are exported at the risk of exporter for sale. Thebanks may finance against such transaction subject to theexporter enjoying specific limit for such purpose. Theoverseas branch/ correspondent of the bank is instructed todeliver documents against Trust Receipt.

5. Advance against Export IncentivesAdvances against the export incentives are given at the pre-shipment stage as well as the post-shipment stage.However, the major part of the advance is given at the post-shipment stage. The advance is granted to an exporter inconsideration of or on the security of any duty drawbackincentives receivable from the Government. The banksfollow their own procedure in granting the advance. Themost common practice is to obtain a power of attorneyfrom the exporter executed in their favour by the banks. Itis sent to the concerned government department like theDirector General of Foreign Trade, Commissioner ofCustoms, etc. These advances are not granted in isolation. Itis granted only if all other types of export finance areextended to the exporter by the same bank.

6. Advance against Undrawn BalancesIn some of the export business, it is the trade practice thatthe bills are not drawn for the full invoice value of thegoods. A small part of the bills is left undrawn for paymentafter adjust-ments due to difference in weight quality, etc.Advances are granted against such undrawn balances. In thiscase the export proceeds must be realised within 90 days.The advances are granted provided the undrawn balance isin conformity with the normal level of balances leftundrawn subject to a maximum of 5% of the full exportvalue. The exporters are supposed to give an undertakingthat they will surrender the balance proceeds within 6months from the date of shipment.

7. Advance against Retention MoneyBanks grant advances against retention money, which ispayable within one year from the date of shipment. Theadvances are granted upto 90 days. If such advances extendbeyond one year, they are treated as deferred paymentadvance which are also eligible for concessional rate ofinterest.

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8. Post-shipment Export Credit Guarantee and ExportFinance GuaranteePost-shipment finance given to exporters by banks throughpurchase, negotiation or dis-count of export bills oradvances against such bills qualifies for this guarantee.Exporters are expected to hold appropriate shipments orcontracts policy of ECGC to cover the overseas credit risks.Export Finance Guarantee cover post-shipment advancesgranted by banks to exporters against export incentivesreceivable in the form of duty drawback, etc.

9. Post-shipment Credit in Foreign CurrencyThe exporters have the option of availing of exports creditat the post-shipment stage either in rupee or in foreigncurrency. The credit is granted under the Rediscounting ofExport Bills Abroad Scheme ( EBR) at LIBOR linkedinterest rates. The scheme covers export bills with usanceperiod upto 180 days from the date of shipment.Discounting of bills beyond 180 days requires priorapproval from RBI. The exporters have the option to availof pre-shipment credit and post-shipment credit either inrupee or in foreign currency. If pre-shipment credit has beenavailed of in foreign currency, the post-shipment creditnecessarily to be under the EBR scheme. This is donebecause the foreign currency pre-shipment credit has to beliquidated in foreign currency.

Exports under Deferred PaymentsYou have learnt that all export proceeds must be surrendered toan authorised dealer within 180 days from the date of ship-ment. Exporters are required to obtain permission from theReserve Bank through authorised dealers in the event of non-realisation of export proceeds within the prescribed period.However, realising the special needs of exports of engineeringgoods and projects, Reserve Bank has formulated specialschemes permitting deferred credit arrangements. This willenable realisation of export proceeds over a period exceeding sixmonths. Hence, contracts for export of goods and servicesagainst payment to be secured partly or fully beyond 180 daysare treated as deferred payment exports. The credit extended istermed as deferred payment term credit.For financing under deferred credit system a single pointapproval mechanism within a three tier system operates.This system includes:i. Commercial banks who are authorised dealers in foreign

exchange in India, can provide in principle clearance forcontracts valued upto Rs. 25 crores. They can avail refinancefrom EXIM bank.

ii. EXIM bank is empowered to give clearances for contracts ofvalue of above Rs. 25 crores and upto Rs. ) 100 crores.

iii. A working group considers proposals of contracts of valuebeyond Rs. 100 crores. The working group consists ofrepresentatives of all the above institutions to providesingle window clearance.

Deferred credit facility is normally allowed only for export ofengineering goods, turnkey projects involving rendering ofservices like designing, civil construction and erection and

commissioning of plant or factory alongwith supply ofmachinery, equipment and materials. Project exports eligible forexport finance are as follows:i. Turnkey projects: These projects involve supply of

equipment alongwith related services like design, detailedengineering, civil construction, erection and commissioningof plants, etc.

ii. Construction projects: involve civil works, steel structuralworks as well as associated supply of construction materialsand equipment.

iii. Technical and consultancy service contracts involveprovision of personnel, furnishing of knowhow, skills,operation and maintenance services and managementcontracts.

These services include:a. Engineering services contracts involve supply of services

such as design, erection, commissioning or supervision oferection and commissioning.

b. Consultancy services contracts involve preparation offeasibility studies, project reports, preparation of designsand advice to the project authority on specifications forplant and equipments.

Deferred Credit FacilitiesExport of goods on deferred payment terms can be financedunder suppliers credit or buyer’s credit. Let us first understandwhat they are,Supplier’s Credit: The exporter extends credit directly to theoverseas buyer and seeks refinance from commercial banks/EXIM bank.Buyer’s Credit: It is a loan extended by a financial institutionsor a consortium of financial institutions to the overseas buyerfor financing a particular contract. Let us discuss buyer’s Creditin detail.Under this scheme, credit is granted by EXIM Bank jointly withan authorised dealer to foreign buyers in connection’ withexport of capital goods and turnkey projects from India. Theexporters are paid out of the buyer’s credit on a non-recoursebasis on their complying with the terms of the export contractsto be financed under the scheme. Before the exporter enters intoany contract providing for credit terms to be financed underbuyer’s credit scheme, they should have detailed discussion withthe bankers. While considering proposals under the scheme, thefollowing factors are taken into account by EXIM Bank:i. competence and capability of Indian exporters in complying

with the proposed commercial terms of the contract;ii. justifiability of the contract on commercial considerations;iii. economic viability of the overseas projects concerned of the

importer and general economic conditions of his country~iv. credit worthiness of foreign borrower.Reserve bank’s permission is also required for the purpose ofgranting credit under the scheme since payment will have to bemade to the exporter on behalf of non-resident buyer. Theauthorised dealer in Form DPX 6 should make application tothe Reserve Bank for the purpose.

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NExport Import Bank of India: Pre- shipment

Export Credit in Foreign CurrencyIn addition to the pre- shipment credit in foreign currencygranted by the commercial banks, the Export- Import Bank ofIndia (EXIM Bank) also offers the facility of pre- shipmentexport credit in foreign currency to only specified categories ofthe exporters unlike the PCFC offered by commercial banks toall categories of the exporters. The specified categories ofexporters are as follows:a. Export House/Trading House with annual export turnover

exceeding Rs 10.00 crores.b. Manufacturing units with minimum export orientation of

25% of pro-duction or export turnover exceeding Rs. 5crores, whichever is lower. For this purpose only physicalexports of commodities are taken into ac-count. Suchexports could be made either directly or through TradingHouses.

c. The exporter should have satisfactory.The Export Import Bank of India provides this facilities to theexporters through commercial banks. Such credit is granted topay for the import of inputs required for export production.This credit is granted on the basis of the firm export order orthe letter of credit.

Salient FeaturesThe salient features of this scheme are as follows:1. EXIM Bank raises short-term foreign currency funds on a

revolving basis from one or more Syndicates of overseaslenders. Such funds are then made available by the EXIMBank to the commercial banks in India who opt to avail ofPCFC for on-lending to eligible exporter customers forimport of eligible items. The commercial banks will, inturn, allocate PCFC limits to their customers on the basisof their assessment of import requi.rement for exportproduction. The advances granted under PCFC to theexporters is fully liquidated from the export proceeds of therelative export bill.

2. The maximum period of an advance under PCFC will notgenerally exceed 180 days.

3. The applicable rate of interest on credit available to theexporter will be two per cent over and above the interest rateat which the funds are raised by the EXIM Bank. Exportersmay also have to pay management fee, commitment, fee,etc, if applicable.

4. The repayment of the pre-shipment credit will be made outof sale pro-ceeds of export shipment in respect of whichthe exporter availed of the facility.

Role of Export Import Bank of IndiaExport-Import Bank of India was set up in 1982, for thepurpose of financing, facilitating and promoting foreign tradeof India. It is the principal financial institution in the countryfor coordinating working of institutions engaged in financingexports and imports. The major functions of EXIM bank areas follows;Finance: The present focus of EXIM Bank is on exportfinance. The Bank finances export of Indian machinery,

manufactured goods, consultancy and technology services ondeferred payment terms. Exim Bank finance is also available atexport production stages.Services: EXIM Bank provides information, advisory servicesto enable exporters to evaluate the international risks, exportopportunities and competitiveness.Research & Analysis: Research & Analysis carried out onspecific industry sub sectors with export potential, and interna-tional trade related subjects are provided to exporters. Look atTable 7.1 where details of various programmes offered by theEXIM Bank have been shown.Table 7.1 lending and service programmes of EXIM Bank

Programme Use For Indian Entities Export (Supplier's) Credit

Enables Indian exporters to extend term credit to Overseas importers, of eligible Indian goods

Financing of Rupee Expenditure for projects Export Contracts

Enables companies to meet cash flow deficits of projects being executed overseas on cash payment terms

Finance for Consultancy And Technology Services

Enables Indian exporters of consultancy and technology services to extend term credit to overseas Importers

Pre-shipment Credit Enables Indian exporters to buy raw material and other Inputs for export contracts involving cycle time exceeding six months.

Finance for Deemed Exports Enables Indian Companies to meet cash flow deficits of contracts secured in India and financed by multilateral funding agencies.

Foreign Currency Pre-shipment credit

Enables eligible exporters to access finance for import of raw materials and other inputs needed for export Production

Finance for EOU's & Units in EPZs

Enables Indian companies to acquire indigenous and imported machinery and other assets for export Production

Foreign Currency Lines of Credit for imports

Enables eligible export-oriented units to acquire imported machinery for export production.

Export Vendor Development Finance

Enables vendors of export-oriented units to acquire plant & machinery and other assets for increasing export capability

Export Product Development Finance

Enables Indian firms undertake product development, R & D for exports.

Overseas Investment Finance Enables Indian promoters to finance equity contribution in joint ventures/ WOS set up abroad.

Software Training Institutes Enables setting up of institutes for software training.

Marketing Finance Enables exporters to implement market development Programmes and finances productive capabilities through loan financing.

Production Equipment Finance Enables eligible export-oriented units to acquire equipment.

Services Underwriting

Enables Indian exporters to raise finance from capital markets through public/ rights issues of equity shares/ debentures with the backing of EXIM Bank's underwriting commitment.

Forfaiting

Enables Indian exporter to convert credit sale to cash sale on without recourse basis. Enables Indian companies to provide requisite guarantees to facilitate execution of export contracts and import transactions

Guarantee Facility Enables Indian companies to provide requisite guarantees to facilitates execution of export contracts and import transactions.

L/C Confirmation Confirmation of L/Cs covering import of capital goods

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Project preparatory services Overseas

Enables Indian Consultancy firms undertake project preparatory studies in developing countries by grant/loan financing.

Business advisory & Technical Assistance Services overseas

Enables Indian consultancy firms undertake specific assignments in select countries through grant financing

Cooperation Arrangement with African Management services Co.(AMSCO) Amsterdam

Enables Indian consultants secure assignments in various projects that are managed by AMSCO in different parts of sub-saharan Africa through grant financing.

Africa Enterprise fund Enables Indian Consultancy firms to undertake specific assignments to assist small and medium entrepreneurs in Sub-Saharan Africa.

Africa project development Facility.

Enables Indian Consultancy firms undertake specific assignments in Sub-Saharan Africa through grant financing.

EC Investment partners Facility Enables setting up of joint ventures in India between Indian companies and enterprises in the European Community

Recent Developments in ExportFinancingAs stated earlier, offer of attractive credit terms is a crucial factorin winning export contracts. Hence, financial institutions areoffering several innovative financial services to exporters. Someof these services are discussed below:Factoring: It is an attractive way of providing export finance toexporters. In this system, factor bears the complete credit risk.Who is a factor? A factor is a special type of agent who,depending upon the type of agreement, offers a variety ofservices. These services include coverage of credit risk, collectionof export proceeds, maintenance of accounts receivables andadvance of funds. Purchase of receivables of its clients withoutrecourse is the most important service of the factor. A bigadvantage to the exporter is that it is without recourse financing.This means that the risk of non-payment by the importer is tobe borne entirely by the factor.In India, International Export Factoring services on withrecourse basis have been approved by the RBI. It provides anew dimension to management of export receivables. SBIFactors and Commercial Services Pvt. Ltd., Bombay have been

For Commercial banks Refinance of Export credit

Enables bank to offer credi t to Indian exporters of eligible goods, who extend term credit over 180 days to importers overseas.

Small scale industry Export Bills Rediscounting

Enables bank to rediscount exports bills of their SSI customers with usance not exceeding 90 days.

Relending facility Enables banks overseas to make available term finance to their clients for import of eligible Indian goods.

Refinance of Term Loans to EOUs

Enables banks to offer credit to eligible export oriented units to acquire indigenous and imported machinery and other assets for export production.

Bulk Import Finance

Enables banks to offer finance to importers for bulk import of consumable inputs.

Guarantee cum Refinance Supplier’s Credit

Enables banks to protect their own cash flow as also its Exporter client’s cash flow on account of default by overseas buyer. Protects the bank by not treating the advance as a non-performing asset for provisioning purpose.

For Overseas Entities Lines of Credit

Enables overseas financial institutions, foreign governments, their agencies to onlend term loans to finance import of eligible goods from India.

Buyer’s Credit Enables overseas buyer to import eligible goods from India on deferred credit terms.

permitted to provide International Export Factoring. In thissystem, the exporter enters into an export factoring agreementwith exporter’s factor. The exporters ship goods to approvedforeign buyers. Each invoice is made payable to a specific factorin the importer’s country. Copies of invoices and shippingdocuments are sent to the Importer’s factor. Exporter’s factorwill make prepayment to the export against approved exportreceivables. On receipt of payments from the importer on duedate of invoice, importer’s factor remits the fund to theexporter’s factor. The exporter’s factor pays to the exporter afterdeducting the amount of prepayments.Forfaiting: Forfaiting refers to the non-recourse discounting ofexport receivables. It is a mechanism of financing exports thatinvolves less risk and enhances international competi-tiveness.It converts a credit sale into cash sale for an exporter. In thissystem forfaiting agency discounts international trade receivablesof the exporter. The forfaiter pays the exporter in cash andundertakes the risk associated with the export deal. The exportersurren-ders, without recourse to him, his rights to claim forpayment on goods delivered to an importer.All exports of capital goods and other goods made on mediumto long term credit are eligible to be financed through forfaiting.In India, EXIM bank plays an intermediary role between theIndian exporter mid the overseas forfaiting agency. The exporterapproaches EXIM bank for forfaiting transaction. The bankreceives bills of exchange or promissory notes from theexporter and sends them to the forfaiter for discounting.Subsequently, the bank arranges for the discounted proceeds tobe remitted to the Indian exporter. The bank issues appropriatecertificates to enable Indian exporters to remit commitment feesand other charges. RBI has allowed Authorised dealers toundertake forfaiting of medium term export receivables.

Let Us Sum UpExport finance is provided at the pre-shipment and post-shipment stages. In India, the export credit facilities areprovided largely by commercial banks, RBI and EXIM banksoffer refi-nance. EXIM bank, in certain cases, participates withcommercial banks in extending medium and long-term credit toexporters. In India, pre-shipment finance is offered in the formof(i) Packing credit (ii) Advance against incentives and (iii) Pre-Shipment Credit in Foreign Currency (PCFC). Packing creditfacilities are provided to the exporters for making necessaryarrangements for executing export contracts. The basic purposeof packing credit is to enable the eligible exporters to procure,process, manufacture or store the goods meant for export. It isextended on the strength of either the letter of credit orconfirmed export contracts. Gener-ally the amount of packingcredit does not exceed FOB value of the export goods or theirdomestic value whichever is less. When the value of thematerials to be procured for export is more than FOB value ofthe contract, the exporters may get the credit against thereceivables export incentives. The pre-shipment finance is alsomade available in foreign currency.The credit provided by a exporter after the shipment of goodsis referred to the post-ship-ment credit. The quantum of creditdepends on export sales and receivables. Various types of post-shipment credits are: (i) Negotiation of Export Documents

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Nunder letter of credit (ii) Purchase/ discount of foreign bills (iii)Advance against bills sent on collection basis (iv) Advanceagainst goods sent on consignment basis (v) Advance againstexport incen-tives (vi) Advance against undrawn balances (vii)Advance against retention money (viii) Post-shipment exportcredit guarantee and export finance guarantee and (ix) Postshipment credit in foreign clemency. Deferred credit facilities areoffered for export of engineering goods, turnkey projects andconsultancy projects.Export Import Bank plays an important role in promotingexports from India through its various financing schemes. Itrefinances to commercial banks in respect of credit extended bythem to exporter, gives loans to Indian companies for financingexports under deferred payment, provides lines of credit andbuyer’s credit to overseas entities. The bank also advises Indianexporters on matters pertaining to terms of payment, exportfinancing, etc. Factoring and Forfaiting are the recent develop-ments in export financing.

Terminal Questions1. What is the purpose of extending packing credit to

exporters? Explain the procedures of packing credit.2. What do you mean by pre-shipment finance? Enumerate

the methods of pre--shipment finance. Describe theprocedure of pre-shipment credit in foreign currency.

3. What is post - shipment finance? Explain various methodsof post-shipment finance.

4. Explain the procedures of export under Deferred payments.5. Describe the role of Export Import Bank of India.6. Write short notes on:

i. Pre-shipment Credit in Foreign Currencyii. Post-Shipment Credit in Foreign Currencyiii. Buyer’s Creditiv. Factoringv. Forfaiting

7. State whether following statements are True or False.i. Generally the amount of packing credit will not exceed

FOB value of the export goods or domestic valuewhichever is less.

ii. Banks are authorized to extend packing credit for afurther period of 180 days.

iii. Pre-shipment credit in foreign currency can not begranted on exports Asian Clearing union countries.

iv. Whenever exporter wants he can avail the postshipment advance against bills sent on collection basis.

v. Advances against the export incentives are given at thepre-shipment stage as well as the post shipment stage.

Answers(i) true (ii) false (iii) false (iv) false (v) true.

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LESSON 19:PROCESSING OF AN EXPORT ORDER

• Objectives• Introduction• Nature and Format of Export Order• Examination and Confirmation of Export Order• Manufacturing or Procuring Goods• Central Excise Clearance• Pre- Shipment Inspection• Appointment of Clearing and Forwarding Agents• Transportation of Goods to Port of Shipment• Port Formalities and Customs Clearance• Dispatch of Documents by Forwarding Agent to the

Exporter• Certificate of Origin and Shipment Advice• Presentation of Documents to Bank• Claiming Export Incentives

• Excise Rebate• Duty Drawback

• Let Us Sum Up• Terminal Questions

ObjectivesAfter studying this unit, you should be able to: .• describe different stages, preparation and processing of

documents for pre-shipment andpost-shipment formalities• explain specific points to be examined while confirming the

receipt of the export order• explain documentary requirements for obtaining excise and

customs clearance of export cargo• describe formalities for c1aiming major export incentives• enumerate documents to be submitted to the Bank.

IntroductionYou have learnt the regulatory framework of foreign trade, theexport sales contract the range of documentation formalities inexport- import trade and Electronic Data Interchange System inUnits 1.2,3 and 4. An export exercise is concluded successfullyafter the exporter has been able to deliver the consignment inaccordance with the export contract and receive payment for thegoods. In this unit you will learn various steps involved in theprocessing of an export order at per- shipment, shipment andpost- shipment stages. You will also learn various formalitiesof claiming export incentive.

Nature and Format of Export OrderProcessing of an export order starts with the receipt of anexport order. An export order may !,e either in the form ofexport sales contract, which is concluded and incorporated in theform of a document or in the form of evidence or an instru-ment evidencing the conclusion of a contract.

Simply stated, it means that there should be an agreement,which is mostly reduced in a documentary form, between theexporter and the importer before the exporter can start makingarrangements for production or procurement of goods andtheir shipment.Generally an export order may take the following forms:i. Proforma Invoice accepted and signed by the importerii. Purchase Order accepted and signed by the exporteriii. Letter of Credit opened by the importer in favour of the

exporter.A proforma Invoice is prepared and sent by the exporter to theimporter. After accepting the terms and conditions given in it asgiven in a documented contract, if any, the importer returns acopy of this invoice to the exporter. Such a process helps inaccepting the offer of the exporter by the importer and, thus theconclusion of an export contract. In the case of long- termcontract, the exporter may be required to send proforma invoicefor any intended ‘shipment. Alternatively, the export contractmay require a purchase order to be sent by the importer to theexporter. If the purchase order is in accordance with the termsand conditions of the contract, the exporter will duly accept it.Opening of a letter of credit is also a common method ofreceiving the export order. Although an instrument of pay-ment, the letter of credit states major terms and conditions ofshipment and enables the exporter to start processing of theexport order.

Examination and Confirmation of ExportOrderAs soon as an export order has been received, the exporter mustfirst acknowledge its receipt by intimating the importer throughtelephone, telex, fax, etc. Though not legally necessary, this stepis helpful in creating business goodwill for the exporter. Theexporter must carefully examine the contents of the order to seethat there is no discrepancy between the export order and exportcontract (verbal or written). Thus, the accepted proformainvoice, buyers purchase order or the letter of credit opened infavour of the exporter must be examined. Items to be exam-ined particularly are:i. Product description, including specification, style, colour,

packing conditions, etc.ii. Marking and labelling requirements, if any.iii. Terms of payment, including currency, nature of letter of

credit (revocable. irrevocable, confirmed, unconfirmed,restricted, unrestricted, etc.), credit period, if any.

iv. Terms of shipment including choice of carrier, mode ofcarriage, place of delivery, date of shipment! delivery, portof shipment, Transhipment, etc

v. Inspection requirement including type of inspection andinspecting agency.

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Nvi. Insurance requirements including risk being covered and

insurable value.vii. Documents for realising payment including the nature and

number of invoices. certificate of origin, certificate ofinspection, certificate of value, bill of exchange, insurancepolicy, transport document and document of title, etc.

viii. Last date of negotiation of document with the bank.A new exporter who is very keen to get into the business maytend to ignore certain aspects of the export order. It is notuncommon that he encounters difficulties while complyingwith the contracted obligations. In the process, he may suffer aloss. For example, the importer may specify inspection to beundertaken by an agency, which does not operate from India.Such a problem will be discovered only after the goods havebeen manufactured. At this stage. it may be difficult to persuadethe importer to change this condition. Consequently, theexporter may suffer a loss. If there are any discrepancies in theexport order, the importer must be immediately informed forits amendment. It is only after the amended order has beenreceived and confirmed by the exporter that he becomes liable tofulfil his contractual obligations. It is commercially prudent toconfirm the order by sending a documentary confirmation. Incertain contracts it may also be the legal requirement.There is no specific format of this confirmatory letter ‘and anordinary letter would serve the purpose. Although someexporters have printed the letter with suitable blank spaces..

Manufacturing or Procuring GoodsEvery export firm has devised internal procedures to suitspecific requirements for ensuring production or procurementof goods, packing, marking and labelling, and dispatching tothe port for shipment. A systematic approach to these activitiescould be to send a delivery note, in duplicate to the productiondepartment. In the case of a merchant- exporter, the marketingdepartment may send a: similar document known as purchaseorder.Specific instructions are given on the above-mentioned docu-ment to the production/procurement department forundertaking production and transport activities. Besidesmentioning the time period within which these activities are t9be completed, delivery note/purchase order may give suchdetails as: product specification, quantity required, packing,marking and labelling requirement, excise clearance requirement,intimation to transport department if any. The marketing orexport department should also instruct the production/procurement department to retain one copy of the deliverynote/ purchase order and confirm the delivery (i.e., transporta-tion to the port) on the duplicate copy.The purchasing, processing manufacturing and packing ofgoods for exports are facilitated by the packing .credit facilitygiven by the commercial banks in India. Under the export credit(interest subsidy) scheme, the Reserve Bank of India enablesthe commercial banks to extend pre-shipment and post-shipment credit to exporters manufacturers, as well as merchantexporters.Pre- shipment credit is given to an exporter to fiancé workingcapital needs for purchase of raw materials, processing them

and converting them into finished goods for the purpose ofexports. This facility is accorded on the basis of either the letterof credit or the confirmed export order or any other evidence ofthe order. The rate of interest charged is concessional one.Banks also grant post- shipment credit to bridge the time- gapbetween. the shipment of the goods and the realisation of saleproceeds.Packing credit advances are normally granted on secured basis,which may mean collateral security through a third partyguarantee or mortgage of immovable property. Once the goodshave been acquired they are to be hypothecated. The banks haveevolved their own docu-mentation and procedural systems forgranting the credit. Generally, following disbursement proce-dure is followed:i. The exporter hands over the export order letter of credit to

the bank, which will accept it and affix a rubber stamp on itreading ‘export finance granted’.

ii. The bank will calculate the drawing power of the exporteron the basis of a number of factors, including the value ofexport order/letter of credit.

iii. Funds will be released by debiting to the packing creditaccount and credit to exporter’s account.

iv. Goods will. generally be required to be sent through theapproved transport agencies and forwarding agents.

v. Goods will be suitably insured while in the warehouse andin transit.

On the basis of the laid down procedures, the exporter willapproach the bank for the pre-shipment credit. This credit isgranted to enable the reporter to manufacture/ procure andpack the goods for shipment overseas.

Central Excise ClearanceThe Central Excise and Salt Act of India and the related rulesprovide the refund of excise duty paid. This also providesexemption from the payment of excise duty both on the finalexport production and inputs used in the manufacture ofexport products, popularly known as rebate in excise duty. Thedocuments used are Invoice and AR4/ AR5 forms.As soon as goods are ready for dispatch to the port forshipment, the production depart-ment of export firm is toapply to the central excise authority for excise clearance of thegoods.The exporters prepare six copies of AR4/AR5 forms. Theexporters are now allowed to remove the goods for export ontheir own without getting the goods examined or after theexamination by the Central Excise Officers. In case of withoutexamination, exporter submits 4 copies of 1):R4 /ARS form tothe superintendent of Central Excise having Jurisdiction overthe premise of the exporter within twenty-four hours of theremoval of the consignment. The Superintendent examines theAR4/AR5 form and having being satisfied, signs the form andreturn it to the concerned persons.Sometimes the exporter desires sealing of the goods by theCentral Excise Officers so that the custom officers at the port ofshipment may not examine the export goods. hi such case, theexporter submits AR4/ AR5 forms in sixtuplicate to the

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superintendent of Central Excise having jurisdiction over thepremises of the exporter. The superintendent may depute aninspector of Central Excise or may himself go for selling andexamination of export cargo. After be is. satisfied, he allows theclearance of cargo.

Pre-shipment InspectionGovernment of India notifies, from time to time, a number ofgoods whose export is subject to compulsory quality control orpre- shipment inspection. Consequently, the Indian customsauthorities will require the submission of an inspectioncertificate issued by the designated. agency bef6repermitting theshipment to take place. The basis of inspection is usually the.importer’s specification, except in the case of export of goodsinvolving safety or health hazards, where notified minimumstandards are enforced.Inspection of export goods may be conducted under1. Consignment-wise Inspection2. In-process Quality Control and3. Self-CertificationLet us discuss consignment-wise inspection. Before the exciseauthorities seal packs, the process of pre-shipment inspectionmust be completed. The production department is to apply tothe, Export Inspection Agency for nominating an inspector forconducting examina-tion of the export goods. The applicationis to be made on a prescribed form known as Notice ofInspection and submitted to the Agency with the followingdocuments:I. A copy of the commercial invoiceII. Crossed cheque of demand draft as inspection feeIII. A copy of export contractIV. Importer’s technical specifications and/or approved sample.After the inspector has completed inspection, the ExportInspection Agency will issue the Inspection Certificate intriplicate. The original certificate is for the customs verification.It is submitted to the customs authorities, along with otherdocuments, before permission to ship goods is granted. Thesecond copy may be sent to the buyer, if needed. The third copyis for the exporter’s record.

Appointment of Clearing and ForwardingAgentsClearing and forwarding agents, also known as freight forward-ers, perform a number of functions on behalf of the exporter.They provide specialised help in the exporter’s ware-house tothe importer’s warehouse by undertaking the procedural anddocumentary formali-ties. lie helps in packing, marking andlabelling of consignment, arrangement for transport to theport. arrangement for shipment overseas, and customs clearanceof cargo, procurement of transport and other documents.However, the main function of the agent is to obtain customsclearance of goods, ship them and procure the relevant trans-port document (Bill of Lading or Airway Bill). For performingthe desired functions, the exporter is required to give detailedinstructions to his agent, who in turn will charge fee for theseactivities. On completion of the process of clearance by theexcise authorities as well as obtaining the Inspection Certificate,

the production department despatches the consignment to theport of shipment by either road or rail. Information to thiseffect is sent to the export department by signing the DeliveryNote or by preparing a Dispatch Advice alongwith the follow-ing documents:a. Railway Receipt or Lorry Way Billb. Invoicec. A R4/ A R5 form ( Original and Duplicate)d. Inspection Certificate (Original)On receipt of these documents, the export department willappoint a clearing and forwarding agent by signing and sendinga document, generally known as Shipping Instruction Sheet orsimply the Shipping Instructions. This document contains fulldetails of instructions of the exporter as well as details or theconsignment to be shipped. Alongwith this document,following documents will be sent to the agent:a. Commercial Invoice (Generally 8-10 copies with at least one

completed)b. Customs Declaration Form in Triplicate (This is a legal

requirement whereby the exporter states that thedeclarations made to the customs authorities by the agenton his behalf are true)

c. Packing list, if neededd. Original Letter of Credit/Contracte. Inspection Certificate (Original)f. GR Form- Original and Duplicate (it is a foreign exchange

declaration form)g. AR4/AR5 form (Original and Duplicate) Invoiceh. Railway Receipt/lorry Way Bill

Transpotation of Goods to Port ofShipmentYou have already learnt the documents relating to transporta-tion of goods to the port of shipment. Transportation andmovement of goods to the port for shipment involve follow-ing activities:• Packing, marking and labelling of consignment• Arrangement for movement of goods either by road or by

rail.An export-worthy packing helps in minimising freight anddelivery costs. It also eliminates the possibility of the insurancecompany’s refusal to pay a claim in the event of a loss ordamage to goods in transit. If there are specific instructions onpacking in the export con-tract, these must be followed. Afterthe goods are packed, the packages are to be properly markedand labelled. Proper marking helps in quick and safe transporta-tion of goods. Mark-ing serves the purpose of identification ofgoods, handling, shipping and delivery of goods upto theimporter. Labels are either stencils or affixed on the packs whichcontain handling instructions. These labels are usually in thepictorial form for easy understanding of the instructions.After the production department has completed the exciseclearance and pre-shipment inspection formalities, the exportgoods are packed, marked and.’ labelled. At the same time. theexport department takes steps to reserve space on the ship

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Nthrough which goods are to be sent. Shipping space can bereserved either through the clearing and forwarding agent orfreight broker who work on behalf of the shipping company ordirectly from the shipping company. After the space has beenreserved, the shipping company will issue a document knownas Shipping Order. This document serves as a proof of spacereservation.Information on space reservation is given to the productiondepartment for making transport arrangements to the port.Where the consignment is sent through a road carrier, nospecific formality is involved. The production departmentengages a reliable carrier and books the consignment to the port(generally in the name of the clearing and forwarding agent).Lorry! Truck receipt is issued which is sent, alongwith otherdocuments, to the clearing and for-” warding agent at the porttown for taking delivery of the cargo.However, for sending cargo by rail, laid down procedure is to befollowed for obtaining allotment of wagon on a priority basisunder a scheme of the Railway Board. According to thisscheme, wagons are allotted on the priority basis for carryingexport goods to the port town for sh1pinent. Followingdocuments are submitted to the booking railway yard/Station.1 Forwarding Note (A railway document)2 Shipping Order (as proof of reservation of shipping space)3 Wagon Registration Fee ReceiptAfter wagons have been allotted, goods are loaded, for whichrailways will issue Railway Receipt (RR). This receipt, alongwithother documents, is sent to the clearing and forwarding agent atthe port town. At this stage, the production export departmentmakes an application to the insurance company for insurancecover (internal as well as overseas) and’ obtains insurancepolicy/certificate in duplicate with appropriate risk coverage.

Port Formalities and Customs ClearanceOn receipt of the documents sent by the export department,the clearing and forwarding agent takes delivery of the cargofrom the railway station or the road transport company andarranges its storage in the warehouse. He also initiates action toobtain customs clearance and permission from the portauthorities to bring cargo into the shipment shed.The objectives of customs control are:a. to ensure that the goods go out of the country after

compliance with different laws concerning export tradeb. to ensure authenticity of value of export goods to check

over/under invoicingc. to correctly assess and collect export duty, if applicabled. To compile data on cargo movements.For complying with these objectives, the customs grantpermission for export at two stages. Firstly, documentary checksare made at the office of the customs (i.e. Customs House).Secondly, physical examination of goods is made in theshipment shed to verify that the goods being exported are thesame as have been declared on the documents submitted at theCustoms House. The document on which customs giveclearance for export is the Shipping Bill.

The clearing and forwarding agent is to file following docu-ments with the Customs House:a. Shipping Bill (4-5 copies)b. Contract! correspondence leading to the contract (Original)c. Letter of Credit, where applicable (Original)d. Commercial Invoice (one for each of the shipping Bill)e. GR Form (Original and Duplicate)f. Inspection Certificate (Original)g. AR 4/ AR 5 Form (Original and Duplicate)h. Packing list, if neededi. Any other document needed by the customsThe Customs Appraiser/Examiner examines these documentsand appraises the value having regard to the following consider-ation:1. That the value and the quantity declared in the shipping bill isthe same as in the export order or letter of credit.That the formalities regarding exchange control, pre- shipmentquality control inspection etc. have been duly completed. Afterexamination of documents and appraisement of value, theCustoms Examiner/Appraiser makes an endorsement on theduplicate copy of the shipping Bill. He also gives directions tothe Dock Appraiser about the extent of physical examinationof the ‘cargo to be conducted at the Docks. All the Documents,except GR (original) Form, the original Shipping Bill and a copyof the Commercial Invoice are returned to the ForwardingAgent to be presented to the Dock Appraiser.After taking delivery of documents from the Export Depart-ment, Forwarding Agent Presents the Port Trust Document tothe Shed superintendent of the port. He obtains carting orderfor bringing the export cargo to the transit shed for physicalexamination by the Dock Appraiser and for their shipment.After bringing the cargo into the shed he presents the followingdocuments to the Dock Appraiser for conducting physicalexamination of the cargo.1. Duplicate, triplicate and export promotion copies of the

shipping Bill Commercial Invoice2. Packing List3. AR 4 /AR 5 form (original and duplicate) and Invoice4. Inspection Certificate (Original)5. GR Form (Duplicate)The Dock Appraiser after conducting physical examinationrecords examination report and makes “Let Export” endorse-ment on the duplicate copy of the Shipping Bill. He hands itover to the forwarding Agent alongwith all other documents tobe presented to the preventive officer of the customs depart-ment who supervises the loading of cargo on board the vessel.The preventive officer makes an endorsement “Let ship” on theduplicate copy of the Shipping Bill. The duplicate copy of theShipping Bi\! is then handed over to the agent of the shippingcompany. This constitutes an authorisation by the customs tothe shipping com-pany to accept the cargo on the vessel.After the goods are loaded on board the vessel, the captain ofthe ship issues a receipt known as ‘Mate’s Receipt’ to the Shed

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Superintendent of the port. The forwarding agent then makes apayment of the port charges and takes delivery of the Mate’sReceipt. He presents the Mate’s Receipt first to the preventiveofficer who records the certificate of shipment on all the copiesof the shipping Bill, original and duplicate copies of AR4/ AR5form. He returns the Export promotion copy, a copy ofDrawback shipping Bill and presents the Mate’s Receipt to theshipping company and requests it to issue the Bill of Lading(2/3 negotiable and a few non-negotiable as required).

Dispatch of Documents by ForwardingAgent to the ExporterAfter obtaining the Bill of Lading from the shipping company,the agent sends the following documents to the exporter.a. One copy of the Commercial Invoice duly attested by the

customsb. Export promotion copy of Shipping Billc. Drawback copy of Shipping Billd. Full set of ‘Clean On Board Bill of Lading’ together with

non- negotiable copiese. Original letter of credit! contract order Copies of Customs

Invoice, if anyf. AR 4/ AR 5 (Duplicate) and Invoiceg. GR Form (Duplicate).

Certificate of Origin and ShipmentAdviceOn receipt of the above documents, the exporter makes anapplication to the chamber of commerce and obtains a ‘Certifi-cate of Origin ‘ in duplicate. Incase of export shipment tocountries offering GSP concession, the GSP Certificate ofOrigin will have to be procured by the exporter from theconcerned authority like Export Inspection Agency.The exporter then sends. ‘Shipment Advice’ to the importerintimating the date of shipment of the consignment by anamed vessel and its expected time of arrival (ETA) at thedestina-tion port. The following documents are also sentalongwith the shipping advice so that the impol1er may startmaking arrangements for taking delivery of the consignments.a. A non- negotiable copy of the Bill of Ladingb. Commercial Invoicec. Packing Listd. Customs Invoice

Presentation of Documents to BankThe exporter presents the following documents to the bank fornegotiation/ collection:a. Commercial invoice (Requisite number of copies) Certificate

of Origin (two copiesb. Customs Invoice (Requisite number of copies) GR Form

(Duplicate)c. Packing List (requisite number of copies)d. Full set of Clean-on-Board Bill of Lading (Negotiable plus

Non- negotiable copies as required)e. Additional copies of the Commercial Invoice for

Certification by the Bank

f. Original Letter of Credit/Export Contractg. Bank Certificate in the prescribed form in duplicateh. Marine Insurance Policy/Certificatei. Bill of Exchange

Claiming Export IncentivesYou have learnt the processing of an export order at pre-shipment, shipment and post shipment level. Let us nowdiscuss the process of claiming export incentives.• Excise Rebate

After completing the post-shipment formalities, the clearingand forwarding agent will file the following documentswith the Maritime Central Excise Collector or JurisdictionalAssistant Collector of Central Excise for claiming therefund of excise duty or for obtaining release from bond, asthe case may be.a. AR4/ AR5 Form (Duplicate copy), which has been

certified by the customs preventive officerb. Non-negotiable copy of the Bill of Lading and lor

shipping Bill certified by the customs preventive officerAdditional documents to be submitted for claimingrefund excise duty are: (a) Application for Refund inForm C and (B) Pre-receipt

• Duty DrawbackFor claiming Duty Drawback, the exporter’s agent will methe customs attested copy of the Drawback Shipping Bill,alongwith the following documents, with the DrawbackDepartment of the Customs House.ifa. Drawback Claim proforma (prescribed application form

in five copies)b. Bank or Customs Certified copy of Commercial Invoicec. Non-negotiable copy of Bill of Ladingd. Any other specifically prescribed document.

After finding the claim to be correct, the Drawback Departmentwill dispatch the cheque of the claim amount to the exporter.Alternatively, if the exporter so desires, this amount will be sentto the exporter’s bank for being credited to his account withintimation to the exporter.

Let Us Sum UpProcessing of an export order starts with the receipt of anexport order, generally in the form of either the proformaInvoice, Purchase Order or Letter of Credit. On its receipt, theexporter must first acknowledge its receipt and then process toexamine it. The examination should be done with reference toterms and conditions of the contract, particularly productspecifica-tions, terms of shipment and payment and submis-sion of documents to the bank. If any discrepancy is found, theimporter must be immediately informed for amendment of theorder. The exporter should then confirm the order with theimporter.For production/procurement and transportation of goods tothe port for shipment, a number of activities are to be under-taken by the production/ procurement department of theexport firm. The first activity is to apply for pre-shipment credit(packing credit) to the Bank. The bank takes into account a

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Nnumber of factors and grants credit to the extent determined bythe value of the confirmed export order. The credit amount isused for manufacturing! procuring and packing goodsThe clearance from the central Excise authorities is needed sothat the exporter can get rebate in the central excise duty paid/payable on the exported goods. For this purpose, AR4/ AR5Form and Invoice are to be completed. Clearance is completedwhen the certified AR 4/ AR 5 (Original and Duplicate) is givento the production department.The production department also applies to the InspectionAgency for obtaining inspection certificate. This certificate isissued when the inspector visits the factory/ warehouse andexamines the goods. The original Inspection certificate will berequired to be submitted to the customs authority for obtain-ing permission to ship goods.Export goods are sent to the port town either by road or by rail.The Indian Railways accord priority in allotment 6fwagonsneeded for moving export consignments, for which theessential requirements is to first reserve space on the ship. Spacereservation may be done either through the freight broker orthe clearing and forwarding agent. The proof of space reserva-tion is the shipping order.At the port two formalities are to be completed. The first is toobtain permission from the port authority to bring cargo insidethe shipment shed. The second formality is to obtain permis-sion from the customs authority to export the goods. Thecustoms permission is granted at three stages- documentarydeara’1ces, physical examination of goods and permission fromthe Customs Preventive Officer. For these purposes, theClearing and forwarding agent of the exporter files the necessaryshipping bill (a customs document) and the supporting docu-ments with the Customs House. After appraising the value ofthe goods, the concerned customs officer notes down instruc-tions for physical examination of goods in the shipment shedon shipping Bill (Duplicate copy).After obtaining permission from the port authority, theexporter’s agent brings goods in the shipment shed. But beforeshipment process can start, the customs officer first physicallyexamines goods and then finally the Customs PreventiveOfficer gives permission to load.Once the shipment process is over. The master of the carrierissues Mate’s Receipt. This receipt is then exchanged with theBill of Lading issued by the shipping company. The exporter’sagent obtains shipment certificate on different documents,which will enable the exporter to claim various incentives.As soon as shipment is completed, the exporter should sendshipment. Advice to the importer mainly in the form of non-negotiable copy of Bill of Lading. Thereupon, documenta-tionformalities are undertaken for getting rebate in Excise Duty andDuty Drawback. At the same time the exporter submitsshipping documents as per the export order to the bank forsecuring the sale amount.

Terminal QuestionsQ1. Describe the steps involved in the receipt, examination

and confirmation of an export order.

Q2. What are the documents needed for i) Central ExciseClearance and ii) Securing Inspection Certificate?

Q3. Describe the process of preparing goods for exports andtheir transit to the port of shipment.

Q4. What are the supporting documents to be submittedalongwith the shipping Bill for getting customspermission for exports?

Q5. What are the three stages at which customs permission toexport is obtained?

Q6. Make a flow chart of processing of an export order uptothe shipment stage.

Q7. What documents are required to be submitted to thebank after goods have been delivered to the carrier?

Q8. Describe ,the formalities for claiming duty Drawback.

Some Useful BooksExport Import Policy, Ministry of Commerce, Government ofIndia (Recent Edition), New Delhi.N. Janardhan, Electronic Commerce, Indian Institute ofForeign Trade (Recent Edition), New Delhi.Nabhi’s Exporters Manual and Documentation, A NabhiPublication (Recent Edition), New Delhi.Nabhi’s New Import Export Policy, A Nabhi Publication(Recent Edition), New Delhi. Ram Paras, Export-What, Where,How (Recent Edition), Anupam Publisher, Delhi.

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LESSON 20:EXPORT ASSISTANCE IN INDIA

• Objectives• Introduction• Importance of Export Assistance• Export Promotion Measure in India.• Expansion of Production Base for Exports.

i. Relaxation in Industrial Licensing Policy/MRTP/FERA/Foreign Collaborations

ii. Liberal Import of Capital Goodsiii. Export Processing Zones (EPZ), Export Oriented

Units (EOU), Specialiv. Economic Zones (SEZs), Electronic Hardware

Technology Parks (EHlTP) and Software TechnologyPark Units (STP)

v. Assured Supply of Raw-Material’ Importsvi. Eligibility for Export/Trading/Star Trading/Super Star

Trading Housesvii. Export Houses Status for Export of Services

• Rendering Exports Price-Competitivei. Fiscal Incentivesii. Financial Incentives

• Strengthening Export Marketing Effort• Let Us Sum Up• Answers to Check Your Progress• Terminal Questions

ObjectivesAfter studying this unit, you should be able to :• explain the importance of export assistance in India• describe various assistances provided for the expansion of

production base for export . explain the fiscal and financialassistances provided to the exporters

• describe the measures taken by the Government of India tostrengthen the export marketing - effort.

IntroductionThe Export-Import policy 1992-97 brought about manyfundamental changes -in India’s external trade policy. Itgradually laid the foundation of globalisation ‘of Indianeconomy by initiating liberalization and making Indianindustries to face competition from foreign MNCs. Until 1992,Indian markets were highly protected and the Indian govern-ment used to give many incentives to the Indian exporters. Butmany6f these incentives were’ withdrawn by the 1992-97 andsubsequent policies.

Importance of Export AssistanceExport promotion was accorded a very low priority during theinitial progmmme of economic development in India. Duringthe 1950s and almost up to mid 1960 export-promotion was

not at all considered as an essential element in India’s economicdevelopment process. Easy and adequate availability of externalassistance from World Bank and other international agencies aswell as developed countries has provided India with more thanadequate amount of foreign exchange for financing develop-ment as well as essential imports. Hence, the urgency of earningforeign exchange through expanding exports was not there. Inaddition, because of the large size of the domestic market inIndia, ‘import substitution’ rather than the’ export promotion’was considered as a more useful strategy for India’s economicdevelopment process. Similarly during the period of the FirstThree Five year plans over 1950-51 to 1965--66" Indianeconomy was in a formative stage. Consequently India’s capacityto export manufactures or industrial products was extremelylimited. Hence, on this account as well, India could not look atinternational markets especially because of her extremely limitedcapacity to offer supplies of- industrial products.However after 1965-66, the aid flows to India were substantiallyreduced. Consequently, for the first time India was made todepend significantly on her exports for acquiring foreignexchange to meet her needs of essential imports. Moreover, bythe second-half of 1960s, a number. of industries especially inthe engineering, chemicals, leather, marine and other sectorshave reached a stage from where they were looking for anopening in international market.Government of India had therefore, considered it as appropri-ate to lay emphasis on the need for export promotion so as toenable the country to meet the’ need of imports. Fortunately, itreceived an encouraging response from the industrial sectorwhich was also looking for international markets. Over the lastcouple of decades export promotion has assumed criticalimportance in Indian economy. Export growth has become themain determinant of economic growth in India. The processof globalization and liberalization has further enhanced theneed of strengthening the support of export-import tradebusiness of the country. Moreover, with the increasing burdenof debt-servicing on the one hand and the situation of aid-fatigue on the other, exports have now emerged as the onlyviable source of meeting the foreign exchange needs of Indianeconomy. Hence, the feasibility of financing almost entirelydepends upon the growth in Indian export. It may, therefore,be ,stated that the future eco-nomic growth in India is insepara-bly linked with growth in Indian exports. Hence, export,promotion is being an overriding consideration in policyformulation. Export promotion’ policy in India has three mainsegments. They are as follows:a. Policies for increasing Investment and production in export

sector.b. Price-support measures for rendering exports more

competitive.

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Nc. Measures for strengthening marketing effort by the export

sector.

Export Promotion Measure in IndiaThe assistance extended to the Indian exporters are asunder :

Import Facilities for Exporters

a. Duty Free Replenishment Certificate (DFRC) :- DFRCis issued to a merchant exporter or manufacturer exporterfor the duty free import of inputs such as raw materials,components, intermediates, consumables, spare parts,including packing materials to be used for exportproduction. Such licence is given subject of the Julfi1mentof time bound export obligation.

b. Duty Entitlement Passbook Scheme (DEPB) :- Underthe DEPB scheme, an exporter may apply for credit as aspecified percentage of FOB value of exports, made infreely convertible currency. The credit shall be availableagainst such export products and at such rates as may bespecified by the Director General of Foreign Trade (DGFT)by way of public notice issued in this behalf, for import ofraw materials, intermediates, components, parts, packagingmaterials, etc.

c. Export Promotion Capital Goods Scheme (EPCG) :-EPCG scheme was introduced by the EXIM policy of 1992-97 in order to enable manufacturer exporter to importmachinery and other capital goods for export production atconcessional or no customs duties at all. This facility issubject to export obligation, i.e., the exporter is required toguarantee exports of certain minimum value, which is inmultiple of tl;1e value of capital goods imported.

Duty Exemption Schemesa. Duty Drawback (DBK) :- The Duty Drawback Scheme is

administered by the Directorate of Drawback, Ministry ofFinance. Under this scheme, an exporter is entitled to claim:-• Customs duty paid on the import of raw materials,

components and consumables.• Central excise duty paid on indigenous raw materials,

components and consumables utilized in themanufacture of goods meant for export.

b. Excise Duty Refund :- Excise duty is a tax imposed by thecentral government on goods manufactured in India. Thisduty is collected at source, i.e., before removal of goodsfrom the factory premises. Export goods are totallyexempted from central excise duty. However, necessaryclearance has to be obtained in one of the following ways.~ Export under rebate.~ Export under bond:

c. Octroi Exemption :- Octroi is a duty paid onmanufactured goods, when they enter the municipal limitsof a city or a town. However, export goods are exemptedfrom octroi.

Fiscal Incentives

a. Exemption from Income Tax :- In order to enableexporters to plough back their earnings and promoteexports, the Government of India has given tax exemption

to exporters on export earnings under section 80 HHCprovision of the Income Tax Act. For example, for the A.Y.2002-03, 60% of the export income is exempted from tax.At the same time, a ten year tax holiday is provided to100% EOUs and units in EPZs.

d. Sales Tax Exemption :- Sales tax is a tax imposed by theState government on goods sold in or outside India.However, exportable goods are exempted from sales tax,provided the exporter or his firm is registered with the SalesTax Authorities. This exemption is given on the followingcategories of goods :-• Goods exported.• Goods purchased from the local market from export

purpose.

Marketing Assistance

a. Market Development Assistance (MDA) :- Thegovernment of India has set up a separate fund under thehead Marketing Development Assistance (MDA) fordeveloping marketing abilities of Indian exporters. It isgranted by the Ministry of Commerce for export marketdevelopment and research abroad. The amount grantedunder MDA varies from 25% to 60% of the actualexpenditure incurred.

b. Market Access Initiative (MAI) :- Under this scheme,financial assistance is available to the export promotioncouncils, C industry and trade associations and other eligibleentities on the basis of the competitive merits of proposalsreceived in this regard for undertaking marketing studies,setting up of common showrooms, warehousing facility,participation in sales promotion campaigns, publicitycampaigns, international trade fairs, seminars, buyers-sellersmeet, etc.

Supply of Raw Materials

a. Industrial Raw Material Assistance Centres (IRMAC)Scheme :.IRMAC is established by the government ofIndia as,,-{i subsidiary of STC. Such centres import rawmaterials in bulk and supply them to the registeredexporters against a valid import licence. This enablesexporters to get timely supply of raw materials at reasonableprices, I~MAC has’ been further simplified- by removingthe actual user clause.

b. Back to-Back Inland Letter of Credit :- The facility ofBack-to-Back Inland letter of credit was announced by theEXIM policy 1992-97 and came into effect from 1st April1995. 13ack.to-back L/C is one, which can be opened Infavour of local suppliers of raw materials or goods so as toenable exporters to got raw materials or goods for exporton credit basis. It is a kind of pre-shipment financeprocured by the exporter for the processing of export order.

Institutional Measures

a. Institutional Measures :- The Government of India(GOI) has established a number of organisations topromote and expand export trade. These organisations are:-• Indian Institute of Foreign Trade (11FT) to provide

training facilities.

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• Indian Institute of Packaging (lIP) to upgrade,packaging standards.

• Export Promotion Councils (EPCs) to undertakeexport promotion activities.

• Export Inspection Council (EIC) to upgrade qualitystandards.

• Export Credit Guarantee .-Corporation (ECGC) toprotect exporters against payment rises.

• Indian Council of Arbitration (ICA) to settle and solvedisputes between importers and exporters. Apart fromthe above institutions, there are a number of otherorganisations such as Federation of Indian ExportOrganisation (FlEa), EXIM Bank, etc.

Expansion of Production Base forExportsThe first prerequisite of export promotion policy is to ensurelarger exportable surpluses. In. other words, if a country wantsto exports more, it must have more to export. It will have moreto export only if more and more is produced for export. Hence,it calls for increasing flow of production and investmentresources into the export sector.

Relaxation in Industrial Licensing Policy/MRTP/FERA/Foreign CollaborationsWith a view to facilitate relatively easier creation/expansion ofproduction capacities for increasing export potential of Indianeconomic, necessary relaxations have been provided for in thepolicies for industrial licensing, MRTP (Monopolies andRestrictive Trade practices Act) and Foreign Exchange Regula-tions, etc. The Foreign Exchange Regulation Act has beenliberalised and Foreign Exchange Management (FEMA) Act,1999 has been operationalised. The rupee has been made fullyconvertible for all approved external transac-tions. As a result,exporters of goods and services and those who are in receipt ofremit-tances are able to sell their foreign exchange at marketdetermined rates. The importers and foreign travellers are alsoable to buy foreign exchange at market determined rates.Exporters have also been allowed to maintain foreign currencyaccounts. There is general liberalisation of remittance of foreignexchange for visits abroad, agency commission; export claims,reduction in export value, reimbursement of expenses incurredon dishonoured export bills, consular fees, etc. Consequently,creation of additions of production capacities for export isliberally allowed, both in the large-scale as well as small-scalesectors. Foreign collaboration and foreign capital investment isalso liberally permitted for the export sector. 100% foreignequity has been permitted to the units in EPZ/EOU/EHTP/STP. All these policy measures are envisaged to go long way infacilitating easy expansion as Well as technological up gradationof export base in India through attracting larger flows ofinvestment and other resources.

Liberal Import of Capital GoodsImport policy of India has made specially liberal provisions foreasy import of capital goods of all types. Accordingly, importsof machinery and equipment are allowed without importlicence. In addition special provisions have been made forimport of capital-goods at a concessional rate of import duty.

Export Promotion Capital Goods (EPCG) Scheme has beenintroduced for liberal import of capital goods.Export Promotion Capital Goods Scheme: New Capitalgoods including computer software systems may be importedunder the Export Promotion Capital Goods (EPCG) scheme.Under this provision, capital goods including jigs, fixtures, dies,moulds and spares upto 20% of the CIF value of the capitalgoods may be imported at 5% customs duty: This import issubject to an export obligation equivalent to 5 times CIF valueof capital goods on FOB basis or 4 times the CIF value ofcapital goods on NFE basis to be filled over a period of 8 years.This period is reckoned from the date of issuance of licence.Import of capital goods shall be, subject to Actual Usercondition till the export obligation is completed.

Export Processing Zones (EPZ), Export-Oriented Units(EOU), Special Economic Zones (SEZs), ElectronicHardware Technology Parks (EHTP) and SoftwareTechnology Park Units (STP)Units undertaking to export their production ‘of goods may beset up under Export Processing Zones (EPZ) scheme, ExportOriented Units (EOU) scheme, Special Economic Zones(SEZs) scheme, Electronic Hardware Technology park (EHTP)scheme or Software Technology Park (STP) scheme. Such unitsmay be engaged in manufacture, services, trading, developmentof software, agriculture including agro-processing, aquaculture,animal husbandry, bio-technol-ogy, floriculture, horticulture,pisciculture, viticulture, poultry, sericulture, and granites may Iexport all products except prohibited items of exports.These units import all types of goods without payment ofduty including capital goods for manufacture, production orprocessing provided they .are not prohibited items, Secondhand. capital goods may also be imported in accordance withthe provisions of the policy: Supplies from DT A to these unitswill be regarded as deemed exports. Foreign equity upto 100%is permissible to these units. These units shall be exemptedfrom payment of corporate income tax for 10 years.

Assured supply of raw material importsAs regards making available the supplies of imported rawmaterials to the export sector, the import policy provides thescheme of Duty exemption and Duty Remission. The dutyexemp-tion scheme enables import of inputs required forexport production. The duty remmission scheme enables postexport replenishment/remission of duty on inputs used in theexport product.Under duty exemption scheme, an advance licence is issued toallow import of inputs which are physically incorporated in theexport product. Advance licence is issued for duty free importof inputs as defined in the policy subject to actual user condi-tion. Such licences are exempted from’ payment of basiccustoms duty, surcharge, additional customs duty, antidumpingduty and safeguard duty, if any. Advance licence can be issuedfor (i) physical exports (ii) ,intermediate supplies and (iii)deemed exports. Duty Remission Scheme consists of Duty FreeEntitlement Certificate and Duty Entitlement PassbookScheme.

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NEligibility for export/trading/star trading/super startrading housesExport/Trading/Star Trading/Super Star Trading Houses havebeen accorded special status. When exporters achieve thespecified level of exports over a period, they may be recognizedas EH/TH/STH/SSTH. Exports made both in free foreignexchange and in Indian rupees shall be taken into account forrecognition. The objective of this scheme is to recognise themas the respective houses”with a view to building marketinginfrastructure and expertise required for export promotion. Theexporters, registered with FlEO or EPC are, eligible for thispurpose. The export performance criteria may be based oneither f.o.b. value of exports or net foreign exchange earnings.Let us discuss them in detail.i) F.O.B. Criteria: The manufacturing or merchandising

units, who have achieved the following targets can beaccorded the status of above mentioned Export Houses.Deemed exports are not counted for this purpose. Look atTable for this criteria.FOB Criteria

ii) Net Foreign Exchange Earnings: Exporters have anoption for obtaining the status of Export and otherHouses based on the following Net Foreign ExchangeEarnings. Look at Table for this criteria.Net foreign exchange criteria

Exporters have also an option to get recognition for one year.In this case relaxation in above earnings has been permitted.EH/TH/STH/SSTH are entitled to the following specialbenefits:i) Import Facilitiesii) Marketing Development Assistance.iii) Foreign Currency, Accountsiv) Foreign Exchange Facilitiesv) Golden Status Certificatevi) Other facilities as specified in the policy

Export houses status for export of servicesService providers sha1l be eligible for recognition as serviceExport House, InternationalService Export House, International Star Service Export House,International Super Star Service Export House on achieving theperformance level as below:

Export of services for recognition of export houses

The service status holders sha1l be entitled to all the facilitiesprovided in the policy.

Rendering export price competitive:-The second pre- requisite of export promotion policy is torender the exports increasingly price competitive in internationalmarket. A number of Price support measures in the form offiscal as well as financial incentives have therefore been providedfor the export sector in India.The need for price- support measures in the form of exportincentives, arises on two accounts. First, price levels in interna-tional markets are invariably the lowest, because of the highdegree of competition therein. On the other hand, Indianeconomy, has over the years emerged as a high economy withlow productivity. Hence, for success full and viable export effortthere is the need for incentives to provide the price support forrendering India’s exports competitive and viable.Secondly, incentives exports also become necessary to neturalisethe domestic market -pull on Indian exporters. Hence, exportincentives also aim at encouraging trade and industry in India toincreasingly undertake export effort on a sustained basis.Under the export promotion policy of India, various types ofincentives have been provided for a price-support measures.These include (a) Fiscal Incentives and (b) Financial Incen-tives.

Fiscal incentivesFiscal incentives for export promotion include (i) duty draw-back, (ii) central excise rebate and (iii) income tax exemption, onexport profits.i. Duty Drawback: In the manufacturing of many export

products imported or indigenous raw materials andcomponents are used on which customs or central exciseduty has been paid. When the finished products areexported in which duty paid inputs are used, a part orwhole of the amount of such duty is allowed -to be drawnback by the exporter or if is refunded to him. This results insubstantial reduction in the cost of material inputs forexport-production. In other words, import duties andcentral excise duties, on material inputs for export activityare allowed to be drawback by the exporters under theincentives policy for duty drawback. The scheme of DutyDrawback has been formulated by the Drawback Directorunder the Central Board of Revenue and Customs from theMinistry of Finance. Details regarding Drawback Scheme can

Category

Average free foreign exchange earning during the preceding three licensing year in rupees.

Free Foreign exchange earning during the preceding licensing year in rupees

Average NFE earned made during the preceding licensing year in rupees

NFE earned during the preceeding licensing year in rupees

Service Export House

4 crore 6 crore 3 crore 5 crore

International Service export House

20 crore 30 crore 15 crore 25 crore

International star service export house

100 crore 150 crore 75 crore 125 crore

International super star service export house

300 crore 450 crore 225 crore 375 crore

Category of Houses Average Net Foreign Exchange Value of eligible exports during the preceding three licensing years

Net Foreign Exchange Value of exports made during the preceding licensing years

Export house Rs. 12 crores Rs. 18 crores Trading House Rs. 62 crores Rs. 90 crores Star trading house Rs. 312 crores Rs. 450 crores Super star trading house Rs. 937 crores Rs. 1350 crores

Category of Houses Average FOB value of exports during the preceding three Licensing year, in Rupees

FOB value of eligible export during preceding Licensing year in Rupees

Export House Rs. 15 crores Rs. 22 crores Trading house Rs. 75 crore Rs. 112 crore Star trading House Rs. 375 crores Rs. 560 crore Super star trading houses Rs. 1125 crores Rs. 1680 crores

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be had from ‘Drawback Rules’ as notified by the office ofDrawback Director. Refund of Duty Drawback is grantedon post-export . basis. The benefit Of duty drawback hasbeen provided on the basis of (a) all industry rates or (b)brand rates separately fixed for individual manufacturers ofthe export products. The incentive of duty drawback helpsreduce significantly the material cost of export products. Itis very important for countries like India, which havesimple manufactures to offer for exports which are verymuch influenced by the material cost. You will learn detailprocedure of Duty Drawback in next lesson.

ii. Central Excise Rebate: Under this scheme, the CentralExcise Duties on the inputs . and final product or on theoutput proposed for export, are refunded to the exporter.It helps in further reduction in the overall cost ofproduction for exports. The scheme also provides for aBond System under which outright exemption fromCentral Excise Duties can be claimed by the exporter. Thescheme is operated as per Central Excise Rules notified bythe Central Excise department. You will learn in detailabout the Central Excise Rebate in next lesson

iii. Income-Tax Exemption: . In order to promote exports,income tax exemption has been granted under Income TaxAct. This exemption scheme is to be phased out over a fiveyear period i.e. by 2004-2005 for all exporters other thanEPZ/EOU/EHTP/STP units. The major exemptions areas follows:1. Part of the profits derived from export of specified

goods or merchandise is deducted for the computationof income tax.

2. Specified amount of profits of companies engage inthe business of hotel or of . a tour operator or a travelagent is deducted.

3. There is a partial tax relief on export of computersoftware and for import of system. The benefit canalso be claimed by a supporting software developerfrom 1-4-1999..

4. The profits from export or transfer of film VTsoftware, TV news software, telecast rights are partiallydeducted.

5. 50% of the profits from project exports is deducted incomputing taxable income of the Indian company orresident tax payer.

6. 10 years tax holidays is granted to units in FTZIEPZand 100% EOU ending with 2010-2011. .

7. There is a tax rebate on remuneration received onservices rendered outside India and other rebate asspecified in the policy.

iv. Sales tax Exemption: There is no tax on sales made forexport purpose. The exporter need not pay sales tax eitheron the goods purchased from manufacturers or traders.

Financial IncentivesThe major scheme of financial incentives include interestsubsidy, financial assistance scheme for agricultural, horticulturaland meat exports.

i. Interest Subsidy: Export sector in India has also beengiven interest subsidy under which the working capital ismade available by the banks to the export sector at aconcessional or subsidised rates of interest. Under thisscheme working capital required for pre- shipment credit aswell as post- shipment credit is provided to the exportsector at concessional rates of interest. This measure helpsIndian exporters. to reduce the working capital cost ofexport operation.

ii. Financial Assistance Scheme for Agricultural, Horticulturaland Meat Exports:In order to promote the exports. of agricultural,horticultural and meat products, agricultural and processedfood products Export Development Authority (APEDA)Provides financial assistance for the following purposes:a. Feasibility studies, surveys, consultancy and data base

up gradationb. Development of infrastructurec. Export promotion and market developmentd. Packaging developmente. Quality controlf. Upgradation of meat plantsg. Organisation building and Human Resource

Developmenth. Air freight assistance for export of horticultural

products export by airi. Generation of relevant research and development

through research institutions.Thus, export incentives in the form of tax- concessions or fiscalincentives, as well as financial incentives, playa major role inrendering Indian exports, competitive in the internationalmarket. However, in view of the highly competitive nature ofinternational market, every country in the world makes an all-out effort to increase her exports, for which various types ofdifferent fiscal and financial incentives are provided. Thus, thepractice of incentives has almost become universal, coveringboth developed as well as developing countries.

Strengthening Export Marketing EffortThe third pre- requisite of export promotion is the marketingeffort. It may be noted that ‘export’ is primarily a ‘sale’ transac-tion. Production can be converted into ‘sale’ only through themarketing effort. In other words ‘marketing effort’ provides thenecessary link or channel’ between production and sales. Hence,success on the export front is dependent upon the marketingeffort. Export promotion policy in India therefore, pays specialattention to the need for improving and strengthening exportmarketing effort. With this objective, the Government of Indiahave established a very comprehensive network of institutionsfor servicing the export sector.In other words; an effort has been made to provide thenecessary infra structure for servicing the export sector, particu-larly to improve the export marketing effort. With this object inview, Government of India have established a number ofspecialized institutions for providing necessary services andassistance to individual corporate units from the export sector.

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NInstitutions established for strengthening export marketingeffort include Export Promotion Council, Commodity Boards,Special Authorities and Industry Associations. These are the.key institutions servicing export effort ~t individual corporatelevel product-wise. The primary ‘function of these institutionsis to provide the exporter with export marketing guid-ance andadvice as well as complete information and details coveringalmost all the critical elements involved in export marketingeffort at the individual corporate unit level on a continuousbasis.In addition, separate institutions have also been established forproviding technical and specialized services to the export-sectorin India. These institutions provide necessary guidance, helpand assistance to individual corporate units, especially in thefield of packag-ing, quality control, risk coverage, long- termcredit, trade fairs and exhibitions, settlement of disputes,package service and market information.For supplementing the export-effort by the private sector,Govt, of India have also estab-lished a number of Corpora-tions in the Government sector for directly undertaking export-import activity. Various state Governments have also estab-lished Export Corporations for promoting exports fromdifferent states respectively.Market Development Assistance: This assistance is providedfor overall development of I overseas markets. It is providedfor sponsoring, inviting trade delegations within and outsidethe country, market studies, publicity, setting up of ware-houses/showrooms, research and development, quality control,etc. MDA is largely available to Approved Organisations,Export Houses/Consortia of Small Scale Industries, Individualexporters or other sponsored persons. The assistance is givenfor air fare, daily allowance, participation in fairs and’ exhibi-tions, etc. The assistance is disbursed by the FIEO and Ministryof Commerce.External Marketing Assistance Scheme for Jute: TheExternal Marketing Assistance Scheme provides grant of marketassistance at the rate of 5% and 10% of FOB value realisationon export of specified diversified products. The benefit isavailable to both manufacturer- exporters and merchantexporters.

Lets Us Sum UpOf late export promotion has assumed critical importance inIndian economy. Export growth has become main determinantof economic growth. With the increasing requirements ofimports, exports have now emerged as the only viable source ofmeeting the foreign ex-change needs. Government of Indiahave provided various incentives for export promotion. Exportpromotion policy include (i) policies for increasing investmentand production in export sector (ii) price support measures forrendering exports more competitive, and (iii) measures forstrengthening marketing effort by the export sector.There has been relaxations in industrial licensing policy MRTP,foreign exchange regulation, foreign collaboration to increase theflow of production and investment resources into the exportsector. Apart from the provisions made for liberal import ofcapital goods, Export Processing Zones, Export-OrientedUnits have been given completely licence-Fee and duty- free

import facilities for all production inputs. Duty Tee licenceschemes have been granted’ to the registered exporters forsupplies of adequate quantities of material inputs required forexport. Export House, Trading House, Star Trading House andSuper Star Trading House have been given special facilities topromote the export business. In order to make India’s exportcompetitive, price viable support incentives have been given tothe exporters. Fiscal incentives include (i) duty drawback (ii)central excise rebate and (iii) income-tax exemption on exportprofits.The scheme of financial incentives include interest subsidy onworking capital and financial assistance scheme for Agricultural,Horticultural and Meat Exports.The success on the export front is crucially dependent upon themarketing of the products. Hence, special efforts have beenmade for improving and strengthening export marketing effort.Government of India have established a number of specialisedinstitutions for provid-ing necessary services and assistance tothe exporters, Marketing Development fund provides necessaryfinancial assistance for market promotion.

Questions BankState whether the following statements are true or False:Q1. i. In the beginning India followed a policy of import

substitution.ii. Import policy has made provision for easy import

of capital goods of all types.iii. there is completely licence free and duty free import

facility for all production inputs for Exportprocessing Zone and Export Oriented Units.

iv. An advance licence is granted only to themanufacturer exporter.

v. Foreign equity upto 75% is permissible to EPZ andEOUs.

Answers to Check Your Progress

j) True ii) True iii) False iv) False v) False

Terminal Questions1. Explain the facilities/concessions for increasing the

production-base for exports from India.2. Analyse the different price support measures introduced in

India for rendering India’s exports more competitive.3. Why the role of marketing effort is crucial in export

promotion? Describe the measures undertaken in India forstrengthening export marketing effort.

4. Explain the rationale for price-support measures for exportpromotion in India.

5. “Export Incentives have become a universal practice”.Discuss.

6. Explain the framework of export incentives in India andanalyse as to how far it provides a total approach to exportpromotion.

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LESSON 21:EXPORT PROMOTION ORGANISATIONS

• Objectives• Introduction• Importance of Institutional Infrastructure• Govt. Policy Making and Consultations• Indian Trade Promotion Organisation (ITPO).• Indian Institute of Foreign Trade (11FT).• Indian Institute of Packaging (lIP).• Indian Counsel of Arbitration (ICA).• Federation of Indian Export Organisation (FIEO).• Marine Products Exports Development Authority

(MPEDA).• Export Processing Zones (EPZ).• 100% Export Oriented Units (EOUs).• Facilities for Units in EOUs, EPZs,EHTPs & STPs.• M. Visvesvaraya Industrial Research & Development Center

(MVIRDC).• Chamber of Commerce (COC). - ,• Question Bank.

ObjectivesAfter studying this unit, you should be able to:• explain the importance of the institutional infrastructure for

export promotion in India• describe the role of government policy making and

consultative body in the export• promotion• explain the functions of export promotion councils and

commodity boards• describe the role of various service institutions engaged in

export promotion• explain the importance of government trading

organisations engaged in the export of specifiedcommodities .

IntroductionExport business requires special knowledge and businessacumen. Exporters need guidance and assistance at differentstages of the export effort. For this purpose, the Governmentof India have set up several institutions whose main functionsare to help the exporter in his work. In this unit, you will learnthe role of these institutions in export promotion.

Importance of InstitutionalInfrastructureExport marketing effort is of vital importance for the successof apart-promotion programme in any country. For undertak-ing international marketing operations” an exporter needsspecial guidance and assistance in critical areas like packaging,market promotion and publicity, quality certification, risk

coverage, market intelligence, finance and credit support etc. It isonly with the support and services rendered by specialisedinstitutions, exporter is able to successfully convert his ‘produc-tion’ into ‘sales in international market. Consequently, anycountry, including India, engaged in the task of export promo-tion, has to establish specialised institutions for strengtheningexport-marketing effort for the country as a whole. This alongwill have the way for creating an export environment andexport- culture, on the foundation of which the exportmarketing effort at the corporate level can be effectively launchedon an intensive and sustained basis.With this object in view, Government of India have establisheda number of specialised institutions in the country for provid-ing the necessary services and assistance to individual corporateunit for a successful export effort. In view of the widelydiversifying nature of the export markets in different parts ofthe world and an equally diverse and varied nature of productsand services traded in international market, Government ofIndia have established specialised institutions at production/industry level for assisting exporters from different. sectors.Institutions engaged in export efforts fall in six distinct tiers. Atthe top is the Department of Commerce of the Ministry ofCommerce. This is the main organisation to formulate andguide India’s trade policy. At the second tier, there are deliberateand consultative organisations to ensure that export problemsare comprehensively dealt with after mutual discussions be-tween the Government and the Industry. At the third tier arethe commodity specific organisations which deal with problemsrelating to individual commodities and/or groups of com-modities. The fourth tier consists of service institutions whichfacilitate and assist the exporters to expand their operations andreach out more effectively to the world markets. The fifth tierconsists of Government trading organisations specifically set upto handle export/ import of specified commodities and tosupplement the efforts of the private enterprise in the field ofexport promotion and import management. Agencies forexport promotion at the State level constitute the sixth tier. Letus now discuss each of them in detail.

Government Policy Making andConsultationsAppropriate government policies are important for successfulexport effort. In view of the increasingly important and criticalrole of foreign trade in economic development, a separateMinistry of Commerce has been entrusted with the responsibil-ity of promoting India’s interest in international market. TheDepartment of Commerce, in the Ministry of Commerce hasbeen made responsible for the external trade of India and allmatters connected with the same. The main functions of theMinistry are the formulation of international commercial policy,negotiation of trade agreements, formulation of country’sexport-import policy and their implementation. It has created a

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Nnetwork of commercial sections in Indian embassies and highcommissions in various countries for export- import tradeflows. It has set up an “Ex-porters Grievances Redressal Cell”to assist exporters in quick redressal of grievances.Board of Trade: For ensuring a regular consultation, monitor-ing and review of India’s foreign trade policies and operations,Government of India have set up a Board of Trade withrepresentatives from Commerce and other important Minis-tries, Trade and Industry Associa-tions, and Export ServiceOrganisations. It is an important national platform for a regulardialogue between the Government and the trade and industry.The deliberations in the Board of Trade provide guidelines tothe Government for :appropriate policy measures for correctiveaction.Cabinet Committee on Exports: With a view to ensureregular and effective monitoring of India’s foreign tradeperformance and related policies, Cabinet Committee onExport has also been set up.Empowered Committee of Secretaries: For speedier andquicker decision-making, an Empowered Committee ofSecretaries has also been established to assist the CabinetCommit-tee on Exports.Grievances Cell: Grievances Cell has been set up to entertainand monitor disposal of grievances and suggestions received. Itis a cell meant for speedy redressal of genuine grievances.Grievances Committees headed by Director General of ForeignTrade and head of concerned Regional Licensing Authority havebeen constituted in the respective licensing offices. The Com-mittee also include representatives of FIEO, concerned ExportPromotion Council/Commodity Board and other departmentsand organisations. The grievances may be addressed to theGrievance Cell of the concerned Licensing Authority in theprescribed Performa.Director General of Foreign Trade (DGFT): DGFT is animportant office of the Ministry of Commerce, to help theformulation of India’s Export-Import policy and implementa-tion thereof. It has set up regional offices in almost all Statesand Union Territories of India. These offices are known asRegional Licensing Authorities. There is an Export Commis-sioner in the DGFT office who functions as a nodal point forall export promotion schemes. The Regional Licensing officesalso act as Export facilitation centres.Director General, Commercial Intelligence & Statistics(DGCI& S): DGCI& S has been entrusted with the task ofcompilation and publication of data on India’s Foreign Trade.It brings out various publications relating to Foreign Trade ofIndia. The major publications are as under:i. Monthly Statistics of Foreign Trade of Indiaii. Monthly Press Notes on Foreign Trade’.iii. Monthly Brochure of Foreign Trade Statistics of India

(Principal Commodities and Countries)iv. Indian Trade Classification based on Harmonised

Commodity Description and Coding Systemv. Indian Trade JournalMinistry of Textiles: Ministry of Textiles is another Ministryof Government of India which is responsible for policy

formulation, development, regulation and export promotionof textile sector including sericulture, jute and handicrafts, etc. Ithas a separate Export Promotion, . Division, offices, advisoryboards, development corporations, Export PromotionCouncils, and Commodity Boards. The advisory boards havebeen constituted to advise the govern-ment in the formulationof the overall development programmes in the concernedsector. It also devises strategy for expanding markets in Indiaand abroad. The four advisory boards are as under:i. All India Handloom Boardii. All India Handicrafts Boardiii. All India Powerloom Boardiv. Wool Development BoardThere are Development Commissioners, Handicrafts andHandlooms, who advises on matters relating to the develop-ment and exports of these sectors. There are TextileCommissioner and Jute Commissioner who advise on thematters relating to the growth of exports of these sectors.Textile Committee has also been set up for ensuring of textilemachine manufac-tured indigenously, especially for exports. Italso issues certificates of origin and other special certificates.States Cell: The cell has been created under Ministry ofCommerce. Its functions are to act as a nodal agency forinteracting with state Government or Union Territories onmatters concerning exp0l1 or import from the State or UnionTerritories. It provides guideline to State level exportorganisations. It assists them in the formation of export plansfor each cases.Development Commissioner , Small Scale IndustriesOrganisation: The Directorate has the headquarter if! NewDelhi and extension centres located in almost an States andUnion Territories. They provide export, promotion servicesalmost at the doorsteps of the small scale industries and cottageunit. The important functions are:i. to help the small scale industries to develop their export

capacitiesii. to organise export training programmesiii. to collect and disseminate informationiv. to help such units in developing their export marketsv. to take up the problems and other issues. related to small

scale industriesBesides, there are Directorates of Industries, National SmallIndustries Corporation and State Corporations for the promo-tion or exports from small scale industries.

Technical and Specialised ServicesAssistanceExport marketing effort at the individual corporate level alsoneeds to be reinforced through a number of technical andspecialised service inputs. These cover important and crucialareas like packaging, quality control, risk coverage, promotionand finance. Let us now discuss them in detail.

Indian Trade Promotion Organisation(ITPO)Indian Trade Promotion Organisation was set up by theMinistry of Commerce, Government of India, on 1 st January

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1992 with its headquarters at New Delhi after the merger ofTrade Development, Authority (TDA) and Trade Fair Authorityof India ,(TFAI). It has five regional offices at Mambai,Bangalore, Kolkata, Kanpur and Chennai and four in Germany,Japan, UAE and USA.As a premier trade promotion agency of the Government ofIndia, the ITPO provides a road spectrum of services to tradeand industry so as to catalyse the growth of bilateral trade,particularly India’s exports and technological upgradation andmodernization of different industry segments.

Functions of Indian Trade PromotionOrganisationa. Organises Trade Fairs and Exhibitions :- It organises

various trade fairs and exhibitions at its exhibition complexin Pragati Maidan and other centres in India. It also extendsthe use of Pragati Maidan for holding pf trade fairs andexhibitions by other fair organisers both from India andabroad.

b. Involves the State Governments :- It enlists theinvolvement and support of the State Governments for thepromotion of India’s foreign trade. It promotesestablishment of facilities and ,infrastructure for holdingtrade’ fairs in state capitals or other suitable locations inIndia, in consultation with the State Governmentsconcerned.

c. Assists in Technological Upgradation and ProductDevelopment :- It provides assistance to Indiancompanies’ in locating suitable foreign collaborators fortransfer of technology, joint ventures, marketing tie-upsand investment promotion. It also assists Indiancompanies in product development and helps them toadapt to meet buyer’s requirements.

d. Helps in establishing Overseas Contacts :- It helps inestablishing a durable contacts between Indian suppliersand overseas buyers. It organises ‘buyer-seller meets with aview to bring buyers and sellers together. It also invitesoverseas buyers and organises their meetings with Indiansuppliers..

e. Other Services:-• To identify and nurture specific export products with

long-range growth prospects.• To conduct in-house and need-based research on trade

and export promotion.• To participate in overseas trade fairs and exhibitions.• To organize seminars, conferences and workshops.• To encourage and involve small and medium scale

units in export promotion efforts.

Indian Institute of Foreign Trade (11FT)Indian I Institute of Foreign Trade was set-up in 1963 by theGovernment of India a’s an autonomous body registeredunder the Societies Registration Act. It was set up with theprime objective of professionalising the country’s foreign trademanagement and increase exports by developing humanresource, generating, analysing and disseminating data andconducting research.

Functions of Indian Institute of ForeignTradea. Training :- The IIFT has been recognised as a centre of

excellence for imparting training and education ininternational business. Its specialisation in intentionalbusiness and a global outlook makes it unique amongmanagement schools in the country. It offers an inspiringlearning environment, which transforms the’ bright youngstudents into talented creative professionals.

b. Collects and Supplies Information :- 11FT conducts,market studies and surveys in the overseas markets. It triesto find out demand for Indian products in overseas market.It supplies this information to the exporters. The exporterscan use such information while making their exportmarketing decisions.

b. Organises Seminars and Workshops :- 11FT organisesseminars and workshops in a number of export marketingareas, such as export pricing, export promotion, etc.Exporters can take advantage of such workshops andseminars by taking active part them.

d. Trade Delegations :- 11FT sends delegates abroad to studyoverseas markets and also to interact with overseasimporters. At the same time, it invites delegates fromabroad, who can study Indian market conditions and canalso interact with Indian exporters.

e. Publications:. A large part of the lIFT’s research work ispublished in the form of study reports, monographs,status papers, etc. for wider dissemination among thebusiness community, government departments andacademic fields. The institute publishes :-• Foreign Trade Review (FTR), a quarterly journal.• Focus WTO, a bimonthly magazine.• Technology Exports, quarterly newsletter.

f. Research and Consultancy :- IIFT has so far brought outover 570 research studies and surveys. It also acts as aconsulting house for solving the problems of the exportersand importers. It analyses the international businessenvironment and develops appropriate corporate strategiesfor the overseas markets.

g. Management Development Programmes :- Combining aunique ‘blend of research and consultancy, lIFT has been apacesetter in addressing to the needs of business executivesby continuously aligning the focus of its ManagementDevelopment Programmes with the changing realities. As aresult, its intensive short duration programmes havereceived the most enthusiastic response.

Indian Institute Packaging (LIP)The Indian Institute of Packaging was set up as a nationalinstitute jointly by the Ministry of Commerce, Government ofIndia, and the Indian Packaging industry and allied interests in1966, with its head quarters and principal laboratories at.Mumbai and regional laboratories at Kolkata, Delhi andChennai.It is a training cum research institute pertaining to packagingand testing. Over the years, it has built up a very strong and

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Ncapable expertise in various fields of packaging sciences andtechnologies. It has excellent infrastructural facilities, which caterto the various needs of the package manufacturing and packageuser industries, both with regard to the domestic distributionand export market requirements.

Functions of Indian Institute ofPackaginga. Training Programmes :- It organises a number of

training programmes pertaining to packaging and alsoprovides suggestions in regard to packaging.

b. Testing Facilities :- It also undertakes testing of packagingmaterials and packages to ensure export quality.

c. UN Certification :- All dangerous goods packages need aUN certification mark before they can be dispatched. IIP isthe only authorised body in India to give this certification.

d. Environmental Cell :- The institute has an environmentcell, which guides exporters as to what type of material canbe used or incorporated in the packaging of their productsso as to reduce environmental threats.

e. Research and Development:- It undertakes research anddevelopment programmes for creating and ,improvingoverall infrastructural facilities for achieving packagingimprovement so as to prevent losses during transportation

f. Collection and Dissemination of Information :. Itcollects information on various packing and packagingstrategies and disseminate them to the exporter for theirbenefits. An up-to-date information 01:1 packagingdevelopments can be availed on its website, “http:/ /www.iip-in.com...

g. International Recognition :- The institute is internationalorganisations. It is recognised by Industrial DevelopmentOrganisation (UNIDO) and Centre (ITC) for consultancyand training.

h. International Membership :- It is a member of the AsianPackaging Federation (APF); the Institute of PackagingProfessionals (IOPPA), USA; the, Institute of Packaging(lOP) UK; Technical Association for Pulp and PaperIndustry (TAPPI) and the World Packaging Organisation(WPO).

i. Other Functions :-• It also carries out graphic designing for international

products.• It advises the government of India for all export

related packages.It is not binding or compulsory for an organisation or companyto be a member of lIP. However, on being a member one canavail the benefits of services provided by lIP, specially testingfacilities for packages to ensure high quality.

Indian Council of Arbitration (ICA)Indian Council of Arbitration (ICA) was set up in accordance tothe recommendations of the Committee on CommercialArbitration constituted by the Ministry of Commerce, Govern-ment of India. It was set up on 15th April 1965 as anautonomous non-profit organisation registered under the

Societies Registration Act, 1860. The main objective of theCouncil is to promote the use of commercial arbitration,particularly in the course of India’s export trade.ICA is a member of the Federation of International Commer-cial Arbitral Institution and has’ mutual co-operationagreements with the International Court of Arbitration, theLondon Court of Arbitration and apex arbitration bodies inThailand, Republic of Korea, Yugoslavia, Bulgaria, Romania,Malaysia, Australia, USA, Denmark, Mauritius, Russia, Ger-many, Egypt, Switzerland, Japan, Philippines, Sri Lanka, SouthAfrica and more.

Functions of Indian council of arbitrationa. The council provides arbitration facilities for all types of

domestic and international commercial disputes.b. It uses its network of offices for conciliation of

international trade complaints received from Indian andforeign parties, for non-performance of contracts or non-compliance with arbitration awards.

c. It organises arbitration meetings, conferences, trainingprogrammes, etc., for company executives, businessmen,lawyers, arbitrators, etc., from time to time in different partsof the country.

d. It conducts research and publishes informative literature ondifferent aspects of commercial arbitration, including aquarterly Arbitration Journal.

e. It provides information arid advice to interested partiesregarding the drafting of trade contracts, arbitration lawsand facilities and dispute settlement procedures in India andin other parts of the world.

f. It keeps abreast of the latest developments, in the field ofinternational commercial arbitration and maintains co-operative links with national and international arbitrationbodies throughout the world.

Federation of Indian Export Organisation(FIEO)Federation of Indian Export Organisations (FIEO) is an apexbody of various export promotion organisations. It was set upin October 1965. It represents the Indian entrepreneurs’ spiritof enterprise in the global market. It has kept pace with thecountry’s evolving economic and trade policies and has providedthe content, directing and thrust to India’s expanding interna-tional trade. As the apex body of all Indian export promotionorganisations, FIEO works as a partner of the Government ofIndia to promote Indian exports.

Functions of Federation of Indian ExportOrganisationa. International Linkage:-

• It has forged strong links with counterpartorganizations in several countries as well asinternational agencies to enable direct communicationsand interaction between India and world businessmen.

• It is registered with UNCTAD as a national non-government organisation, and has direct access toinformation and data originating from UN bodies and

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world agencies like the IMF, ADB, ESCAP, WorldBank, FAO, UNIDO and others,

b. Dissemination of Information :-• It has bilateral arrangements for exchange of

information as well as for liaisoning with severaloverseas chambers of commerce and trade andindustry associations.

c. Liaisoning with the Government :-• It sends representations on policy matters to Central

and State (Regional) Governments.• It helps in. establishing contacts between the

government and commercial bodies both in India andoverseas’.

d. Market Development Assistance (MDAJ) :- The Ministryof Commerce, Government of India, through FIEO,reimburses certain percentage of the expenditure incurred bythe recognised exporters, such as all types of export houses,on sales-cum-study tours, participation in exhibitions andfairs abroad, advertisements in foreign media, etc.

e. Market Research and Development Department :- TheMarket Research and Development department offers thefollowing services to the exporters community :-• Arranging meetings with diplomats, incoming

delegations and buying missions.• Inviting delegations.• Organising trade fairs and exhibitions in India as well

as abroad.• Opening foreign offices and warehouses.• Organising seminars for promotion of international

trade.• Opening new FIEO offices abroad.

f. Publicity Department :- The Publicity department ofFIEO performs the following functions :-• Bringing out various special supplements in Indian

and overseas dailies in order to project the selectedfinished products in India and abroad.

• Creating and telecasting episodes in NEPC channel topromote India’s prominent brands in variouscountries covered by the channel.

• It has published Directory of Foreign Buyers andDictionary of Indian Exporters.

• It publishes a fortnightly magazine, “FIEO News”, tocover developments in the field. of international tradeconcerning India.

Marine Products Exports DevelopmentAuthority (MPEDA)Marine Products Export Development Authority (MPEDA)was constituted in 1972 under the Marine Products ExportDevelopment Authority Act 1972. The headquarter of MPEDAis located at Kochi in Kerala. The Authority operates twooverseas trade promotion offices, one at Tokyo (Japan) and theother at New York (USA). The role envisaged for the MPEDAunder the statue is comprehensive, which covers organisation,

coordination, regulation and growth of the export of marineproducts with special reference to the quality, processing,packaging, storage, transport, shipment, marketing extensionand training in various aspects of the industry.

Functions of Marine Products ExportsDevelopment Authoritya. To promote seafood exports by liaisoning. with Indian

exporters and overseas importers.b. To develop contacts with government agencies and officials

to remove identified constraints.c. To promote the image of Indian sea products in overseas

markets through publicity campaigns.d. To create awareness on the capabilities of Indian processing,

packaging, quality and inspection procedures.e. To find suitable joint venture. partners for deep sea fishing,

aquaculture projects, processing and marketing value addedproducts, etc.

f. To implement development measures vital to the industrylike distribution of insulated fish boxes, putting up fishlanding platforms, improvement of peeling sheds,modernisation. of industry such as upgrading of platefreezers, installation of machinery, generator sets, ice makingmachineries, quality control laboratory, etc.

h. To promote brackish water aquaculture for production ofprawn for export.

i. Promotion of deep-sea fishing projects through testfishing, joint venture and equity participation.

j. To undertake various market promotion programmes, suchas :-• Conducting overseas market survey.• Collecting data and maintenance of data bank. -’• Providing assistance for market development.• Undertaking publicity through media and producing

literature and films on trade promotion.• Sponsoring of sales team and delegations abroad.• Inviting overseas importers and experts for export

promotion visits to India.• Organising buyer-seller meets in overseas markets.• Participating in overseas trade fairs and exhibitions.• Organising trade fairs and exhibitions in India. For

example, MPEDA organises seafood trade fair andexhibition every alternate year in India.

Export Processing Zones (EPZS)Export Processing Zones (EPZs) are industrial estates, whichform enclaves from the Domestic Tariff Areas (DTA) and areusually situated near seaports or airports. They are intended toprovide an internationally competitive duty free environmentfor export production at low cost. This enables the products ofEPZs to be competitive, both quality-wise and price-wise, in theinternational market. There are seven EPZs in India at :-a. Kandla (Gujarat).b. Santacruz (Mumbai).

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Nc. Falta (West Bengal).d. Noida (UP).e. Cochin (Kerala).f. Chennai (Tamilnadu).g. Visakhapatnam (Andhra Pradesh).Government has also permitted’ development of EPZs byprivate, state or joint sector. The Inter-Ministerial Committeeon private EPZs has already cleared three proposals for settingup of private EPZs in Mumbai, Surat and Kancheepuram.

Difference between EPZS and SEZSThe main difference between the SEZ and the EPZ is that theSEZ is an integrated township with fully. developed infrastruc-ture on international standards whereas EPZ is just anindustrial part. In fact,-all existing EPZs have been asked toconvert themselves into SEZs. However, some units are notinterested in the conversion on account of the sale into DTA atconcessional rate of duty is not available inSEZs. The Govern-ment has asked such units to move out to the Domestic TariffArea (DTA).

Facilities Aavailable to Units in EPZSa. Each zone provides basic infrastructure such as developed

land for construction of factory sheds, standard designfactory buildings providing ready-built sheds, roads, power,water supply and drainage.

b. Customs clearance is arranged within the zones at no extracharge.

c. Provision has also been made for locating banking, postoffice facilities and offices of clearing agents in the ServiceCentre located in each Zone.(For more details refer EOU/SEZ/EHTP/STP units)

100% Export Oriented Units (100% EOUS)The Export Oriented Units (EOUs) Scheme, introduced in early1981, is complementary to the EPZ scheme. It adopts the sameproduction regime but offers a wider option in location withreference to factors like source of raw materials, port, hinterlandfacilities, availability of technological skills, existence of anindustrial base and the need for a larger area of land for theproject.EOUs have been established with a view to generating addi-tional production capacity for exports by providing anappropriate policy framework, flexibility of operations andincentives.(For more details refer to EOU/SEZ/EHTP/STP units)EOUs, EPZs, Electronic Hardware Technology Park Units(EHTPs) & Software ‘Technology Park Units (STPs)Units undertaking to export their entire production of goodsand services may be set up under :-a. The Export Oriented Unit Scheme;b. The Export Processing Zone Scheme.,c. The Electronic Hardware Technology Park Schemed. The Software Technology-Park Scheme.

Activities undertaken BV such unitsa. Manufacturing, servicing, repairing; remaking,

reconditioning, re-engineering including making, of gold /silver,/platinum/ jewellery and articles thereof;-

b. Agriculture including agro-processing, -aquaculture, animalhusbandry, bio-technology, floriculture, horticulture,pisiculture,viticulture, poultry, sericulture and granites;

c. Export of all products except goods mentioned asrestricted and prohibited items of exports in ITC (HS)Classification of Export and Import items.

d. Software units may undertake export using datacommunication links or in the form of physical exportsincluding export of professional services.

e. Units for generation distribution of power can also besetup in EPZs.

f. No trading unit is permitted

Facilities for Units Located under EOU/EPZ/STP/EHTP Schemesa. Importability or Procurement of Goods from Domestic

Tariff Areas :- An EOU/EPZ/EHTP/STP unit canimport or procure from the domestic sources, free of duty,all its requirements of capital goods, raw materials,consumables, spares, packaging material, office equipments,etc.• No licences are required for such import or domestic

procurement.• Such units can utilise goods imported or domestically

procured ,over a period of 2 years.b. Exemption from Duties ;. They are exempted from most

of the duties and levies such as state levies including salestax, anti-dumping duties, etc.

c. Income Tax Concession :- They are also entitled forconcessions in respect of

payment of income tax under various sections of theIncome Tax Act, 1961.

d. Exemption from Industrial Licensing :- They areexempted from industrial licensing for manufacture ofitems reserved for Small Scale Industry sector.

e. Sub-contracting:- They can, with the permission of theCustoms Authorities, sub-contract part of the productionand production process in DTA.

f. Inter-Unit Transfer :-They can supply to other EOU/SEZ/EHTP/STP units without payment of duty and suchsupplies are counted towards fulfilment of exportobligation.

g. Supplies from DTA :- Supplies form DTA to EOU/SEZ/EHTP/STP units are regarded as ‘Deemed Exports’ andthe DTA supplier is eligible for the deemed export benefits.

h. DTA Sale :- Units, other than gems and jewellery units,may sell goods and services upto 50% of. FOB value ofexports, subject to fulfilment of minimum NFEP onpayment of applicable duties. No DTA sale is permitted incase of motor cars, alcoholic liquors, tea (except intent tea)and books.

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i. Export Obligation :- They can achieve export performanceand Net,Foreign Exchange Earning as a Percentage ofexports (NFEP) cumulatively over a period of 5 years.Virtually no penal action is taken for shortfalls during thefirst three years of operation.

j. 100% Foreign Equity :- 100% Foreign Direct Investment(FDI) in the manufacturing sector is permissible to theEOU/SEZ/EHTP/STP units. For FDI in services andtrading sector, the sectoral norms as notified by theDepartment of Industrial Policy and Promotion areapplicable.

k. Other Entitlements:-• Can procure duty-free inputs for supply of

manufactured goods to advance licence holders.• Are exempted from State Trading regime except in

limited cases.• Can club their exports with exports of their parent

company for purposes of Obtaining Trading orExport House status.

• Manufacturers processors who have acquired qualitystatus with specified certification from identifiedagencies are eligible for double weightage forrecognition as status holder.

• Can repatriate their profits freely without any dividend-balancing requirement.

M. Visvesvaraya Industrial Research andDevelopment CentreThe World Trade Centre, Mumbai has been named as the M.Visvesvaraya Industrial Research and Development Centre afterthe name of Dr. M. Visvesvaraya, an engineer and a scientist. Itwas established in 1970 as a non-profit company licensed underSec. 25 of the Companies Act. The Council of Managementcomprising of industrialists, representatives from Central andState governments and apex Trade Promotion Organisations,governs it.MVIRDC became of a member of WTCA in 1971 after whichit was known as WTC, Mumbai. It consists of three centrallyair-conditioned building. The arcade comprises of various stateEmporia, banks, offices, shops and showrooms. It also housesthe prestigious Expo-Centre (exhibition hall). Centre- Icomprises of areas leased to various organisations connectedwith world trade, business and industry such as EXIM bank,RBI, EPCs, etc. It also houses WTC offices as well as meetingrooms. Centre-II has been entirely leased out to the IndustrialDevelopment Bank of India. (IDBI)

Functions of World Trade Centre

a. Trade Information Services :- WTC offers the IMPEXData Bank facility. It is India’s first ever computeriseddatabase on imports and exports. It comprises of detailson export and import transactions. It helps in identifyingproducts in demand for export or import, locate markets,evaluate competitive prices, understand the market players,etc.

b. WTCA Online :- WTCA online is a unique internet basedwebsite, providing a one-stop source for global business

information through strategic alliances with leadinginformation and service providers. WTCA online offersquality products representing the best international tradeinformation and services at discounted prices.

c. Trade Education Services’:- World Trade Institution(WTI), the educational wing of WTC Mumbai, was. set upin 1991. It was the pioneer in introducing a six monthsPost Graduate Diploma in Foreign Trade (PGDFT) andPost Graduate Diploma in Foreign Exchange and RiskManagement (PGDFERM). It has been certified as ‘BestPractice Institute’ by WTCA, New York.

d. Foreign Trade Facilitation Cell :- A Foreign TradeFacilitation Cell has been set up in order to :-• To give advice on starting of import/export business

and authorities to be approached for solving import/export problems.

• To make recommendations to the government inregard to the EXIM Policy and procedure.

e. International Trade Library :- It is an exclusive source ofbusiness information. Businessmen and students can easilyaccess various sources of trade information through thelarge collection of trade directories, journals and relatedpublications. Market reports on different products by ITCand cm are the main strengths of this library.

f. Business Services :- Specific business meetings can be“Organized for the visiting overseas businessmen for theirproducts of interest. A minimum two weeks advance noticeis required. WTC also offers state of the art supportfacilities, video conferencing, Temporary office space,meeting rooms, translation capabilities, etc.

g. Research and Development :- The Centre has conductedresearch work on diverse topics like Multimodal Transport,Agro-based Industries, European Union Market, etc. As afollow up to such studies the Centre has brought outresearch publications. Current thrust of Centre’s researchactivity is on the implications of the WTO agreements onIndia’s foreign trade.

h. Other Services :- Apart from the above services, the WTCalso provides exhibition facilities, facility of WTC clubs(lounge and dining services for members and guests)different publications’ such as Trade Promotion Bulletin(monthly), Current Research and Development Briefs(Monthly), WTC Intercom (Quarterly), etc.

Chamber of Commerce (COC)Manufacturers, industrialists and traders in different regions asper their needs and requirements establish the Chamber ofCommerce and Industry. The membership of Chamber ofCommerce is open to all. They playa prominent role in theexport promotion activities of trade and industry. They arrangeperiodic meetings which help in :-a. An exchange of information and compilation of data,

indicating the present state of the export activities in aparticular trade or industry.

b. An exchange of views and formulation of specific remedialpolicies, which will be taken up with the Government.

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NMembership of the Chambers and Associations is open to allmembers of trade and industry. The discussions therein areamongst professional people who have a thorough knowledgeof a trade or an industry. This can be an excellent forum toproject practical, viable and sound suggestions for removingimpediments or changing policies in the national interest.Many of these Chambers or Associations have separate sectionsor cells dealing with the export trade, which are helpful ininterpreting government policies to members, disseminatingdata on export markets and also making representations to thegovernment.

Question BankQl. What are the common functions of Export Promotion

Council?Q2. What is the difference between EPCs and Commodity

Boards?Q3. What are the functions of Commodity Boards?Q4. Why were Export Inspection Agencies constituted?Q5. What role does Indian Trade Promotion’ Organisation

play in export promotion?Q6. Write note on Indian Institute of Foreign Trade.Q7. Explain the role of Indian Institute of Foreign Trade in

promotion of exports.Q8. What role does Indian Council of Arbitration play in

export promotion?Q9. Explain the role of Federation of Indian Export

Organisation in export promotion? Q.10 What areExport Processing Zones? How do they help inpromoting exports?

Qll. What is 100% EOU? What are its benefits?Q12. Write a brief not on All India Handicrafts Board.Q13. Write a not on MPEDA.

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LESSON 22:STATE TRADING IN INDIA

• Introduction• Objectives of state trading• Functions• Advantages• State trading in india• Export development measures• Weakness & future plans of stc• Future of stc• Chart on stc• Question bank

IntroductionThere is no precise definition of State trading. There are varioustypes of’ government participation in foreign trade, all of whichcan be defined as State trading. For example, in the centrally-planned economies the entire foreign trade is nationalised andis, therefore, conducted directly by government departments orgovernment-owned corporations. On the other hand, there arecountries, which are essentially free enterprise economies, butexport and import of specific commodities are entrusted togovernment trading organisations or departments. Forexample, import of raw and unmanufactured tobacco is a Statemonopoly in France. The Government Food Agency of Japanregulates the import, export and internal distribution of rice;wheat and barley. Similarly, Japan Monopoly Corporation whichis a State body has the exclusive rights of tobacco importation.The Australian Wheat Board has the exclusive rights for exportsof wheat. There are many such instances all over the world. ,The third variety of State trading is found in mixed economicslike India. In I India, State participation in foreign trade ismostly done through government-owned trading organisationsor through government departments. The government-ownedtrading corporations are, h9wever, commercial entities registeredunder the Companies Act and have, the same rights andobligations as any private sector firm.

Rationale of State TradingState hading is resorted to for a number of reasons. In thecentrally. planned economies, foreign trade as a matter of Statepolicy is nationalised. Foreign trade in those countries is to beconducted by State trading organisations because otherwise thecentral planning mechanism will not function properly. In thedeveloped free enterprise economies, State trading sometimes ispractised as a source of revenue. That is why it is found thattrade in products like alcohol and tobacco is subject to Statemonopoly. Similarly, trade in drugs and arms and ammunitionis managed through State bodies in the interest of health andnational security of the country. State trading in a number ofagricultural products is quite common because State interven-tion is necessary to avoid large fluctuations in the prices and

preventing deterioration in the income of the agriculturalproducers.State trading, however, is more commonly practised in thedeveloping economies. The reasons behind this are varied. First;such countries may not have adequately developed private sectortrading bodies which can effectively participate in internationalcommerce and also protect the national interest. Secondly, theprivate sector bodies, though possessing adequate trading ex-pertise, will be solely motivated by profit consideration.However, it may be necessary from the national standpoint topromote new export items and cultivate new export marketsever. by sustaining short-terms losses. This can be done only bygovernment bodies having act developmental role and whichare backed by the government so that the financial losses do nothamper the pursuit of long-term objectives. Thirdly, thecentrally-planned economies have emerged as important exportmarkets for a large number of developing countries includingIndia. Since the foreign trade of these countries is in-variablyconducted through State trading organisations, it is found thatgovernment trading bodies are in a better position to negotiatewith their counterparts in the centrally-planned economies.

Canalisation of ImportsState participation in imports in generally motivated by someother considerations. These are:(a) to reap the advantage of bulk buying,(b) to mop up any excess profit which the private sector firms

might enjoy in import business, and(c) to ensure proper internal distribution of the imported

items and to maintain stable domestic price level.

Advantage of Bulk BuyingThere are essentially three elements which can be associated withthe advantage of bulk purchase. First, a bulk purchaser may getbetter discount and trading terms. Secondly, since the bulkpurchaser will be a monopolist, the possibility that prices ofcommodities, in short supply can be pushed up by competitivebidding by the Indian importers, is eliminated. Thirdly, sincethe international markets of many importable items aremonopolistic, State trading will give rise to countervailingpower which may mitigate to some extent the ill effects of themonopolistic market structure.

Mopping up of Excess ProfitsIn a situation where demand for imports exceeds the supply ofimports, there is bound to be a premium on importedmaterials. If the import licence is issued to an importer, thepremium will accrue to him. Further, ‘the extent of thepremium will be determined by the market forces. The higher isthe excess demand for imports, the higher will be the premium.If the premium is high it means not only a correspondinglylarger windfall profit to the importer but also a rise in the cost

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Nof production of those items which use the imported materialas input. Both these problems can be solyed through State.trading for two reasons: First, because the State tradingorganisations having the monopoly right to import aregovernment organisations, the premium will accrue to thegovernment. Secondly, the magnitude of the premium will alsonot be a problem because the government can decide on theprices at which the State trading organisations will release theimported materials in the domestic market.

Maintenance of Internal DistributionIf foreign exchange availability poses no problem and theimport trade is completely free, internal distribution ofimported items at fair and equitable prices will not create anyproblem. But since such conditions generally do not prevail in adeveloping country, sporadic scarcity of imported items willoccur. ‘To avoid these problems, it may be necessary to handover the import of essential items to government tradingorganisations which can plan the import operation in such away that a steady in flow will be. maintained. This will avoidsudden scarcities and consequent spurt in domestic prices.

Objectives of State TradingA country may undertake state trading to achieve one or moreof the following objectives:i. To achieve its political objectives,ii. To boost its export trade,iii. To enlarge domestic planning programmes by purchasing

products required to fill a gap in the plans and bycontrolling outside economic forces that may affect theseplans,

iv. To improve the country’s balance of internationalpayments;

v. To control foreign exchange,vi. To maintain national security and defence by furthering

military preparedness and by preventing potential enemiesfrom receiving strategic materials,

vii. To acquire specific products either because they can beobtained at lower cost or because they are scarce at home orabroad,

viii. To advance domestic interests by improving bargainingpower in trade or by protecting trade against foreigncompetition.

Function of the State TradingCorporationAt the outset, the main function of STC was to deal withbilateral trading practices, especially in the socialist countries. Buttoday it has become a premier trading house having branches inalmost all the trading countries of the world. It deals in nearly300 commodities spread over 84 countries of the world.

Trading Activities of the STCa. Direct Trading :- Direct trading includes those goods

where STC has monopoly to deal with. Such goods areprocured, packed and shipped by STC while import itemsare purchased from the foreign countries by STC officeslocated there.

b. Indirect Trading :- In the case of indirect trading, thecontracts for the sale or the purchase of commodities arenegotiated by STC while the actual fulfilment of thecontracts is entrusted to the private businessmen enrolledby the STC.

c. Canalised Trade :- Canalised trade includes the import orexport of certain items through the concerned agencies ofSTC. The canalised items of export include sugar, castor oil,molasses, groundnut extractions, etc. Canalised items ofimports include edible’ oils, writing and printing paper,non-edible oils, etc.

d. Export Promotion Measures:-• It provides financial and raw material assistance.• It participates in trade fairs and exhibitions.• It undertakes product research.• It undertakes market research.

e. Other Activities :- STC also performs servicing functions,thereby bringing buyers and sellers together and assistingthem in fulfilling contracts.• It helps the government departments and, industrial

concerns in processing supplies of plant and machineryfrom abroad.

• In some cases, it settles trade disputes between theIndian and foreign parties.

The corporation is successful in introducing several newcommodities for exports and in developing new markets forIndian goods. In recent years, the STC is also taking activeinterest in marketing research, advertising and sales promotion.,However, it is a public sector organisation with usual difficul-ties and limitations of its own.

Services Rendered by the State Trading Corporation

a. To the Indian Industry :- STC helps thousands of Indianmanufacturers to find markets abroad for their products’. Itassists them in making the best use of raw materials andproduction infrastructure, guides and helps them in theirmarketing efforts. Some of the services offered by STC tothe Indian manufacturers include :-• Provides financial assistance to the Indian exporters on

easy terms.• Imports machinery and raw materials for export

production.• Assists in the areas of marketing, technical know-how,

quality control, packaging, documentation, etc. ,• Supply of imported goods in small quantities as per

the requirements of buyers.• Helps in exhibiting the products .of small scale

manufacturers in the international trade fairs andexhibitions.

• Market intervention on behalf of the Government:b. To the Overseas Buyers :- STC acts as an expert guide for

the overseas buyers interested in Indian goods. It helpsthem in finding the best Indian manufacturers, undertakesnegotiations, fixes delivery schedules, overseas quality

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control, etc., and tries to provide a complete satisfaction tothe overseas buyers.

c. To the Indian Consumers :- Indian consumers are alsobenefited from STC’s expertise and infrastructure. STCimports essential commodities in order to cover shortfallsarising in the domestic market during the periods ofscarcity. Generally, it imports the items of daily requirementssuch as sugar, wheat, pulses, etc., so as to stabilise theirprices.

Advantages of State TradingOne of the important features in most countries in the post-war years has been the rapid extension of the function of thestate in commercial fields. In most countries trade is closelyregulted by the state, while in others it is partly or whollyconducted by state organs. In India, too, the trend towardsstate participation is becoming increasingly significant.The controls over international trade are, in some respect, themost dangerous of all, and they stem from state trading. Privateenterprise economies have a considerable admixture ofgovernmental trade. State trading may be assumed for pur-poses of governmental responsibilities for defence, the desire toprotect important sources of taxation and control publicmorals. The limitation of foreign exchange and shipping, plusthe need for saving manpower were responsible for statetrading and bulk purchases during the war and in the warperiod of reconstruction. There was an element of monopolyselling and monopoly buying. The argument for the perpetua-tion of the system rested on economies of scale. If foreignproducers, for example have assured markets in governmentalbulk purchase contracts, they would cease to worry aboutmarketing problems and would concentrate on efficientproductions, passing on a part of the gains of efficiency to theconsumer in the form of lower prices of goods.Few countries are willing however, to allow a foreign govern-ment to deal directly with private producers in importantmarkets without intervention. Such foreign government mayyield to the big buyers to squeeze down prices, and improvetheir terms of trade. This calls for an organisation on theselling side. With both the buyer and seller orgainsed, thereshould solution and which frequently results in a stalemate, andalways leads to complaints

State Trading in IndiaState trading in India has a fairly long history. State trading inimports is first discussed followed by a discussion on Statetrading in exports.-

State Participation in ImportsThe advisability of taking over imports’ of certain specifieditem was first considered by the Government of India in 1948.The context was the abnormal increase in the price of EastAfrican cotton of which India was a bulk importer. The marginbetween the prices at which the import was negotiated by theGovernment and the domestic price thereof was so high thatsuggestion was made that the Government of India shoulddirectly import the East African cotton so that the marginbetween the domestic price and the c.i.f. price could accrue to theGovernment. The Government, however, took a decision not

to take over import trade in East African cotton.1 Since thenState trading in imports was discussed by various committeesand by 1956 the Government had come to the conclusion thatthere should be government corporations which were to beentrusted with the function of import of specific items. Twofactors persuaded the Government that canalisation of importsfor some items . was necessary. The first factor was the graduallyincreasing trade with the’ socialist countries. Private traders inIndia had not the expertise in dealing with the Governmenttrading organisations in these countries, and therefore, facedproblems while negotiating export import contracts. Sinceunder the rupee-payment arrangement exports and importshave to balance; the Government of India have the responsibil-ity to see that the import plan is fulfilled. A State tradingorganisation, through which imports could be canalised, wouldbe an effective instrument to achieve this result. The secondfactor was the artificial scarcity created by small importers whohad been given import licences to make abnormal profits.The State Trading Corporation of India (STC) was set up bythe Govern-ment of India in 1956 which was designated as thesole import agency of such items as the, Government maydecide from time to time. STC, however, would import otheritems as well apart from the canalised items. The functions ofthe STC as given in the Memorandum of Association are asfollows:i. To organise and undertake trade with the State trading

countries as well as other countries in commoditiesentrusted to the company for such purpose by the UnionGovernment from time to time and to undertake thepurchase, sale and transport of such commodities in Indiaor anywhere else in the world.

ii. To undertake at the instance of the Union Governmentimport and/or internal distribution of any commodities inshort supply with a view to stabilising prices andrationalising distribution, and

iii. To generally implement such special arrangement forimports, ex-ports; internal trade and/or distribution ofparticular commodities as the Union Government mayspecify in the public interest.

Very high margin of profit earned by the importers of certainconsumer commodities like cassia, betel nuts, cloves, etc., forwhich adequate foreign ex-change could not be allocated due totight foreign exchange position, prompted the Government totake the decision of complete import canalisation of itemswhere either the speculative profit or profit due to a widedisparity between the domestic demand-supply position waslikely to be high. The success of the State canalising agency inarranging bulk import by items, initially canalised, such as rawsilk, caustic soda, soda ash, etc. at favourable prices also gave theGovernment more confidence in enlarging the sphere ofimport canalisation.By canalising the import of speculative items, the Governmentmanaged to appropriate the. profit which otherwise would havegone to the quota holders. The profit made in these operationshelped the Government to pursue another policy objective, viz.,export promotion. The State Trading Corporation was directed

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Nby the Government to push up export of items which aredifficult to sell, and therefore may involve financial losses.“In order to offset the losses on export of difficult-to-sellitems. import of certain scarce commodities, such as betelnuts,cloves, copra, etc., are canalized through the State TradingCorporation. When imports of these items……. Arecanalised through the STC, the corporation mops up a portionof the large profit which is available on these commodi-ties…….”!The maintenance of an equitable distribution of importedmaterials as well as to keep the interests of the unorganisedsector of the industry in fact are also considerations which forcethe Government to use the instrument of import canalisation.Stabilisation of raw material prices is another objective whichwas sought to be achieved through the instrument of importcanalisation. Import of mercury was canalised in 1961. Thedomestic sale price of mercury had shot up in 1960 to Rs. 3,500per flask against a of. price of only Rs. 1,000 per flask. Thereason of such an abnormal rise in price was speculation. Thecanalisation of import through the State Trading Corporationimmediately produced the desired result. The State TradingCorporation fixed its sale price at Rs. 1,800 per flask and thedomestic sale price stabilised at Rs. 2,200 per flask. However, forthe manufacturers of caustic soda, who needed mercury as abasic raw material, the STC charged significantly lower price, viz.,a 15 per cent markup on the of. price of Rs. 800-900 per flask.For others, the price was Rs. 1,800 as indicated above. Thus,canalisation in effect achieved two objectives: first, to ensuresupply of imported raw material at reasonable prices to thedomestic I manufacturers, and secondly, to mop up the excessprofit which inevitably I would be there, when adequate foreignexchange could not be allocated for ‘ the importation of anitem.The following items have been canalised for import (subject tochanges from time to time):Newsprint, Wool, Palm oil (edible), Rayon grade woodpulp,Synthetic ~ rubber, Caprolactum, Alkaloid benzene, Endrinetechnical, Chlorine diphosphate, Palm oil (soap), Sunflowerseed oil, Sisal/manila hemp, Paraxylene, Tallow, Carbaryltechnical, Tetracycline HCL, Poly filament yarn, Ampicil trihyd,Art silk yarn, Chloram powder, Pot. Chloride, Soyabean oil,DMT, ME glycol, Cement, Sugar, White printing paper, Non-ferrous metals, Asbestos fibre, Antimony metals, Mercury andAG fluorspar.

Impact of CanalisationAnalysing the impact of canalisation, the Ministry of Com-merce submitted before the Estimates Committee:“The effect of canalisation of import through State agencies hasresulted in savings in foreign exchange on imports on accountof bulk purchases and also on account of bulk shipments andin supply of raw materials to consumers in the country atreasonable rates”

Other Advantages are Stated to be

a. import and distribution in a planned and phased manner,b. long-term supply arrangements,

c. self-generation of foreign exchange through special linkarrangements,

d. equitable distribution in India through’associations/consortia”.2

However, views of the trade and industry in respect of importcanalization were not always favourable.A major complaint of industry and trade has been regarding thepricing policy and the high service charges. It has been pointedout that in the case of some items, specially raw materials, t9iprices charged by the STC have been excessive. Anothercomplaint has been the absence of close liaison betweenindustry and trade and the State trading agencies. At present,trade and industry have no means of knowing how exactly arethe State trading agencies- fixing their prices.Anlaysing the Indian situation, Mr. Boothaligam, DirectorGeneral, NCAER, and a former Secretary to the Government ofIndia, submitted before the Estimates Committee:“Canalisation could be justified and be beneficial only in areaswhere two tests can be met. The first is that the organisationmust be equipped to work and actually work in such a mannerthat bulk purchases are made economically taking advantage offavourable changes in the world market. The second is that thefinal user must get his material at least as cheaply and as quicklyas he might have if allowed to import himself.”To conclude, the observations made by the Estimates Commit-tee may be noted:“The Committee agrees that canalisation is no doubt a questionof policy which only the Government is competent to decide.They would, however, suggest that the canalisation of importof a commodity may be done if it serves public interest. Theywould also stress that before canalisation of import ofcommodities was decided upon, all the important factors,including the capacity of the Corporation, should be taken intoconsideration. They recommended that after canalisation isdecided upon, the Government must exercise vigilance to seethat it served the purpose for which it was undertaken”.

Canalisation of ExportsThe basic objectives of State trading in exports are as fo11ows:a. It was observed in the case of certain products that there

was secular decline in the total value of exports. It wasthought that a govern-ment trading organisation would beable to reverse this trend by concerted action.

b. In some cases the inter se competition among the Indianexporters was resulting in lower unit value realisation. Entryof State trading organisation in the international marketthrough which exports were to be canalised could result inthe improvement of unit value realisation. .

c. There are certain products for which. there maybe apremium in Lie international market. By canalising exportof such products, excess profits from export operation canbe mopped up by the Govern-ment.

d. Another objective of canalisation was to eliminate underinvoicing. It was found that sometimes the Indianexporters were quoting lower prices in their invoices whilethe world prices for such products were considerably higher.

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This led to the suspicion that the country had been losingforeign exchange because of the malprac-tices adopted bycertain exporters.

e. Canalisation was also thought of as an instrument toimprove the bargaining power of Indian exporters. It wasfound that the principal buyers in Western Europe and theUnited States were large corpora-tions and to negotiatecontracts with them would require the exist-ence of anequally large counterpart in India which would be able tosupply exportable products in bulk quantities. Especially forproducts which originate in the small-scale sector, acoordinating agency like the STC would be helpful inpromoting export of such products.

The following items have been canalized for export (subject tochanges from time to time):Sugar, Semi-processed leather, Castor oil, Footwear leather,Cement and clinker, Rice basmati, Shellac/lac, Opium crude,Salt, Lemongrass oil, Canvas/ Plastic footwear, Molasses,Groundnut extractions, Barytes, Chrome ore, Silimanite andProcessed mica.The State trading organisations have also a promotional role sofar as exports are concerned. As regards non-canalised items, thebasic objectives of the State trading corporations are:1. To function as catalytic agency for promoting new items of

export. For example, in 1981-82 several new items wereintroduced in international markets by the STC includingrayon viscose fabrics to the USA, textile fabrics and threadsto Vietnam, green tea to Algeria and stereo musicequipment to Hungary. Algeria and Libya have beenidentified as potential markets for a number of agriculturalcommodities.

2. To form consortia. of manufacturers specialising indifferent’ lines , like railway wagons, readymade garments,plywood, etc.

3. To provide support to traditional items, viz., jute, coffee,coir, etc.

4. To identify new export markets. STC developed several newmarkets during 1981-82 including Saudi Arabia and Malaysiafor mango pulp, Hungary and GDR for fashion garments,the UK for golf shoe uppers, Spain for footballs andUganda for bicycle and bicycle parts. STC has exploredSouth Korea and Hong Kong for export of Indian goodsto third countries. STC is negotiating with Hong Kong forexport of building materials and textiles for export to theUSA and African countries.

5. To introduce products in international markets particular-lythose manufactured by the small-scale and cottage sectorsuch as sandalwood, billets, silver jewellery, kuth oil, driedmush- room, etc

6. To introduce product adaptation and development keepingin line with the changes in the international markets. Forexample, Mica Trading Corporation is trying to exportfabricated mica as the demand for the traditional product,viz., processed mica, is declining over the years.

Performance of the State Trading Corporation

Performance Indicators

Annual Turnover (2000-2001) Rs. 1040 Crore (US$ 228 million) Equity Rs. 30 Crore (U8$ 6.6 million) Profit after tax (2000-2001) Rs. 3 Crore (U8$ 0.7 million) Net Worth (as on 31.3.2001) Rs. 421 Crore (U8$ 92 million)

Exports from IndiaSTC exports a diverse range of items to a number of destina-tions throughout the world. Exports by STC vary fromtraditional agricultural commodities to sophisticated manufac-tured products.Besides, negotiating, contracting and shipping, STC seeks tointroduce new products, explore new markets and undertakewide ranging ancillary functions such as product development,financing, quality control and import of machinery and rawmaterials for export production.STC makes use of its world-wide connections, abundantexperience, up-to-day information about the market trends andlong term perspective on various commodities to ensurecompetitive prices, right quality and adherence to deliveryschedules to the buyers abroad.

Principal Items of Exports

Imports into IndiaSTC imports a number of essential commodities to cover thedomestic shortfalls and hold the price line. STC serves thenational objective by arranging timely imports at most competi-tive prices. In the process, the Corporation makes best use ofits strength in handling bulk imports, vast infrastructure andabove all an experience of over four decades in fulfilling theneeds of the industry.

Principal Items of Imports

Agricultural Commodities Manufactured goods Edible Oils Hydrocarbons Sugar Gold & Silver Wheat Urea Fatty Acids Scientific Instruments Pulses Instruments for Police & Hospitals

Export Development MeasuresThe export development measures undertaking by STC during1989-90 included the following;

Agricultural Commodities Manufactured goods Wheat, Rice & 8ugar Chemicals, Drugs & Medical Disposables Spices & Cashew Engineering & Construction Materials Tea & Coffee Consumer Products Tobacco and Rubber Textiles Garments Opium Leatherware Groundnuts Processed Foods Castor oil & Seeds Jute Goods

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N• STC provided financial and raw material assistance for the

export of ibuprofen, thermoplastic wovens, phosphorourcompounds and mercury salts. Oxalic acid / diethyl oxalate.

• During the Year, STC participated in 23 fairs, exhibitionsand buyer/seller meet in India and abroad including IITF ‘89, New Delhi in which STC’s stall was awarded GoldMedal for best display.

• STC’s Design and Development Cells based in New Delhiand Agra developed a number of new samples of footwearand shoe uppers for display in various international fairsand exhibitions and for negotiations of export orders onbehalf of the small scale industry. Testing facilities forleather items were also provided in STC laboratories to helpthe small scale industry in quality control.

• A number of machines were installed in design-cum-Development Cell at Jalandhar for testing the quality ofgoods and other material being used for manufacture ofsports items.

• For the first time, STC undertook the task of purchasingsoyabeans in the mandis, prcessing and selling the oildomestically and exporting soyabean meal.

Offshore TradeThe Corporation’s offshore trade during 1989-90 increased toRs.14 cores from Rs 4 crores in 1988-89. The main items andmarkets for which trading were undertaken were. That rice toDubai and Yemen, Iranian cement to Nepal, IndonesianCondensed milk to Maldives and Chemicals and pharmaceuti-cals to Poland from Germany.Foreign Exchange Earnings/OutgoThe Total exchange earnings and outgo during the year are givenbelow.• Foreign exchange earnings by way

of exports (FOB Value) 731.82• Foreign exchange outgo;

• Imports (CIF Value) 610.51• Interest 50.06• Other expenses 7.25

STC set a target of Rs 580 crores for exports for the year 1990-91 During the year emphasis was laid on direct buying andselling.Salient features of the export strategy adopted by STC for 1990-91 are given below:1. STC continued to make efforts to strengthen supply base

for selected commodities to be identified as thrust areas.2. STC took action to underwrited part or whole of

production of identified units for export of manufacturedproducts.

3. STC financed export oriented projects and convertedfinancially weak companies into exporting. Items addedwere tea and castor oil.

4. STC took up development of Brand Marketing in selectareas e.g sports goods.

5. An attractive package of services offered to the associatessuch as:

I. Development of infrastructural services for theassociates by way of import, bulk purchasing locallyand warehousing.

II. Financial assistance for expansion of capacity.III. Setting up of testing laboratories to ensure consistent

quality export.

Weaknesses and Future Plans of STCSome of the major weaknesses of the STC pointed out by astudy con-ducted by the Indian Institute of Management,Ahemdabad, were:i. Though the objectives with which STC was established are

known and clear, STC management has rarely taken anymajor entrepreneurial decision on its own.

ii. There seem to be no guidelines or criteria for choice by STCmanagement of new product/markets.

iii. Not much expertise has been developed to locate anddevelop sources of supply of exportable products.

iv. Also not much expertise is developed in procuring importsfrom sources of supply abroad.

v. Much of the expertise is in operating as an agent, inprocessing’ indents and tenders and in transportation anddistribution; not In-merchan-dising, procurement ormarketing.

The setback in the exports of non-canalised items can beattributed to the STC’s failure to develop and appropriatesupply base and take adequate promotional steps amongimporters.In recent years, STC has taken some major steps to improve itsworking. They are: -a. Diversifying the product range-:it has continued to add new

items to its export basket like moccasins, orthopedic shoes,sports shoe uppers, compressors, RD. pipes, cocoa beans,peacock feathers and clutch and security bags. It would layemphasis on value added products like computer software,Maruti vehicles, scooters and mopeds, consumer electronicsand packaged tea.

b. Trying to spearhead the national effort to identify newmarkets for Indian commodities and manufactured goodsand establish itself in these markets on a long-term basis.

c. Developing a reliable supply base for production of qualitygoods in association with the State undertakings, co-operative organizations and others in selected and identifiedsector. . If necessary, STC shah undertake investments fordevelopment of such production base. The STC has alsodecided to enter into joint ventures to develop captivesupply sources for exports.

d. Establishment of 100 per cent export-oriented productionunits the product ranges identified so far are leatherproducts, sports goods and engineering goods. These willbe mainly set up with foreign technical and equityparticipation and 100 per cent. buyback arrangements.

e. Improvement in quality, grading packaging, etc.f. Participation in fairs/exhibitions in India and abroad.

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g. Evolution of a scheme to supply raw materials atinternational prices for export production.

Corporate PlanThe STC has drawn up a corporate plan with the main objectiveof achieving a turnover of Rs 5,000 crores by the year 1999-2000. The major strategies to be followed in this regard include:• Increased emphasis on direct buying and selling.• Strengthening overseas marketing network.• Entering into joint ventures.• Undertaking OGL imports.• Expanding domestic trade.• Undertaking infrastructure development.• Exploring new lines of business.• Organisational restructuring.• Strengthing of information base.With its long experience of exporting a wide range of prod-ucts/com-modities to over a hundred developing anddeveloped countries and a sound infrastructure, STC should~ot merely act as canalising agency but should organise itself asan effective trading house on the lines of Japanese tradinghouses. It should provide new dimensions and leadership asthe biggest export house in the country.

Future of State Trading in IndiaWith the Government’s new economic policy taking shape, it isnow evident that canalisation, except of very few sensitivecommodities, will not be there in the country’s export-importpolicy. This, to a large extent, has already eroded the base andprofitability of the State Trading enterprises-a trend which willget strengthened in the coming years. These organisations will,therefore, have to redefine their role and create capacity toemerge as global traders without the support of any monopolybusiness on the Government account. Both MMTC and STChave initiated measures in this direction but these have notbecome very successful. For example, while canalised exportsconstituted per cent of MMTC’s total exports in 1991-92, thisincreased to 59 per cent in 1995-96. However, in the case ofSTC, although is total turnover during 1995-96 amounted toRs. 1,685 crores as compared to Rs. 1,861 crores during theprevious year, the non-canalised turnover increased by 5 per centfrom Rs. 847 crores in 1994-95 to Rs. 892 crores in 1995-96.STC has made rapid strides in offshore trading, a new area ofgrowth identified by it. It earned Rs:65 crores in 1994-95. Thetrading covered items like wheat, sugar and rubber. Oneoffshore deal struck by it relates to supply of wheat, valued atRs. 60 crores, to Sri Lanka, the origin of wheat being the USAThe STC has supplied sugar to Commonwealth of Indepen-dent States after getting the commodity from the EuropeanCommunity and South America. Rubber, on the other hand,has been obtained from Sri Lanka and sold to Iran.Since the canalised business has virtually come to’ a standstilldue to decanalisation, the STC has been finding avenues togenerate profits from sources like offshore trading, apart fromdirect exports of a number of items like leather productsincluding shoes, and other consumer goods. It is also engaged

in the import of industrial raw materials for supply to actualusers in the country mainly for export production.With a view to developing captive sources of supply forexports,. the STC has entered into a number of joint ventures.It has also set up warehouses overseas for developing exportson a sustained basis. The MMTC has also decided to set upjoint ventures in various fields of its activities.Since the Government wants the STC and MMTC to functionas internation-al trading houses in competition with the privatesector, it is strongly felt by these organisations that the Govern-ment should give them autonomy in their business operations,including investment in joint ventures to improve the turnover.

Recent Policy Stance on State TradingGovernment of India’s policy on State trading has undergone asea change “from 1985 onwards. Abid Hussain Committee(whose recommendations were discussed earlier in the chapteron India’s Trade Policy) recommended that State trading inimports should be restricted to only very sensitive items, suchas crude petroleum or in those cases where economies of bulkprocurement are clearly evident. In other cases, imports shouldnot be canalised. Similarly in the case of exports, canalisationshould be used only when very specific social objectives are to beachieved. As a result, the number of canalised items, bothexport and import, has been progressively reduced. In the latestExport-Import Policy (1997-2002), only 6 export products arecanalised. These include, among others, petroleum products,onions and niger seeds. On the import side, 8 products arecanalised. Principal among these products are petroleumproducts, edible oils, oilseeds and cereals.The major State trading organizations in India are:1. The State Trading Corporation of India Ltd. (STC).

Organisation Chart of STC

Exp-

orts

Imports

Domestic Trade

Chairman & Managing Director

Vigilance Internal Audit Mangement Services Trade & Export Development Practice Management Board Secretariat and Parliament cell

Exective Director Finance

Executive Director

Executive Director Markekting

Executive Director marketing

Finance & Accounnt Insurance legal

Personnel & Codification Industrial Relations General Administration Protocol & Travel Public Relations & Advtg. Building Cell Hindi Cell housing Colony Library Securlty

Drugs & Chemicals Sugar Alcohol Molasses Leatherware Shellac

Agricultural Products Soyabean Meal/ Other Extractions Coffee Tea Castrol Oil Tobacco

Consumer products Fresh & Processed Foods Meat 7 Marlne Products Engg. & Construction Material Cement Cashew Joint Ventures Counter Trade rmy Software Textiles & Garments and Jute Sports Goods Grants By Govt of India

Forest Products Rubber Chemicals

Edible Oils Fatty Acids Pulses

Newsprint General Import

Imported Cars Import of OGL Items In Chemical Drugs & Plastics Timber

Bearn/Seed Processing & Oil Sale Pulses

Executive Director Personal

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N2. The Projects and Equipment Corporation of India Ltd.

(PEC).3. MMTC Ltd.4. The Tea Trading Corporation ofIndia (TICI).5. Spices Trading Corporation Ltd.Thus over the years the turnover of the STC has increasedmanifold. The increase in exports has been significant after1971-72. They reached the maximum of Rs. 796 crores in 1983-84 after which there has been a decline. As a result of effortsmade by STC to promote non-canalised trade, an all time highexport turnover of Rs 806 crores was achieved in 1994-95. Onthe other hand, there was almost a continuous increase inimports till 1984-85. Imports declined as canalisation policychanged.One important point to be noted is that in imports, thepercentage of canalised items is far higher than the percentageof non-canalised items. The percentage of canalised itemsvaried between 74 and 94 in exports and between 72 and 97 inimports during the period 1972-73 to 1976-77. This is becausethe STC’s efforts are mostly guided by the policies of theGovernment of India from time to time and it is left withlimited scope for showing its initiative in there areas. But inrecent years, the percentage of canalised items has gone down inexports, but in imports, canalised items still predominate.

ProductsOver a period, the products handled by STC have also shownan increase. STC-The Merchant of India, an STC publication,refers to 17 agricultural commodities, 8 consumer products, 15items of army software, 3 items of con-struction material, 6major and a number of miscellaneous engineering items, 10items of fresh and processed foods, 7 items of leather, 3 itemsof meat and marine products, 19 items of textiles and gar-ments, alcohol, sugar, molasses and castor oil. The importitems include edible oil (6 items), cement, explosives, natural .rubber, standard and glazed newsprint and white printingpaper.The major items of export in 1994-95 were cereals, coffee,cashew kernels, leather, drugs and chemicals, engineering andconstruction material, sugar, textiles and garments. The majoritems of imports were edible oils and sugar.The STC has developed a sound infrastructure for developmentof exports in the form of 17 branches in India and 17 overseasoffices and a large force of trained marketing personnel.STC’s Indian branches playa vital role in port clearance, storage,move-ment and distribution of imported items, in addition toprocurement and ship-ment operations for export items. Theforeign branches provide valuable support in identification ofnew products and markets, assessment of market potential,quality and packaging needs, preparation of new productdevelopment strategy and assistance in carrying out negotiationsfor import and export.

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LESSON 23:STATE TRADING ORGANISATION IN INDIA

Introduction

Short notes

• HHEC• PEC• MMTC• CCI

IntroductionGovernment of India’s policy on State trading has undergone asea change “from 1985 onwards. Abid Hussain Committee(whose recommendations were discussed earlier in the chapteron India’s Trade Policy) recommended that State trading inimports should be restricted to only very sensitive items, suchas crude petroleum or in those cases where economies of bulkprocurement are clearly evident. In other cases, imports shouldnot be canalised. Similarly in the case of exports, canalisationshould be used only when very specific social objectives are to beachieved. As a result, the number of canalised items, bothexport and import, has been progressively reduced. In the latestExport-Import Policy (1997-2002), only 6 export products arecanalised. These include, among others, petroleum products,onions and niger seeds. On the import side, 8 products arecanalised. Principal among these products are petroleumproducts, edible oils, oilseeds and cereals.The major State trading organizations in India are:(1) Handicraft and handloom Exports Corporation of India

Ltd. (HHEC).(2) The Projects and Equipment Corporation of India Ltd.

(PEC).(3) MMTC Ltd.

(4) Mica Trading Corporation Of India Ltd. (MITCO).(5) Spices Trading Corporation Ltd.Thus over the years the turnover of the STC has increasedmanifold. The increase in exports has been significant after1971-72. They reached the maximum of Rs. 796 crores in 1983-84 after which there has been a decline. As a result of effortsmade by STC to promote non-canalised trade, an all time highexport turnover of Rs 806 crores was achieved in 1994-95. Onthe other hand, there was almost a continuous increase inimports till 1984-85. Imports declined as canalisation policychanged.One important point to be noted is that in imports, thepercentage of canalised items is far higher than the percentageof non-canalised items. The percentage of canalised itemsvaried between 74 and 94 in exports and between 72 and 97 inimports during the period 1972-73 to 1976-77. This is becausethe STC’s efforts are mostly guided by the policies of theGovernment of India from time to time and it is left withlimited scope for showing its initiative in there areas. But in

recent years, the percentage of canalised items has gone down inexports, but in imports, canalised items still predominate.

Chairman-cum-Managing Director

Organization ChartProductsOver a period, the products handled by STC have also shownan increase. STC-The Merchant of India, an STC publication,refers to 17 agricultural commodities, 8 consumer products, 15items of army software, 3 items of con-struction material, 6major and a number of miscellaneous engineering items, 10items of fresh and processed foods, 7 items of leather, 3 itemsof meat and marine products, 19 items of textiles and gar-ments, alcohol, sugar, molasses and castor oil. The importitems include edible oil (6 items), cement, explosives, andnatural. Rubber, standard and glazed newsprint and whiteprinting paperThe major items of export in 1994-95 were cereals, coffee,cashew kernels, leather, drugs and chemicals, engineering andconstruction material, sugar, textiles and garments. The majoritems of imports were edible oils and sugar.The STC has developed a sound infrastructure for developmentof exports in the form of 17 branches in India and 17 overseasoffices and a large force of trained marketing personnel.STC’s Indian branches playa vital role in port clearance, storage,move-ment and distribution of imported items, in addition toprocurement and ship-ment operations for export items. The

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Nforeign branches provide valuable support in identification ofnew products and markets, assessment of market potential,quality and packaging needs, preparation of new productdevelopment strategy and assistance in carrying out negotiationsfor import and export.

Handicraft & Handloom Exports Corporation of IndiaLtd. (HHEC)The Handicraft and Handloom Exports Corporation of IndiaLtd. (HHEC) was set up in 1962. It undertakes the export ofhandicrafts (including woolen carpets), handloom products(inducting ready-to-wear garments) and gold jewellery. TheHHEC is a wholly owned subsidiary of the STC. It acts as asupplementary agency to provide private sector agenciesparticipating in the exports of handicrafts and handloomproducts. In 1976 the HHEC has started its wholly ownedsubsidiary called the Central Cottage Industries Corporation ofIndia (CCIC). It has also established showrooms at New York,Boston, Paris and Tokyo.A Central Public Sector Undertaking under the administrativecontrol of the Ministry of Textiles, Government of Indiaestablished with the twin objectives of:I. To undertake export of Handicrafts, Handlooms Products,

Khadi & Products of Village Industries from India.II. Export Promotion and Trade development of Handicrafts

and Handlooms products (including hand-knotted woolencarpets and ready made garments) and also to undertakeexport of gold and silver jewellery/articles and import ofbullion, timber and other raw Material.

India has a rich history of handicrafts that has evolved over thecenturies. The entire wealth of timeless Indian handicrafts havesurvived through ages. The legacy of Indian culture promiseseverything- beauty, dignity, form and style. The magnetic appealof Indian culture resides in its exclusivity, its mystical tone thatleaves people amazed at their sight.HHEC has been involved for the past 4 decades in develop-ment and exports of handicrafts utilising the crafts skills fromall over India to create visually appealing and economicallysuitable products for the world markets.

Main Functions of Handicraft & handlooms ExportsCorporation of India.:-

i. The HHEC studies consumer preferences abroad andintroduces new products with special attention to quality.

ii. It provides information and financial facilities in the formof loans to those engaged in the manufacturing ofhandicrafts and handloom products for exports.

iii. It participates in the trade fairs and exhibitions abroad andalso arranges visits of foreign trade delegations.

iv. Its “Sonar” retail outlets offer to public a variety ofhandicrafts not usually available in the market.

v. It is doing good business in the USA and West Europeanmarkets as regards handicrafts and handloom goods.

About HEPC - A Gateway to Handloom ExportersHandloom Export Promotion Council (HEPC) is a statutorybody constituted under The Ministry of Textiles, Governmentof India to promote the exports of all handloom products like

fabrics, home furnishings, carpets and floor coverings, etc.HEPC was constituted in the year of 1965 with 65 membersand its present membership is around 2000 spread all over thecountry. The Handloom industry mainly exports fabrics, bedlinen, table linen, toilet and kitchen linen, towels, curtains,cushions and pads, tapestries and upholstery’s, carpets and floorcoverings, etc. The basic objective of HEPC is to provide allsupport and guidance to the Indian Handloom exporters andInternational buyers for trade promotion and Internationalmarketing. HEPC has its head office at Chennai and regionaloffices at New Delhi and Mumbai.

AdministrationHEPC is incorporated as a non profit making company undersection 25 of the Companies Act, 1956 and governed by theMemorandum and Articles of Association framed by theCouncil. It is administered by an Executive Committeeconsisting of elected representatives from the export trade,exofficio members and nominated Government officials. TheCommittee is headed by Chairman. The Chairman and ViceChairman hold office for a period of two years. The secretary(Executive Director) of the Council, an IAS cadre officerappointed by the Government, assists the Council to run theadministration.

Our Objectives

1. Organizing participation in trade fairs, exhibitions andbuyer-seller meets in India and Abroad.

2. Providing guidance, consultancy and support to handloomexporters to promote handloom exports.

3. Conducting propaganda regularly and popularise IndianHandloom products abroad though various means ofpublicity.

4. Collect, collate and disseminate trade data and commercialintelligence to exporters.

5. Facilitate the upgrading, popularisation and adoption oftechnology, quality and design improvement, standards andspecifications, product development, diversification andinnovations, etc.

6. Undertaking market studies in individual foreign countries.7. Sending trade missions to the foreign countries.8. Bringing out useful publications like colour catalogue,

colour trends catalogue, importers and exporters directoriesetc.

9. Laying down standards of quality and packaging in respectof Indian Handlooms for export.

10. Approving agents, representatives or correspondence inforeign markets for continuously and regularly reporting theprice, market preferences and reception accorded to IndianHandloom products.

11. Undertaking or assisting in research on schemes oftechnological nature designed to improve the efficiency ofthe handloom sector.

12. To advise the Government, local authorities and publicbodies on the policies adopted by them in relation to theireffect on industry or commerce and other measure includingdirect and indirect taxations in so far as such policies or

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measure having a bearing directly or otherwise on export ofIndian Handloom products

Inquiring and investigating into complaints received fromforeign buyers or Indian exporters and act as arbitrators if askedfor it.

Our Strategies

a. Arrange for the participation of member exporters in theimportant trade fairs, organising buyer-seller meet (BSM),business missions.

b. Provide financial grants to the exporters with marketdevelopment assistance for under taking sale-cum- studytours, participation in international fairs, publicity etc.

c. Popularise Indian Handloom products abroad throughwebsite publicity, advertisements in commercial portals,trade magazines, conducting exclusive hand woven shows,and through Council publications.

d. Dissemination of trade information like market studies,colour trends, design trends, export trends, standards andspecifications, Government policies, circulars etc. throughpublications and news letters.

e. Conducting workshops, seminars on upgrading technologyin pre-loom, loom, post loom practices to improve qualityand productivity, popularising modern dyeing practices,product innovations, diversifications and improvement,quality compliance, better merchandising practices, packagingmethods and so on to improve the competitiveness ofIndian Handloom products.

f. Promote product innovation, diversification andimprovement in the selected handloom clusters underDevelopment of Exportable Products and Marketingscheme (DEPM) for promoting the production ofexportable products.

g. Providing design support to develop new designs, fabricsimulation colour printouts, peg plan graph outputs, layoutinformation and computer aided colour matching etc. to theexporters.

h. Generating and dissemination of trade enquiries forfacilitating International buyers to source the handloomproducts from Indian Handloom exporters.

i. Liaison with Government for strengthening infrastructurefacilities in handloom export production centres, takeefforts to improve forward and backward linkages inhandloom sector.

j. Serve as a link between trade and Government to formulateappropriate policies to promote handloom export growth.

k. Inquiries into the complaints made against exporters andtake up the exporter’s problems related to the buyers withrespective embassies.

About EPCH - A Gateway to Handicrafts ExportersExport Promotion Council for Handicrafts (EPCH) has beenestablished under the Exim Policy of Govt. of India in 1986-87and is a non-profit earning organization. EPCH is an apexorganization of trade, industry and government sponsored byministry of Textile, government of India for promotion ofhandicraft from country and projected India’s image abroad as a

reliable supplier of high quality of handicraft goods & servicesand ensured various measures keeping in view of observanceof international standards and specifications.The Council has created necessary infrastructure as well asmarketing and information facilities, which are availed both bythe member exporters and importers.

EPCH CouncilThe Council is run and managed by team of professionalsheaded by Executive Director. The Committee of Administra-tion consist of eminent exportersExport Promotion Council for Handicrafts has a rarestdistinction of being considered as MODEL COUNCIL whichis self sustaining and where all the promotional activities areself financed.Export of Handicraft:-A rising trend of the export ofhandicrafts (other than hand knotted carpets) was merely Rs.387.00 crores during the year of establishment of the Co

ManagementThe Council is run and managed by team of professionalsheaded by Executive Director. The Committee of Administra-tion consist of eminent exporters, professionals and seniorGovt. officials. The Export Promotion Council for Handicraftshas a rarest distinction of being considered as MODELCOUNCIL which is self sustaining and all the promotionalactivities are self financed.uncil i.e. 1986-87 rose to level of Rs.8343 crores in 2002-2003.

Project and Equipment Corporation of India Ltd. (PEC)The Projects and Equipment Corporation of India (PEC) wasformed in April 1971 as a wholly owned subsidiary of the STC.It took over the Railway Equipment and Engineering Divisionof the STC.

Main Objectives of Project & Equipment of India Ltd

a. To boost the export of engineering and railway equipmentin established markets.

b. To boost the exports of turnkey projects in the field ofrailway systems, public utilities and industrial plants.

c. To penetrate new marketsd. To promote the export of non-traditional and new

products

Minerals and Metals Trading Corporation of India(MMTC)MMTC is an independent corporation, set up in October 1963in the public sector by transferring to it all activities of STCrelating to trade in minerals and metals. MMTC was set up bythe Government as a conalising agency for export and importof minerals, metals and fertilizers, over the years the Corpora-tion has been discharging the service responsibility efficiently byimbibing confidence in the customer community. Simulta-neously with this, responding to the customer community.Simultaneously with this responding to the imperative need forgenerating foreign exchange to this, responding to the impera-tive need for generating foreign exchange to bridge thelwidening trade gap, the corporation started channelising itsorganizational and marketing acumen for development of

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Nexports in noncanalised areas. The results have been highlyimpressive. MMTC’s socialized exports which were a meagerRs. 40 million in 1983-84 registered accelerated growth andincreased more than 125 folds to Rs. 5250million in 1989-90.Corporation’s total exports have crossed the 10,000 millionrupee mark. MMTC’s total turnover during the magical mark ofRs. 50,000 million. With the bonus issue the original capital ofRs. 30 million contributed by the government have now grownto Rs. 500 million and net worth to Rs. 2,828 million. It is thefirst international trading company of India to be given thecoveted status ‘Super Star Trading House’ and it is the firstPublic Sector Enterprise to be accorded the status of ‘GoldSuper Star Trading House’ for long standing contribution toexport.

Activity Profile of MMTCGoing Place:- MMTC is a state owned enterprise dischargingan important responsibility that of finding markets for India’sexports and meeting India’s requirements of essential Goods.Towards this end MMTC has a wide spectrum of activities.These cover international marketing, trade finance, distribution,infrastructure development and new joint collaborations withother important manufacturing companies to set up projects inIndia and abroad.Between these activities MMTC has been able to harness India’srich potential in international trading.

Activities and Services

i. Exports of primary and manufactured products.ii. Import of Industrial commodities.iii. Trade and counter trade.iv. Agents and representatives for domestic produces.v. Domestic trade services.vi. Investments in joint ventures.

Trading Groups

i. Minerals Group: mineral based products.ii. Metals Group: ferrous and non-ferrous metals and metal-

based products.iii. Fertilisers Group: fertiliser raw material, intermediates and

finished fertilisers.iv. Export Trade Group: light engineering products, gems and

jewellery, handicrafts, agro products and counter trade.MMTC’s imports have been steadily rising. From a level of Rs.210,000 million in 1985 – 86, imports have risen to Rs. 350,000million in 1989 – 90. The intensity of exports has also beensteadily rising. There is however, a broad measure of agreementthat imports do not offer any substantial scope for pruningeven in the face of severe balance of payments pressure. Mostof MMTC’s imports are essential imports required for agricul-ture or industrial growth. A fair proportion of imports aredirectly related to exports and another significant proportionpertains to capital goods imports. In the circumstances, the onlymeaningful solution available to MMTC is to meet thechallenge of balance of payments crisis and to plan for majorthrust in exports.

Review of OperationsThe year 1989 – 90 can truly be described as one of the mosteventful year for the MMTC. It has been a year of recordachievements. The Corporation’s turnover crossed the magicalfigure of Rs. 50,000 million recording an increase of 31% overthe previous year. This is indeed an outstanding achievementfor the corporation, considering that the turnover during 1988 –89 itself had registered an increase of 34% over the previousyear. During the last two years the turnover has gone up fromRs. 27,941 million to Rs. 50,973 million. The performance onthe export front has also been spectacular. From a level of Rs.7,284 million in 1987 – 88 the exports have jumped to Rs.11,483 in 1989 – 90.

ProfitabilityAnother record achievement is significant improvement in theprofitability of the Corporation during the year. Profit beforetax at Rs. 851million is the highest ever achieved by theCorporation in its 30-year’s history – an increase of 23% overthe previous highest level of Rs. 691 million reached in the year1988 – 89.

Foreign Exchange Earnings and OutgoDuring the year the outgo of foreign exchange on tradingactivities was Rs. 32,788 million compared to Rs. 23,371 millionduring the previous year. The inflow of foreign exchange wasRs. 11,021 million as against Rs. 8,642 million in 1988 – 89.After over 30 years as India’s leading trading house MMTC iscreating a new, more powerful role for itself. It’s now joininghands with others to set up joint ventures in India and abroad.This fusion of powerful conglomerates will add anotherchapter to India’s drive for achieving international recognition asan important sourcing centre.

Corporate Mission of the MMTCAs a-major trading company in Asia, MMTC aims at achievingsustainable and viable growth rate by achieving excellence in itsactivities, generating optimum profits through total satisfactionof shareholders, customer suppliers, employees and society.

Main Functions of the MMTC

a. It organises and undertakes trade in metals and mineralsand other allied commodities as may be entrusted to itfrom time to time by the Government of India.

b. It explores new markets for metals, minerals and alliedcommodities in overseas markets with a view to diversifyingand expanding Indian exports.

1987 - 88 1988 - 89 1989 - 90 Percentage increase (+)/ decrease (-) for last 2 years

Exports Canalised 3334 4778 6231 86.9 Non – canalised 3950 3947 5252 33.0 Total Exports 7284 8725 11483 57.6 Imports

Canalised 20697 29303 38149 84.3 Non – canalised 490 410 997 103.5 Total Imports 21187 29714 344 (-) 26.7 Domestic 470 361 344 (-) 26.7

Total Turnover 28941 38800 50973 76.1

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(c) It undertakes to procure and distribute, at the instance ofthe Union Government, minerals, ores and concentratedmetals with a. view to stabilising their prices.

(d) It purchases or takes on lease any mines or mining rights,f8.llow land in the country or elsewhere and any interesttherein.

Organization chart of MMTC

Mica Trading Corporation of India Ltd. (MITCO)During 1989 – 90, MITCO achieved record turnover of Rs.322.85 million. Its total exports of mica was Rs. 312.90 million– highest ever – registering an increase of about 28% over theprevious year export of Rs. 245.10 million. Export to GeneralCurrency Area increased by 36% from Rs. 125.50 million during1988 – 89 to Rs. 170.13 million in 1989 – 90. For the RPAcountries the growth rate was about 19% with exports increas-ing from Rs. 118.92 million during 1988 – 89 to Rs. 141.82million in 1989 – 90.The sales turnover of mica products during 1989 – 90, how-ever, stagnated around the previous year level of Rs. 15 milliondue to continued teething problems in marketing of micapaper. Report of mica paper increased marginally from Rs. 7.3million in 1988 – 89 to Rs. 7.8 million during 1989 – 90. Costdisadvantage vis – a – vis the long established competitors inthe developed countries was the major obstacle in boostingexport of this product. Efforts are being made to overcomethese problems through change in marketing strategy. With thecommissioning of the first phase of the Insulating MaterialsProject it has become possible to convert mica paper into heater

BOARD

CMD BOARD SECTT VIGILANCE GM EXPORT PRODUCTS - 1 CGM CPPM – 1 GM DIRECTOR DIRECTOR DIRECTOR DIRECTOR DIRECTOR (MINERALS) (METALS) (FERTILISERS) (FINANCE) (PERSONNEL) IRON ORE NFM FINISHED F & A PERSONNEL

FERTILISER & ADMIN RAW MATERIALS AND

INTERMIDIATE (FERT)

OTHER ORES IRM ALL OVERSEAS AUDIT PR & OL PROJECTS LINKED WITH FERTILISERS SHIPPING & STEEL LAW AGRO MARINE & TRANSPORTATION MINERALS JOINT VENTURES MSD & IN MINERAL COMPUTER RELATED AREAS INSURANCE INFRASTRUCTURE PROJECTS RELATING TO IRON ORE MITCOMICA & OTHER MINRALS CGM CGM CGM CGM CGM CGM CGM (F&A) (LAW) (MICA) (PERS (ARGO & MARINE

ADMIN & MINOR MIN)

GM GM GM GM GM GM (A/CS) IRON (OTHER (NFM) (STEEL (FERT RAW ORE MINERALS) & IRM) MAT.) GM (AUDIT) PURCHASE GM (EXPORT GR.) GM (STEEL) GM (FERT)

micanite sheets for which there is good demand. Samples ofheater micanite sheets have been sent to the prospective buyersfor evaluation. Second phase of the Insulating Material Projectis expected to be completed by the end of 1990.The proposed R & D Centre by MITCO has been registered asan approved centre by the Department of Science & Technologyand further steps are being taken for its implementation. Thegovernment have merged MITCO with its holding companyMMTC Ltd.

ConclusionsThe STC’s efficiency has varied directly with the quality of thepersons in actual charge of its operations. It handles a sizablevalue of India’s total foreign trade. Though the STC has notdone any harm to foreign trade interests, it should show greaterdetermination and drive in pushing the nation’s exports.From the beginning, the STC has met with severe hostilityfrom private traders and trading interest. All the traders havebeen unanimous in objecting to what they consider as anunwarranted intrusion of the state in the trade. Complaintsregarding wagon allotments in movement of goods have beenvoiced.The traders obviously view export and import from their pointof view: they should, in fact, change their attitude. However,care should be taken to ensure that existing channels do notabruptly dry up and adversely affect the country’s foreign trade.The choice of the name STC seems a bit tactless. The namecould have been India’s Commodity Exchange or India’sInternational Trade Centre, without explicitly thrusting forwardthe concept of the much argued and rather suspected StateTrading. The STC should not be judged on profit – and – lossaccount alone, but rather on the basis of its ability and successin fulfilling the objectives of maximisation of exports anddiversification of trade. It has created an awareness amongprivate traders that if they do not maintain a certain minimumcode of conduct, the state would step in to set matters right.This awareness is perhaps the greatest contribution of the STCto the success of India’s foreign trade.There are certain inherent weaknesses in the STC because it islargely manned by bureaucrats who lack business experience andinitiative. Businessmen with practical knowledge must replacegovernment officials. The interlocking of the activities of theGovernment of India and the STC makes possible theconcealment of inefficiency under intricate official procedures.There is an urgent need for coordinating the trade conducted byprivate traders and the STC. Moreover, the STC offices abroadhave not been in a position to create an impact. There is,therefore, a need for creating a better image of India’s foreigntrade, not only in this country but in the markets of the worldas well.STC has been arranging imports of edible oils, chemicals, fattyacid, rubber, newsprint, etc., on a wide scale. To achieve itsstated objectives, it established as its subsidiaries CashewCorporation of India, Handicrafts and Handloom ExportCorporation, Project and Equipment Corporation, Tea TradingCorporation of India Ltd and Central Cottage IndustriesCorporation of India Ltd.

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NWith the new Exim policy liberalising the imports of certainitems for government departments, banks, and public sectorunits, the role and activities of STC have widened. It needs totake some more steps to diversify its operations. The new policyhas decanalised a number of items. The subsidiaries of the STChave helped in importing some essential materials in time.Their role in the promotion of export of handicraft, handloomitems, engineering goods and turnkey projects is praiseworthy.In the new policy the role of STC has been reduced to a mereexport house. Now it has to seen that in years to come whatcontribution STC could make in the export drive of India.

ArticleMMTC Keeps Exports To S. Korea Intact throughNovel TieupsMMTC Ltd. has managed to salvage its iron ore exports tocurrency crisis-hit South Korea through a $ 6 million revolvingline of credit from Indian Overseas Bank (lOB) in favour ofPohang Iron & Steel Company (Posco), the second largest steelproducer in the world. A similar facility from an internationalbank has also been worked out while MMTC is negotiating acredit arrangement from a Japanese trading company in a bid toassist Pasco.While helping Posco, which is all set to overtake global leaderNippon in a few years, the financing arrangements would alsoensure that MMTC’s exports to South Korea, valued at morethan $30 million, is not hit. The first shipment under therevolving line of credit extended by lOB was cleared on April 1,1998. Another shipment is expected to leave on April 20. Thetwo shipments together account for 2.80 lakh tonnes, valued ataround $6 million. Since lOB has provided a revolving creditfacility valid for 90 days, Posco could buy iron ore worth at least$18 million from MMTC if three cycles are completed within ayear.MMTC has a five-year agreement with South Korea to sell 2.3million tonnes of iron ore per annum. The public sectortrading company sold iron ore worth $32 million to SouthKorea in 1997-98 despite the currency crisis which led to steepdevaluation of the Won, affecting Posco, which is the sole buyerfrom that country. Since Posco is a strong company, MMTC wasadvised to support it at the time of difficulty. Following theAsian currency crisis, the. South Korean major had expressed itsinability to pay on time for iron ore and sought supplies fromMMTC without an L/C (Letter of Credit).When MMTC approached Export Credit Guarantee Corpora-tion (ECGC) for insurance cover, the plea was turned down.After persuasion from the Government, ECGC agreed toprovide cover to shipments destined for South Korea whoserating has gone down after devaluation of the Won. However,ECGC is seeking a 3.86 per cent premium and the insurancepayable would be only 60 per cent of the value of shipment.The payment would be made only after a period of ninemonths. In other cases, the premium is lower while thepayment works out to 90 per cent of the shipment value andECGC pays the amount after three to four months.Since the ECGC option was not considered viable, MMTCworked out a credit arrangement with an international bankbased in the US. After the shipments w!>,re made, the bank

made payments to MMTC and recovered it from Posco after 90days. Now, MMTC is having talks with a Japanese tradingmajor for a different sort of arrangement following a successfulpact clinched by a private exporter. Trade sources said S.Salgoankar, a Goa-based exporter, has struck a deal with Itochuof Japan for supplies to Posco. According to this arrangement,touch would pay the exporter once the shipments are cleared.Payments from the South Korean company will be collectedafter 90 days or ltochu would buy steel against the credit.It is understood that MMTC is having talks with anotherJapanese trading company and had even considered the optionof buying steel from Posco through this arrangement. How-ever, the Steel Ministry has not cleared the proposal sincedomestic producers like Steel Authority of India (SAIL) arealready facing poor off take. Therefore, the current arrangementwould be to ensure that MMTC gets paid on delivery of ironore shipments while the Japanese trading company squares offthe deal with Posco later through cash payment or steelsupplies.The Hindustan Times, April 17, 1998.

Questions BankQ1.What are the functions of State Trading Corporation?Q2.What services are rendered by the state trading Corporation

to different entities.Q3.Analyses the achievements of STC in the field of imports

and export.Q4.Name the major STC organizations in India, Explain any

one of them.Q5.Write a note on MMTC and HHEM.Q6.Write a note on canalization of trade. What are its

objectives?Q7.What are the objectives of STC? To what extent it is

successful in achieving them?

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LESSON 24:IMPORT TRADE PROCEDURES

• Introduction of Import• Liberalisation of Imports.• Types of Importers.• Special Schemes for Importers.• Import Procedure :-

• Pre-import Procedure.• Legal Dimensions of Import Procedure.

• Question Bank.

IntroductionIn 1992 import of goods and services into India were valued atRs. 50,000 crores. Merchandise imports exceeded exports. Thisflow of goods and services from abroad provides a wide verityof critical materials, parts and products not otherwise available.Additionally the flow provides a basis for foreigners to pay forIndian exports and provides Indian consumers with a wideselection of goods from which to purchase. The importfunction however often receives little attention because of theemphasis on the expansion of exports, except when importsdirectly compete with domestically produced products. Despitethe quantitative importance of the function and the critical needfor imported goods, the import function remains littleunderstood by many in universities, government and busi-nesses alike.Importing refers to the purchase of foreign products for use orsale in the home market. It involves searching foreign marketsfor acceptable products and sources of supply providing fortransfer of the product to home market, arranging financingnegotiating the import documentation and customs procedureand developing plans for use or resale of the item or service.Thus successful importing depends on more than goodbuying, it requires planning for acceptance of the product anddelivery of the promised benefits. The importing firm has theresponsibility to determine whether the foreign product orservice meet the needs of the home market.

Liberalisation of ImportsConsequent upon a comfortable balance of payments positionof the country, increasing necessity of imports for exportproduction and globalisation of Indian economy, the Govern-ment of India has liberalised the import regime from time totime. At present, practically, all controls ‘on imports have beenlifted. Under the new EXIM Policy 2002-07 announced onMarch 31,2002, the Government has initiated a comprehensive’package intended to make international trade a vital part ofdevelopment strategy. It has substantially eliminated licensing,quantitative restrictions and other regulatory and discretionarycontrols both on exports and imports. ‘All goods may be imported freely in India without anyrestriction except to the extent such imports are regulated by theprovisions of the EXIM Policy 2002-07 or any other law for the

time being in force. Moreover, the customs duties on importshave been considerably reduced and rationalised during the lastfew years. The procedure for imports has been considerablysimplified and the bureaucratic controls have been reduced tothe bare minimum.’ Besides, availability of foreign exchange forimports has also been eased. Regulations regarding personalimports such as consumer goods, baggage etc., have beensubstantially liberalised.

The Import ProcessImporting has been considered in several place in this text. Thepresent chapter serves:i. to organize the various aspects of importing by

presentation of the import process,ii. to describe major importing institutions,iii. to portray probation confronting Indian importers.iv. To elucidate major facts of the custom law and procedure

andv. Because of its close relationship to customs arrangements.The discussion should aid you in conceptualizing the importprocess and should provide a somewhat different perspectiveon Indian commercial policy.Essentially the import process comprises the following fivestages:i. determining market demand and purchase motivation.ii. Locating and negotiating with sources of supply.iii. Securing physical distribution.iv. Preparing documentation and customs processing to

facilitate movement among countries and organization.v. Developing plan for resale or use.1. Determining Market Demand And Purchase

Motivation:- Importers can have a distinct advantage overforeigners in the home market, because often they know orcan more easily learn the requirements and nuances of themarket. They are closer to the market, may live there andmay be native to the market. They are familiar withinformation sources and institutions. This knowledge canhowever be a disadvantage when familiarity leads tocarelessness and individuals assume a level of knowledgethat does not really exist. Enthusiastic exclamations offamily and friends over souvenirs from aboard are nosubstitute for careful market analysis.Home country manufacturers in fabricating their own finalproducts import raw material and component parts for use.The potential for such materials and parts is determined bythe expected sales of the manufacturers who use them. Acareful analysis of trade report and business conditions willand importers in determining the market potential for bothfinal products and components. Manufacturers may not

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Nonly buy crude materials from abroad but operate minesand processing plants abroad from which they import tomeet their requirements.

2. Locating and Negotiating with sources of supply:-Importer must develop dependable supply sources in orderto assure customers and themselves of their ability todeliver promised goods at the negotiated time and placeand in the correct quantity and quality. Various negotiatedtime and place and in the correct quantity from a constantscouring of the foreign market by the importer, residentbuyer, or middlemen to the worshiped control ofsupplying firms. The choice among the various options isdependent on supply market characteristics, the productinvolved. And the importer’s ability to finance and managethe operation.The importer and the importer’s customers are interested insupply sources that are capable of producing the quantitiesand the quality levels possible, sources should be operatingin an environment that is conducive to satisfactory futureperformance if the relationship is expected to continue.Product quality is partly a technical matter of specificationsor conformance to samples or description. It also hasanother dimension Foreign products may be perceiveddifferently than local ones. Some foreign products fromsome countries may be seen as being of higher quality thanlocal products 9 (e.g. cars) while other foreign products mayfind it difficult to overcome an image of poor quality. Thequality perception can change over time, but importersshould at least, be aware of the potential differencesperceived by their customers.Price financial arrangements, terms of trade, andpromotional aids are among other factors for negotiation.Even among parent companies and their subsidiariesnegotiation may be needed to establish policy transferpricing, priorities, product line, and deliveries.

3. Physical Distribution:-The logistics of supply, includingdelivery dates, transportation modes, inventory policy andclaims servicing, may be the responsibility of either thebuyer or seller or both-and may be subject to negotiation.These considerations affect the ability of a exporter todeliver goods to customers or the assembly line on timeand they the final cost. Risk management policies will varywith the negotiated results.

4. Documentation:- Documentation is important ininternational trade. The distances between trading partnersand the sovereign rights of nations require more elaboratesystems than those in domestic trade. Each businessperson desires to protects a personal interest and eachnation wishes to be certain its laws are upheld, its revenuesprotected, and its sovereignty maintained its laws areupheld, its revenues protected, and its sovereigntymaintained Previous chapters have indicated some of thedocuments needed to support these systems. Theindividual importer has little choice but to conform at leastin the short-run Failure to carry out the documents neededto support these systems. The individual importer has littlechoice but to conform at least in the short-run. Failure to

carry out documentation procedures can be costly and resultin no delivery. Exporters who require irrevocableconfirmed letters of credit will not ship merchandise onrevocable unconfirmed letters. Customs procedures areespecially relevant.

5. Developing a Plan for Restate or Reuse :-Importers needto have a plan for resale or use of the goods they buyOtherwise, they may find themselves stuck with a productthat doesn’t appeal to the local people or does not necessaryfit the production and use systems of specific business orinstitution. It is advantageous, then, for the importer tohave a plan for convincing others of the merits of a productor service.

Types of ImportersFour basic types of importing institutions are found in themost countries: private industrialists end users, governmentagencies and facilititating agencies. These are augmented bymany agents of foreign suppliers.1. Private Industrialists:- Private industrialists who buy and

sell for their own account. There are numerous privateindustrialists may carry on a significant portion of theimport business while in India, the activities ofindustrialists are hampered by government attempts toachieve economic development goals. Restrictions such asthe following are not unusual:Private industrialists are precluded from importing any itemon the controlled list and they are often unable to getgovernment approval to import on deferred payment terms. for industrial raw material importation licensing has beenliberalised by the government of India.

2. End Users:- End users are manufacturers public- utilities,hospitals, colleges, university etc, who buy for their ownuse. They purchase raw materials, supplies, machinery andequipment to facilitate their own operations and gear levelof their importing to their expected level of operations.Imports of this group often constitute the major source ofimports for our country.Traditionally Indian industrial buyers purchased fromabroad only the domestic suppliers could not service theirrequirements. Recently however the growth ofmultinational companies improved transportation andcommunication supply shortages and increased exposure toforeign firms have led to increased use of foreign sources.The importation of goods from abroad has enabled manyend users to gain the advantages of technologicaldevelopments abroad as the Europens, Japanese, andothers have expanded their research and development.Often goods are available at lower prices than fromdomestic sources, thereby permitting domesticmanufacturers to be more competitive when theyincorporate materials and parts in their final product.

3. Governmental agencies :- governmental agenciesconstitute a separate class of importers because of theiroperating characteristics, usually being subject to anextensive budgeting process detailed procedures for biddingand bidding and ordering and attempted close co-

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ordination with governmental development and socialplans. The exact role of governmental agencies variesamong countries.In India purchases by government agencies and governmentowned corporations account for a large percentage of allimports. This is true of all developing countries where theemphasis is on developmental plans and conservation offoreign exchange.

4. Facilitating Agencies:-a. clearing agents: For the routine associated with clearingmerchandise through customs as well as resolvingcontroversies that may ensue an importer may engage theservices of a customhouse broker. These intermediaries areexport in the complicated paperwork connected withcustoms procedures. They often combine functions andserve also as forwarding agents.The clearing agent verifies the documents on shipmentsinto India, sees to the payment of duties and collects freightcharges and arranges for the shipment of goods from portsto importers. Not only must brokers have knoeledge ofdocuments, classifications and duty rates but they must alsobe familiar with countervailing duties. The value of theirservices is indicated by the fact that over 90% of all importsare processed customhouse brokers.b. Customs Bonded Warehouses:- Importers may not alwayswant to take immediate possession of importedmerchandise. They can postpone the payment of duty bystoring dutiable import in customs bonded warehouseswhere they may clean sort repack and make certain changesin the condition of merchandise.Customs bonded warehouses are in the charge of acustoms officer who jointly with the proprietor has custodyof all stored merchandise subject to detailed customsregulations. Imported merchandise may be withdrawn fromthe warehouse:1. for consumption2. for transportation and exportation or3. for transportation and warehousing at the another

port.

Special Schemes for ImportersAs per the latest EXIM Policy 2002-07, import of goods ispermissible under the following ‘special schemes, designed forencouraging exports :-a. Export Promotion Capital Goods Scheme (EPCG) ;-

EPCG scheme was introduced by the EXIM policy of 1992-97 in order to enable manufacturer exporter to importmachinery and other capital goods for export production atconcessional or no customs duties at all. This facility issubject to export obligation, i.e., the exporter is required toguarantee exports of certain minimum value, which is inmultiple of the value of capital goods imported.

b. Duty Free Replenishment Certificate (DFRC) :”, DFRCis issued to a merchant exporter or manufacturer exporterfor the duty free in:1port of inputs such as raw materials,components, intermediates, consumables, Spare paJ1:S,

including packing materials to be used for. exportproduction. Such certificate is subject to the fulf1lment oftime bound export obligation, arid is issued in respect ofproducts covered under the Standard Input Output Norms(SIONs).

c. Duty Entitlement Passbook Scheme (DEPB) ;- Underthe DEPB scheme, ‘an . exporter may apply for credit as aspecified percentage of FOB value of exports, . made infreely convertible currency. The credit shall be availableagainst such export products and at such rates as may bespecified by the Director General of Foreign Trade..(DGFT)by way of public notice issued in this behalf, for import’ “of raw materials, intermediates, components, parts,packaging materials, etc

d. Advance Licence :- An advance licence is issued for dutyfree import of components which are physicallyincorporated in the, products manufactured for export. Inaddition, fuel, oil, energy, catalysts, etc., which; areconsumed in the course of production process may also -beallowed.Duty free import of mandatory spares up to 10% of theC.I.F. value of the licence which are required to be exportedor ‘supplied with the resultant product may also be allowed.Advance Licence can be issued for :--• Physical Exports.• Intermediate Supplies.• Deemed exports.

Pre-import Procedurea. Selecting the Commodity :- An importer should select the

commodity for import after considering various commercialfactors as well as legal considerations including theregulations contained in the EXIM Policy. Imports may bemade freely except to the extent they are regulated by theprovisions of the EXIM Policy.. Prohibited goods cannotbe imported at all. Import of restricted items is permittedthrough licensing only while canalised items can be canalisedthrough specified State Trading Enterprises (STEs).

b. Selecting the Overseas Supplier :- Imports can be madefrom any country of the world except Iraq. However, thereshall be no ban on the import of items form Iraq in casewhere the prior approval of the concerned sanctioncommittee of the UN Security Council has been obtained.The information regarding overseas suppliers can beobtained from various trade directories, consulate generals,international trade fairs and exhibitions and chamber ofcommerce.

c. Capability and Creditworthiness of Overseas Supplier:- Successful completion of an import transaction mainlydepends upon the capability of the overseas supplier tofulfil his contract. Therefore, it is advisable to verify thecreditworthiness of the overseas supplier and his capacity tofulfil the contract through confidential ‘reports about himfrom the banks and Indian embassies abroad. It is.advisable to finalise contract through indenting agents ofoverseas suppliers situated in India.

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Nd. Role of Overseas Suppliers’ Agents in India :- Some

reputed overseas suppliers have their indenting agentsstationed in India. These agents procure orders from theIndian parties and arrange for the supply of goods fromtheir principal abroad. It is advisable to import throughsuch agents as they can be readily contacted in case there isany dispute regarding quality or quantity of goodsimported, receipt of payment, documentation formalities,etc.

e. Inquiry; Offer and Counter-offer :- It is advisable thatbefore finalising the terms of import order, one should callfor the samples or catalogue and other relevant literatureand the specifications of the items to be imported. Importof samples of goods is exempted from import dutiesunder ‘Geneva’ Convention of 7th November 1952. Aftersatisfying- himself with the samples and thecreditworthiness of the overseas supplier, the importershould proceed to fmalise the terms of the contract to beentered into.

Stages in an Import TransactionThe following stages mark the various steps involved inimporting goods into India under an import licence and quota:1. Placing the Indent:- The importer places order for the

goods he requires and for which he holds an import licence.The order is called indent and may be placed either directlyor through specialized intermediaries called indent house.The word indent is used for import of goods according towhich two or three copies of the order are prepared andindented is one which does not specify the price and otherdetails of the goods ordered but leaves them but leavesthem to the discretion of the buyer in the exportingcountry. A If an indent specifies the price at which goods aresought to be imported it may give rise to negotiationsbetween the parties. In such a case the indent incorporatingthe price finally settled is called a confirmatory indent.Though one order goods directly generally importers preferto make use of the services of indent houses for thispurpose. The indent firms serves as middlemen betweenthe exporters and importers and charge a certain %age ofcommission from the importer . in India many of the bigindent houses have their offices in port towns like Bombay,Calcutta.The indent houses maintain close touch with the wellknown foreign firms who send the samples of theirproducts to them. Their salesmen take these samples to theintending importers and book orders from them. Thedetails of the order taken down by the salesmen in theirnote books are entered in the indent form. Two copies ofthe indent form are sent to the importer for his acceptance.The importer returns one of the copies duly accepted andsigned to the indent house which then sends a copy of theindent to its agent in the foreign country concerned.If an importer does not act through an indent house, hemay place an order directly with the exporter.

2. Obtaining Foreign Exchange:- The foreign exchangereserves of any country are controlled by the Government

and are released through the central bank. In India, theexchange Control Department of the Reserve Bank ofIndia deals with applications for the release of foreigncurrency. However an importer is able to get the foreignexchange only from an exchange bank approved andrecognized by the Reserve Bank of India for dealings inforeign exchange. The importer has to produce the importlicence along with the prescribed form for securing foreignexchange required to pay for the goods ordered fromanother country. The exchange back through which thepayment is proposed to be routed puts its endorsement onthe application form. On the strength of the applicationand the licence and the exchange policy of the governmentof India in force at the time of application the ReserveBank of India sanction the release of a certain amount ofthe desired foreign currency. This paves the way for theimporter to go ached with the other formalities inconnection with an import transaction. It must be notedthat while licence is issued by the Government for allimports during the period of its validity exchange madeavailable only for a specific transaction for which an orderhas been placed.

3. Arrangement for Payment :- After the importer hassucceeded in securing the requisite amount of foreignexchange from the Reserve Bank of India, he has to makearrangements for paying for the goods ordered. This maybe done through an L/C where it is intended to enable theshipper to obtain payment for the goods immediately onsurrendering a documentary bill to a bank in his owncountry.Another method will be to request the exporter to forwardthe documentary bill through his banker to the importer forbeing delivered to him either against acceptance of the billof exchange or against its payment. In such cases, when theshipper (exporter) has shipped the goods and the an advicenote to the importer stating the date of shipment thegoods and the probable date when the ship is expected toreach its destination. At the same time he draws a bill ofexchange on the importer (also called indentor) for the fullinvoice value of the goods. Various documents like masterdocument, insurance policy, bill of lading and certificate oforigin are attached to this bill. That is way it is called the‘Documentary Bill’ A Documentary Bill may either be D/Aor D/P i.e. the banker through which it is sent may beinstructed to deliver the document against the acceptance ofthe bill by the importer or against the payment by him..(D/A=Documents against Acceptance: D/P = Documentsagainst payment)The bank’s branch in the importing country, or its agentthee, arranges for the bill to be presented to the drawee(importer). The attached documents are handed over to himimmediately thereafter if it is a D/A bill in case of a D/Pbill, the bank delivers the documents only after the importerpays the amount of the bill on maturity. Generally, indenthouse is mentioned as the ‘Referee in case of need’ on thebill. In case, the importer cannot comply with therequirements regarding acceptance or payment the indenthouse does so on his behalf.

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4. Clearing the Goods:- Assuming that the importer hastaken possession of the various documents relating to thegoods shipped, he will have to comply with the formalitiesprescribed for clearing the goods. When the ship carryingthe goods touches at a port, it is notified in the newspapersand the importer has to secure the release of cargo from thecustody of the customs authorities. The first thing for himto do is to obtain the ‘Endorsement for Delivery’ deliveryor order on the back of the bill of Lading which is thedocument of title of goods. The shipping campus of thesuch endorsement only if it is satisfied that the freight hasbeen paid it freight has not already been paid by the shipperor exporter, the importer will have to make the payment onthis score before he can be given a given a green signal by theshipping company. The importer then presents two copiesof the Port Trust Dues Receipt and three copies of the Billof Entry to the Port Trust Office to obtain clearanceregarding dock dues, etc. Thereafter, one copy of the firstform and two copies of the second are presented to theCustoms office.

Bill of Entry. The Bill of Entry, drown in triplicates, atteststhe fact that goods of specified quantity, value anddescription are entering the bounds of the country.Separate forms of the Bill of Entry are used used for eachone of the three classes of good: (i) free goods which areexempted from customs duty, (ii) goods for homeconsumption, and (iii) bonded goods.

5. Payment of Customs Duties:- If the goods are free, noimport duty is to be paid at the Customs Office. Ondutiable goods, the importer or his agent will pay theimport duty which may be specified, i.e. based on weightmeasurements etc. It may be advalorem, i.e according to thetariff or the market value of the commodity or its invoicevalue.Payment of customs duty can also be made under thesystem called the “Permanent Deposit System” Under thissystem, an importer may maintain a running account withthe Customs Office and make deposits from time to time.The duty payable on a particular consignment of goodsreceived at the customs is charged to the account and theimporter is informed of this.

In case the importer is not in a position to pay the customsduty on the whole of imported goods, he may apply to thecustoms authorities to get when placed in the ‘BondedWarehouse’. He can then pay the duty on each installmentof goods that he withdraws from time to time.To save themselves from the botheration of going throughall the above mentioned formalities, the importers mayentrust the hob to clearing and forwarding agents. In sucha case, these agents will take it upon themselves to deliverthe goods at the exporter’s warehouse. Clearing agentscharge commission for their services.

Import Procedure SimplifiedAs per the new Import Policy 1992-1997 Import procedure hasbeen simplified:

• Against seven application forms required for import ofvarious items in the negative list only one form will now berequired.

• Most of the imports are now free from licensing. However,where licensing is required-cases like duty-fee imports forexport production-considerable delegation of powers hasbeen made to the regional licensing authorities.

• Under the new procedure, import licences/customs clearancepermits will have validity of 12 months. However, capitalgoods licences and customs clearance permits will be validfor 24 months. Revalidation may be granted on merits.

• Other highlights of import procedure are: grant of licencesfor certain items of raw materials. Components andconsumables in the negative list of imports decentralizedapplication for second hand capital good upto a CIF valueof Rs 50 lakh to be considered by the regional licensingauthorities.

• Imports through courier service up to a value of Rs. 5000 ata time can be made in accordance with the policy.

• Licences for import of cloves, cinnamon and cassia to begranted to the extent of 10 per cent of best year’s importsin value in any of the preceding 5 licensing years, subject tofulfillment of export obligation. Items qualifying forexports include tea, coffee, tobacco and certain spices.

• Dealers of books may be granted licences on the basis of 20per cent of the purchase turnover for import of fiction andother books.

• Import of motor vehicles including tourist coaches and air-conditioning units will be permitted within the entitlementof the licences given to hotels travel agent and touroperators.

• The import entitlement of any one licensing year can becarried forward either in full or in part and added to theentitlement of the two succeeding licensing years.

• A special licensing committee headed by the Chief controllerof Imports and Exports may consider applications foradvice on the grant of licence for import of restricted items.

• Import of spares for imported motor vehicles and tractorsupto a maximum value per year of Rs. 20000 (for motorvehicles ) and Rs.10000 for tractors for each imported vehiclecan be made without a licence.

• Similarly, aircraft après can also be imported without alicence on the basis of the manual of the aircraft or on therecommendations of the department of civil aviation.

• Goods imported without restrictions may be transferred toother. However, in the case of goods imported with actualused conditions can be transferred only with the priorpermission of the licensing authority.

• Import licences issued under various provisions of thepolicy will indicate the value both in rupees and in foreigncurrency at the exchange rate prevailing on the date of theissue of licence. No enhancement of rupee value will benecessary if the imports are covered by the amount offoreign currency indicated in the licence.

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N• Authorized dealers of foreign exchange will indicate the

value in foreign currency as well as in rupees determined onthe basis of the market and official exchange rate in theletters of credit opened for import of freely importableitems or the items proposed to be imported against alicence.

Legal Dimensions of Import Procedurea. Finalisation of the Terms of Contract :- The import

contract should be carefully and comprehensively draftedincorporating therein, precise terms as well as all relevantconditions of the trade deal. There should not be anyambiguity regarding the exact specifications of the goodsand terms of the purchase including import price, mode ofpayment, type of packaging, port of shipment, deliveryschedule, licence and permits, discount and commission,insurance, arbitration, etc

b. Mode of Pricing and INCO TERMS :- While finalisingterms of import contract, the importer should, inter-alia, befully conversant with the mode of pricing and the mannerof payment for the imports. As regards mode of pricing,the overseas supplier should quote the terms prevailing ininternational trade. International Chamber of Commerce(ICC), Paris, has given detailed definition of a few standardterms popularly known as ‘INCO TERMS’. These termshave almost universal acceptance.

c. Mode of Settlement of Payment :- There are mainly threemodes of settling international transactions dependingupon the creditworthiness of the importer or exporter,.demand for the commodity in the international market,exchange control regulations prevailing in the importer orexporter countries and other relevant factors :-• Advance Payment.• Payment or Acceptance against Documentary

Collections.• Payment under Letter of Credit.

d. Obtaining lEC Number :- In India, it is obligatory forevery importer and exporter to register themselves with theDirector General of Foreign Trade (DGFT) and obtainImport-Export Code (lEe) Number. The application form’-for obtaining IEC number should be accompanied by a feeof Rs. 1000 and two copies of passport size photographsof the applicant duly attested by the banker of the applicantand other relevant documents. .

e. Obtaining Import Licence :- If the item to be importedfalls in the . prohibited list, then such item cannot beimported at all. However, if it falls in restricted list then thenecessary clearance must be obtained from appropriatelicensing authority. Similarly, if it is subject to thecanalisation through State Trading Enterprises (STEs), thenthe necessary formalities are to be completed pertaining tothe same.

f. Obtaining Foreign Exchange :- In India, all foreignexchange transactions are regulated by the Exchange ControlDepartment of the Reserve Bank of India (RBI). Therefore,every importer is required to make an application to theReserve Bank of India (RBI) for getting. sanction for

making overseas payments. The Exchange ControlDepartment scrutinises the application and if satisfied,sanctions necessary foreign exchange for the importtransaction.

g. Arranging Finance for Import :- It is advisable that thefinancial planning for imports should be done in advance inorder to avoid huge demurrages on the imported goodslying uncleared for want of payment. Banks normally donot extend any fund based assistance to importers.However, they enable industrial units and others to haveaccess to imported inputs and machinery by establishingletters of credit in favour of the overseas suppliers.

h. Obtaining Import L/C Limit:- Import L/C limits aresanctioned by the banks on submission of complete loanproposal as in the case of other types of credit facilities.This requires advance financial planning so as to retireimport bills under L/C on time. Any delay in retirement ofbills not only strains the relations is of the importer withhis bank but also results in additional costs by way of extracommission, penal interest, demurrage charges, etc.

i. Dispatching Letter of Credit :- If the’ term of paymentagreed between the importer and the overseas supplier is aletter of credit then the importer should obtain the letter ofcredit from his bank and forward it to the overseas supplierwell within the time agreed for the same. The importermust see to it that the letter of credit has been prepared inthe strict conformity of the import contract entered betweenthem.

Import by Export Oriented Units/ExportProcessing Zones UnitsThe Government of India decided to establish export process-ing zones in 1965 in order to provide all facilities to theexporters to promote exports from India. The entire schemewas reviewed in 1980 when it was decided by the Governmentto introduce the scheme of export oriented units and providethem with all facilities in order to achieve faster rate of growthin exports. The export oriented units could be established inthe export processing zones or outside the zones. The 100%EOUs located in export processing zones were known as EPZunits. Besides, the export processing zones the Governmentalso established specialised processing zones to promote theexport of elec-tronics hardware, and computer software. Forthis purpose electronics hard. ware technology parks andsoftware technology parks were established. The basic require-ment of the units to be established under these zones or forthe export oriented units outside the zones is that these unitsshall undertake to export their entire production of goods andservices.The units established as export oriented units or units in theexport processing zones may be engaged in the manufacture,services, trading, development of software, agriculture, agro-processing, aqua-culture, animal husbandry, bio-technology,floriculture, horticulture, pisciculture, viticulture, poultry,sericulture and granites. Such units are allowed to export allprod-ucts except banned items.

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Duty Free ImportsThe most significant feature of the units in these zones orexport oriented units is that these units are allowed to makeduty free import of all types of goods including capital goodsrequired by the units for the manufacture of goods or tradingof goods or supply of services. The only condition is that theitems of import should not be banned under the ExportImport Policy 1997--2002.Such units are also allowed to import goods including capitalgoods requiredby them free of cost or on loan from their clients in foreigncountries. The units in the STP /EHTP /EPZ are also allowedto import duty free all types of goods for creating a centralfacility for use by software development units in STP /EHTP /EPZ.The EOU /EPZ/EHTP /STP units can procure the goodsfrom bonded warehouses in the domestic tariff area withoutpayment of import duty .The units are allowed to import evensecond hand capital goods or import goods on lease basis.The EOU /EPZ/EHTP /STP units are allowed to importwithout payment of import duty all other goods besides capitalgoods required by them for their activities. The list of itemspermitted for export is as follows:Capital goods, as defined in the Policy including the followingand their spares.i. DG sees, captive power plants, transformers and accessories,ii. Pollution control equipment,iii. Quality assurance equipment,iv. Material handling equipment, like fork lifts and overhead

cranes,v. Un-interrupted Power Supply System (UPS), Special racks

for storage, storage systems, modular furniture, computerfurniture, anti-static carpet, teleconference equipment, servocontrol system, air-con-ditioners, panel for electrical SecuritySystems.

vii.Tools, jigs, fixtures, gauges, moulds, dyes, instruments andacces-sories; Raw materials, components, consumables,intermediates, spares and packing materials;

iii. Prototypes and technical samples for product diversification,development or evaluation;

viii. Drawings, blue prints, charts, microfilms and technical data;ix. Office equipment, including P ABX, fax machines, video

projection system;Spares and consumables for the above items.The facility of duty free import available to the EOO / EPZ/STP /EHTP is subject to fulfilment of export obligation bythese units. The obligations of these units are at two differentlevels as explained below:

Import of Commercial SamplesThe import of commercial samples is exempt from the levy ofimport duty as provided vide General Exemption No. 42(Notification No. 154/94-Cus dated 13.07.1994 - with latestamendment on 6.07.1999 vide notification no. 86/99-Cus). The

samples may be paid for or imported free of any charge. The ex-emptions from import duty are different in both the cases.

Commercial Samples (Paid for)A bonafide commercial traveller or businessman may importcommer-cial samples without payment of import duty upto avalue. limit of Rs. 60,000 or 15 units in number, within aperiod of twelve months subject to the fol-lowing conditions:The samples are imported as a part of personal baggage or bypost or by air.1. The importer produces Importer-Exporter Code (1EC)2. Number at the time of importation.3. The goods are clearly marked as samples.4. The importer, at the time of importation:

Commercial Samples and Prototypes (Free ofCharge)A bonafide business firm may import, without payment ofimport duty, bonafide commercial samples and prototypes bypost or by air or by courier service upto a value limit of Rs.5,000 provided the said goods have been supplied free ofcharge. The postal charges or the air freight is not taken intoaccount for determining the value of commercial samples andprototypes.

Question BanksQ1. Name the different categories of importers.Q2. Explain the special schemes of import liberalisation in

India.Q3. Explain the main steps in pre-import procedure.Q4. What are the legal dimensions of import procedure?

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LESSON 25:IMPORT TRADE DOCUMENTATION

• Introduction• Capital goods• Custom Clearance Procedure for Imported goods• Import Documents• Retirement of Import Documents• Classification of Goods for Import Policy & Assessment of

Duty.• Bill of Entry.• A Note on Forward Contract

IntoductionThe Export-Import policy offers facilities for the import of rawmaterials, parts, components other inputs and the capital goodsto facilitate production of goods for the purpose of promotionof exports.Many a time, an export firm is required to make import of thevarious inputs and machines for the purpose of exportproduction.The facility of import is allowed under the ‘following categories:1. Import of unrestricted items2. Import of restricted items3. Import of capital goodsThe present chapter deals with these facilities and explains thepro-cedure involved in customs clearance of the importconsignments.1. Import of unrestricted Items

The business firms having Importer- Exporter CodeNumber are allowed to import the goods which do notattract any kind of restriction under the Export-/importPolicy: 2002-07, as amended from time to time. There is nopermission .or approval required to import such items. Theimporter intending to import la certain item should first ofall, ascertain the ITC(HS) classification number ‘of the itemby referring to the ITC(HS) Classifications of Import andExport Items. Thereafter, relevant chapter as given inSchedule 1 ( Import Policy) should referred to find out thepolicy regarding import against the item at the desiredTC(HS) number. If the item is unrestricted for import, theonly requirement make import in terms of procedurewould be to pay for the import duty leviable that item andseek the customs clearance of the import consignment.

2. Import of restricted itemsAny business firm intending to import restricted items shallbe required to apply for import licence under the NegativeList. ( Negative List refers to the list of restricted items.)The details of these restricted items can be obtained bymaking a reference to Schedule l(lmport Policy) as given inthe ITC(HS) Classification of Import and Export Items.

The importer has to give reasons as to why he needs toimport the restricted items. In other words, justification forthe import has to be provided because import licencecannot be claimed as a matter of right. It is a privilegeextended by the Government to the importer. If thelicensing authority is not satisfied then it may not grant theimport licence

Capital GoodsImport of Capital GoodsThe policy regarding the import of capital goods is very liberal.There are no restrictions for the import of New Capital Goods.The only require-ment is to arrange for the customs clearance ofthe import consignment against the payment of the applicableimport tariff.

Import of Second Hand Capital GoodsAs far as second hand capital goods are concerned, their importis allowed freely provided the second hand capital good is notmore than 10 years old. However, such goods shall not betransferred, sold or otherwise disposed off within a period of 2years from the date of import without the prior permission ofthe Director General Foreign Trade.

Warehousing of Imported GoodsAn importer may not like to clear or may have certain problemsin clear-ing the goods imported immediately on payment ofduty for home consump-tion. In such an eventuality, he can,subject to certain conditions being sat-isfied, deposit the goodsin a Public or Private Bonded Warehouse. The object ofwarehousing is to allow the facility of deferring payment ofduty on im-ported goods pending actual clearance for HomeConsumption on payment of duty or their re-export withoutpayment of duty to any foreign port.The importers are required to file a set of yellow coloured billof entry commonly known as warehousing or Into bond Billof Entry (B/E) if they want the facility of warehousing of theimported goods. The warehousing BIE is almost the same asHome Consumption Bill of Entry and the procedures for itsprocessing are also the same except that the payment of theduty is de-ferred.After the assessment of goods for the lievy of the import dutyis com. pelted, the scrutinizing appraiser debits the importlicence{s} where necessary, and the set of warehousing Bill ofEntry {WR B/E} undergoes usual counter checks by theAssistant Collector of Customs. The formalities of calculationof duty, licence, registration and its pre-audit are also gonethrough as in the case of a Borne Consumption, B/E.The W R Bill of Entry is thereafter audited by the InternalAudit Depart-ment and then sent to Import Bond Departmentwhere the importers file the requisite warehousing Bond u/s 59of Customs Act, 1962. The Bond after scrutiny is accepted by

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A.C. {Bond} and registered in the Bond Department and WRnumber is impressed on all copies of B.E. The original copy itkept in the Bond Department, while the others are handed overto importers I clearing agent. The goods are thereafter examinedby the Dock Appraising staff on the basis of orders of thescrutinising Appraiser on Duplicate copy, and if found in order,the same are allowed to be physically warehoused by the DockAppraiser under the escort of a Preventive Officer.

Clearance of Warehoused of Goods for HomeConsumption Under Ex-Bonds B/EIn order to clear the dutiable imported goods from warehouse,the Bonder is required to present an ex-bond bill of entry,printed on green paper in the Imported Bond Department. It isnot obligatory for the importer to take clearance of the entireconsignment which was warehoused under a particular IntoBond BIE while filing an Ex-bond Bill of Entry. Even Ex-bond Bills of Entry for part clearance can be submitted. Theimporter after getting the Ex-Bond BIE registered in theImport Bond Department submits it to Appraising Depart-ment alongwith Triplicate copy of related Into Bond BIE andinvoice/ packing list, for verification of the particulars furnishedon the BIE (made on the basis of Into Bond B/E). Theconcerned Group Appraiser classifies and reassesses, if neces-sary. Concerned group A.C. and calculation of import dutythereafter hand over the assessed BIE to the importers clearingagents for payment of duty and taking delivery of the goodsafter the usual counter check.

Custom Clearance Procedure forImported GoodsUnder the Ministry of Finance (Department of Revenue), thereindependent Boards of Revenue :-a. Central Board of Direct Taxes (for Income Tax, Wealth Tax

etc.)b. Central Board of Excise and Customs.The Customs administration vests with the Central Board forExcise and Customs, which shapes the policy and decides thefunctions of the customs formalities in the country, in terms ofthe provisions of the Customs Act 1962.All goods imported in India have to pass through the customsclearance after they cross the Indian border. The goods soimported are examined, appraised, assessed, evaluated and thenallowed to be taken out of customs charge for use by theimporter.The procedure for customs clearance in general for goodsimported ,in India is as follows :a. Import Manifest :- As per the section 30 of the Customs

Act, 1962, the persons in charge of a conveyance carryingimported goods should hand over, within 24 hours of thearrival of the conveyance, an import manifest to thecustoms. The import manifest is a complete list of all itemsthe conveyance carries on board, including those to betransshipped and those to be carried to the subsequentports of call.

b. Entry in the Import Department of Customs House :.On receipt of information regarding the arrival of thegoods, the importers or their agents have to make an entry

by filing a Bill of Entry, in a prescribed form in the’ ImportDepartment of Customs House. The, date of presentationof Bill of Entry is an important date as the rate of dutyapplicable to the imported goods will be the rate, which isin force on t1}e date of presentation.

c. Presentation of Bill of Entry for Appraisal :- After theBill of Entry is noted in the import department, the sameshould be presented to the Appraising Counters along withthe following necessary documents :-• Import licence,jf necessary.• Exporter invoice.• A copy of Letter of Credit.• Original Bill of Lading and its non-negotiable copy.• Two copies of Packing List. ‘• ‘Weight spe9ifications.,• Manufacturers test certificate.• Certificate of Origin.• Delivery order issued by Shipping company or its,

agent.• Freight and insurance amount certificate if the import

is on FOB terms• A declaration from importer that he has not paid nay

commission to agents in India.• Customs declaration• Catalogue/drawing, etc for machinery imported.In addition to the above, the following documents are alsorequired to be submitted wherever necessary:-• If the spare part are imported-exporters invoice

showing unit price and extended total of leach item;• If the second hand machinery is imported-chartered

Engineer’s Certificate;• If the steel is imported-Manufacturer’s Analysis

Certificate;• If Chemicals and allied products are imported-

Literature showing chemical consumption;• If the textiles items are imported- Textile

Commissioners endorsement or certificate.If the above documents furnished by the importer arefound to be adequate for acceptance of the declared valueand determination of classification and acceptance of ITCLicence, the Bill of Entry is completed by the AssistantCollector and sent to the Licence Section with an order tothe Dock Staff for examination of goods before clearance.

d. Clearance of Goods ;- After payment of duty (the originalcopy of Bill of Entry is retained in the Customs House) theimporter should obtain the duplicate copy of Bill of Entryon which order for examination of the goods is given byCustoms and get the goods examined. If the description ofgoods. is found to be correct, on the basis of declared andaccepted particulars, clearance of goods is allowed by theappraiser.

e. Warehousing the Goods;- The imported goods can bewarehoused at the port of shipment without the payment

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Nof duty by presenting a “Bill of Entry for Warehousing” tothe Bonds Department along with a bond for twice theamount of duty payable. Initially the facility is granted for 3months, which may be extended upto a period one year.The warehoused goods can be cleared in one or moreinstallments. For clearance of goods from the warehouse,the importer is required to present what is known as ‘Ex-bond Bill of Entry’.

f. Import Follow-up ;- Once an importer is allowed to remitforeign exchange out of the country he has an obligation toimport the permitted goods of equivalent value in thecountry. If no goods or goods for lesser values areimported, it would lead to leakage of foreign exchange.

Import DocumentsYou have learnt the export documents in detail. Let us nowdiscuss the import documents.1. Importer Exporter Code (IEC) Number: No person can

import goods without obtaining an Importer-ExporterCode (lEC) Number unless he has been specificallyexempted. The IEC Number is obtained from the RegionalLicensing Authority. You have already learnt the procedureof obtaining IEC Number in Unit .

2. Bill of Entry: It is a document on which clearance ofimported goods is effected. All goods discharged from avessel, from foreign or coastal ports are cleared on Bill ofEntry in the prescribed form. The Bill of Entry form hasbeen standardised by the Central Board of Excise andCustoms.

Four copies of bill of entry are submitted. Original andduplicate for customer departments, triplicate is owner’s copyand the fourth copy is for the purpose of foreign exchange tobe submitted to bank. There are three types of Bill of Entry asdiscussed below:i. Bill ofentry for home consumption (white in colour):

where an importer wants to get his goods cleared in one lot,he has to present the Bill of entry for home consumption.

ii. Bill of entry for warehousing (into bond, yellow incolour): Where an importer wants to shift goods to awarehouse and thereafter gets his goods cleared in smalllots, he has to present ‘into bond’ bill of entry. Reason maybe that he is unable to pay duty leviable on all goods at oneinstance or may be because of storage problem.

iii. Ex.-Bond Bill of Entry (Green in Colour): When animporter wants to remove goods from the warehouse, hehas to present an Ex-bond bill of entry which is green incolour.a. Bill of Entry is not required in the following cases:b. passengers baggage favour parcelsc. mail box and post parcelsd. boxes, kennels of cargos containing live animals or

birdse. unserviceable stores, e.g. dunnage wood, empty

bottles, drums etc. of reasonable valuef. ship’s stores in small quantities for personal use

g. cargo by sailing vessels from customs ports whenlanded at open bundles only

For imports through the medium of post there is no bill ofentry. Instead a way bill is r prepared by the foreign post officefor assessment of duty.

Retirement of Import Documentsa. Loading of Goods and Receipt of Shipment Advice :-

On loading of goods the overseas supplier dispatches theshipment advice to the importer informing him about theshipment of goods. The shipment advice contains invoicenumber, bill of lading, airways bill number and date, nameof the vessel with date, the port of export, description ofgoods and quantity and the date of sailing of the vessel.’

b. Retirement of Import Documents :- After shipping thegoods, the overseas. 40' supplier prepares the necessarydocuments as per the terms of contract’ and letter of creditand hands them over to his bank for their onwardnegotiation< to importer in the manner as specified in theL/C. The set normally contains bill of exchange,.commercial invoice, bill of lading, packing list, certificate oforigin, marine insurance policy, etc.For the retirement of documents, the importer is requiredto submit the following documents to his bank :-a. A letter authorising his bank to debit the equivalent

Indian rupees to the value of documents includingbank charges.

b. Exchange control copy of the Import Licence, ifapplicable.

c. Form Al duly completed for the remittance in foreignexcl1ange.

c. Acceptance of the Bill of Exchange :- Bill of Exchangeaccompanied by the above documents is known as theDocumentary Bill of Exchange. It is of two types :-• Documents against Payment (Sight Drafts) :- In

case of sight draft, the drawer instructs the bank tohand over .the relevant documents to the importeronly against payment.

• Documents against Acceptance (Usance Draft) :- Incase of usance draft, the drawer instructs the bank tohand over the relevant documents to the importeragainst his ‘acceptance’ of the bill of exchange.

d. Scrutiny of Documents Received under L/c :- Afterreceipt of import documents from the exporter’s bank, theimporter’s bank will scrutinise the documents as to theircorrectness as per the terms and conditions of L/C andhands over them to the importer after payment. Theimporter should also scrutinise the documents and ensurethat there are no discrepancies.

e. Appointment of C & F Agent :- In India, the procedurefor clearance of imported goods is very lengthy, timeconsuming and involves lots of legal formalities. Therefore,it is advisable to hire the services of C&F agents who arewell versed with such formalities. The C&F Agent preparesthe bill of entry containing details of goods to be clearedfrom the customs. In case, the C&F agent does not have

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relevant information about the goods to be cleared, heprepares a bill of sight in order to enable himself tophysically check the goods imported and prepare bill ofentry on that basis.

Classification of Goods for Import Policyand Assessment of DutyMost of the goods imported are assessed and valued forcalculation of import duty provided they are imported in termsof the Import Policy and evaluated for calculation of customsduty by virtue of the nature of goods or by virtue of its enduse. The imported goods, which do not fall in parameter of theImport Policy, are’ normally confiscated or allowed to be clearedonly on payment of heavy penalty.

Types of Customs DutiesThe following types of Customs Duties are levied on goodsimported into or exported out of India :-a. Basic Duty ;- Basic duty is levied on all goods imported

into India as prescribed in Schedule-I of Customs TariffAct. This duty is levied as a percentage of value of goodsimported or at a specified rate.

b. Auxiliary Duty ;- This duty was levied in addition to thebasic duty prescribed under the Finance Act every year.However, with effect from 28th February 1993, thegovernment has withdrawn auxiliary duty.

c. Additional or Countervailing Duty ;- This duty is leviedon the total cost of imported goods at the rate equal toexcise duty on like goods when manufactured in India. Thisduty is levied to protect the domestic industry.

d. Specific Duty :- This duty is levied in order to counterbalance the excise duty leviable on the imports going intothe production of such goods in India.

Mode of Levy of Customs Duty

a. Specific Duties :- Specific duty is a duty imposed on eachunit of a commodity imported or exported. For example,Rs.5 on each meter of cloth imported or Rs.500 on eachT.V. set imported. In this case, the value of commodity isnot taken into consideration.

b. Advalorem Duties :. Advalorem duty is a duty imposedon the total value of a commodity imported or exported.For example, 5% of F.O.B. value of cloth imported or 10%of C.LF. value of T.V. sets imported. In this case, thephysical units of commodity are not taken intoconsideration.

c. Compound Duties :- Compound duty is the combinationof specific and advalorem duties. In this case, the quantitiesas well as the value of the commodity are taken intoconsideration while computing tariff. For example, 5% ofF.O.B. value plus,50 paise per meter of cloth imported.

Valuation of GoodsValuation of goods is done as per principles and down inCustoms Valuation Determination and Prices. of ImportedGoods) Rules, 1998.

Demurrage ChargesThe goods imported and discharged in the Customs area arestored in the warehouses of CWC or Port Trusts or other

designated authority. Initially, such goods are allowed to bestored freely for few days and thereafter demurrage or storagecharges are levied. The “Free Period” for different cargo isdifferent as under :-a. Commercial and Non-commercial Cargo :- 7 calendar

days from date of landing.b. Unaccompanied Baggage :- 14 calendar days from date of

landing.

Direct Delivery Facility for Imports by AirThe facility of ‘Direct Delivery’ of goods imported by air-isallowed in certain cases:a. Goods like fresh fruits, frozen food, life saving drugs and

appliances, TV films;b. Any cargo requiring special handling or storage; andc. Any cargo in respect of which order of the Deputy Collector

of Customs, Air Cargo Unit, have been obtained in advancepermitting direct delivery.

Bill of EntryThe bill of entry is a document, prepared by the importer or hisclearing agent in the prescribed form under Bill of EntryRegulations, 1971, on the strength of which clearance ofimported goods can be made.When goods are imported in a particular country, the importerhas to pay the necessary import duty. For this purpose,necessary information about the goods imported must be givento the customs authorities in a prescribed form called bill ofentry form. Bill of entry is a document, which states that thegoods of the stated values and description in the specifiedquantity have entered into the country from abroad. The bill ofentry is drawn in triplicate. The customs authorities may ask theimporter to supply other documents like invoice, -broker’s noteand insurance policy, etc., in’ order to verify the correctness ofthe information supplied in the bill of entry form.

Types of Bill of EntryFor the purpose of giving information in the bill of entryform, goods are classified into three categories namely :-a. Bill of Entry for Goods Imported for Home

Consumption (White coloured) :- This kind of bill ofentry is used for clearing imported goods by payingcustoms duty at the port.

b. Bill -of Entry for Bonded Goods’ (Yellow coloured) :- Thiskind of bill of entry is used when no duty is paid onimported goods and, therefore, they are transferred tocustoms recognised bonded warehouses.

c. Bill of Entry for Ex-bond Clearance for HomeConsumption (Green coloured) :- This kind of bill ofentry is used where the importer intends to clear thedutiable goods, either in part or full, from a bondedwarehouse by paying necessary duty.

Contents of Bill of EntryThe main contents of the Bill of Entry are :-a. Name and address of the importer.b. Name and address of the exporter. .c. Import licence number of the importer.

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Nd. Name of the port/dock where goods are to be cleared.e. Description of goods.f. Value of goods.g. Rate and amount of import duty payable.h. Other relevant documents.However, no bill of entry is required in the following cases :-a. Passengers’ baggage;b. Favour parcels;c. Mail bags and Post parcels;d. Boxes, kennels of cages containing live animals or bird~;e. Post parcels, ship stores in small quantities for persona, use.f. Un-serviceable stores, such as, dunnage wood, empty bottles,

drums, etc., of reasonable value (below Rs. 50);g. Cargo by sailing vessels from Customs Ports when landed at

open bunders only.

Processing of the Bill of EntryOnce the Bill of Entry is completed by the Appraiser, and thesame has been countersigned by the Assistant Collector, then itis forwarded to the Licence Department for debit and audit, andthereafter returned to the importers for payment of duty in theAccounts / Cash department. After recovery of duty, theoriginal Bill of Entry is retained in the Accounts Departmentand the duplicate and other copies are returned to the importersfor getting the goods examined in the docks. In the Docks,Shed Appraiser / Examiner shall examine the goods, and if theconsignment is in order, he will give the out of charge forpayment of the Port Trust Charges. This procedure underwhich 80 to 90% of the consignments are being cleared isknown as the Second Check Proce-dure. As against this, in thealternative procedure what is known as the First Check Proce-dure, the Scrubnising Appraiser in the Group gives theexami-nation order. The goods are then examined in the docksand the Bill of Entry returned to the Scrutinising Appraiser forcompletion and licence debit. In this case, the Customs out ofcharge is given by the Accounts Department soon after therecovery of duty. This procedure is resorted to only in caseswhere the appraisers or the assessing Group finds it difficult tocomplete the assessment on the basis of the documents madeavailable.The import consignment can be opened only by the properofficer of the customs for examination of the goods lying in aCustoms Area. Examination of cargo for assessment purposeis chiefly the function of the Appraising Department havingspecial staff of examiners in the docks / Air Cargo shed.‘The result of the examination or weighments is noted on thereverse of the Bill of Entry. It is absolutely essential that recordsof examination and weighment should be made, attested anddated at the time of examination or weighment. If examina-tion or weighment takes place on more than one day, the resultof examination or weighment made on each day is clearlyrecorded. The Officer at the same time, obtains on the docu-ments the importer’s or his accredited representative’s signatureon the entries made from day-to-day showing the result ofweighment.

A Note on Forward ContractInternational contracts are either concluded in Indian rupees orin foreign currency. If the contract is concluded in terms ofIndian rupees, all relevant documents are prepared in Indianrupees and hence no conversion is involved. However, if thecontract is concluded in some internationally accepted currencythen the importers have to pay Indian rupees equivalent. to theamount of foreign currency.Where the international contract has been concluded in foreigncurrency, an importer is always at risk due to adverse fluctuationsin the exchange rates in the international market. Such risks canbe avoided by the following methods :-a. Invoicing the Goods in Indian Rupees :- The first remedy

to adverse movements in exchange rates is invoicing goodsin Indian rupees. However, foreign seller may not agree toinvoicing goods in Indian rupees.

b. Entering into a Forward Exchange Contract :- This isthe most commonly practised alternative for insuring therisks arising out of adverse movements in exchange rates.Under this adjustment, the importer enters into contractwith its bank to purchase from the bank, foreign exchangeat a future date or period and the bank agrees to sell thefirm the foreign exchange on that date or during the agreedperiod at certain predetermined rate agreed upon at the timeof entering into contract. Thus, the importer knows inadvance the exchange rate that he is going to pay on deliveryof import documents.

Question BankQ1. Describe the procedure for the retirement of import

documents.Q2. Explain the customs clearance procedure for imported

goods.Q3. Explain the different types and modes of levying import

duties.Q4. What is Bill of Entry? What is its significance?Q5. Write a note on Forward Contracts.

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LESSON 26:IMPORT FINANCE

• Objective• Introduction• Import Financing• The Regulatory Framework• Exchange Control Regulations Concerning Imports• Methods of Import Finance

a. Financing Import under Letter of Creditb. Fil1’lncing against Bills under Collectionc. Financing Imports against Deferred Paymentd. Financing under Foreign Credite. Import Loans by Export Import Bank of India

• Let Us Sum up• Answers to Check Your Progress• Terminal Questions

ObjectivesAfter studying this unit, you should be able to:• explain the nature and significance of import financing

decisions• describe the institutional regulatory framework of import

financing• discuss the exchange control regulations concerning

imports.• explain various methods of import financing

IntroductionImports play an important role in the economy of everycountry, rich and poor alike. Rich countries need to importcapital goods, raw materials and technology to ensure anoptimum utilisation of their production capacity. They need toimport a wide variety of consumer goods to enable their peopleto enjoy a high standard of living. Poor countries need toimport technology and capital equipment and some timestrategic raw materials to develop indus-tries for accelerating paceof their development. In India, for example, the pace ofindustrialization, level of exports and consequently the rate ofeconomic growth is heavily dependent upon imports. A lowlevel of imports usual1y indicates low purchasing power of itspeople and also emergence of recessionary trends in economy.At a firm’s level efficient management of import operations iscritical factors in determining the overall profitability of itsimports. Hence, a through understanding of import financingtechniques and practices is necessary for concerned managers. Inthis unit, you will learn the regulatory framework and relatedexchange control mechanism of import financing and variousmethods of import financing.

Import FinancingIndia followed a restricted import policy till mid eighties.Nothing could be imported without a licence involving

cumbersome procedures alongwith intricate documentation.Although some liberalization measures were taken in secondhalf of eighties, real breakthrough came only in 1991. Steadyprogress has been made in nineties in replacement of quantita-tive restrictions, licensing and discretionary control over importsby deregulation, simplification of procedures and protectionthrough tariff and exchange rates. Export Import policies of1992-97 and 1997-2002 were the steps in this direction.It is against the background of nature and significance ofIndia’s import trade, one has to understand import financingmethods and techniques. Import financing involves makingpayment to foreign entities for the goods purchased fromthem. From the management decision making viewpoint, itmeans making decision regarding terms of payment (Le.choosing one among several alternatives), arranging funds,involving choice of financial institution and the instrument tobe used for making payment and involving choice of intermedi-ary, through whom the payment is to be made.

The Regulatory Frame WorkThe principal objectives of India’s Export Import Policy is toaccelerate the country’s transac-tion to an internationally orientedeconomy with a view to derive maximum benefit from theexpanding global market. Various policy objectives are achievedbasically through three legislations.These are:1. Foreign Trade (Development & Regulation) Act, 1993

administered by Director General, Foreign Trade (DGFT)replacing the earlier legislation Import & Export (Control)Act, 1947, administered by the Chief Controller of Imports& Exports (CCIE).

2. Foreign Exchange Management Act, 1999 administeredby the Department of Economic Affairs, Ministry ofFinance and the Exchange Control Development of theReserve bank of India. FEMA has been brought is place ofForeign Exchange Regulation Act.

3. Indian Customs and Excise Act, 1962 administered byCentral Board of Excise and Customs.

The Foreign Exchange Dealers Association of India (FEDAI)frames the rules and operational procedures and changesrelating to imports. In addition, Uniform Customs & Practicefor Documentary Credit (UPDC) formulated by InternationalChamber of Commerce, Paris which has a global acceptance, isindispensable to cover transactions under documen-tary credits.India’s import policy is formulated within the framework ofobligations of the membership of World Trade Organisation(WTO). Hence, the policy does not have a discriminatory andrestrictive dimension. Whatever restrictions on importscontinue are the ones which have -been allowed under theWTO regime. In line with WTO provisions for according

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Npreferential treatment of imports from developing countries,India has signed several preferential treading arrangement withsome South Asian Countries and the products, which willattract concessional rate of duty, are also specified.Physical control over imports is exercised by DGFT and theCustoms Dept. RBI exercise financial controls through theguidelines provided to authorised dealers. Of late, tariffs ratherthan quantitative restrictions are being used to regulate importtrade.Under the present policy, all goods, except those appearing onNegative list can be freely imported in India. For goodsincluded in the restricted, or banned list, import licence may beissued by the Director General of Foreign Trade. An importlicence is an authorisation which includes a customs clearancepermit (CCP) indicating inter alia, quantity description and valueof the goods, actual user conditions if any, the minimumexport value if any, export obligation, if any, and value additionobligation, if any. Import licences which are issued on C.I.F.basis, is given in duplicate viz. Customs Copy (for clearancefrom customs) and Exchange Control copy for remittances.For exporting units, certain special facilities have been providedunder the present policy. Under the Export Promotion Capitalgoods (EPCG) Scheme, capital goods can be imported at aconcessional rate of custom duty, subject to an export obliga-tion to be fulfilled within a specified period of 5-8 years. Underthe Duty Exemption Scheme, the government permits importof raw materials. intermediates, components, consumables,spare parts, accessories, packing materials and computersoftware required for direct use in the product to be ex-portedduty free under different categories of licences. Advance licence isissued for inputs needed for export production. It can be issuedfor physical exports, intermediate supply and deemed exports.

Exchange Control RegulationsConcerning ImportsExchange control regulations refer to rules and regulationsframed and administered by the Reserve bank of India (RBI)under the provisions of Foreign Exchange Management Act,1999. These regulations aim at pooling resources for nationaldevelopment in the best interest of the country. Under theprovisions of the Act, RBI regulates sale and purchase offoreign currencies, Commercial banks with a licence to deal inforeign currencies, called authorised dealers (ADs) buy and sellforeign currencies in accordance with the guidance provided bythe RBI. Let us learn various regulations regarding payment ofimports.Mode of Payment: Exchange control regulations govern salesof foreign currencies to non -residents against import of goodsfrom any country except - Nepal and Bhutan. It may be pointedout that residents of these two countries are residents for thepurposes of exchange control regulations, hence, ADs cannotsell any foreign exchange for financing imports from these twocountries.Under the existing regulations, ADs provide foreign currenciesto importers:i. for remittance to foreign supplies as advance payments.

ii. Paying the foreign supplies in compliance of theirundertaking under the letter of credit.

iii. discounting on purchasing except documents.iv. advances against shipping documents.Authorised dealers can open a letter of credit (L/C) to facilitateimports, subject to following regulations:a. Letters of credit may be opened by banks only on behalf of

their customers who maintain account with them.b. L/C should be opened in favour of overseas suppliers of

shipper of goods.c. Application for L/C must be accompanied by sale contract

and other documentary evidence relating to the order and itsconfirmation and import licence, if any.

Authorised dealers have been permitted to sell foreign curren-cies for making payment towards imports into India. For thispurpose, importers have to submit an application in form Agiving the necessary details including classification of goodsbased on Harmonized system. It is also obligatory on the partof an importer to submit exchange control copy of customsbill of entry to the authorised dealer through whom the relativeremittance was made as evidence that the relative goods forwhich the payment was made have actually been imported intoIndia within three months from the date of remittance.In respect of imports by post parcel, postal wrappers arerequired to be submitted as docu-mentary evidence in supportof imports into India.Currency of Payment: According to exchange control regula-tions, payment for imports should be made in a currencyappropriate to the country or through an account appropriate tothe country of origin of goods irrespective of the country fromwhere they are shipped or supplied. RBI has given a list ofpermitted currencies and approved methods of payment forimports in Exchange Control Manual for guidance of import-ers.Time limit for settlement of imports bills: Time limit forsettlement of import bill is 6 months from the date ofshipment, but authorised dealers can settle without reference toRBI even if the period of six months has expired, provided theAD is satisfied about the bonafides of the circumstances.

Methods of Import FinanceThe methods of import financing include: financing under L/C, financing against bills under collection, financing againstdeferred payment, financing under foreign credit and finance byEXIM Bank of India. Let us discuss them in detail.1. Financing Import Under Letter of Credit

Letter of credit can be defined as a commitment of bank topay the seller of goods or services a certain amountprovided he presents stipulated documents evidencing theshipment of goods or the performance of services within aprescribed period of time. As a credit instru-ment and as ameans of making and securing payment, the letter of creditis an essential instrument for conducting world trade today.It fulfils all the requirements provided the conditionsregarding its use are stated in clear and unambiguous terms.

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Import Letters of Credit Financing Involves threePrincipal Stages

i. Requesting bank to open a letter of creditii. Retiring documents under letter of creditiii. Import Trust receipt facility.Each time a L/C is opened, the importers has ~o file a formalstamped “Letter of credit application and Agreement” in theprescribed form. The application should set forth the precise,terms and conditions under which the importer wishes hisbank to establish the credit, and describe the documentscovering the goods purchased which the bank is to receive inexchange for payments.As the correct opening of the credit is the first essential to theultimate success of the transaction and as the L/C will .beissued on the basis of information supplied by the importer inthe L/C application, it is absolutely necessary that the informa-tion supplied by him must be complete and precise, After duescrutiny of the application form, the relevant letters are issuedby the bankers subject to the Uniform Customs And Practicefor Documentary Credits, in order to guard against confusionand misunderstanding.Letters of credit may be opened by mail or Fax depending uponthe urgency of the situation. It may be revocable or irrevocable.Irrevocable L/C implies that the terms and conditions of thecredit can be amended only with the consent of all the con-cerned parties. At times, the importer may ask the issuing bankto get the credit confirmed by another bank. It means that inaddition to the issuing bank (the confirming bank) assumes thecommitment to pay provided the terms of the credit arefulfilled.L/C is sent by the issuing bank to a bank in the supplierscountry with a request to deliver the same to the supplier, calledthe beneficiary. If the beneficiary is satisfied with terms andconditions mentioned in L/C he ships the goods, obtains therequired documents and submits them to bank, usually hisown, unless a name has been specified in the credit. Bankscrutinizes the documents and if he finds them in conformitywith the L/C and the reimburse-ment instructions, he pays thesuppliers. Thereafter he sends the documents to the issuingbanker who again scrutinises the documents with references tothe terms of the credit. If he is satisfied, he pays the negotiatingbanker.After paying the negotiating banker the issuing banker releasesdocuments of title to the importer on his executing a stampedLetter of Trust (Trust Receipt). It means that the importerundertakes to deposit with the bank the sale proceeds immedi-ately on relisation but in no case later then period stipulated inthe trust letter. The import trust receipt facility is given by thebanks to first class customers only.Bankers also grant import loans to their approved customersand undertake the clearance of goods on their behalf. In suchcases, the bills received under letter of credit are retired to debitof loan account of the customer by the bank and the relativedocuments forwarded to an approved clearing agents forclearance of goods. After the goods are cleared, dispatched andRailway Receipts sent to the bank, the relative goods or Railway

Receipts are delivered to the importer after receiving the dueamount. Where arrangements exist, the goods may be stored inthe bank godown under bank’s lock and released againstproportionate payments as and when desired by the importer.2. Financing against Bills under Collection

In the case of imports not covered by letters of credit, thedocuments are forwarded by a bank in the supplier’scountry, known as the collecting bank, for collection ofproceeds from the importer and payment to the supplierthrough the remitting bank. In such cases, the collectingbank would examine the documents and the instructionsstated in the covering schedule to ensure that all the stateddocuments have been received intact and the bill of ladingand the bill of exchange are endorsed in its favour or blankendorsed to enable the bank to handle the documents. Thebank than presents the documents to the importer onpayment (in case of sight or D/P Bill) or against writtenacceptance (in case of usance or d/p bill). Where theimporter is eligible to receive the documents only onpayment, he can avail an import loan or a trust receiptfacility, as discussed before. Obligations of various partiesinvolved are provided in Uniform Rules for Collection(URC) Publication No. 322 issued by InternationalChamber of Commerce, ParisSometimes, shipping documents may be sent by theexporter directly to his importer. In such a case, the bankmay receive clean bills for collection of proceeds. I n suchcases, banks are required to call for documentary evidence ofimports such as custom noted invoice, exchange controlcopy of bill of entry and import licence, if any.Payment for bills in respect of imports through post canalso be arranged through a bank. In such cases, the relativepostal receipts must be produced as evidence of shipmentthrough post and an undertaking to submit postalwrappers within three months from the date of wrappers.

3. Financing Imports against Deferred PaymentImports under deferred payment implies that the supplierhas agreed to supply goods on credit terms extendingbeyond six months. In such cases, authorised dealer has torefer each deferred payment case to RBI for prior approvalof advance payment, bank guarantee and installments(principal and interest) with documents viz. exchangecontrol copy of import licence, if any, contract copy andstatement of desired facilities.Appraisal for issue of guarantees or loans is similar to termfinance. For importing under deferred payment, theimporter should have sufficient cash generated to pay thedue instalments. He should arrange for payment of advanceand down payments from his own resources which wouldcover bank’s margin requirement. Imported machinery hasto be hypothecated to the bank and the importer shouldcounter guarantee the transaction.

4. Financing under Foreign CreditGovernment of India gets assistance in the form of loansand development credits from international financialinstitutions as also foreign governments. These loans are of

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Ntwo types - tied loans and loans in free foreign currencies.Terms and conditions of each loan along with detailedinstructions regarding the procedure to be followed foropening letters of credit, submission of documents etc. areset out in public notices issued by DGFT. RBI also issuescirculars for each foreign credit giving important instructionsrelating to such imports.Payment under foreign credit may be made undera. letter of commitment method orb. reimbursement method.Under the letter of commitment procedure, remittancesfrom India for the relative imports are not permitted. Theimporter in India obtains a letter of commitment from theGovernment of India after furnishing a bank guarantee forpayment of rupee equiva-lent of the import value. Theimporter furnishes the letter of commitment to the bankopening L/C. Then the usual procedure follows. Theshipping documents are delivered to the importer onpayment I acceptance. Where no L/C is opened at all and onreceipt of document covering imports rupee deposits aremade to Government account by the importer through thebank.Under the reimbursement method, the aid giving thecountry makes available to the Govern-ment of India onproduction of evidence of payment of imports. Hence,payment to the suppliers is made by the L/C opening bankthrough the normal banking channels and reimbursementis by the Government of India by submitting the requireddocuments.

5. Import Loans by Export-Import Bank of IndiaBank finances imports from third countries required forexecuting projects overseas for which Indian exporters havewon contracts.Regarding imports into India, Exim Bank finances suchimports which are export. related, i.e. imports by ExportOriented Units, import of computer systems fordevelopment and export of software, import of plant,machinery, technology for up gradation/expansion ofproduction capability for export markets.Exim Bank also finances bulk imports of consumableinputs and canalized items. Under this scheme, promissorynotes drawn in favour of commercial banks by theirimporter borrowers are discounted, Exim bank will issueletter of commitment for finance on request from commer-cial bank indicating its requirement The quantum of financedepends on the condition that import order should not beless than Rupees one Crore.

Let Us Sum UpImports play an important role in economy of every country -rich and poor a like. Their role in India is particularly crucial inview of country’s continued dependence of foreign capital andtechnology. Hence, it is necessary to ensure that import opera-tions at firm’s level also are managed efficiently. Significantchanges in India’s import policy aiming at removing bottle-necks on account of red tape and lengthy documentation havetaken place in recent years.

Import financing means making decisions regarding term ofpayment (choosing one among several alternatives) arrangingfunds, involving choice of financial institution and the instru-ment through which the payment is to be made. The choice isconditioned by regula-tory framework concerning imports andavailability of foreign currencies.In India, Foreign Trade (Development and Regulation) Act1993, Foreign Exchange Manage-ment Act 1999 and IndianCustoms and Excise Act 1962 are the three legislations consti-tuting the regulatory framework. While Foreign Trade(Development & Regulation) Act and Indian Customs & ExciseAct regulate the physical importation, Foreign ExchangeRegulation Act regulates remittances on account of payment forimports. As a result of liberalisation in foreign trade sector,import licensing has been abolished and import licences areneeded only for terms included in the negative list on importsat concessional rates of import duty. Exchange control regula-tions have prescribed requirements regarding mode ofpayment, currencies to be used and the period within thepayments for imports have to be paid.Imports can be financed in several ways. Importer can requesthis banker to open a letter of credit in favour of his supplier.Under the system supplier gets paid immediately uponsubmission of specified documents to the- bank. Importerobtains release of these documents either upon payment ordebit to his loan account. He can ask the supplier to send thedocuments to the banker. Whom he instructs to make paymentby debiting his account. Importer gets a loan either on TrustReceipt or hypothecation of imported goods to pay for theimports. Where an importer contracts to pay instalments,permission of RBI needs to be taken. He can obtain a loanfrom the bank to pay for the jnstalment. Imports under creditextended International Financial Institutions and foreignGovernments can be financed either through commitment (i.e.Government of India commits a part of loan to the importerand gets paid in Indian rupees) or reimbursement method i.e.after paying the supplier, the bank gets reimbursed by loangiving agency. Export Import Bank of lndia lends to importersto finance their export related imports.

Reference:- Case Studies on HSBCImport ServicesWith over 130 years of experience supporting importersglobally, HSBC is well positioned to fulfill your trading needs.A full range of import services is available, ensuring that yourimport documents are processed without delay by our experi-enced staff.Simply apply to us for import facilities, and we can beginhandling your imports immediately.Our range of services includes:Letter of creditImport CollectionsImport FinanceShipping GuaranteesLetter of credit:- For importers who are looking for newsuppliers, one of the primary considerations when deciding on

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the payment terms is to ensure that the goods supplied are thegoods ordered. The two main instruments to ensure this aredocumentary collections, whereby the importer only makespayment in exchange for documents of title for the goodsshipped, and a Letter of Credit, where the importer requests hisbank to confirm payment for the goods, given certain condi-tions being met.Using HSBC to process your Letter of Credit and collectionsoffers a number of advantages both to you and your suppliers• Financial Strength

A Letter of Credit issued by HSBC has the backing of oneof the world’s largest financial services organizations. Thismeans that any LCs issued by us in your name will beuniversally acceptable both by your vendors and yourvendors’ banks.

• Global NetworkOur global network of over 9,500 offices in more than 80countries and territories means that wherever you trade, anHSBC representative is available overseas to assist yourtransactions. In addition, by routing your Letter of Creditthrough our overseas branches, we can ensure that the creditis advised to your supplier without delay. This is particularlyimportant if you need your goods in a hurry, or yourvendor needs some time to prepare the export documents.

• Expert AssistanceOur highly trained staff is available at any time to provideyou advice on any aspect of issuing a letter of credit andprocessing collections. We can also arrange training sessionsfor your staff at your offices

• Vendor supportBeneficiaries of an HSBC Letter of Credit are entitled to thesame high level of professional support and advice as ourcustomers. Our overseas trade services staff is available toexplain complex LC terms to your suppliers and to assistthem in preparing export documents and identifyingdiscrepancies. In addition, we are even prepared to provideexport finance to your supplier after completion of somesimple documentation*.

• Wide Range of Special LCs availableWith our wide range of specialist knowledge in Letters ofCredit, we can advise on and deliver a range of specializedinstruments: Standby Letter of Credit, transferable Letter ofCredit, Back-to-Back Letter of Credit, Revolving Letter ofCredit and Red Clause Credits.

Import Collection:- Collections offer a cost-effective but securemeans of trading internationally. Using these instruments, theimporter only effects payment in exchange for the documentsof title for the goods shipped. If these are found to beunacceptable, payment can be refused, giving the buyer piece ofmind.Using HSBC to process your collections offers the followingadditional benefits:• Global network

With a network of over 9,500 offices in more than 80countries and territories, chances are that your suppliers willbe able to easily dispatch their collections to us from one of

our branches. This ensures that your documents will arrivefaster, allowing settlement without delay.

• Financial strengthBy banking with one of the world’s largest financial serviceorganizations you can rest assured that your suppliers willget paid as soon as your account is debited. No hiddeninterest or payment delays.

• Expert assistanceOur highly trained staff is available at any time to provideyou advice on any aspect of issuing processing collections.We can also arrange training sessions for your staff at youroffices.

• Excellence in serviceWe have established strict service standards, which willensure that we will inform you within one working day ofany documentary collections drawn on you.

• TechnologyTo automate the collection generation process, we havedeveloped Electronic Direct Sends, a collection generatingsystem integrated with our EDI service, allowing collectionsto be generated and dispatched to you without delay.

Import Finance:- Whether you import using documentarycredits or collections, we are prepared to consider providingimport finance for you. Financing your imports with HSBCoffers a number of advantages:• Facilities structured around your Trade Cycle

Many banks treat import finance in the same manner as theytreat overdrafts. This means higher interest charges for you,and a risk that your facilities are fully utilized when ashipment comes in. With HSBC, your import financefacilities are carefully constructed around your actual tradingcycle after a consultation session with your corporaterelationship manager. This means your facilities will bestructured around the actual business you do, allowing youto enjoy lower interest rates, and finance will always beavailable to cover your shipments.

• Stronger Capital BaseWith HSBC, you have the backing of one of the world’slargest financial service institutions with over 130 years ofexperience financing trade. This means your facilities arestructured with the long term objectives of your business inmind and we will stand by you in market downturns. Inaddition, we can call upon the HSBC Group’s extensiveinternational resources to provide appropriate trade-financesolutions.

• Partnership PhilosophyHSBC has always sought to work with our clients based onour core philosophy of partnership and many of our largestclients today started their relationship with us as a smalltrader many years ago. The strengths of our partnershipshave been clearly demonstrated in the wake of the recentfinancial turmoil in Asia. We have continued to stand byour clients. As one of our customers recently commented,we don’t take the umbrella away when it rains.

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N• Experienced dedicated corporate relationship

managersA meeting with our corporate relationship managers ismore like a meeting with a consultant than with yourbanker. When you talk, we listen, and we put maximumeffort in identifying your requirements and developingsolutions.

Shipping Guarantee:- In certain situations your goods mayarrive in port before the shipping documents have beenprocessed through the banking system. In these circumstances,HSBC can issue a shipping guarantee, allowing you to takecontrol of the goods from the shipping company without thebill of lading. The advantages of using HSBC for this are asfollows:• Rapid Issuance

Shipping guarantees are only of value if they are issuedimmediately. HSBC can issue shipping guarantees as soonas the application is made*, meaning you can release yourgoods from the carrier immediately.

• Financial StrengthHSBC-issued shipping guarantees are universally acceptedby all shipping companies. This means you can always beassured that you will get your goods on time.

Source: hsbc.com

Question BanksQ1. What is Import Financing?Q2. What do you mean by import Licence?Q3. What do you mean by Trust receipt?Q4. What do you mean by deferred payment?Q5. State whether following statements are true or False.

I) Time limit for settlement of import bill is 6months from the date of shipment.

II) Uniform Custom and practice for DocumentaryCredit is not indispensable to cover transactionsunder documentary credit

III) Import licences are issued on CIF basis.IV) Authorised dealers can sell foreign exchange for

financing imports from Bhutan.V) Payment of import should be made in a currency

appropriate to the country.VI) Letter of credit can not be opened by mail.VII) After paying the negotiating bankers, the issuing

bankers release documents of title to the importeron executing a stamped letter of Trust.

VIII) When shipping documents are directly sent toimporter by exporter the bank receives clean bills forcollection of proceeds.

IX) Government of India gets assistance in the form ofloans and development credits from internationalfinancial Institutions.

Answers to check your progress

i) True vi) False

ii) False vii) Trueiii) True viii) Trueiv) False ix) Truev). True

Terminal QuestionsI. What is importing financing? Describe the regulatory

framework related to import financing.2. Explain various exchange control regulations concerning

imports.3. Enumerate the methods of import finance. Describe the

procedure of financing import under letter of credit.4. Explain various methods of import finance alongwith the

documentation procedure.5. Write notes on:

i) Financing against bill under collectionii) Financing under foreign currency Import loan by Exim

Bank of Indiaiii) Financing under deferred payment arrangement

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UNIT I

CHAPTER 1:LESSON 27:

LOCATING AND SELECTING OVERSEAS AGENTS

Learning Objectives• Introduction• Finding an Agent• Methods of paying Agents• Appointing an Agent• Relationship with the Agent

IntroductionIf a supplier has some success in personal selling to visitingbuyers or during sales visits abroad, he may feel that the nextstep is to have someone selling for him in a selected exportmarket. He may also feel that he needs on-the-spot help inestablishing the marketing channels, for example, in finding andworking with distributors or wholesalers.The supplier cannot spend a great deal of time on export sellinghim-self because of his responsibilities to the business athome. The idea of a full time travelling sales person may seemattractive at first. But it is probably not economic to make suchan appointment as a first step in exporting. Furthermore, if thesupplier appoints one of his sales executives to handle this, itwould take this executive time before he or she gets to knowthe export market well enough to sell successfully.In such situations, it is usual to appoint an agent. An agent is aperson’ of the firm that handles negotiations on the suppliersbehalf. An export agent is simply an agent who is active in theexport market. Agents work on the basis of commissions anddo not assume any risks. In contrast, a distributor being a directcustomer, pays for the goods that are supplied and takes overthe risk of further marketing. In this chapter, the word “agent”and the word “distributor” are used to refer to separateactivities: one term should not be confused for the other.The following box compares the advantages of using an agentwith those of employing the company’s export sales staff.

Finding an AgentThere are good agents and bad ones, and even some good onesmay not be suitable for the products or for the prospectivecustomers. When selecting, check that:• They are respectable business representatives.• They are not representing a competing producer.

• They have the organisational structure and the facilitiesnecessary to do the job.

• They have serious long-term interest in the product and arenot handling too many other products.

• They are experienced in the type of product and market areaand have established connections.

Finding, appointing and using an agent needs careful planning.First a list of the possible agents for this particular product isneeded. The suppliers own embassy abroad or local chambersof commerce can probably supply that list. Then the suppliercan write to these possible agents, explain his requirements andask if they are available to handle the product.From the replies received, a short list of the most suitableagents can be prepared. If possible, each of them can be visitedpersonally. In any case, references should be obtained fromothers, particularly from other firms that the agent representsand if possible, from some customers.It is very important that the relationship with the agents is clear.A formal agreement should cover the following points in a waythat makes misunderstandings impossible.a. A clear indication of who is the agent and who is the

exporter and the purpose of the agreement.b. A clear “description of the products covered by the

agreement (bear-ing in mind that different products mightbe added later on).

c. A clear definition of the territory to be covered (forexample, “the whole of Kenya” or “the seaboard states ofthe United States”).

d. The duties of the agent in terms of publicity and thepublicity back- up which will be provided.

e. The duties of the agent. Will the agent be merely processingor-ders? Or will he/she also handle import licenses andexchange con-trol requirements? Will the agent work on adel credere basis. e.g. guarantee that a payment will be gotfrom the customers in return for a higher commission?

f. Payment and payment methods. For example, what is thecom-mission? Will the commission and any other paymentbe made on all orders received from the sales territory,whether they are placed through the agent or directly withthe supplier?

g. The duties of the exporter (for example on prices and termsof deliver).

h. The type of market information to be supplied to theagent. i. Who will pay for operating expenses such as thosefor cables, telephone calls and fax messages.

i. The duration of the agreement and the way of canceling it.j. The law governing the agreement and the method of

arbitration between them in the event of any dispute.

Advantages of an Agent Advantages of the Sales Executive Cost is variable: no expenses unless sales are achieved.

100% commitment of time.

Agent has local knowledge Can carry out research and and other activities.

An agent’s sales of an already established product can help in the in the introduction of a new and unknown product

Will not fear that success will bring about his/her replacement.

Highly motivated, is paid only if he/she sells.

Staff development Customers impressed by commitment. Knows details of production and origin.

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NMethods of Paying AgentsIt is usual for an agent to be paid on a commission basis. Thecommission is normally a percentage of the value of the goodssold and for which, payments have been received from thecustomer. Because of this, agents are sometime called “commis-sion agents.”It is difficult to generalise about rates of commission. They mayvary from less than 1% to more than 1% according to thenature of the market and the sales problems. For contractscovering a large volume of commodities to be delivered over afairly long period, the agent’s commission may be under 1%. Atthe other extreme, an agent might get a commission of 15% forsmall orders for handicrafts.Sometimes there might be an agreement with the agents to paythem a commission on all orders received from customers in.their territory regardless of whether orders are actually placedthrough them. Whatever type of agreement is there, agents’should always be told about orders received direct fromcustomers so that they can follow up and possibly obtain repeatorders. The supplier and the agent should also let each otherhave copies of all correspondence with customers.Del credere agents Agents receive higher than usual paymentswhen they act del credere. This means’ that they ‘take the creditrisk for the orders they obtain and are responsible for makingpayment to the supplier if the customer fails to do so. Delcredere agents are normally paid a higher commission thanordinary agents (the extra commission may be anything from5% to 15%), to compensate them for the credit risk theyassume. Del credere agents are not very common, but wherethey exist they enable exporters to sell with great confidence,particularly in markets where it is difficult for them wJudge thecreditworthiness of prospective customers.This exercise can be done to help the agent selection process:

Exercise 1

The letter below has been sent to potential agents, whose names have beengiven to the managing director of a Garments Company Limited by hiscountry’s trade attaché in Turkey.

Dear Sirs,

Our trade attaché in Turkey informs us that your company may be in aposition to take up the Turkish agency for our range of leather jackets.We enclose illustrations and price lists of our products and should begrateful if you could let us have your comments.

Please let us have details of your organisation, the agencies you hold at themoment, the area you ,cover and the commission rate you would expect onproducts of this sort.

Yours faithfully,Managing DirectorGarments Company Ltd.

Here are the replies.

First reply: From the Universal Agency company

Dear sirs,

Thank. you for your letter of November 1st. We are certainly interestedin the agency for your most attractive range of leather garments, which weare sure would sell in Turkey, provided they are introduced by a large well-established, well. known firm of agents such as ourselves.

We have enclosed a full list of the 200 firms we represent, and you willsee that they include well-known names in the field of clothing, hardware,engineering supplies and building equipment.

We employ 20 salespersons covering the whole of Turkey and 50 headoffice staff. We expect to receive a minimum 10% commission.

Yours faithfully,

Second reply (handwritten): From Y Evirgen

Dear sirs,Thank. you for your letter. I am very interested in becoming the agent foryour impressive range of leather garments. I have already shown theillustrations to a garment shop in Izmir and I expect they will give me anorder in the next day or so.

I have been an agent for the last six months and I cover Turkey using myhome as my office. My wife helps with the correspondence and we currentlyrepresent the ABC Glove Company of London in Turkey. We should behappy to work for a 5% commission.

Yours faithfully,

Y. Evirgen Third reply: From the Turkish

Third reply: from the Turkish Garment Agency

Dear sirs,

Thank you for your letter of Ist November. Your agency is of greatinterest to me as I specialise in leather products. I am sure I can provideyou with good business.

I employ one representative to cover eastern Turkey and I cover the westmyself. We employ a secretary at our office in Bursa and we are in closeand continuous contact with wholesale and retail leather-garmentdistributions, departmental stores, mail-order houses and institutionalbuyers such as the armed forces. We usually work on a 7.5% commission.

I represent the Jones Garment Company, the Ahamed GarmentCompany, the Fungko Brush Company and six shoe manufacturers. I feelsure that your excellent products would fit in very well with myprogramme.

Yours faithfully,

Fourth reply: Fax from QuickworkTo: The Garment Company Limited

From: Quick Work Representatives, Istanbul

Letter received. Agency accepted with thanks ship 1000 pieces style 2A,assorted sizes at once to our account 60 days credit at prices as your listplus charges delivery our warehouse istanbul.

After studying the replies, it is necessary to reflect on the additionalinformation required on each agent and how to obtain it. Then the fourpotential agents should be listed in the order of preference based on theinformation given in the letters and the reasons for the ranking is to beexplained. These have to be written down.

Below is a discussion of additional information requirements. For allpotential agents the Garment Company should:

• Obtain the addresses of the manufacturers currently represented andwrite to them for independent references.

• Obtain bank references for each agency.

• Ask each agency to suggest a marketing plan for Turkey, for theCompany’s products.

• Obtain the names of major wholesales of leather jackets from itstrade attaché and ask them for their opinions of the four agents.

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From the individual agents, the Garment Company shouldrequest the following information:

• Universal Agency Company: What products are currently being soldto the leather garment trade? How many different products are sold byeach of the 20 salespersons?

• Y. Evirgen: Ask for details of present and previous connections withthe leather products industry, and for call list and frequency of calls.

• Turkish Garment Agency: Obtain full details of the five ranges ofleather jackets currently sold and determine whether these will competewith or complement the Garment Companies products.

• Quickwork: Send a cable requesting details of organisation and linescarried as asked for in your letter. Ask for cash with order, orpayment on dispatch of goods ordered. Do not ship goods untilpayment is received and it is established that the company is qualifiedto be a long-term representative.

The above list of information requirements is not exhaustive. Other ideasmight be just as useful.

A suggested order of preference is given below.

1. Turkish Garment Agency: If it is not selling a directly competitiveline and if it is willing to guarantee a reasonable minimum volume ofsales in the first six months.

2 Y.Evirgen: If he is willing to report regularly, the Garment Companycan probably take advantage of Mr. Evirgen’s recent entry into thetrade and his weak position, to demand a full service.

3. Universal Agency Company: It is too large and is unlikely to give theGarment Company much attention. It is apparently not in the leathergarment trade at all.

4. Quickwork: Appears to be seeking a “quick killing.” However, itshould not be rejected out of hand and should be reassessed whenfurther information is received.

Appointing an AgentWhen an agent has been found, it is important to have clearwritten agreements with him or her. This must cover all thepoints that are potential sources of difficulty or disagreement inthe future. An agency agreement is given below.

The Agreement

This agreement is between the Garment Company (the manufacturer) andMr. Y. Evirgen of Ankara, Turkey (the agent).

• The manufacturer hereby appoints the agent as his representative inTurkey (the territory) with effect from next January 1st.

• The products covered are all leather garments manufactured by themanu-facturer any time during the term of the agreement. Any otherproducts that may subsequently be manufactured by the manufac-turer are not cov-ered by this agreement and would have to be thesubject of a separate agreement

• The agreement is to run for a trial period of one year, and may betermi-nated on December 31st or before. Thereafter the agreementmay be ter-minated by either partly, by written notice delivered to theother at least one year before the proposed date of termination.

• The agent agrees to devote his best efforts to promoting the sales ofthe manufacturer’s products, and not accept any agency or otherwiseto ,promote the product of a competitive or potentially competitiveproduct unless specifically permitted to do so by the manufacturer.

• The manufacturer agrees to pay the agent a commission at the rateof 5% of the ex works value of all orders, for leather garmentsreceived and accepted during the period of his appointment, fordelivery into the territory, whether or not the orders were sent directby the agent. Such commission will be paid only when the goods havebeen paid for by customers, and payments are to be made in arrearsquarterly. The manufacturer further agrees to inform the agent ofall inquiries received and other dealings it may have with theterritory.

• The manufacturer will supply the agent free of charge withreasonable supplies of publicity material and samples. Any samplesor publicity material or samples not disposed of with the agreementof the manufacturer, are to ,. remain the property of manufacturerand are to be returned to the manufacturer at his own expense at thetermination of the appointment.

• The agent will pay for all travelling, office, stationery, postage andadministrative expenditure with the territory. Any advertising willbe paid for by the manufacturer at his discretion when it has beenauthorised, by him.

• The manufacturer shall reimburse the agent for any expensesinvolved in visiting the manufacturer’s country if the agent isrequested by the manufacturer to make such a visit. During any suchvisit, the agent will devote himself wholly to the business of themanufacturer unless specifically permitted to do otherwise.

• This agreement shall be interpreted according to the laws of themanufacturer’s country. In the event of any dispute, an arbitratorshall be appointed by the President of the manufacture’s countryChamber of Commerce and the arbitrator’s decision shall beaccepted as binding on both parties.

Signed on behalf of Garment Company Witnessed:

Peter Smith, Managing Director Date:

Witnessed:

Date

Signed: Y. Evirgen, Agent

Relationship with the AgentIt is important to regard the agent as a part of the organisation.Whichever export market he may be based in, it is important totreat him as a part of the firm and to make him feel that hereally is a part of it. This is essential if he is expected to sell theproducts enthusiastically.The advantages of using an agent may be summarised asfollows:• There is automatic cost control if the agent is payed

according to the results and orders he produces.• He is the representative and also the local salesman in the

export market in which he is based.• He can provide information about his export market (too

much of his time should not be used in this way because,he is there primarily to sell).

He can help with publicity and is in the best place to keep an eyeon competitors’ prices and to deal with enquires and complaintsfrom customers (if he should do this effectively, he must bekept well-informed about the products and the company).

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NThere are also certain possible disadvantages in using an agent.They include the following.• An agent may represent too many companies; this might be

a temptation for him to concentrate on selling the productshe finds easiest to sell. he may neglect the other products(which may include the companies products too).

• He may concentrate on short-term business and quickreturns. This is less likely if he is made to feel involved inthe company and its long-term interests.

• If the success in the export market is not a result of hisefforts, the company may be paying him more than it canafford, if it has to pay him a commission on all business.

Getting the Best from the AgentAfter appointing an agent, it is in the companys’ interest to getthe best possible results out of him. It should be rememberedthat, once appointed, he becomes a part of the organisation.• He should be made to feel proud to represent the company• He should be treated as well as the company’s staff.• What he can tell about his local market should be listened

to.• As he will be working for other exporters as well, he cannot

be expected to devote the whole of his time to thiscompany only.

It is also worth bearing in mind the following practical do’s anddon’ts in developing the relationship with the agent.

Things to do

• It should be remembered, even in times of stress, that he isa part of the company.

• All the available information about products should begiven especially about new ones coming along - hissuggestions on their potential should be found.

• The company should help him to sell- especially withinformation about successful new ways of selling,developed by agents in other countries.

• The company should put him in touch with any likelycustomers that it hears about.

• The company should make sure that the same personcorresponds with the agent or at least signs the letters, sothat they get to know each other by correspondence.

• He should be visited as often as possible as give himdemonstrations of the product.

• The manufacturer should invite him to come and see thecompany, and treat him like a guest.

• His help should be invite in preparing marketing plans.• He should have copies of all the correspondence with

customers in his market.

Things not to do

• Circular letter should not be sent. He should be treated asan individual.

• Too much information should not be asked for, unless heis paid you pay extra for it; an agent is there primarily to sell.

• Instant success should not be expected, but of course heshould not be forgotten about.

• No one new in your organisation should contact him,without explaining who the new person is.

Many producing companies in developing countries do notneed a marketing channel because; they work under subcontractsfor companies in developed countries. The latter often supplythe design, the materials and sometimes the equipment forproduction. Their partner companies in developing countriesprovide labour.This final exercise is on distribution channels.

Exercise 2Choose the correct answers to the following questions.1. Which of the following products usually have shorter

distribution channels?() Consumer products () Industrial products

2. Which marketing channel would you consider using to sellcanned pineapples in Germany?L] Large retail stores L] Retail shopsL] Mail-order companies L] Import companyL] Cooperative wholesale union L] Central buying

organisations of foodsupermarket chains.

3. Suppose you were a producer of handicraft dolls and youwant to market them in Chile. You have a choice between anindependent agent and employing your own salesman. Theagent will charge a commission of $3 for each doll sold.Contracting a salesman will cost you a fixed salary of $500 amonth and a commission of $1 per doll sold.

4. Which of the two channels would you select for each of thefollowing situations?L] You expect to sell 200 dolls a month.L] You are likely to sell 10,000 pieces a year.

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Learning Objectives• Introduction• Master Documents and Aligned documentation System• Proforma Invoice.• Commercial Invoice• Packing List• Mate’s Receipt

IntroductionAt the outset it must be mentioned that improved system ofdocumentation for exports announced by the government ofIndia on 31 March , 1991 is fine and should be adopted by theexporters as far as possible. However a word of caution wouldbe in order. To date we have arrangements with only 80countries around the word where UN key Layout(Masterdocuments) are followed. With these countries Indian exportercould jolly well use the improved version of documentsannounced by the government of India as per the New Eximpolicy 1992-97.For the remaining countries (other than 80 countries where UNkey Layout (Master Documents) is not in use, the Indianexporter has to ascertain from the importer of his requirementsand must comply to his dictates for documentation. The basicdictum for the exporter’s comply 100% the Letter of Creditrequirements for Documentation, otherwise exporter could bein problem and his payment may be stopped. Moreoverexporter prepares export documents not for his own conve-nience but largely to meet the requirements of the overseasimporter who largely conveys it through the Letter of Credit.Treatment in this chapter is therefore slightly exhaustive ofdocuments where the old requirements have also been kept inview while introducing master documents.Export documentation work constitutes a heavy charge on ourexport activity. It is complex cumbersome and costly. This ispartly due to the nature of export trade itself involving as itdoes a number of intermediary organizations and authorities atdifferent stages of export activity between the seller and thebuyer. All these, in turn, generate a lot of paperwork andprocedural formalities. The documents material to an exportsales contract are not many in number. However the problem iscomplicated due to the heavy paper work and the proceduralformalities that are required to be complied with before theessential documents can be procured.The procedural and documentary formalities associated withexports have been evolved and practiced over the years bydifferent authorities/organizations to suit their own conve-nience without much regard to the repercussions they mighthave on the total export activity. The resultant mass of paper-work caused much inconvenience and inordinately long delay inthe movement of goods. There was a need for a total approach

to the problem. This meant evolving not only simple exportdocuments and procedures in each of the individual areas ofexport activity but also ensure their compatibility and harmonyin the totality of export operation.Notwithstanding the need for such an approach to the proce-dure generated problems, it has been appreciated that the taskof procedural simplification is a containing an long-term onerequiring. In some cases prior amendment of the statutes,policies and regulations they stem from One of the ways inwhich this has been done is through the use of standardizeddocument in our export trade.The documents use differed in size and layout, despite the factthat most of the information requirements are common to anumber of them Because of the difference in their sizes anddesigns, these documents has to be completed individually.This method of preparation of documents was susceptible toerrors and discrepancies, which, even through minor, causeddelays at different stages in the processing of documents, costly,hold up of consignments at checkpoints and terminals, andultimately in the realization of export proceeds.

Legal ProvisionAccording to the Customs Act (Section 40), the person inchargeof a Convey-ance-vessel, vehicle, Aircraft, etc., cannot permitloading of export Cargo at the Customs Station unless anduntil the formal permission to export given by the properCustoms Officer, is presented. Before granting the permission,the Cus-toms Officer, however ensures that the goods beingexported are in accordance with the different regulations,particularly in terms of the following:a. The goods are of the same type, sort and value as have been

declared by the exporter,b. The Duty or Cess leviable thereon has been properly

determined and paid,c. Provisions of Export (Control) Order, Export (Quality

Control and Inspection) Act and Foreign Exchange(Regulation) Act are complied with.

The Customs Act (Section 50) further states that the exporter,in case of goods to be exported in a vessel or aircraft, has topresent the Shipment Bill and other connected documents tothe proper officer. Any export ship-ment therefore, involves thepreparation of several document declarations and certificates, onthe basis of which the Customs Authorities grant neces-sarypermission. There are also several documents required forsubmission to the Port Authorities. In addition, a few moredocuments are required if the export product(s) fall(s) withinthe purview of the Export Assistance Schemes and Facilities.

Export DocumentationOnce the goods are ready, an exporter has to prepare and executevarious documents at different tages of sending the shipment

LESSON 28:EXPORT DOCUMENTATION - I

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Nof goods to the im-porter. These documents are important fortwo reasons:a. as an evidence of shipment and title of goods andb. for obtaining paymentThe various documents are therefore, of vital interest to theexporter and the Bank which is the usual media of payment.The documentary require-ments are both regulatory andoperational in nature and have to comply with the Rules andRegulations of the Indian Government as well as the import-ing country for different types of products. These requirementsare different for different types of products. When exportingfor the first time, exporters should, always find out from theirbuyers the documents required for the product concerned.Accuracy and completeness are a prime necessity in documentscovering export shipments. Whether two or twenty copies ofthe Invoice are required by the buyer, the same should besupplied as, the buyer probably has some reasons for it. Minordiscrepancies of any kind either in the date itself or in the typingin the documents, which look harmless sometimes assume amen. acing form. Erasures and strike over in typing or changesor additions made in ink must never be indulged as these onlyarouse the suspicion that the documents have been tamperedwith. Any alteration or addition made by an Authority issuingthe documents must be endorsed properly, with the signa-turesof the person issuing the documents only. If the documentsare not the correct ones or if they are not filled in correctly to thelast, the importer may not be able to get the goods when theship carrying them arrives. This may seem obvious but it bearsemphasis since both the requirements and penal-ties are greaterbeyond comparison in export than in domestic trade.The main purpose of the documents accompanying a shipmentis to pro-vide a specific and complete description of the goodsso that they can be assessed correctly for Duty purpose and meetthe Import Licensing require-ments or Import Quota Restric-tions imposed on the goods for clearance pur-pose. If there areany discrepancies in the documents and or if the requireddocuments are not produced, the shipment may not be allowedfor import or may even be confiscated by the Customs of theimporting country. There is a plethora of documents in exporttrade - different forms, applications and documents are requiredto be filled in for obtaining Export Licences, complet-ing Pre-shipment Inspection, for Customs Clearance and shipping, forob-taining payment and export finance and for claiming exportbenefits like Duty Drawback, etc.The experienced exporter, because of the complexity ofdocumentation, will find it a good idea to have the variousdocuments prepared for him by a Shipping and ForwardingAgent or should take advice from a fellow exporter. TheExporter should also develop a habit of thoroughly scrutinis-ing the docu-ments for any possible errors or discrepancies andif any errors or discrepan-cies are found, must rectify themimmediately before dispatching them to the Bank of buyer.

Standarised Pre-shipment ExportDocumentsThe Government of India has made it mandatory for everyexporter to use standardised preshipment export documents

w.e.f September 1, 1991. This is popularly known as AlignedDocumentation System (ADS), based on UN Layout Key. TheADS Methodology involves the preparation of documents on auniform and standardA4 size of paper. The documents arealigned to one another in such a way that, the common itemsof information are given the same relative slots in each of thedocuments included in the System. This makes it possible toprepare one Master document embodying the informa-tioncommon to all the documents included in the aligned series andto run off all the aligned documents from the same Masterdocument with the help of suitable marking reproductiontechniques. The Pre-shipment documents on a Standard Layoutwere first introduced by Sweden in 1956 followed by Denmark,Finland and Norway. It was later that most of the Europeancoun-tries, USA, Australia, etc, have adopted this ADS system.Advantages:- The ADS system offers the following advantages:1. Dispenses with the conventional documentation practices.2. Brings in uniformity in documentation.3. Ensures economy, speed, accuracy and convenience.4. Facilitates expeditious checking and processing of

documents at dif-ferent stages.5. Generates as many copies as required of Commercial and

Regulatory Documents from their respective Master Copiesthrough Photo-copying Machines.

Documentation Practices in IndiaIn India, on an average, about 25 documents are associated withthe Preshipment stage to export transaction. These documentsare classified into two categories namely, Commercial andRegulatory. The Commercial documents are those which, byCustoms of Trade, are required for effecting physical transfer ofgoods and their ‘title’ from the exporter to the importer.Regulatory Preshipment documents are those which have beenprescribed by different Government Departments/Bodies incompliance of the require-ments of various Rules and Regula-tions under relevant laws like Exchange Control Regulations,Export Trade Control, Customs, etc.The Government of India, therefore identified some exportdocuments for standardization with the help of the concernedofficial and commercial interests in the country. The documentstaken up for standardization include: Invoice, Certificate ofOrigin, Packing List, Bill of Lading, mate’s receipts, ShippingBill. Different forms in respect of each of these documentsused in the country were examined from the point of view ofstandardization and putting them in to an aligned system. Thecommon items of information appearing in each of thesedocuments were recorded to develop a common denominator amaster documents- from which the repetitive informationcould be reproduced in one run on all the documents leavingonly the information specific to individual documents to befilled in separately. Any information on the master which is notrequired on a particular document can be omitted by differentmasking techniques at the reproduction stage

Master DocumentsAll these problems of late have been avoided by following asystem which provides an alternative to the repetitive, unpro-ductive and time consuming work necessitated by the exporter’

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compulsion to prepare separately a number of documents allcontaining practically the same information. This system isknown as the’ Aligned Documentation System’. Already in usein a number of countries, this system is reported to have madefor simplicity, convenience, speed, accuracy and economy indocumentation work.United nations key Layout has mace it possible to manycountries to reproduce in one run the repetitive information onall the export documents from just one document called the‘Master Document’. As a result, exports in these countries havebeen able to reduce the documentation costs by 50 to 70%.The documentation of simplified export documents hasreduced the burden of the exporters and has given a push tothe country’s ongoing export drive. The exporters now can saveatleast 50% of the time and cost on documentation. It will thushelp in expediting decision-making process. Virtually eliminatethe chances of errors and facilitate electronic transmission ofexport documentation and data. Therefore simplification ofexport documentation and procedures are key measures topromote exports.Earlier Indian exporters were required to submit 25 documentsto various agencies and authorities merely to ship the goods.Each document had to be individually prepared. The newssystem standardized these document and aligned then to eachother on basis of united nations key layout which has alreadybeen adopted by most of Indians trading partners. Thus nowinstead of typing out 25 documents, exporters prepare onlytwo master documents.The new system also includes simplification and relaxation ofrelated procedures, which will further reduce the delays and timecomponent currently involved in export effort. It is expectedthat as fallout of the introduction of the new system, a selfpropelling process towards further rationalization of documen-tation and procedural requirements would get in motion in allthe conceived organizations. And at the end of it the exportershould be able to spend his resource and energy more onexport production and marketing than on meeting the de-mands of archaic export procedures.In the new set up attempts have been made first to standardizeand simplify each document and secondly to align them to eachother using as far as possible the UN Key Layout. These aligneddocuments are in time with the proforma used by countrieswith whom more than 80% of India’s foreign trade is trans-acted.The two master documents- one for commercial use and theother for regulatory documents meant for customs, RBIand port trust-have maximum advantage of alignment andminimum cost and time for preparing individual documents.The two- master documents contain all the information thatwas common to individual documents. Earlier, there were aplethora, of commercial document which include amongothers, invoice, packing, list intimation for inspection insurancedeclaration form, shipment advice and the exchange controldeclaration form.Thus the one run method of preparation of Documentsinvolves the use of standardized and aligned documents.

Aligned Documentation System (ADS) is based on the UNlayout key. Under this system, different forms used in theinternational trade transaction are printed on paper of the samesize and in such way that the. Common items of informationare given .the, same relative slots in each of the documents.For the purpose of Aligned Documentation System docu-ments, have been, classified as undera. Commercial Documents:- Commercial .documents are

required for effecting physical transfer of goods and theirtitle from the exporter to the importer and the realisation’Of export sale proceeds. Out of the 16 commercedocuments in the export documentation framework asmany as ‘14 have been standardised and aligned to oneanother. These are performance invoice, commercial invoice,packing list, shipping instructions, intimation for,inspection, certificate, of inspection of quality control,insurance declaration, certificate of insurance, mate’s receipt,bill of lading or, combined transport document, applicationfor certificate origin, certificate of origin, shipment adviceand letter to the bank for collection or negotiationHowever, shipping order and bill of exchange could not bebrought within the fold of the Aligned DocumentationSystem.The following are the 16 Commercial documents generallyinvolved at the pre- shipment stage:-1. Proforma invoice2. Commercial Invoice3. packing List4. Shipping Instruction5. intimation of Inspection6. certificate of Inspection7. Insurance Declaration8. Certificate of Insurance9. Shipping Order10. Mate’s Receipt11. Bill of Lading/Combined Transport Document12. Application for Certificate of Origin13. Certificate of Origin14. Bill of Exchange15. Shipment Advice16. Letter to the Bank for Collection/Negotiation of

Documentsb. Regulatory Documents: - Regulatory pre-shipment export

documents are prescribed by the different governmentdepartments and bodies in order to comply with variousrules and regulations under the relevant laws governingexport trade such as export inspection, foreign exchangeregulation, ex port trade control, customs, etc. Out of 9regulatory documents four have been standardised andaligned. These are shipping bill or bill of export, exchangecontrol declaration (GR from), export application dockchallan or port trust copy of shipping bill and receipt forpayment of port charges.

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NIt is proposed to conduct training and orientation programmesat all export centers to familiarize the exporting communitywith the new system. The regulatory documents associated with the pre- shipmentstage of an Export Transaction are given below:-1. Gate Pass-I/Gate Pass-II (now deleted)2. AR-4 Form3. Shipping Bill/Bill of Export4. Export Application/Dock Challan/Port Trust Copy of

Shipping Bill5. Receipt for Payment of Port charges6. Vehicle Chit7. Exchange Control Declaration (GRIPP) Forms8. Freight Payment Certificate’9. Insurance Premium Payment CertificateOut of the above 9 Regulatory documents, four have beenstandardised.In fact, these four documents have been reducedto only three. The receipt for payment of Port Charges has beenincorporated in the Export Application/ Dock Challan/PortTrust Copy of Shipping Bill, thus one document has beencompletely eliminated.

Guidelines for Commercial Documentsand Master Document 1Paper size and specifications The ADS, as discussed earlier,involves the use of standardised trade documents aligned toone another. All the docu-ments under the system are to beprepared onA4 size of paper, measuring 297mm * 210mmwith standard margins - 10mm top, 20mm left, 6mm widthand 180mm in length. The size of the individual boxes shouldbe strictly as per specifications. Maximum tolerance is 1 mm.The captions inside boxes should be printed in 6 points, sans-serif face and should be located as near to the top left of theboxes as possible. As the documents are to be generatedmechanically, it is important for the paper to be of a consistentspecification, with grammage of 70 to 85 gm, by all users. Thepaper should be stable in conditions of 50 to 60% relativehumidity. Needless to emphasis that accu-racy in layout andprinting is an essential requirement.Master document I :-The Master document will be. typed on asheet of paper in light blue ink. The mask for the photocopiermay be made of a transparent polyester film (of 0.004 in. or0.005 in. thickness) with white opaque patches to blank outunwanted information from the Master document or it mayalso be cut from an opaque white plastic sheet. After the’desired information is typed on Master document - I, therelevant mask is laid over it. Both the Master document and themask over it are then fed to the photocopying machine. Thedesired information is then automatically reproduced on therelevant document through transparent or open portion of themask. Any additional information, which is specially required tobe given in any par-ticular documents, can be either pre-printedor inserted in the relevant box as and when required.

Guidelines for Regulatory Documentsand Master Document IIPaper size and specification As against the Commercialdocuments which are designed onA4 size of paper, Regulatorydocuments are to be prepared on foolscap size of papermeasuring 34.5 cms * 21.5 cms, The margins are, top 1.5cms,bottom 1.5 cms, left 1.8 cms and right 0.5 cms. The insidemeasure-ment are 31.5 cms * 19.2 cms. The measurements ofindividual boxes, as indicated in the Master document - II,should be strictly adhered to. The paper to be used for thesedocuments should be of consistent specifications.Reproduction technique The three Regulatory documentsunder reference have been so aligned that their respectivecommon data requirements have been accommodated on thefront side of each of these documents. This makes it possibleto prepare a single Master document (as illustrated in Masterdocument - II) from which the front side of all the threedocuments can be run off at one go without/using any mask.The caption Master document – II would, however need to beblanked out to prevent its reproduction on the blank forms ofthe Regulatory documents with pre-printed titles. The blankforms of shipping Bills/Bills of Export, GR Forms and thePort Trust docu-ments will have a common pre-printedDeclaration, as to the correctness of the particulars furnished inthese documents. Besides, the exporters will also attach otherrelevant Declaration(s) with the Shipping Bill/Bills of Ex-port,as per the printed statement to this effect on these documents.The Master document in respect of the Standardised Forms ofShipping Bill/Bill of Export, Exchange Control Declaration(GR) Form and the Port Trust documentis a sort of three- in-one, as it seeks to present the common requirements on thefront side of each of these documents. The form of ShippingBill, however, does incorporate several pieces of informationwhich are not required by the Customs but are required by theReserve Bank of India under the Foreign Exchange RegulationsAct.Conversely, these are some details which are required by theCustoms Authorities but not required by the RBI. Similarly, thePort Trust document may also have on its face some informa-tion with which Port Authorities are hardly concerned. In theinterest of alleviating the burden of the Exporter in thepreparation of these documents individually and to facilitatepreparation of these three documents from a single Masterdocument, this minor conces-sion on the part of each of theseauthorisation is not only desirable but also necessary. While thefront side of these three Regulatory documents can be preparedfrom Master Document - I, necessary provision has been madeon the reverse side of these documents. It will be useful if thefollowing points are kept in view while completing the MasterDocument-II from which the Regulatory documents are to begenerated:i. All the columns in Master document- II should be

completed and nec-essary information typed within therelevant boxes or columns with-out any overlapping. TheCaption Master document-II should be suit-ably covered toprevent its impression on the documents to be gener-atedthrough the Master.

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ii. With a view to achieving total legibility, and having dueregard to the layout of the documents, it is necessary thattypewriter and not a fountain pen should be used by theexporters.

ill. As the Master document II embodies all the informationwhich is common to the front side of the three RegulatoryDocuments it would need to be prepared separately. Thethree documents with the requi-site number of copies maybe photocopies from the Master Document- II on Bankforms of the documents with pre-printed captions. Nomasks need to be used.

iv. Each copy of the three documents should be signed in inkby the exporter Forwarding Agent, as the case may be, sothat it becomes a legally valid document.

v. Six versions of Master document-II have been designedand Forward-ingAgentsExporters should use the relevantMaster document-II, depending upon the type of ShippingBill of Export required to be filled.Master Document-II (A): For shipping Bill for Export

of Duti-able goods andShipping Bills of Ex-portgoods under Claim for DutyDrawback.

Master Document-II (B): For Shipping Bills for Exportof Duty Free Goods.

Master Document-II (E): For Shipping Bills for exportof Goods Ex-bond.

Master Document-II (E): For Bills of Export of DutyFree Goods

Master Document-II (F): For Bills of Export of GoodsEx-bond.

vi. As regards Shipping Bills different forms have beendesigned for different types of Shipping Bills, namely,Shipping Bills for Duty Free goods, Shipping Bill for DutyFree goods Ex-bond, Shipping Bill for Dutiable goods andShipping Bill for goods under Claim for Duty Drawback. Aseparate Form exists for Bill of Export. Appropriate Formshould be used depending upon the type of goods to beex-ported.

vii. As the Port Trust document incorporated the receipt forpayment of port charges (called Export Application atBombay Port), it may be necessary for the Exporters/Forwarding Agents to prepare this docu-ment in triplicate.While the original of the Port Trust document is meant forkeeping record of receipt and shipment of goods, thedupli-cate copy is to be used as the receipt for payment ofPort charges. The triplicate copy of this document will servethe purpose of the Shipper’s copy as record of shipmentand payment of Port charges in respect to the goodshandled by the Port Trust.

viii. On the reverse of the Port Trust document ExportApplication/Dock Challan/Port Trust copy of ShippingBill- space has been provided for completion of cartingpermission and Customs formalities. Par-ticulars have alsobeen made for acknowledgement of goods ‘on Board’ bythe Master of Vessel. This seeks to do away with the practice

for Kacha Notes of any interim document required to beissued by the Master of Vessel prior to the issue of ‘Mate’sReceipt’ in respect of consignments shipped on-board.

With the adoption of the Aligned Documentation Systeminvolving the use of two Master documents, it will be possiblefor the exporters and other concerned agencies bodies to availthe advantages of ‘System approach’ to Export documentation.

Need for Preparing Export DocumentsExport documents have to be prepared for various purposes,viz.1. Declaration of Exports as per Exchange Control

Regulations of the country.2. Transportation of the goods.3. Customs clearance of the goods.4. Other purposes.Some of the forms for preparing documents have beenstandardised under the Aligned Documentation Systemintroduced w.e.f. 1.10.1991.Declaration forms :-There are four main declaration formswhich are pre. scribed. These are called GR, PP, VP/COD andSoftex Forms. All exports to which the requirement ofdeclaration applies must be declared on appropriate forms asindicated below:GR Form Used for exports to all countries made

otherwise than by Post.PP Form Used for exports to all countries by Parcel

Post, except when made On ‘’ValuePayble” or “Cash on Deliv-ery” basis

VP COD FORM Used for exports to all countries by ParcelPost under arrangements to realiseproceeds through Postal channels on“Value Payable” or Cash on Delivery”basis. Used for export of ComputerSoftware in non-physical form.

SOFTEX While Export Declaration are to be made ina set of to copies (original and duplicate)of GR or PP form, VP/COD forms areto be submitted in a single copy.

GRIPP forms are printed in distinctive colours and each setbears a printed number which appears on both copies of theForm. They are avail. able for sale with Reserve Bank of India.However, exporters can get these forms through AuthorisedDealers also. VP/COD Forms are sold directly to exporters byReserve Bank of India.Export Declaration Forms have utmost importance and arebinding on the exporter. It is therefore necessary, that enoughcare is taken while de-claring exports on these forms with specialreference on the following points:i. Name and address of Authorised Dealer through whom

proceeds of exports have been or will be realised should bespecified in the rel-evant column of the form.

ii. Details of commission and discount due to foreign agentor buyer should be correctly declared otherwise difficultiesmay arise at the time of remittance of such commission.

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Niii. It should be clearly indicated in the form whether the export

is on ‘Outright sale basis’ or ‘on Consignment basis’ andirrelevant clauses must be struck out.

iv. Under the item ‘Analysis of Full Export value’, a break upof the full export value of goods under FOB value, freightand insurance should be furnished in all cases, irrespectiveof the terms of the contract.

Disposal of Copies of ExportDocumentation Formi. GR Forms covering export of goods other than jewellery

should be completed by the exporter in duplicate and boththe copies should be submitted to Customs at the Port ofShipment. Customs will give their running Serial numberon both the copies of the GR Forms after verifying theparticulars and admitting the corresponding Ship-ping Bill.The value declared by exporter will also be verified byCustoms and they will also record the assessed value.Duplicate copy of GR Form will again be presented toCustoms at the time of actual shipment .After examinationof goods and certifying the quantity passed for shipment,the duplicate copy will again be returned to exporter forsubmission to an Authorised Dealer. However, an excep-tion to submission of GR forms to the CustomsAuthorities has been made in case of deep Sea fishing.

ii. a. PP Forms are to be first presented to an AuthorisedDealer for counter signature. The Form will becountersigned by the Au-thorised Dealer only if thePost Parcel is addressed to his Branch orCorrespondent Bank in the country of import. Theconcerned Overseas Branch or Correspondent Bank isto be instructed to deliver the Post Parcel againstpayment or acceptance of relevant Bill, as the case maybe.

b. For Post Parcel addressed directly to the consignee, theAuthor-ised Dealer will countersign the Form,provided1. an irrevocable Letter of Credit for the full value of

export has been opened in favour of exporter andhas been advised . through Authorised Dealerconcerned; or

2. the full value of the shipment has been received inadvance by the exporter through an AuthorisedDealer, or

3. the Authorised Dealer is satisfied on the basis ofstanding and track record of the exporter andarrangements made for re-alisation of the exportproceeds that he could do so. If the AuthorisedDealer is not satisfied about the standing, etc., ofthe exporter, the application is rejected. Noreference is en-tertained by the Reserve Bank insuch cases.

4. In the case of VP/COD Forms only one copy isrequired to be com-pleted and submitted to PostOffice along with the relative parcel at the time ofdispatch.

The export of computer software may be undertaken inphysical form i.e. software prepared on magnetic tape and papermedia as well as in non-physi-cal form by direct data transmis-sion through dedicated earth stations/satel-lite links. Theexport of computer software in physical form is subject tonormal declaration on GRIPP Form and regulations applicablethereto will also be applicable to such exports. However, exportof software in non-physi-cal form is fraught with many risksand special guidelines have been framed for handling suchexports.

Export InvoiceInvoice is a document of content. It’s the exporter’s bill forgoods and sets forth the terms of sale. The invoice is a basicdocument. As a document of contents it must fully identifythe overseas shipment and serve as a basis for the preparationof all other documents, which in greater or lesser detailreproduce information from it. The exporter should strictlyfollow the requirements of the importer in regard to invoicing.The standard document in respect of the invoice based on theUnited Nations Key Layout, which has been accepted as thebasis of this document in many entries. The informationrequirements of the document have been determined afterexamining a number of forms of invoices used by leadingexport organizations and after series of discussions with therepresentatives of the Department of Customs and CentralExcise and the Federation of Custom House Agents’ Associa-tions in India.Invoices based on the suggested design will be acceptable notonly in many countries but will also help facilitate processing ofdocuments at various stages. The Declaration given at thebottom (left hand) of the Invoice follows the UN recommen-dation. The standard Invoice can be reproduced from themaster by masking only three columns, i.e. Notify Party,Insured Value and No. of Original Bs/L No, and Date on theinvoices. But under the present procedure for customs clearanceand shipment of export cargo, this information, and particularlyin respect of the B/L No. and Date, will be available toexporters only after shipment has been effected. Where requiredunder letter of credit, such information will need to the banksfor negotiation. But for this, the rest of the information can bereproduced from the masterThe information referred to in the preceding lines can be givenabove the columns for Country of Origin and Final Destina-tion in the order of name of shipping line, ETD (port ofshipment), ETA (destination port) and B/L No. and Date.Unused space, in the Buyer’s column and below the Consignee’sColumn can be utilised for incorporation of any other informa-tion which may be special to a transaction. Value and OriginClauses can be printed on the back side of the Standard Invoice.There may be cases when exports are required to give detaileddescriptions or specifications of the various items forming partof the consignment exported in one lot. In such cases,exporters are advised to use Continuation sheets’ to theInvoice.

Proforma InvoiceThe starting point of the export contract is in the form of offermade ‘by the exporter to the foreign customer. The offer made

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by the exporter is in the form of a proforma invoice. It is aquotation given as a reply to an inquiry. It normally forms thebasis of all trade transactions.It is proposed to conduct training and orientation programmesat all export centers to familiarize the exporting communitywith the new system.

Contents of Proforma Invoicea. Name and address of the exporter.b. Name and address of the importer.c. Mode of transportation, such as Sea or Air or Multimodal

transport.d. Name of the port of loading,e. Name of the port of discharge and final destination.f. Provisional invoice number and date.g. Exporter’s reference number.h. Buyer’s reference number and date.i. Name of the country of origin of goods.j. Name of the country of final destination.k. Marks and container number.l. Number of packing descriptions.m. Description if goods given details terms of internationally

accepted price quotation,n. Signature of the exporter with date.

Importance of Proforma Invoicea. It forms the basis of all trade transactions.b. It may be useful for the importer in obtaining import

licence or foreign exchange.

Commercial InvoiceCommercial invoice is an important and basic export docu-ment. It is also known as a Document of Contents as itcontains all the information required for the preparation ofother documents. It is actually a seller’s bill of merchandise. It isactually a seller’s bill of merchandise. It is prepared by theexporter after the execution of export order giving details aboutthe goods shipped. It is essential that the invoice is prepared inthe name of the buyer or the consignee mentioned in the letterof credit.This is the first basic and the only complete document amongall commercial documents for the shipment. Besides fulfillingthe obligation under the export contract, the exporter needs thisdocument for a number of other purposes including: i)obtaining export inspection certificate ii) getting excise clearanceiii) getting customs clearance and iv)securing incentives. Thus,this document is prepared at both the pre- shipment and postshipment stages.In the first place, Commercial Invoice is a document ofcontents that describes details of goods sent by exporter. It isthe statement of account, which must contain identificationmarks and numbers, description of goods and quantity ofgoods.Every shipment has identification marks, which identify thecargo with various documents. These are private marks. which

are made on the packages. These marks could be either in theform of symbols (say, a star, triangle. rectangle, etc.) or numeri-cal. Similarly. Every package under a shipment is numbered,usually written serially. The commercial invoice must specify theserial numbers given in a particular consignment.Commercial invoice must describe the goods shipped by theexporter. The description of goods must correspond exactlywith the description given in the contract or the letter of creditIt means that there should not be any difference (includingspelling) between these descriptions. Thus. if a contractdescribes the goods as “Ten Thousand Pairs of Blouses andSkirts”. the exporter should not describe them as ‘’Ten Thou-sand Blouses and Ten Thou-sand Skirts”. though logically boththe descriptions mean the same.Sometimes description of the goods includes the number ofpackages and the type of packing material. Thus. if the contractspecifies shipment to be made in “ten new gunny bags’” theexporter should send the contracted goods and describe themas needed. If the commercial invoice wrongly describes theshipment as “ten gunny bags” instead of “ten new gunnybags’” the bank may refuse to honour shipping documents andnot pay for them.The quantity described on the commercial invoice shouldneither be less or more than the contracted quantity. In otherwords. the exporter should not ship less than contractedquantity, unless the contract permits part shipment. However, ifthe goods are being shipped under a letter of credit. partshipment is permitted, unless it is specifically prohibited. Onthe other hand. quantity shipped should not be more than thecontracted quantity. This is so even if the exporter may not becharging for the additional quantity.Second function of the commercial invoice is that it is theseller’s bill given to the buyer. As a bill, it must contain thename and address of the buyer, unit price, amount andauthorised signatures with designation. Unless required by thebuyer, the total invoiced value should be net of any commis-sion or discount; in other words, it should be the realisableamount of goods as per the trade terms. Sometimes a contractrequires a detailed I breakup of the amount to be recorded onthe invoice for enabling the customs authority in the importingcountry to calculate import duty.The name and address given in the commercial invoice shouldbe the same as given in the export contract or the letter of credit.as the case may be. Under a letter of credit, unless otherwisespecified the commercial invoice must be made out in the nameof the applicant I of the credit. As in the case of quantity to berecorded on the invoice, the amount should neither be less normore than the stipulated amount in the contract or the letter ofcredit. The only exception is that if the contract or the letter ofcredit permits part-shipment, an individual invoice can be lessthan the total amount.The commercial invoice also sets forth the terms of sale ( i. e.fob/cif /c&f),etc. mode and date of shipment and terms ofpayment. It can also serve as a packing list and a certificate oforigin. A packing list shows details of goods contained in eachpack of shipment. When the law in an importing country doesnot specifically require a separate certificate of origin issued by a

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Nthird party. it can be self- certified by the exporter on thecommercial invoice. Exporters themselves according to therequirements of their business devise the format of Commer-cial invoice. Look at Annexure I where the format ofCommercial invoice has been given.

Contents of Commercial Invoicea. Name and address of the exporter.h. Name and address of the consignee.c. Name and the number of Vessel or Flight.d. Name of the port of loading.e. Name of the port of discharge and final destination. ‘f. Invoice number and date.g. Exporter’s reference number.h. Buyer’s reference number and date.i. Name of the country of origin of goods.j. Name of the country of final destination.k. Terms of delivery and payment.l. Marks and container number.m. Number and packing description. ,n. Description of goods giving details of quantity, rate and

total amount in terms of internationally accepted pricequotation.

o. Signature of the exporter with date.

Significance of Commercial Invoicea. It is the basic document useful in preparation of various

other shipping documents.b. It is used in various export formalities such as quality and

pre;:-8hipment inspection, excise and customs procedureetc. -

e. It is also useful in negotiation of ~documents forcollection and claim of incentives.

d. It is useful for accounting .purposes to both exporters aswell as importers.

Packing ListThis may be shown on invoice or separately, and should containitem by item, the contents of cases or containers or of ashipment with its weight and description set forth in such amanner as to permit checks of the contents by the customs onarrival at the port of destination as well as by the recipient.The packing list is a relatively simpler document and the wholeof the information can be reproduced from the master bymasking information not desired on the packing list. Specialinformation, if any, can be given in the blank space in the lowerthird portion of the document.The exporter prepares the packing list to facilitate the buyer tocheck the shipment. It contains the detailed description of thegoods packed in each case, their gross and net weight, etc. Thedifference between a packing note and a packing list is that thepacking note contains the particulars of the contents of anindividual pack, while the packing list is a consolidated state-ment of the contents of a number of cases or packs.

Contents of Commercial Invoicea. Name and address of the exporter.b. Name ‘and address of, the consignee.e. Name and the number of Vessel or Flight.d. Name of the port of loading.e. Name of the port of discharge and final destination.f. Invoice number and date.g. Name of the country of origin of goods.h. Name of the country of final destination.i. Marks and container number.j. Number and packing description.k. Description of goods in terms of quantity and special

remarks, if any.l. Signature of the exporter with date.Normally, ten copies of the packing note/list should beprepared. The first is to be sent with the shipping documents,two copies in advance to the buyer, one to the shipping agentand the remaining retained by the exporter.

Mate’s ReceiptMate’s receipt is a receipt issued by the Commanding Officer ofthe ship when the cargo is loaded on the ship. The mate’sreceipt is a prima fade evidence that I goods are loaded in thevessel. The mate’s receipt is first handed over to the f Port TrustAuthorities. After making payment of all port dues, theexporter or his agent collects the mate’s receipt from the PortTrust Authorities. The mate’s, receipt is freely transferable. Itmust be handed over to the shipping company in order to getthe’ bill of lading. Bill of lading is prepared on the basis of themate’s receipt.

Types of Mate’s Receiptsa. Clean Mate’s Receipt :- The Commanding Officer of the

ship issues a clean mate’s receipt; if he is satisfied that thegoods are .packed properly and there is no defect in thepacking of the cargo or package. .

b. Qualified Mate’s Receipt :- The Commanding Officer ofthe ship issues a qualified mate’s receipt, when the goods arenot packed properly and the shipping company does nottake any responsibility of damage to the goods duringtransit.

Contents of Mate’s Receipta. Name and logo of the shipping line.b. Name and address of the shipper.c. Name and the number of vessel.d. Name of the port of loading.e. Name of the port of discharge and place of delivery.f. Marks and container number.g. Packing and Container description.h. Total number of containers and packages.i. Description of goods in terms of quantity.j. Container status and seal number.

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k. Gross weight in kg. and volume in terms of cubic meters.l. Shipping bill number and date.m. Signature and initials of the Chief Officer.

Significance of Mate’s Receipta. It is an acknowledgement of goods received for export on

board the ship.b. It is a transferable document. It must be handed over to the

shipping company in order to get the bill of lading.c. Bill of lading, which is the title of goods, is prepared on the

basis of the mate’s receipt.d. It enables the exporter to clear port trust dues to the Port

Trust Authorities.

Questions, BankQ.l What is the significance of the Aligned Documentation

System?Q.2 What are the contents of Commercial Invoice?Q.3 Explain the components of Mate’s Receipt.

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1. Bill of Lading2. Certificate of Origin3. Shipping Bill4. Consular Invoice5. Bill of Entry6. Airway Bill7. GR Form8. Distinguish Between:-

• Commercial Invoice and Consular Invoice.• Certificate of Origin and consular Invoice• Mate’s receipts and Bill of Lading.

Bill of LadingBill of lading is issued by the shipping company or its agentsstating that goods are either being shipped or have beenshipped. Essentially a transport document. it serves manypurposes in international commerce.The bill of lading is a document issued by the shippingcompany or its agent acknowledging the receipt of goods onboard the vessel, and undertaking to deliver the goods in thelike order and condition as received, to the consignee or hisorder, provided the freight and other charges as specified in thebill have been duly paid. It is also a document of title to thegoods and, as such, is freely transferable by endorsement anddelivery. A bill of lading serves three main purposes:-i. This document evidences the contract of affieightment

(transport) between the shipping company and the shipper(exporter or importer).

ii. It is a receipt given by the shipping company for cargoreceived by it.

iii. It is a document of title (This is the most significantfunction of the bill of lading).

Let us first understand the meaning of the term “evidence ofthe contract of affreightment”. When goods are to be carried byany carrier (say. a ship), the contract of affreightment willcontains terms and conditions of carriage. In particular, thiscontract will mention the responsibility of the carrier (e.g..shipowner) in providing space. receiving. loading carrying andunloading of the cargo. Thus. if there is any loss or damage tothe cargo when it is in the custody of the carrier. the contract willprovide for the circumstances in which the carrier can be heldliable for the loss or damage. Further, in case the carrier is to be Iliable for loss or damage. the contract will provide for theamount of claim which carrier will be required to pay to thecargo owner. A bill of lading also contains printed terms andconditions of the contract of affreightment on it However. it isnot considered as a Conrad by itself; instead it is the mostimportant evidence of the contract. Law courts all over theworld have held that in case of a dispute, the aggrieved party

may produce any other evidence, which may controvert a printedclause in the bill of lading. Any other evidence could be a specificagreement in which for example, the ship owner may haveagreed to a higher amount of liability than the standardamount. Thus, in such cases, the ship owner does not have adefence that his maximum liability is as printed in the bill oflading.Bill of lading is a receipt issued by the shipping company on itsagents. Law requires that as a receipt, it must contain leadingidentification marks, number of packages or quantity or weightor any other unit of account, and apparent order and conditionof the goods.Bill of lading is the only evidence to file a claim against theshipping company in the event of non-delivery, defectivedelivery or short-delivery of the cargo at the destina-tion. As aresult, this document indicates that the contracted goods havebeen either given into the charge of the shipping companies orshipped by the exporter by the named ship on the date specifiedon the bill of lading. If shipment is according to the contractterms, the exporter gets the right to demand the sale amountfrom the importer while the importer is entitled to get deliveryof the goods at the destination. Look at Annexure 2 where aspeci-men of bill of lading has been given.For the bill of lading to be negotiable in fact three requirementsmust be fulfilled:1. it must be made out to the order to the shipper.2. It must be signed by the steamship company.3. It must be endorsed in blank by the shipper.

Types of Bill of Ladinga. Clean Bill of Lading :- A bill of lading acknowledging

receipt of the goods apparently in good order andcondition and without any qualification is termed as a cleanbill of lading.

b. Claused Bill of Lading :- A bill of lading qualified withcertain adverse remarks such as, “goods insufficiently packedin accordance with the Carriage of Goods by Sea Act,” istermed as a claused bill of lading.

c. Through Bill of Lading :- It covers goods beingtranshipped enroute but where the first carrier has theresponsibility as the principal carrier for all stages of thejourney. For example, goods may be shipped from Bombayto Dubai and transhipped from Dubai to a port in LatinAmerica.

d. Trans-shipment B/L: It has similar characteristic as theThrough B/L except that in this case the first carrier actsonly as an agent for effecting Trans-shipment of cargo.

e. Stale Bill of Lading :- A bill of lading that has been heldtoo long before it is passed on to a bank for negotiation orto the consignee is called a stale bill of lading.

LESSON 29:EXPORT DOCUMENTATION - II

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f. Freight Paid Bill of Lading :- When freight is paid at thetime of shipment or in advance, the bill of landing ismarked, freight paid. Such bill of lading is known as freightbill of lading.

q. Freight Collect Bill of lading: - When the freight is notpaid and is to be collected from the consignee on the arrivalof the goods, the bill of lading is marked, freight collectand is known as freight collect bill of lading.

The Design of Bill of LadingThe design for the bill of lading is based on the Standard Billof Lading recommended by the International Chamber ofshipping. A number of shipping lines in India’s overseas tradeare already issuing bills of lading on the ISO A4 size paper.However. In some case, these bills of lading are based on theold pattern.The Standard Bill of Lading included in the aligned series can bereproduced from the master by using the relevant mask. TheChief Officer of the ship through the port trust issues bankforms of bills of lading are supplied by shipping companies toshippers who prepare these documents and present them forsignature at the shipping to the shipper. While preparing “ToOrder Bills of Lading care should be taken to mask theConsignee box also. The words Unto Order May be typed inthe Consignee box and the name and address of the Consigneegiven in the box for the Notify Party. The other details on thebill of lading will be completed by the office of the shippingcompany before the document is signed and handed over to theshipper in exchange for the mate’s receipt.Bill of lading is a document of title that will enable the lawfulholder of any of the original Bill to take delivery of the goodsat the stipulated port of destination. Thus, a claimant of title togoods is required to surrender an original BIL (also popularlyknown as negotiable copy of B/L) for claiming goods from theshipping company or its agents. A bill of lading is not anegotiable instrument, though it is transferable by endorsementand delivery. What is the purpose of transferability of the billof lading? Transferability enables the banks to pay money to theexporter against surrender of shipping documents, includingB/L, even before the goods reach the destination. Similarly, itenables the goods to be resold by the importer before goodsreach the destination. For creating transferability, the bill oflading has to be made in such a way that the’ goods areconsigned to the ‘order of a party. The party could be either theexporter himself, or a negotiating or paying, bank or any otherparty as provided in the contract or letter of credit. For example,if B/L is prepared in the following way, it can be transferredthrough endorsement in the same manner as in a cheque. Thereare three main columns in B/L. These are Consignor (Shipper);Consignee or Order of and Notifying party. Notifying party isthe party to whom the shipping company is to send “notice ofarrival”. Transferability can be created by filling- up thesecolumns in the following manner:Consignor: ABC Company, New DelhiConsignee: (Or Order of) Bank of XYZ, New DelhiNotifying party: KNM, London

By not striking-off the words “Or Order Of “and. writing thename of the negotiating bank, the bank becomes the firstendorsee. Title to goods will be transferred from the negotiat-ing bank to the paying bank to importer on endorsements bythe negotiating and the paying banks in succession.In contrast to the “Order BIL” is the consignee-named B/L.The consignee-named B/L is made out in the name of aspecific party. Hence, title to goods cannot be transferred to athird party. The exporter should not ship goods under thiskind of B/L as goods can be released by the shipping companyat the destination without the presentation of the ‘original ‘B/L. Thus, if payment from the importer has not been secured,the exporter may lose hold over goods and may not get paid.However, if payment in advance has been received or if goodsare being shipped under irrevocable letter of credit, the con-signee named B/L is a valid document.According to international commercial practice, BIL along withother shipping documents must be presented to the bank notlater than twenty- one days of the date of shipment as given inBIL. Sometimes the buyers may also specify the last date or thenumber of days after shipment by which the documents mustbe submitted to the bank. Where the exporter does not followthis stipula-tion, the documents are said to have become “stale”and B/L in such case will be known as Stale B/L. A State B/L isone which is tendered to the paying bank at so late a date that itis impossible for it to be dispatched to the consignee in time toreach him before the goods themselves arrive at the destinationport.Example An exporter sent off his goods but forgot to sendthe Bill of Lading to the customer. Without this document thecustomer was unable to obtain the goods at the Port ofdestination, so the goods had to be stored at the docks untilthe Bill arrived. The customer sent the storage charges to theexporter, maintaining that because the exporter’s fault, thecharges had been incurred. He sued the exporter for the costs ofthe storage, and won.

Contents of Bill of Ladinga. Name and logo of the shipping line.b. Name and address .of the shipper.c. Name and the number of vessel.d. Name of the port of loading.e. Name of the port of discharge and place of delivery.f. Marks and container number.g. Packing and container description.h. Total number of containers and packages.i. Description of goods in terms of quantity.m. Container status and seal number.k. Gross weight in kg. and volume in terms of cubic metres.l. Amount of freight paid or payable.m. Shipping bill number and date.n. Signature and initials of the Chief Officer.

Endorsement on Bill of LadingBy practice and custom he bill of lading has been transferable.If however, the bill requires the goods to be delivered to a

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Nparticular named person and does not include a reference to hisassignees, the bill of lading is not transferable. It is only rarelythat a bill of lading would be drawn this way.The consignee or consignor as the case may be, can transfer theB/L either by a special endorsement, i.e. an endorsement whichnames the transferee to whom delivery is to be made or by anendorsement in blank to be bearer. The holder may, however,convert the blank endorsement into a special endorsement byinserting, the name of a person to whom delivery is to bemade. It is then called the “endorsement in full”

Sending of Bill of Lading to ImporterB/L are mad out in sets and any number of copies mayconstitute the set according to the requirements of the particulartransaction and the importer. The number of copies to bemade out will be indicated by the importer before the shipmenttakes place. In case there is no such indication, normally, twocopies. One set of documents is sent by the first class airmailand the second by the following mail, so that if one is lost.Delivery of the goods can be taken by the importer because ofthe second set.

Significance of Bill of Lading forExportersa. It is a contract between the shipper and the shipping

company for the carriage of the goods to the port ofdestination.

b. It is ari acknowledgement indicating that the goodsmentioned in the document have been received on boardfor the purpose of shipment..

c. A clean bill of lading certifies that the goods received onboard the ship are in order and good condition.

d. It is useful for claiming incentives offered by thegovernment to exporters.

e. The exporter can claim damages from the shippingcompany if the goods are lost or damaged after the issue ofa clean bill of lading.

Significance of Bill of Lading forImportersa. It acts as a document of title to goods, .which is

transferable by endorsement and delivery.b. The exporter sends the bill of lading to use bank of the

importer so as to enable him to take the delivery of goods.c. The exporter can give an advance intimation to the foreign

buyer about the’ shipment of goods by sending him a non-negotiable copy of bill of lading.

Significance of Bill of Lading forShipping Companya. It is useful to the shipping company for collection of

transport charges from the importer if not collected fromthe exporter.

Certificate of OriginThe importers in several countries require a certificate of originwithout which clearance to import is refused. The certificate oforigin states that the goods exported are originally manufac-

tured in the country whose name is mentioned in the certificate.Certificate of origin is required when :-a. The goods produced in a particular country are subject to

preferential tariff rates in the foreign market at the timeimportation.

b. The goods produced in a particular country are banned forimport in the foreign market.

Types of the Certificate of Origina. Non preferential Certificate of Origin :- Non-

preferential certificate of origin is required in general by allcountries for clearance of goods by the importer, on whichno preferential tariff is given. It is issued by :-• The authorised Chamber of Commerce of the

exporting country.• Trade Association of the exporting country.

b. Certificate of Origin for availing Concessions underGSP:- Certificate. of origin required for availing ofconcessions under Generalised System of Preferences (GSP)extended by certain countries such as France, Germany, Italy,BENELUX countries, UK, Australia, Japan, USA, etc. Thiscertificate can be obtained from specialised agencies, namely;• Export Inspection Agencies.• It. Director General of Foreign Trade.• Commodity Boards and their regional offices.• Development Commissioner, Handicrafts.• Textile Committees for textile products.• Marine Products Export Development Authority for

marine products.• Development Commissioners of EPZs.

e. Certificate for availing Concessions underCommonwealth Preferences (CWP) :- Certificate oforigin for the purpose of Commonwealth Preference is alsoknown as ‘Combined Certificate of Origin and Value’. Twomember countries, Le, require it. Canada and New Zealandof the Commonwealth. For concession underCommonwealth preferences, the certificates or origin haveto be submitted in special forms obtainable from the HighCommission of the country concerned.

d. Certificate for availing Concessions under otherSystems of. Preference :- Certificate of origin is alsorequired for tariff concessions under the Global System ofTrade Preferences (GSTP), Bangkok Agreement (BA) andSAARC Preferential Trading Arrangement (SAPTA) underwhich India grants and receives tariff concessions onimports and exports. Export Inspection Council (EIC) isthe sole authority to print blank Certificates of . Originunder BA, SAARC and SAPTA which can be issued by suchagencies as EPCs, DCs of EPZs, EIC, APEDA, MPEDA,FIEO, etc.

Contents of Certificate of Origina. Name and logo of chamber of commerce.b. Name and address of the exporter.c. Name and address of the consignee.

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d. Name and the number of Vessel of Flight.e. Name of the port of loading.f. Name of the port of discharge and place of delivery.g. Marks and container number.h. Packing and container description.i. Total number of containers and packages.j. Description of goods in terms of quantity.k. Signature and initials of the concerned officer of the issuing

auth9rity.l. Seal of the issuing authority.

Significance of the Certificate of Origina. Certificate of origin is required for availing of concessions

under Generalised System of Preferences (GSP) as well asunder Commonwealth Preferences (CWP).

b. It is to be submitted to the customs for the assessment ofduty and clearance of goods with concessional duty.

c. It is required when the goods produced in a. particularcountry are banned for import in the foreign market.

e. It helps the buyer in adhering to the import regulations ofthe country.

f. Sometimes, in order to ensures that goods bought fromsome other country have not been reshipped by a seller, acertificate of origin is required.

Shipping BillShipping bill is the main customs document, required by thecustoms authorities for granting permission for the shipmentof goods. The cargo is moved inside the dock area only after theshipping bill is duly stamped, i.e., certified by the customs.Shipping bill is normally prepared in five copies :-a. Customs copy.b. Drawback copy.c. Export promotion copy.d. Port trust copy.e. Exporter’s copy.Free Shipping Bill is used for export of goods which neitherattracts any Duty/Cess nor is entitled to Duty Drawback ontheir exportation. Dutiable Shipping bill is used in case ofgoods subject to Export Duty/Cess but mayor may not beentitled to Duty Drawback. Drawback Shipping Bill or Bill ofExports is used in the case of goods which are entitled toDrawback. Ship. ping Bill for Shipment Ex-bond is for use incase of imported goods for Re. exports and which are kept inBond.Following documents are required for the processing of aShipping Bill:a. GR Forms in duplicate for shipments to all countries.b. Four copies of Packing list giving contents, quantity, gross

and net weight of each Package.c. Four copies of Invoices indicating all relevant particulars

such as no. of packages, quantity, unit rate, total FOB/CIFvalue, correct and full description of goods, etc. (One copy

of this Invoice is to be pasted on the duplicate copy ofShipping Bill).

d. Contract, Letter of Credit, Purchase Ordere. Inspection/Examination Certificate.The Formats presented for the Shipping Bill are as under:1. White Shipping Bill for export of Duty Free goods

prepared in tripli-cate in the Standardised Format.2. Green Shipping Bill for export of goods under claim for

Duty Draw- back prepared in quadruplicate in the prescribedForm.

3. Yellow Shipping Bill for export of Dutiable goods preparedin triplicate in the prescribed Form.

4. Pink Shipping Bill for export of Duty Free goods ex-Bondprepared in triplicate in the prescribed Form.

Where the goods are to be cleared by the Land Customs, Bill ofexport is prepared instead of Shipping Bill. Bill of Exports arealso of four types i.e. white, green, yellow and pink for thepurpose stated above. Standardised Formats of the Bill ofExport are also available with the booksellers who deal withExim publications.

Types of Shipping BillBased on the incentives offered by the government, customsauthorities have introduced three types of shipping bills:-a. Drawback Shipping Bill :- Drawback shipping bill is

useful for claiming the customs drawback against goodsexported.

b. Dutiable Shipping Bill :- Dutiable shipping bill isrequired for goods which are subject to export duty.

c. Duty-free Shipping Bill :- Duty-free shipping bill is usefulfor exporting the goods on which there is no export duty.

Application for export is used for seeking customs permis-sion of export goods to the neighboring countries likeBangladesh by road, river or rail. This is of Three Types, namely,for export of “Free”, “Dutiable” and “Drawback” cargos.Customs declaration form for goods sent by post parcel is astandard form for all types of cargo. However, for claim-ingduty drawback, the exporter has also to file another documentknown as “Form D”. Port authorities in India have specifieddocuments for bringing the cargo into the shed for shipment aswell as for payment of port charges. This document is calledport - trust copy of shipping bill in Bombay dock challan inCalcutta and Export application in Madras and Cochin. Like theshipping bill, the clearing and forwarding agent of the exporterprepare this document.In order to facilitate easy recognition and quick processing,following colours have been provided to different kinds ofshipping bills

Types of goods By Sea By Air Drawback Shipping Bill Green Green Dutiable shipping Bill Yellow Pink Duty free Shipping Bill White Pink

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NContents of Shippining Billa. Name and address of the exporter.b. Name and address of the importer.c. Name of the vessel, master or agents and flag.d. Name of the port at which goods are to be discharged.e. Country of final destination.f. Details about packages, description of goods, marks and

numbers, quantity and details of each case.g. FOB price and real value of goods as defined in the Sea

Customs Act.h. Whether Indian or foreign merchandise to be re-exportedi. Total number of packages with total weight and value.

Significance Of Shipping Billa. Shipping bill is the main customs. document, required by

the customs authorities for granting permission for theshipment of goods.

b. The cargo is moved inside the dock area only after theshipping bill is duly stamped, i.e., certified by the customs.

c. Duly endorsed shipping ,bill is also necessary for thecollection of export incentives offered by the government.

(d) It is useful to the Customs Appraiser while determining theactual value of goods exported.

Consular InvoiceConsular invoice is a document required mainly by the LatinAmerican countries like Kenya, Uganda, Tanzania, Mauritius,New Zealand, Myanmar, Iraq, Australia, Fiji, Cyprus, Nigeria,Ghana, Guinea, Zanzibar, etc. This invoice is the most impor-tant document, which needs to be submitted for certification tothe Embassy of the importing country concerned. The mainpurpose of the consular invoice is to enable the authorities ofthe importing country to collect accurate information about thevolume, value, quality, grade, source, etc., of the goods im-ported for the purpose of assessing import duties and also forstatistical purposes.In order to obtain consular invoice, the exporter is required tosubmit three copies of invoice to the Consulate of theimporting country concerned. The Consulate of the importingcountry certifies them in return for fees. One copy of the invoiceis given to the exporter while the other two are dispatched tothe customs office of the importer’s country for the calculationof the import duty. The exporter negotiates a copy of theconsular invoice to the importer alongwith other shippingdocuments.

Significance of Consular Invoice for theExportera. It facilitates quick clearance of goods from the customs in

exporter’s as well as importer’ country.b. Certification of goods by the Consulate of the importing

country indicates that the importer has fulfilled allprocedural and licensing formalities for import of goods.

c. It also assures the exporter of the payment from theimporting country.

Significance of Consular Invoice for theImportera. It facilitates quick clearance of goods from the customs at

the port of destination and therefore, the importer getsquick delivery of goods.

b. The importer is assured that the goods imported are notbanned for imports in his country.

Significance of Consular Invoice for theCustoms Officea. It makes the task of the customs authorities easy.b. It facilitates quick calculation of duties as the value of goods

as determined by the Consulate is considered for thepurpose.

Bill of EntryThe bill of entry is a document, prepared by the importer or hisclearing agent in the prescribed form under Bill of EntryRegulations, 1971, on the strength of which clearance ofimported goods can be made.When goods are imported is a particular country, the importerhas to pay the necessary import duty. For this purpose,necessary information about the goods imported must be givento the customs authorities “in a prescribed form called bill ofentry form. Bill of entry is. a document, which states that. thegoods of the stated values and description in the specifiedquantity have entered into the country from abroad. The bill ofentry is drawn in triplicate. The customs authorities may ask theimporter to supply other documents like invoice, broker’s noteand insurance policy, etc. in order to verify the correctness of theinformation supplied in the bill of entry form.For the purpose of giving information in the bill of entryform, goods are classified into three categories namely :-1. Bill of entry for home consumption (whjte in colour ):

where an importer wants to get his goods cleared in one lot,he has to present the Bill of entry for home consumption.

2. Bill of entry for warehousing (into bond, yellow incolour): Where an importer wants to shift goods to awarehouse and thereafter gets his goods.Cleared in small lots, he has to present ‘into bond’ bill ofentry. Reason may be that he is unable to pay duty leviableon all goods at one instance or may be because of storageproblem.

3. Ex-Bond Bill of Entry (Green in Colour ): When animporter wants to remove goods from the warehouse, hehas to present an Ex-bond bill of entry which is green incolour.

Bill of Entry is not required in the following cases:a. passengers baggageb. favour parcelsc. mail box and post parcels.d. boxes, kennels of cargos containing live animals or birds.e. unserviceable stores, e.g. dunnage wood, empty bottles,

drums etc. of reasonable value.f. ship’s stores in small quantities for personal use.

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g. cargo by sailing vessels from customs ports when landed atopen bundles only

The importer has to fill up a separate bill- of entry form fordifferent classes of goods. In India, separate forms are not usedbut all the entries are made in one form. The free goods aremarked as free in the entry form itself. The importer has to paythe duty before securing the possession of the goods.

Contents of Bill of Entrya. Name and address of the importer.b. Name and address of the exporter.c. Import licence number of the importer.c. Name of the port/ dock where goods are to be cleared.d. Description of goods.f. Value of goods.g. Rate and amount of import duty payable.e. Other relevant documents.

Airway BillAn airway bill, also called an air consignment note, is a receiptissued by an airline for the carriage of goods. As each shippingcompany has its own bill of lading, so each airline has its ownairway bill.Airway Bill or Air Consignment Note is not treated as adocument of title and is not issued in negotiable form.

Contents of Airway Billa. Name of the airport of departure and destination.a. The names and addresses of the consignor, consignee and

the first carrier.b. Marks and container number.d. Packing and container description.e. Total number of containers and packages.i. Description of goods in terms of quantity.g. Container status and seal number.h. Amount of freight paid or payable.a. Signature and initials of the issuing carrier or his agent.

Importance of Airway Billa. It is a contract between the airlines or his agent to carry

goods to the destination.b. It is the document” of instructions for the airline handling

staff.c. It acts as a customs declaration form.d. Since, it contains details about freight it also represents

freight bill.

GR FormGR Form is an exchange control document required by theReserve Bank of India (RBI). As per the exchange controlregulations, an exporter has to realise the proceeds of the goodshe has exported within 180 days of their shipment from India.In order to ensure this, the RBI has introduced the GRprocedure.GR form is to be submitted in duplicate to the Customs at theport of shipment along with the shipping bill. Customs will

give their running serial number on both the copies afteradmitting the customs shipping bill. Customs authorities. willcertify the value declared by the exporter on both the copies ofthe GR form at the space earmarked and will also record theassessed value. They will then return the duplicate copy of theform to the exporter and retain the original for transmission tothe RBI. Within 21 days from the shipment of goods, exportermust lodge the duplicate copy of GR together with relativeshipping documents with the authorised dealer named in theGR form for negotiation of export bills.After the documents have been negotiated, the authoriseddealer will report the transaction to the RBI. The duplicate- copy‘of GR form together with a copy of invoice will be retained bythe authorised dealer till full export proceeds have been realisedand thereafter submitted to the RBI.On account of introduction of Electronic Data Interchange(EDI) System at certain customs offices where shipping bills areprocessed electronically, the existing declaration in GR form hasbeen replaced by a declaration in form SDF (Statutory Declara-tion Form).

Other DocumentsCustoms Invoice Countries like U.S.A., Canada, etc., needCustoms’s In-voice. It is generally made out on a special formprescribed by the Customs Authorities of the importingcountry and helps for allowing entry of goods in the importingcountry at preferential tariff rates. The Invoice Forms aregenerally available at the Consular Officer of the importingcountry and are required to be signed and witnessed after dulyfilling out the same.Legalised/visaed Invoice These are the Invoices sworn fortheir genuine-ness by the seller as being correct, before theappropriate Consulate/Cham-ber of Commerce Embassy asthe case may be, and they bear the stamp and authentication ofthe Consulate/Chamber of Commerce Embassy as being inorder. A nominal charge is collected by them from the seller fordoing this. These Invoices are required by some of the LatinAmerican Countries. There is no prescribed form of thisInvoice.Certified invoice At times the exporter is called upon to certifyon the Invoice, that the goods are of particular origin ormanufactured/packed at a particular place and in accordance withspecific contract. When Certificates as such appear on theInvoice, it is called as a Certified Invoice.Bill of exchange/draft A Bill of Exchange also known asDraft contains an order from the credit to the debtor to pay aspecified amount to a person mentioned therein. The maker ofa Bill is called the “Drawer”, the person who is directed to pay iscalled the “Drawee” and the person who is entitled to receivepayment is called the “Payee.”When it is drawn on a foreign firm it is termed as a ForeignDraft or Bill of Exchange. It is prepared either in an interna-tional currency or Indian Rupees depending on the terms of thecontract. Accordingly, the Bill is known by the name of currencyin which it is drawn. For example, a Bill drawn in US dollars isknown as ‘Dollar Bill’ and when prepared in rupees, beingtermed as ‘Rupees Bill’.

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NWhen the goods are shipped by Sea, the bills are drawn in setsand two sets of documents, including drafts are mailed to theforeign correspondent through an authorised dealer forpresentation to the Drawee (importer). Each one bears areference to the other.A Bill of Exchange or Draft is of two types: (I) ‘Sight Draft’ or‘Draft at Sight’ and (ii) “Usance Draft” or “Usance Bill”.When the Drawer i.e. exporter expects the Drawee i.e. importerto make ; payment immediately after the Draft is presented tohim, it is called a ‘Sight : Draft’. Unless and until the Draft isreceived, the Negotiating/Collecting Bank does not hand overthe Shipping documents and the buyer cannot take delivery ofgoods.As there is no Aligned document for Draft the same can beprepared by the Exporter in the usual formatCertificate of inspection Inspection Certificate, indicatingthat goods have been inspected before shipment, is neededunder some contracts or by some countries. This Certificate isgenerally required to be issued by one of the authorisedindependent Inspection Agencies/Surveyors in the exporter’scoun-try. The Certificate is issued in the Aligned documentForm.Black list certificate This is to certify that the ship/aircraftcarrying the goods has not touched a particular country on itsjourney or that the goods are not of a particular country. Thiscertificate is usually called for when countries have strainedpolitical relations with another.Weight note This document is used to confirm that thePackets/Bales, etc., are of a particular weight and not more thanthe stipulated weight as per contract. It may at times give grossweight and net weight of the whole consignment.Manufacturer’s/supplier’s quality/inspection certificateThis is a Certifi-cate to the effect that the goods which have beenmanufactured/supplied are as per the requirement of theContract of Sale.Languages certificate Importers in the European EconomicCommunity Countries require Languages Certificate along withthe GSP Certificate in respect of hand loom cotton fabricsclassifiable under NEMEX Code 55.09. Indian exportersshould apply for this certificate simultaneously or sepa-rately.The Language Certificate is issued in quadruplicate, three copiesof which are given to the exporter. He should transit one copyto his overseas importer, along with other documents, forrealisation of export proceeds.The Languages Certificate is issued by the Textile Committeeagainst a small fee.Manufacturer’s certificate In addition to the Certificate ofOrigin, some countries require a Manufacturer’s Certificate to theeffect that goods shipped have actually been manufactured andare available.Certificate of chemical analysis To ensure that the qualityand grade of items like metallic ores, pigments, etc., is the sameas specified in the Sale Contract, importers may require theexporter to send a Certificate of Chemical Analysis from arecognised analyst.

Certificate of shipment This Certificate is issued by theShipping Agent and ensures that a certain lot of goods havebeen shipped.Health/veterinary/sanitary certificates When the goodsthat are exported are foodstuffs, marine products, hides, livestocks, etc., usually depending upon the goods which are beingimported, a certificate from the Health /veterinary/ SanitaryAuthorities is called for by the overseas buyers. This is becausethe importer desires to know if the goods are fit for humanconsumption.Certificate of conditioning Certificate issued by a CompetentOffice in which, on the basis of the ascertained humidity factor,the dry weight of wool or silk is reckoned and certified. .Antiquity certificate This Certificate is required in the case ofexport of antiques. It is issued by the Archaeological Survey ofIndia.Certificate of measurement Freight can be charged either onthe basis of weight or measurement. When it is charged onweight basis, the weight declared by exporter is accepted.However, Certificate of measurement from the Indian Cham-ber of Commerce or any other approved organisation may beobtained by the exporter and given to the shipping companyfor calculation of necessary freight. This Certificate contains thename of vessel, the Port of destination, description of goods,quantity, length, breadth, depth, etc. of packages.Car/Lorry ticket This Ticket is prepared for admittance ofcargo through the Port gate. This is also known as ‘VehicleTicket or Gate Pass’. This includes the details of export cargo,i.e. shipper’s name, car/lorry numbers, marks on packages,quantity and description.Shut out advice It is a statement o(packages shut out by a shipand is prepared by the shed concerned and sent to the exportershowing the particu-lars of packages, for disposal arrangement.Short shipment form Short Shipment Form is an applicationto the Cus-toms Authorities at Port advising the shortshipment of goods and for claim-ing the return of the Dutyand/or Cess paid on such short shipping goods.Shipping advice A Shipping Advice is used to inform theoverseas customer about the shipment of goods. The ShippingAdvice is prepared in Aligned docu-ment. The Exporter onlyadvises );his importer about the Invoice number, Bill ofLading/Airway Bill number and date, name of the vessel withdate, the port ,of export, description of goods and quantityand the date of sailing of the vessel.

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Mate’s Receipt Bill of lading 1. Meaning:- Mate’s is a receipt by the Commanding Officer of the ship when the cargo is loaded on the ship.

Bill of lading is the Official document issued by the shipping company acknowledging the receipt of goods on board the vessel.

2. Purpose:-It is issued in order to enable the exporter or his agent to secure bill of lading from the shipping company.

It is issued in order to enable the importer to take the delivery of goods at the port of destination.

3. Evidence:- It is an evidence of goods having been loaded on board the ship

It is a contract between the shipper and the shipping company for the carriage of goods from the port of loading to the port of destination.

4. Types:- It is of two types : ~ Clean mate's receipt. ~ Qualified mate's receipt

It is of several types : ~ Clean and claused bill of lading, ~ Transhipment bill of lading. ~ Stale bill of lading. ~ Freight Paid & Collect bill of lading

5.Details of Fright:-It does not specify whether the fright is paid on goods on not.

It does specify whether bill of lading is freight paid or not.

6. Issuing Authority:- It is issued by the Commanding Officer of the ship or his mate.

It is issued by the shipping company or its agent.

7. Title of Goods:- It is not a title of goods.

It is a document of title of goods

8. Negotiability:- It is not a negotiable document.

It is a negotiable instrument

9. Sequence:- It is prepared before the bill of lading.

I t is prepared on the basis of the mate's receipt.

Distinction Between - Mate’s Receipt and Bill ofLading

Distinction Between - Certificate of Origin andConsular Invoice

Certificate of Origin Consular Invoice 1. Meaning:- The certificate of origin states that. The goods exported are originally manufactured in the country whose name is mentioned in the certificate

Consular invoice is a certificate issued by the Consulate of the importer's country situated in the exporter's country certifying the volume, value, quality, grade, source, etc., of the goods imported.

2. purpose:-Certificate of origin is required q For claiming the benefit preferential

tariff rates. q In case goods' produced in a

particular country are banned for import in the foreign market.

Consular invoice is required in order to provide accurate information about the volume, value, quality, etc." of the goods imported to the authories of the importing country for the purpose of assessing import duties.

3. Legislation :-It does not require any legislation from the Consulate of the importing country situated in the exporting country.

It does require legislation from the Consulate of the importing country situated in the exporting county.

4.Issuing Authority : It is issued by the Chambers of Commerce, Export Promotion Councils or Authorised Trade Associations.

It is issued only by the Consulate of the. importer's country situated in the exporter's country.

Commercial Invoice Consular Invoice 1. Meaning:- Commercial invoice is the statement of account of sale prepared by the exporter after the execution of export order giving details about the goods shipped.

Consular invoice is a certificate issued by the Consulate of the importers country situated in the exporters country certifying the volume, value, quality,grade,source, etc. of the goods imported.

2. purpose:- It is required : ~ In preparation of various shipping documents. ~ In pre-shipment inspection, excise and customs procedures. ~ In negotiation of documents for collection and claim of incentives.

It is required in order to provide accurate information about the volume, value, quality, grade, source, etc., of the goods imported to the authorities of the importing country for the purpose of assessing import duties.

3. Significance:- It is a primary document and is required for the preparation of various other shipping documents

. It is a secondary document and as such is required when desired by the importer

4. Contents:- It contains the terms and conditions of sale as well as detailed description of the goods to be exported

It contains accurate information about the volume, value, quality, grade, source, etc., of the goods exported

5. Cost:- since, it is prepared by the exporter himself he needs not to pay any charges for the same.

Distinction Between - Commercial Invoice andConsular Invoice

Lets Sum UpDocumentation in export business is complex but .not difficultto understand if one knows the reasons of making documentsat different stages of export transactions. Some of thesedocuments are made or secured at the preshipment stage whileothers are made or secured after the shipment has been made.The need for export documents arises due to commer-cial, legaland incentive perspectives. Commercial perspective helps inprotecting the respective interests of the exporter and importer.Regulatory perspective emphasises to follow the regulatoryprovisions of that particular country. Incentive perspective helpsin getting various incentives according to the prevailing policy ofthe government.Main commercial documents in C.l.F. contract are: Commercialinvoice, Bill of lading! Airway bill, Post parcel receipt, Insurancepolicy/Certificate and bill of exchange. The details required tobe mentioned in these documents will depend upon the termsand conditions of the export contract/letter of credit.Commercial invoice performs many functions. It is a documentof contents and a bill. It gives information about the shipmentand payment terms and also acts as a certificate of origin. Bill oflading and airway bill are transport documents and act mainly asreceipt of cargo given by the carrier. Bill of lading, in particular,is also a document oftitle and for this reason it acquires thetransferability. Insurance policy/certificate will enable the assured(exporter/importer/bank, etc.) to claim compensation from theinsurance company for loss or damage to the goods caused bythe perils insured against. Bill of exchange protects the interestsof the exporter by linking the payment for goods with theother documents. In other words, the banking channel willensure that the importer does not get the charge of goodsunless he has either paid for the goods or has obligated himselfto make the payment after the expiry of an agreed period. Thisis to be done by accepting and honouring of the Bill ofExchange by the importer.

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NThe legal regulatory documents fulfil the legal requirements ofthe concerned countries. In India, law stipulates that for anyoneto be in the export business, registration with the licensingauthorities (Importer- Exporter code No.) is essential. But ifsuch exporter also wants to claim certain specified exportincentives, he will have to get the Registration-Cum-Member-ship Certificates from the concerned export promotionorganization. In addition, the exporter has to follow documen-tation and procedural formalities for any consignment that isshipped. Main documents for these purposes are GR/PPVP/COD/SOFTEX FORM (under Foreign Exchange ManagementAct). Export Licence/Permit. Export Inspection Certificate,Shipping Bill (customs clearance) and port Trust Copy ofShipping Bill Dock Challan/Export Application (Port Clear-ance). In addition to docu-ments needed in exporting countrythe importing country may also specify documents to beobtained by the exporter. These documents are generally in thenature of certificates of . origin and quality. Documents are alsoneeded for claiming export incentives; some of the maindocuments are Invoice and AR41 AR5 Forms (excise rebate).Drawback Copy of Shipping Bill (Duty Drawback)Faced with the problem of the non- standardized documenta-tion’ Aligned Documentation System’ has been developed. Inline with system. Government of India has also developedStandardized Pre- shipment Export Documents. With the helpof this system. Several documents can be prepared from aMaster document. Import documents include IEC No and Billof Entry.

Questions BankQ1.What are the different types of Bill of Lading?Q2.What is the significance of Certificate of Origin?Q3.What is the significance of Consular Invoice?Q4.Distinguish between Mate’s Receipt and Bill of Lading.Q5. Distinguish between certificate of Origin and Consular

Invoice.Q6. Distinguish between Commercial Invoice and Consular

Invoice.Q7. What do you mean by “Application for export .Q8.State whether the following Statements are True or False.

i. GR Form is required to be filled in duplicate for allexports in physical form other than by post.

ii. RBI Code Number is required for the purpose ofmonitoring the flow of foreign exchange againstexport of goods by a firm.

iii. Softex form is required to be prepared in duplicate forexport of computer software in non- physical form.

iv. When goods are exported by road or by rail, thedocument used for this purpose is called shipping bill.

v. Drawback shipping bill is used for export of goodsentitled to duty drawback.

Fill in the Blanks

i. Under the Foreign Exchange Regulations, exporters fromIndia have to declare exports on... form for all exports inphysical form other than by post.

ii. The application for getting the Export Inspection Certificateis the... ............

iii. Shipping Bill is prescribed by... authority.iv. Customs Invoice is prescribed by the………country.v. The document prescribed for obtaining GSP facility is

called... .............vi. ………….. is the document prescribed by the Indian

Railways for getting a priority in the allotment of wagonsfor movement of export consignments.

vii. Main documents for claiming rebate in central excise dutyare ……… and………….

Ans.11 (i) True (ii) false (iii) True (iv) True (v) False.Ans:12 I) CNX From and GR form ii) Intimation for inspec-tion iii) Customs iv) Importing v) GSP Certificate of Origin vi)Forwarding note. vi) Invoice and Ar4/AR5 Forms.

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Learning Objectives• Objectives• Introduction• Importance of Export Assistance• Export Promotion Measure in India.• Expansion of Production Base for Exports.

i. Relaxation in Industrial Licensing Policy/MRTP/FERA/Foreign Collaborations

ii. Liberal Import of Capital Goodsiii. Export Processing Zones (EPZ), Export Oriented

Units ( EOU), Specialiv. Economic Zones (SEZs), Electronic Hardware

Technology Parks (EHlTP) and Software TechnologyPark Units (STP)

v. Assured Supply of Raw-Material’ Importsvi. Eligibility for Export/Trading/Star Trading/Super Star

Trading Housesvii. Export Houses Status for Export of Services

• Rendering Exports Price-Competitivei. Fiscal Incentivesii. Financial Incentives

• Strengthening Export Marketing Effort• Let Us Sum Up• Answers to Check Your Progress• Terminal Questions

ObjectivesAfter studying this unit, you should be able to :• explain the importance of export assistance in India• describe various assistances provided for the expansion of

production base for export . explain the fiscal and financialassistances provided to the exporters

• describe the measures taken by the Government of India tostrengthen the export marketing - effort.

IntroductionThe Export-Import policy 1992-97 brought about manyfundamental changes -in India’s external trade policy. Itgradually laid the foundation of globalisation ‘of Indianeconomy by initiating liberalization and making Indianindustries to face competition from foreign MNCs. Until 1992,Indian markets were highly protected and the Indian govern-ment used to give many incentives to the Indian exporters. Butmany6f these incentives were’ withdrawn by the 1992-97 andsubsequent policies.

Importance of Export AssistanceExport promotion was accorded a very low priority during theinitial progmmme of economic development in India. Duringthe 1950s and almost up to mid 1960 export-promotion wasnot at all considered as an essential element in India’s economicdevelopment process. Easy and adequate availability of externalassistance from World Bank and other international agencies aswell as developed countries has provided India with more thanadequate amount of foreign exchange for financing develop-ment as well as essential imports. Hence, the urgency of earningforeign exchange through expanding exports was not there. Inaddition, because of the large size of the domestic market inIndia, ‘import substitution’ rather than the’ export promotion’was considered as a more useful strategy for India’s economicdevelopment process. Similarly during the period of the FirstThree Five year plans over 1950-51 to 1965--66" Indianeconomy was in a formative stage. Consequently India’s capacityto export manufactures or industrial products was extremelylimited. Hence, on this account as well, India could not look atinternational markets especially because of her extremely limitedcapacity to offer supplies of- industrial products.However after 1965-66, the aid flows to India were substantiallyreduced. Consequently, for the first time India was made todepend significantly on her exports for acquiring foreignexchange to meet her needs of essential imports. Moreover, bythe second-half of 1960s, a number. of industries especially inthe engineering, chemicals, leather, marine and other sectorshave reached a stage from where they were looking for anopening in international market.Government of India had therefore, considered it as appropri-ate to lay emphasis on the need for export promotion so as toenable the country to meet the’ need of imports. Fortunately, itreceived an encouraging response from the industrial sectorwhich was also looking for international markets. Over the lastcouple of decades export promotion has assumed criticalimportance in Indian economy. Export growth has become themain determinant of economic growth in India. The processof globalization and liberalization has further enhanced theneed of strengthening the support of export-import tradebusiness of the country. Moreover, with the increasing burdenof debt-servicing on the one hand and the situation of aid-fatigue on the other, exports have now emerged as the onlyviable source of meeting the foreign exchange needs of Indianeconomy. Hence, the feasibility of financing almost entirelydepends upon the growth in Indian export. It may, therefore,be ,stated that the future eco-nomic growth in India is insepara-bly linked with growth in Indian exports. Hence, export,promotion is being an overriding consideration in policyformulation. Export promotion’ policy in India has three mainsegments. They are as follows:

LESSON 30:EXPORT ASSISTANCE IN INDIA

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Na. Policies for increasing Investment and production in export

sector.b. Price-support measures for rendering exports more

competitive.c. Measures for strengthening marketing effort by the export

sector.

Export Promotion Measure in IndiaThe assistance extended to the Indian exporters are asunder :

Import Facilities For Exporters

a. Duty Free Replenishment Certificate (DFRC) :- DFRCis issued to a merchant exporter or manufacturer exporterfor the duty free import of inputs such as raw materials,components, intermediates, consumables, spare parts,including packing materials to be used for exportproduction. Such licence is given subject of the Julfi1mentof time bound export obligation.

b. Duty Entitlement Passbook Scheme (DEPB) :- Underthe DEPB scheme, an exporter may apply for credit as aspecified percentage of FOB value of exports, made infreely convertible currency. The credit shall be availableagainst such export products and at such rates as may bespecified by the Director General of Foreign Trade (DGFT)by way of public notice issued in this behalf, for import ofraw materials, intermediates, components, parts, packagingmaterials, etc.

c. Export Promotion Capital Goods Scheme (EPCG) :-EPCG scheme was introduced by the EXIM policy of 1992-97 in order to enable manufacturer exporter to importmachinery and other capital goods for export production atconcessional or no customs duties at all. This facility issubject to export obligation, i.e., the exporter is required toguarantee exports of certain minimum value, which is inmultiple of tl;1e value of capital goods imported.

Dutv Exemption Schemes

a. Duty Drawback (DBK) :- The Duty Drawback Scheme isadministered by the Directorate of Drawback, Ministry ofFinance. Under this scheme, an exporter is entitled to claim:-• Customs duty paid on the import of raw materials,

components and consumables.• Central excise duty paid on indigenous raw materials,

components and consumables utilized in themanufacture of goods meant for export.

b. Excise Duty Refund :- Excise duty is a tax imposed by thecentral government on goods manufactured in India. Thisduty is collected at source, i.e., before removal of goodsfrom the factory premises. Export goods are totallyexempted from central excise duty. However, necessaryclearance has to be obtained in one of the following ways.• Export under rebate.• Export under bond:

c. Octroi Exemption :- Octroi is a duty paid onmanufactured goods, when they enter the municipal limitsof a city or a town. However, export goods are exemptedfrom octroi.

Fiscal Incentives

a. Exemption from Income Tax :- In order to enableexporters to plough back their earnings and promoteexports, the Government of India has given tax exemptionto exporters on export earnings under section 80 HHCprovision of the Income Tax Act. For example, for the A.Y.2002-03, 60% of the export income is exempted from tax.At the same time, a ten year tax holiday is provided to100% EOUs and units in EPZs.

d. Sales Tax Exemption :- Sales tax is a tax imposed by theState government on goods sold in or outside India.However, exportable goods are exempted from sales tax,provided the exporter or his firm is registered with the SalesTax Authorities. This exemption is given on the followingcategories of goods :-• Goods exported.• Goods purchased from the local market from export

purpose.

Marketing Assistance

a. Market Development Assistance (MDA) :- Thegovernment of India has set up a separate fund under thehead Marketing Development Assistance (MDA) fordeveloping marketing abilities of Indian exporters. It isgranted by the Ministry of Commerce for export marketdevelopment and research abroad. The amount grantedunder MDA varies from 25% to 60% of the actualexpenditure incurred.

b. Market Access Initiative (MAI) :- Under this scheme,financial assistance is available to the export promotioncouncils, C industry and trade associations and other eligibleentities on the basis of the competitive merits of proposalsreceived in this regard for undertaking marketing studies,setting up of common showrooms, warehousing facility,participation in sales promotion campaigns, publicitycampaigns, international trade fairs, seminars, buyers-sellersmeet, etc.

Supply of Raw Materialsa. Industrial Raw Material Assistance Centres (IRMAC)

Scheme :.IRMAC is established by the government ofIndia as,,-{i subsidiary of STC. Such centres import rawmaterials in bulk and supply them to the registeredexporters against a valid import licence. This enablesexporters to get timely supply of raw materials at reasonableprices, I~MAC has’ been further simplified- by removingthe actual user clause.

b. Back to-Back Inland Letter of Credit :- The facility ofBack-to-Back Inland letter of credit was announced by theEXIM policy 1992-97 and came into effect from 1st April1995. 13ack.to-back L/C is one, which can be opened Infavour of local suppliers of raw materials or goods so as toenable exporters to got raw materials or goods for exporton credit basis. It is a kind of pre-shipment financeprocured by the exporter for the processing of export order.

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Institutional Measures

a. Institutional Measures :- The Government of India(GOI) has established a number of organisations topromote and expand export trade. These organisations are:-• Indian Institute of Foreign Trade (11FT) to provide

training facilities.• Indian Institute of Packaging (lIP) to upgrade

,packaging standards.• Export Promotion Councils (EPCs) to undertake

export promotion activities.• Export Inspection Council (EIC) to upgrade quality

standards.• Export Credit Guarantee .-Corporation (ECGC) to

protect exporters against payment rises.• Indian Council of Arbitration (ICA) to settle and solve

disputes between importers and exporters. Apart fromthe above institutions, there are a number of otherorganisations such as Federation of Indian ExportOrganisation (FlEa), EXIM Bank, etc.

Expansion of Production Base forExportsThe first prerequisite of export promotion policy is to ensurelarger exportable surpluses. In. other words, if a country wantsto exports more, it must have more to export. It will have moreto export only if more and more is produced for export. Hence,it calls for increasing flow of production and investmentresources into the export sector.

Relaxation in Industrial Licensing Policy/MRTP/FERA/Foreign CollaborationsWith a view to facilitate relatively easier creation/expansion ofproduction capacities for increasing export potential of Indianeconomic, necessary relaxations have been provided for in thepolicies for industrial licensing, MRTP (Monopolies andRestrictive Trade practices Act) and Foreign Exchange Regula-tions, etc. The Foreign Exchange Regulation Act has beenliberalised and Foreign Exchange Management (FEMA) Act,1999 has been operationalised. The rupee has been made fullyconvertible for all approved external transac-tions. As a result,exporters of goods and services and those who are in receipt ofremit-tances are able to sell their foreign exchange at marketdetermined rates. The importers and foreign travellers are alsoable to buy foreign exchange at market determined rates.Exporters have also been allowed to maintain foreign currencyaccounts. There is general liberalisation of remittance of foreignexchange for visits abroad, agency commission; export claims,reduction in export value, reimbursement of expenses incurredon dishonoured export bills, consular fees, etc. Consequently,creation of additions of production capacities for export isliberally allowed, both in the large-scale as well as small-scalesectors. Foreign collaboration and foreign capital investment isalso liberally permitted for the export sector. 100% foreignequity has been permitted to the units in EPZ/EOU/EHTP/STP. All these policy measures are envisaged to go long way infacilitating easy expansion as Well as technological up gradationof export base in India through attracting larger flows ofinvestment and other resources.

Liberal Import of Capital GoodsImport policy of India has made specially liberal provisions foreasy import of capital goods of all types. Accordingly, importsof machinery and equipment are allowed without importlicence. In addition special provisions have been made forimport of capital-goods at a concessional rate of import duty.Export Promotion Capital Goods (EPCG) Scheme has beenintroduced for liberal import of capital goods.Export Promotion Capital Goods Scheme: New Capital goodsincluding computer software systems may be imported underthe Export Promotion Capital Goods (EPCG) scheme. Underthis provision, capital goods including jigs, fixtures, dies,moulds and spares upto 20% of the CIF value of the capitalgoods may be imported at 5% customs duty: This import issubject to an export obligation equivalent to 5 times CIF valueof capital goods on FOB basis or 4 times the CIF value ofcapital goods on NFE basis to be filled over a period of 8 years.This period is reckoned from the date of issuance of licence.Import of capital goods shall be, subject to Actual Usercondition till the export obligation is completed.

Export Processing Zones (EPZ), Export-Oriented Units(EOU), Special Economic Zones (SEZs), ElectronicHardware Technology Parks (EHTP) and SoftwareTechnology Park Units (STP)Units undertaking to export their production ‘of goods may beset up under Export Processing Zones (EPZ) scheme, ExportOriented Units (EOU) scheme, Special Economic Zones(SEZs) scheme, Electronic Hardware Technology park (EHTP)scheme or Software Technology Park (STP) scheme. Such unitsmay be engaged in manufacture, services, trading, developmentof software, agriculture including agro-processing, aquaculture,animal husbandry, bio-technol-ogy, floriculture, horticulture,pisciculture, viticulture, poultry, sericulture, and granites may Iexport all products except prohibited items of exports.These units import all types of goods without payment ofduty including capital goods for manufacture, production orprocessing provided they .are not prohibited items, Secondhand. capital goods may also be imported in accordance withthe provisions of the policy: Supplies from DT A to these unitswill be regarded as deemed exports. Foreign equity upto 100%is permissible to these units. These units shall be exemptedfrom payment of corporate income tax for 10 years.

Assured Supply of Raw Material ImportsAs regards making available the supplies of imported rawmaterials to the export sector, the import policy provides thescheme of Duty exemption and Duty Remission. The dutyexemp-tion scheme enables import of inputs required forexport production. The duty remmission scheme enables postexport replenishment/remission of duty on inputs used in theexport product.Under duty exemption scheme, an advance licence is issued toallow import of inputs which are physically incorporated in theexport product. Advance licence is issued for duty free importof inputs as defined in the policy subject to actual user condi-tion. Such licences are exempted from’ payment of basiccustoms duty, surcharge, additional customs duty, antidumping

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Nduty and safeguard duty, if any. Advance licence can be issuedfor (i) physical exports (ii) ,intermediate supplies and (iii)deemed exports. Duty Remission Scheme consists of Duty FreeEntitlement Certificate and Duty Entitlement PassbookScheme.

Eligibility for Export/Trading/Star Trading/Super Star Trading HousesExport/Trading/Star Trading/Super Star Trading Houses havebeen accorded special status. When exporters achieve thespecified level of exports over a period, they may be recognizedas EH/TH/STH/SSTH. Exports made both in free foreignexchange and in Indian rupees shall be taken into account forrecognition. The objective of this scheme is to recognise themas the respective houses”with a view to building marketinginfrastructure and expertise required for export promotion. Theexporters, registered with FlEO or EPC are, eligible for thispurpose. The export performance criteria may be based oneither f.o.b. value of exports or net foreign exchange earnings.Let us discuss them in detail.i. F.O.B. Criteria: The manufacturing or merchandising

units, who have achieved the following targets can beaccorded the status of above mentioned Export Houses.Deemed exports are not counted for this purpose. Look atTable for this criteria.

FOB Criteria

ii. Net Foreign Exchange Earnings: Exporters have anoption for obtaining the status of Export and otherHouses based on the following Net Foreign ExchangeEarnings. Look at Table for this criteria.

Net Foreign Exchange Criteria

Exporters have also an option to get recognition for one year.In this case relaxation in above earnings has been permitted.EH/TH/STH/SSTH are entitled to the following specialbenefits:i. Import Facilitiesii. Marketing Development Assistance.iii. Foreign Currency, Accounts

Category of Houses Average FOB value of exports during the preceding three Licensing year, in Rupees

FOB value of eligible export during preceding Licensing year in Rupees

Export House Rs. 15 crores Rs. 22 crores Trading house Rs. 75 crore Rs. 112 crore Star trading House Rs. 375 crores Rs. 560 crore Super star trading houses Rs. 1125 crores Rs. 1680 crores

Category of Houses

Average Net Foreign Exchange Value of eligible exports during the preceding three licensing years

Net Foreign Exchange Value of exports made during the preceding licensing years

Export house Rs. 12 crores Rs. 18 crores Trading House Rs. 62 crores Rs. 90 crores Star trading house Rs. 312 crores Rs. 450 crores Super star trading house

Rs. 937 crores

Rs. 1350 crores

iv. Foreign Exchange Facilitiesv. Golden Status Certificatevi. Other facilities as specified in the policy

Export Houses Status for Export ofServicesService providers sha1l be eligible for recognition as serviceExport House, InternationalService Export House, International Star Service Export House,International Super Star Service Export House on achieving theperformance level as below:

Export of Services for Recognition of Export Houses

The service status holders sha1l be entitled to all the facilitiesprovided in the policy.

Rendering Export Price CompetitiveThe second pre- requisite of export promotion policy is torender the exports increasingly price competitive in internationalmarket. A number of Price support measures in the form offiscal as well as financial incentives have therefore been providedfor the export sector in India.The need for price- support measures in the form of exportincentives, arises on two accounts. First, price levels in interna-tional markets are invariably the lowest, because of the highdegree of competition therein. On the other hand, Indianeconomy, has over the years emerged as a high economy withlow productivity. Hence, for success full and viable export effortthere is the need for incentives to provide the price support forrendering India’s exports competitive and viable.Secondly, incentives exports also become necessary to neturalisethe domestic market -pull on Indian exporters. Hence, exportincentives also aim at encouraging trade and industry in India toincreasingly undertake export effort on a sustained basis.Under the export promotion policy of India, various types ofincentives have been provided for a price-support measures.These include (a) Fiscal Incentives and (b) Financial Incen-tives.

Fiscal IncentivesFiscal incentives for export promotion include (i) duty draw-back, (ii) central excise rebate and (iii) income tax exemption, onexport profits.i. Duty Drawback: In the manufacturing of many export

products imported or indigenous raw materials andcomponents are used on which customs or central excise

Category

Average free foreign exchange earning during the preceding three licensing year in rupees.

Free Foreign exchange earning during the preceding licensing year in rupees

Average NFE earned made during the preceding licensing year in rupees

NFE earned during the preceeding licensing year in rupees

Service Export House

4 crore 6 crore 3 crore 5 crore

International Service export House

20 crore 30 crore 15 crore 25 crore

International star service export house

100 crore 150 crore 75 crore 125 crore

International super star service export house

300 crore 450 crore 225 crore 375 crore

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duty has been paid. When the finished products areexported in which duty paid inputs are used, a part orwhole of the amount of such duty is allowed -to be drawnback by the exporter or if is refunded to him. This results insubstantial reduction in the cost of material inputs forexport-production. In other words, import duties andcentral excise duties, on material inputs for export activityare allowed to be drawback by the exporters under theincentives policy for duty drawback. The scheme of DutyDrawback has been formulated by the Drawback Directorunder the Central Board of Revenue and Customs from theMinistry of Finance. Details regarding Drawback Scheme canbe had from ‘Drawback Rules’ as notified by the office ofDrawback Director. Refund of Duty Drawback is grantedon post-export . basis. The benefit Of duty drawback hasbeen provided on the basis of (a) all industry rates or (b)brand rates separately fixed for individual manufacturers ofthe export products. The incentive of duty drawback helpsreduce significantly the material cost of export products. Itis very important for countries like India, which havesimple manufactures to offer for exports which are verymuch influenced by the material cost. You will learn detailprocedure of Duty Drawback in next lesson.

ii. Central Excise Rebate: Under this scheme, the CentralExcise Duties on the inputs . and final product or on theoutput proposed for export, are refunded to the exporter.It helps in further reduction in the overall cost ofproduction for exports. The scheme also provides for aBond System under which outright exemption fromCentral Excise Duties can be claimed by the exporter. Thescheme is operated as per Central Excise Rules notified bythe Central Excise department. You will learn in detailabout the Central Excise Rebate in next lesson

iii. Income-Tax Exemption: . In order to promote exports,income tax exemption has been granted under Income TaxAct. This exemption scheme is to be phased out over a fiveyear period i.e. by 2004-2005 for all exporters other thanEPZ/EOU/EHTP/STP units. The major exemptions areas follows:1. Part of the profits derived from export of specified

goods or merchandise is deducted for the computationof income tax.

2. Specified amount of profits of companies engage inthe business of hotel or of . a tour operator or a travelagent is deducted.

3. There is a partial tax relief on export of computersoftware and for import of system. The benefit canalso be claimed by a supporting software developerfrom 1-4-1999..

4. The profits from export or transfer of film VTsoftware, TV news software, telecast rights are partiallydeducted.

5. 50% of the profits from project exports is deducted incomputing taxable income of the Indian company orresident tax payer.

6. 10 years tax holidays is granted to units in FTZIEPZand 100% EOU ending with 2010-2011.

7. There is a tax rebate on remuneration received onservices rendered outside India and other rebate asspecified in the policy.

iv. Sales tax Exemption: There is no tax on sales made forexport purpose. The exporter need not pay sales tax eitheron the goods purchased from manufacturers or traders.

Financial IncentivesThe major scheme of financial incentives include interestsubsidy, financial assistance scheme for agricultural, horticulturaland meat exports.i. Interest Subsidy: Export sector in India has also been

given interest subsidy under which the working capital ismade available by the banks to the export sector at aconcessional or subsidised rates of interest. Under thisscheme working capital required for pre- shipment credit aswell as post- shipment credit is provided to the exportsector at concessional rates of interest. This measure helpsIndian exporters. to reduce the working capital cost ofexport operation.

ii. Financial Assistance Scheme for Agricultural,Horticultural and Meat Exports:In order to promote the exports. of agricultural,horticultural and meat products, agricultural and processedfood products Export Development Authority (APEDA)

Provides financial assistance for the following purposes:a. Feasibility studies, surveys, consultancy and data base up

gradationb. Development of infrastructurec. Export promotion and market developmentd. Packaging developmente. Quality controlf. Upgradation of meat plantsg. Organisation building and Human Resource Developmenth. Air freight assistance for export of horticultural products

export by airi. Generation of relevant research and development through

research institutions.Thus, export incentives in the form of tax- concessions or fiscalincentives, as well as financial incentives, playa major role inrendering Indian exports, competitive in the internationalmarket. However, in view of the highly competitive nature ofinternational market, every country in the world makes an all-out effort to increase her exports, for which various types ofdifferent fiscal and financial incentives are provided. Thus, thepractice of incentives has almost become universal, coveringboth developed as well as developing countries.

Strengthening Export Marketing EffortThe third pre- requisite of export promotion is the marketingeffort. It may be noted that ‘export’ is primarily a ‘sale’ transac-tion. Production can be converted into ‘sale’ only through themarketing effort. In other words ‘marketing effort’ provides thenecessary link or channel’ between production and sales. Hence,success on the export front is dependent upon the marketingeffort. Export promotion policy in India therefore, pays special

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Nattention to the need for improving and strengthening exportmarketing effort. With this objective, the Government of Indiahave established a very comprehensive network of institutionsfor servicing the export sector.In other words; an effort has been made to provide thenecessary infra structure for servicing the export sector, particu-larly to improve the export marketing effort. With this object inview, Government of India have established a number ofspecialized institutions for providing necessary services andassistance to individual corporate units from the export sector.Institutions established for strengthening export marketingeffort include Export Promotion Council, Commodity Boards,Special Authorities and Industry Associations. These are the.key institutions servicing export effort ~t individual corporatelevel product-wise. The primary ‘function of these institutionsis to provide the exporter with export marketing guid-ance andadvice as well as complete information and details coveringalmost all the critical elements involved in export marketingeffort at the individual corporate unit level on a continuousbasis.In addition, separate institutions have also been established forproviding technical and specialized services to the export-sectorin India. These institutions provide necessary guidance, helpand assistance to individual corporate units, especially in thefield of packag-ing, quality control, risk coverage, long- termcredit, trade fairs and exhibitions, settlement of disputes,package service and market information.For supplementing the export-effort by the private sector,Govt, of India have also estab-lished a number of Corpora-tions in the Government sector for directly undertaking export-import activity. Various state Governments have also estab-lished Export Corporations for promoting exports fromdifferent states respectively.Market Development Assistance: This assistance is providedfor overall development of I overseas markets. It is providedfor sponsoring, inviting trade delegations within and outsidethe country, market studies, publicity, setting up of ware-houses/showrooms, research and development, quality control,etc. MDA is largely available to Approved Organisations,Export Houses/Consortia of Small Scale Industries, Individualexporters or other sponsored persons. The assistance is givenfor air fare, daily allowance, participation in fairs and’ exhibi-tions, etc. The assistance is disbursed by the FIEO and Ministryof Commerce.External Marketing Assistance Scheme for Jute: TheExternal Marketing Assistance Scheme provides grant of marketassistance at the rate of 5% and 10% of FOB value realisationon export of specified diversified products. The benefit isavailable to both manufacturer- exporters and merchantexporters.

Lets Us Sum UpOf late export promotion has assumed critical importance inIndian economy. Export growth has become main determinantof economic growth. With the increasing requirements ofimports, exports have now emerged as the only viable source ofmeeting the foreign ex-change needs. Government of India

have provided various incentives for export promotion. Exportpromotion policy include (i) policies for increasing investmentand production in export sector (ii) price support measures forrendering exports more competitive, and (iii) measures forstrengthening marketing effort by the export sector.There has been relaxations in industrial licensing policy MRTP,foreign exchange regulation, foreign collaboration to increase theflow of production and investment resources into the exportsector. Apart from the provisions made for liberal import ofcapital goods, Export Processing Zones, Export-OrientedUnits have been given completely licence-Fee and duty- freeimport facilities for all production inputs. Duty Tee licenceschemes have been granted’ to the registered exporters forsupplies of adequate quantities of material inputs required forexport. Export House, Trading House, Star Trading House andSuper Star Trading House have been given special facilities topromote the export business. In order to make India’s exportcompetitive, price viable support incentives have been given tothe exporters. Fiscal incentives include (i) duty drawback (ii)central excise rebate and (iii) income-tax exemption on exportprofits.The scheme of financial incentives include interest subsidy onworking capital and financial assistance scheme for Agricultural,Horticultural and Meat Exports.The success on the export front is crucially dependent upon themarketing of the products. Hence, special efforts have beenmade for improving and strengthening export marketing effort.Government of India have established a number of specialisedinstitutions for provid-ing necessary services and assistance tothe exporters, Marketing Development fund provides necessaryfinancial assistance for market promotion.

Questions BankState whether the following statements are true or False:Q1. i. In the beginning India followed a policy of import

substitution.ii. Import policy has made provision for easy import of

capital goods of all types.iii. there is completely licence free and duty free import

facility for all production inputs for Export processingZone and Export Oriented Units.

iv. An advance licence is granted only to the manufacturerexporter.

v. Foreign equity upto 75% is permissible to EPZ andEOUs.

Answers to Check Your Progressi. True ii. True iii. False iv. False v. False

Terminal Questions1. Explain the facilities/concessions for increasing the

production-base for exports from India.2. Analyse the different price support measures introduced in

India for rendering India’s exports more competitive.3. Why the role of marketing effort is crucial in export

promotion? Describe the measures undertaken in India forstrengthening export marketing effort.

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4. Explain the rationale for price-support measures for exportpromotion in India.

5. “Export Incentives have become a universal practice”.Discuss.

6. Explain the framework of export incentives in India andanalyse as to how far it provides a total approach to exportpromotion.

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Learning Objectives• Objectives• Introduction• Institutional Framework• Pre-shipment Financ

• Packing Credit• Advance against Incentives• Pre-shipment Credit in Foreign Currency

• Post Shipment Finance• Negotiation of Export Documents Under Letters of

Credit• Purchase/ Discount of Foreign Bills• Advance against Bills Sent on Collection• Advance against Goods Sent on Consignment• Advance against Export Incentives• Advance against Undrawn Balances• Advance against Retention Money• Post-shipment Export Credit Guarantee and Export

Finance Guarantee• Post-shipment Credit in Foreign Currency

• Export Under Deffered Payment• Deferred Credit Facilities• Role of Export Import Bank of India.• Recent Development in Export Financing• Lets Sum Up

• Answers to Check Your Progress• Terminal Questions

ObjectivesAfter studying this unit, you should be able to:1. describe the procedure of pre-shipment credit2. explain various types and procedure of post-shipment

credit .3. explain the role of Export Import Bank of India.4. describe the recent development in export finance.

IntroductionYou have learnt various provisions of Exchange Regulations inUnit 6. Export financing is another important area of exportbusiness. Export finance refers to the credit facilities ex-tendedto the exporters at pre-shipment and post-shipment stages. Itincludes any loan to an exporter for financing the purchase,processing, manufacturing or packing of goods meant foroverseas markets. Credit is also extended after the shipment ofgoods to the date of realisation of export proceeds. In this

unit, you will learn various schemes of finance avail-able toexporters at pre-shipment and post-shipment stages. You willalso be acquainted with the role of EXIM Bank in exportfinance.

Institutional FrameworkInstitutional framework for providing finance comprisesReserve Bank of lndia, Commercia1 Banks, Export ImportBank of India and Export Credit and Guarantee Corporation.Reserve Bank of India, being the central bank of country, laysdown the policy frame work and pro-vides guidelines forimplementation.Finance short or medium term, is provided exclusively by theIndian and foreign commercial banks which are members ofthe Foreign Exchange Dealer’s Association. The Reserve Bankof India function as refinancing institutions for short andmedium term loans respectively, Provided by commercial banks.Export Import Bank of India, in certain cases, participates withcommercial bank in extending medium term loans to exporters.Commercial banks provide finance at a concessional rate ofinterest and in turn are refinanced by the Reserve Bank! ExportImport Bank of India at concessional rate. In case they do notwish to avail refinance, they are entitled for an interest ratesubsidy. Export Credit & Guarantee Corporation (ECGC) alsoplays an important role through its various policies andguarantees providing cover for commercial and political risksinvolved in export trade.

Pre-shipment FinancePre-shipment finance is provided to the exporters for thepurchase of raw materials, process-ing them and convertingthem into finished goods for the purpose of export. Let usdiscuss various pre-shipment advances available to the export-ers.

Packing CreditThe basic purpose of packing credit is to enable the eligibleexporters to procure, process, manufacture or store the goodsmeant for export. Packing credit refers to any loan to an exporterfor financing the purchase, processing, manufacturing orpacking of goods as defamed by the Reserve Bank of India. Itis a short-term credit against exportable goods.Packing credit is normally granted on secured basis. Sometimesclear advance may also be granted. Many advances are clean attheir initial stage when goods are not yet acquired. Once thegoods are acquired and are in the custody of the exporter banksusually convert the clean advance into hypothecation! pledge. Letus first discuss the detail procedure of packing credit.Eligibility: Packing credit is available to all exporters whethermerchant exporter, Export/ Trading/ Star Trading/ Super StarTrading Houses and manufacturer exporter. Manufacturers ofgoods supplying to Export/ Trading/ ST/ SST Houses andMerchant exporters are eligible for packing credit. The-foreign

LESSON 31:EXPORT FINANCE

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buyer through the medium of a reputed bank gives the creditto eligible exporters, for specified purposes against irrevocableletter of credit. It is also available against a confirmed or firmexport order/contract placed by the buyer for export of goodsfrom India.Running Account Facility: The RBI has permitted banks togrant packing credit advances even without lodgement of-L/ Cor firm-order/ contract under the scheme of Running Ac-countFacility subject to, the fol1owing.conditions .

i. The facility may be extended, J1rcwid.ed the need forRunning Account facility has been established by theexporters to the’ satisfaction of the bank.

ii. The bank may extend this facility only to those exporterswhose track record has been good.

iii. L/C or firm order is produced within a reasonable periodof time. For Commodities under selective credit control,banks should insist on production of LlCs or firm orderswithin one month from the date of sanction.

iv. The concessive credit available ~in respect of individual pre-shipment credit should not go beyond 180 days.

Packing credit may also be given under the Red Clause letter ofcredit. In this method, credit’ is given at the instance andresponsibility of the foreign bank establishing the LlC. Here,the packing credit advance is made against a simple receipt and isunsecured.Amount:- The loan amount is decided on the basis of exportorder and the credit rating of the exporter by the bank. Gener-ally the amount of packing credit will not exceed FOB value ofthe export goods or their domestic value whichever is less. Itcan be to the extent of domestic value of the goods eventhough such value is higher than their FOB value provided thegoods are entitled to duty draw back and also covered by theExport Production Finance Guarantee of the ECGC.Period:- The packing credit can be granted for a maximumperiod of 180 days from the date of disbursement. The banksare authorised by RBI to extend this period. This period can beextended for a further period of 90 days, in case of non-shipment of goods within 180 days. The extension can be doneprovided the banks are satisfied that the reasons for extensionare due to circumstances beyond the control of the exporters.Pre-shipment credit may be given for a longer period upto amaximum of270 days, if the banks are satisfied about the needfor longer duration of credit.Rate of Interest:-The interest payable on pre-shipment financeis usually lower than the normal rate, provided the credit isextinguished by lodging the export bills on remittances fromabroad. If the exporter fails to do so they would not be able toavail concessional rate of interest.In order to avail the packing credit; exporters are expected tomake a formal application to the bank giving details of creditrequirements along with the required documents.

Advance Against IncentivesWhen the value of the materials to be procured for export ismore than FOB value of the contract, the exporters may getpacking credit advance more than the FOB value of the goods.

The excess of cost of production over the FOB value of thecontract represents incentives receivables. For example, when thedomestic price of goods exceeds the value of export orders, thedifference represents duty drawback entitlement. Banks cangrant ad-vances against duty drawback at pre-shipment stagesubject to the condition that the loan is covered by ExportProduction Finance Guarantee of Export Credit GuaranteeCorporation (ECGC). This guarantee enables banks to sanctionadvances at the pre-shipment stage to the full extent of cost ofproduction. The extent of cover and the premium are the, sameas for packing credit guarantee.

Pre-shipment Credit In Foreign CurrencyThis is an additional window to rupee packing credit scheme.This credit is available to cover both the domestic and importedinputs of the goods exported from India. The facility isavailable in any of the convertible currencies. The credit will beself-liquidating in nature and accordingly after the shipment ofgoods the bills will be eligible for discounting/ rediscount-ingor for post-shipment credit in foreign currency. The exporterscan avail this finance under the following two options.i. the exporters may avail pre-shipment credit in rupees and,

then, the post-shipment credit either in rupees or in foreigncurrency denominated credit or discounting/ rediscountingof export bills.

ii. The exporters may avail pre-shipment credit in foreigncurrency and discounting/ rediscounting of the export billsin foreign currency.

PCFC credit will also be available both to the supplier units ofEPZ/ EOU and the receiver units of EPZ/ EOU. The credit inforeign currency shall also be available on exports to AsianClearing Union (ACU) Countries. This will be extended only °!lthe basis of confirmed! firm export orders or confirmed L/Cs.The Running Account facility will not be available under thescheme.

Post-shipment FinanceIt may be defined as “any loan or advance granted or any othercredit provided by a bank to an exporter of goods from Indiafrom the date of extending the credit after shipment of goodsto the date of realisation ion of export proceeds. It includes anyloan or advance granted to an exporter on consideration of oron the security of, any duty drawback or any cash receiv-ables byway of incentive from the government.While granting post-shipment finance, banks are governed bythe guidelines issued by the RBI, the rules of the ForeignExchange Dealers Association of India (FEDAI), the TradeControl and Exchange Control Regulations and the Interna-tional Conventions and Codes of the International Chambersof Commerce. The exporters are required to obtain credit limitssuitable to their needs. The quantum of credit depends onexport sales and receivables.Post shipment finance is granted under various methods. Theexporter may choose the type of facility as per his requirement.The Banks scrutinise the documents submitted for complianceof exchange control provisions like:i. the documents are drawn in permitted currencies and

payment receivable as permitted method of payment;

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Nii. the relevant GR/PP form duly certified by the customs is

submitted and particulars as stated in the GR/PP form areconsistent with the documents tendered as well as the salecontract! firm order etc./ letter of credit;

iii. the documents are submitted within the time limitstipulated and in case of delay suitable explanation is made;

iv. the period of usance is in consonance with the time limitprescribed for realisation of export proceeds.

Let Us Now Discuss Various Types of Post-shipment Finance.

1. Negotiation of Export Documents Under Lettersof CreditWhere the exports are under letter of credit arrangements, thebanks will negotiate the export bills provided it is drawn inconformity with the letter of credit. When documents are pre-sented to the bank for negotiation under L/C, they should bescrutinized carefully taking into account all the terms andconditions of the credit. All the documents tendered should bestrictly in accordance with the L/C terms. It is to be noted thatthe L/C issuing bank under-takes to honour its commitmentonly if the beneficiary submits the stipulated documents. Eventhe slightest deviation from those specified in the L/C can givean excuse to the issuing bank of refusing the reimbursement ofthe payment that might have been already made by the negotiat-ing bank.

2. Purchase/Discount of Foreign BillsPurchase or discount facilities in respect of export bills drawnunder confirmed export contracts are generally granted toexporters who enjoy bill purchase/discounting limits sanc-tioned by the bank. As the security offered by the issuing bankunder letter of credit arrangement is not available, the financingbank is totally dependent upon the credit worthi-ness of theforeign buyer. The documents, under the Documents againstPayment (DIP) arrangements, are released through foreigncorrespondent only when payment is received. Whereas in thecase of Documents against Acceptance (D/A) bills, documentsare delivered to the overseas importers against acceptance of thedraft to make payment on maturity. Since the financing banksare open to the risk of non-payment, ECGC policies issued infavour of exporters and assigned to banks are insisted upon.Under the policy, ECGC fixes limits and payment terms forindividual buyers and the financ-ing bank has to ensure that thelimit is not exceeded so that the benefits of policy are avail-able.Banks also secure a guarantee from ECGC on the post-shipment finance extended by them either on a selective orwhole turnover basis. Banks sometimes do obtain creditreports on foreign buyers before they purchase the export billsdrawn on the foreign buyer.

3. Advance against Bills Sent on CollectionPost-shipment finance is granted against bills sent on collectionbasis in the following situations:i. when the accommodation available under the foreign bills

purchase limit is exhausted ii)when some export bills drawnunder L/ C have discrepancies.

iii. where it is customary practice in the particular line of tradeand in the case of exports to countries where there areproblems of externalisation.

Under the above situation, the bank may send the bill oncollection basis and finance the exporter to some extent out ofthe total bill amount. The amount advanced will be liquidatedout of the export proceeds of the export bill and the balancepaid to the exporter.Exporters may avail themselves on the forward exchange facilitywhere they do not wish to be subjected to exchange risk onaccount of the new procedures for overdue export bills.

4. Advance against Goods Sent on ConsignmentSometimes exports are effected on consignment basis. In suchcondition payment is receiv-able to sale of goods. Goods areexported at the risk of exporter for sale. The banks may financeagainst such transaction subject to the exporter enjoying specificlimit for such purpose. The overseas branch/ correspondent ofthe bank is instructed to deliver documents against TrustReceipt.

5. Advance against Export IncentivesAdvances against the export incentives are given at the pre-shipment stage as well as the post-shipment stage. However,the major part of the advance is given at the post-shipmentstage. The advance is granted to an exporter in consideration ofor on the security of any duty drawback incentives receivablefrom the Government. The banks follow their own procedurein granting the advance. The most common practice is to obtaina power of attorney from the exporter executed in their favourby the banks. It is sent to the concerned government depart-ment like the Director General of Foreign Trade, Commissionerof Customs, etc. These advances are not granted in isolation. Itis granted only if all other types of export finance are extendedto the exporter by the same bank.

6. Advance against Undrawn BalancesIn some of the export business, it is the trade practice that thebills are not drawn for the full invoice value of the goods. Asmall part of the bills is left undrawn for payment after adjust-ments due to difference in weight quality, etc. Advances aregranted against such undrawn balances. In this case the exportproceeds must be realised within 90 days.The advances are granted provided the undrawn balance is inconformity with the normal level of balances left undrawnsubject to a maximum of 5% of the full export value. Theexporters are supposed to give an undertaking that they willsurrender the balance proceeds within 6 months from the dateof shipment.

7. Advance against Retention MoneyBanks grant advances against retention money, which is payablewithin one year from the date of shipment. The advances aregranted upto 90 days. If such advances extend beyond one year,they are treated as deferred payment advance which are alsoeligible for concessional rate of interest .

8. Post-shipment Export Credit Guarantee andExport Finance GuaranteePost-shipment finance given to exporters by banks throughpurchase, negotiation or dis-count of export bills or advancesagainst such bills qualifies for this guarantee. Exporters areexpected to hold appropriate shipments or contracts policy ofECGC to cover the overseas credit risks.

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Export Finance Guarantee cover post-shipment advancesgranted by banks to exporters against export incentivesreceivable in the form of duty drawback, etc.

9. Post-shipment Credit in Foreign CurrencyThe exporters have the option of availing of exports credit atthe post-shipment stage either in rupee or in foreign currency.The credit is granted under the Rediscounting of Export BillsAbroad Scheme ( EBR) at LIBOR linked interest rates. Thescheme covers export bills with usance period upto 180 daysfrom the date of shipment. Discounting of bills beyond 180days requires prior approval from RBI. The exporters have theoption to avail of pre-shipment credit and post-shipment crediteither in rupee or in foreign currency. If pre-shipment credit hasbeen availed of in foreign currency, the post-shipment creditnecessarily to be under the EBR scheme. This is done becausethe foreign currency pre-shipment credit has to be liquidated inforeign currency.

Exports Under Deferred PaymentsYou have learnt that all export proceeds must be surrendered toan authorised dealer within 180 days from the date of ship-ment. Exporters are required to obtain permission from theReserve Bank through authorised dealers in the event of non-realisation of export proceeds within the prescribed period.However, realising the special needs of exports of engineeringgoods and projects, Reserve Bank has formulated specialschemes permitting deferred credit arrangements. This willenable realisation of export proceeds over a period exceeding sixmonths. Hence, contracts for export of goods and servicesagainst payment to be secured partly or fully beyond 180 daysare treated as deferred payment exports. The credit extended istermed as deferred payment term credit.For financing under deferred credit system a single pointapproval mechanism within a three tier system operates.This system includes:i. Commercial banks who are authorised dealers in foreign

exchange in India, can provide in principle clearance forcontracts valued upto Rs. 25 crores. They can avail refinancefrom EXIM bank.

ii. EXIM bank is empowered to give clearances for contracts ofvalue of above Rs. 25 crores and upto Rs. ) 100 crores.

iii. A working group considers proposals of contracts of valuebeyond Rs. 100 crores. The working group consists ofrepresentatives of all the above institutions to providesingle window clearance.

Deferred credit facility is normally allowed only for export ofengineering goods, turnkey projects involving rendering ofservices like designing, civil construction and erection andcommissioning of plant or factory alongwith supply ofmachinery, equipment and materials. Project exports eligible forexport finance are as follows:i. Turnkey projects: These projects involve supply of

equipment alongwith related services like design, detailedengineering, civil construction, erection and commissioningof plants, etc.

ii. Construction projects: involve civil works, steel structuralworks as well as associated supply of construction materialsand equipment.

iii. Technical and consultancy service contracts involveprovision of personnel, furnishing of knowhow, skills,operation and maintenance services and managementcontracts.

These services include:a. Engineering services contracts involve supply of services

such as design, erection, commissioning or supervision oferection and commissioning.

b. Consultancy services contracts involve preparation offeasibility studies, project reports, preparation of designsand advice to the project authority on specifications forplant and equipments.

Deferred Credit FacilitiesExport of goods on deferred payment terms can be financedunder suppliers credit or buyer’s credit. Let us first understandwhat they are,Supplier’s Credit: The exporter extends credit directly to theoverseas buyer and seeks refinance from commercial banks/EXIM bank.Buyer’s Credit: It is a loan extended by a financial institutionsor a consortium of financial institutions to the overseas buyerfor financing a particular contract. Let us discuss buyer’s Creditin detail.Under this scheme, credit is granted by EXIM Bank jointly withan authorised dealer to foreign buyers in connection’ withexport of capital goods and turnkey projects from India. Theexporters are paid out of the buyer’s credit on a non-recoursebasis on their complying with the terms of the export contractsto be financed under the scheme. Before the exporter enters intoany contract providing for credit terms to be financed underbuyer’s credit scheme, they should have detailed discussion withthe bankers. While considering proposals under the scheme, thefollowing factors are taken into account by EXIM Bank:i. competence and capability of Indian exporters in complying

with the proposed commercial terms of the contract;ii. justifiability of the contract on commercial considerations;iii. economic viability of the overseas projects concerned of the

importer and general economic conditions of his country~iv. credit worthiness of foreign borrower.Reserve bank’s permission is also required for the purpose ofgranting credit under the scheme since payment will have to bemade to the exporter on behalf of non-resident buyer. Theauthorised dealer in Form DPX 6 should make application tothe Reserve Bank for the purpose.

Export Import Bank of India: Pre-Shipment

Export Credit In Foreign CurrencyIn addition to the pre- shipment credit in foreign currencygranted by the commercial banks, the Export- Import Bank ofIndia ( EXIM Bank) also offers the facility of pre- shipmentexport credit in foreign currency to only specified categories of

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Nthe exporters unlike the PCFC offered by commercial banks toall categories of the exporters. The specified categories ofexporters are as follows:a. Export House/Trading House with annual export turnover

exceeding Rs 10.00 crores.b. Manufacturing units with minimum export orientation of

25% of pro-duction or export turnover exceeding Rs. 5crores, whichever is lower. For this purpose only physicalexports of commodities are taken into ac-count. Suchexports could be made either directly or through TradingHouses.

c. The exporter should have satisfactory.The Export Import Bank of India provides this facilities to theexporters through commercial banks. Such credit is granted topay for the import of inputs required for export production.This credit is granted on the basis of the firm export order orthe letter of credit.

Salient FeaturesThe salient features of this scheme are as follows:1. EXIM Bank raises short-term foreign currency funds on a

revolving basis from one or more Syndicates of overseaslenders. Such funds are then made available by the EXIMBank to the commercial banks in India who opt to avail ofPCFC for on-lending to eligible exporter customers forimport of eligible items. The commercial banks will, inturn, allocate PCFC limits to their customers on the basisof their assessment of import requi.rement for exportproduction. The advances granted under PCFC to theexporters is fully liquidated from the export proceeds of therelative export bill.

2. The maximum period of an advance under PCFC will notgenerally exceed 180 days.

3. The applicable rate of interest on credit available to theexporter will be two per cent over and above the interest rateat which the funds are raised by the EXIM Bank. Exportersmay also have to pay management fee, commitment, fee,etc, if applicable.

4. The repayment of the pre-shipment credit will be made outof sale pro-ceeds of export shipment in respect of whichthe exporter availed of the facility.

Role of Export Import Bank of IndiaExport-Import Bank of India was set up in 1982, for thepurpose of financing, facilitating and promoting foreign tradeof India. It is the principal financial institution in the countryfor coordinating working of institutions engaged in financingexports and imports. The major functions of EXIM bank areas follows;Finance: The present focus of EXIM Bank is on exportfinance. The Bank finances export of Indian machinery,manufactured goods, consultancy and technology services ondeferred payment terms. Exim Bank finance is also available atexport production stages.Services: EXIM Bank provides information, advisory servicesto enable exporters to evaluate the international risks, exportopportunities and competitiveness.

Research & Analysis: Research & Analysis carried out onspecific industry sub sectors with export potential, and interna-tional trade related subjects are provided to exporters. Look atTable 7.1 where details of various programmes offered by theEXIM Bank have been shown.Table 7.1 lending and service programmes of EXIM Bank

Programme Use For Indian Entities Export ( Supplier's) Credit

Enables Indian exporters to extend term credit to Overseas importers, of eligible Indian goods

Financing of Rupee Expenditure for projects Export Contracts

Enables companies to meet cash flow deficits of projects being executed overseas on cash payment terms

Finance for Consultancy And Technology Services

Enables Indian exporters of consultancy and technology services to extend term credit to overseas Importers

Pre-shipment Credit Enables Indian exporters to buy raw material and other Inputs for export contracts involving cycle time exceeding six months.

Finance for Deemed Exports Enables Indian Companies to meet cash flow deficits of contracts secured in India and financed by multilateral funding agencies.

Foreign Currency Pre-shipment credit

Enables eligible exporters to access finance for import of raw materials and other inputs needed for export Production

Finance for EOU's & Units in EPZs

Enables Indian companies to acquire indigenous and imported machinery and other assets for export Production

Foreign Currency Lines of Credit for imports

Enables eligible export-oriented units to acquire imported machinery for export production.

Export Vendor Development Finance

Enables vendors of export-oriented units to acquire plant & machinery and other assets for increasing export capability

Export Product Development Finance

Enables Indian firms undertake product development, R & D for exports.

Overseas Investment Finance Enables Indian promoters to finance equity contribution in joint ventures/ WOS set up abroad.

Software Training Institutes Enables setting up of institutes for software training.

Marketing Finance Enables exporters to implement market development Programmes and finances productive capabilities through loan financing.

Production Equipment Finance

Enables eligible export-oriented units to acquire equipment.

Services Underwriting

Enables Indian exporters to raise finance from capital markets through public/ rights issues of equity shares/ debentures with the backing of EXIM Bank's underwriting commitment.

Forfaiting

Enables Indian exporter to convert credit sale to cash sale on without recourse basis. Enables Indian companies to provide requisite guarantees to facilitate execution of export contracts and import transactions

Guarantee Facility Enables Indian companies to provide requisite guarantees to facilitates execution of export contracts and import transactions.

L/C Confirmation Confirmation of L/Cs covering import of capital goods

Project preparatory services Overseas

Enables Indian Consultancy firms undertake project preparatory studies in developing countries by grant/loan financing.

Business advisory & Technical Assistance Services overseas

Enables Indian consultancy firms undertake specific assignments in select countries through grant financing

Cooperation Arrangement with African Management services Co.(AMSCO) Amsterdam

Enables Indian consultants secure assignments in various projects that are managed by AMSCO in different parts of sub-saharan Africa through grant financing.

Africa Enterprise fund Enables Indian Consultancy firms to undertake specific assignments to assist small and medium entrepreneurs in Sub-Saharan Africa.

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Recent Developments in ExportFinancingAs stated earlier, offer of attractive credit terms is a crucial factorin winning export contracts. Hence, financial institutions areoffering several innovative financial services to exporters. Someof these services are discussed below:Factoring: It is an attractive way of providing export finance toexporters. In this system, factor bears the complete credit risk.Who is a factor? A factor is a special type of agent who,depending upon the type of agreement, offers a variety ofservices. These services include coverage of credit risk, collectionof export proceeds, maintenance of accounts receivables andadvance of funds. Purchase of receivables of its clients withoutrecourse is the most important service of the factor. A bigadvantage to the exporter is that it is without recourse financing.This means that the risk of non-payment by the importer is tobe borne entirely by the factor.In India, International Export Factoring services on withrecourse basis have been approved by the RBI. It provides anew dimension to management of export receivables. SBIFactors and Commercial Services Pvt. Ltd., Bombay have beenpermitted to provide International Export Factoring. In thissystem, the exporter enters into an export factoring agreementwith exporter’s factor. The exporters ship goods to approvedforeign buyers. Each invoice is made payable to a specific factorin the importer’s country. Copies of invoices and shippingdocuments are sent to the Importer’s factor. Exporter’s factorwill make prepayment to the export against approved exportreceivables. On receipt of payments from the importer on duedate of invoice, importer’s factor remits the fund to theexporter’s factor. The exporter’s factor pays to the exporter afterdeducting the amount of prepayments.Forfaiting: Forfaiting refers to the non-recourse discounting ofexport receivables. It is a mechanism of financing exports thatinvolves less risk and enhances international competi-tiveness.

It converts a credit sale into cash sale for an exporter. In thissystem forfaiting agency discounts international trade receivablesof the exporter. The forfaiter pays the exporter in cash andundertakes the risk associated with the export deal. The exportersurren-ders, without recourse to him, his rights to claim forpayment on goods delivered to an importer.All exports of capital goods and other goods made on mediumto long term credit are eligible to be financed through forfaiting.In India, EXIM bank plays an intermediary role between theIndian exporter mid the overseas forfaiting agency. The exporterapproaches EXIM bank for forfaiting transaction. The bankreceives bills of exchange or promissory notes from theexporter and sends them to the forfaiter for discounting.Subsequently, the bank arranges for the discounted proceeds tobe remitted to the Indian exporter. The bank issues appropriatecertificates to enable Indian exporters to remit commitment feesand other charges. RBI has allowed Authorised dealers toundertake forfaiting of medium term export receivables.

Let Us Sum UpExport finance is provided at the pre-shipment and post-shipment stages. In India, the export credit facilities areprovided largely by commercial banks, RBI and EXIM banksoffer refi-nance. EXIM bank, in certain cases, participates withcommercial banks in extending medium and long-term credit toexporters. In India, pre-shipment finance is offered in the formof(i) Packing credit (ii) Advance against incentives and (iii) Pre-Shipment Credit in Foreign Currency (PCFC). Packing creditfacilities are provided to the exporters for making necessaryarrangements for executing export contracts. The basic purposeof packing credit is to enable the eligible exporters to procure,process, manufacture or store the goods meant for export. It isextended on the strength of either the letter of credit orconfirmed export contracts. Gener-ally the amount of packingcredit does not exceed FOB value of the export goods or theirdomestic value whichever is less. When the value of thematerials to be procured for export is more than FOB value ofthe contract, the exporters may get the credit against thereceivables export incentives. The pre-shipment finance is alsomade available in foreign currency.The credit provided by a exporter after the shipment of goodsis referred to the post-ship-ment credit. The quantum of creditdepends on export sales and receivables. Various types of post-shipment credits are: (i) Negotiation of Export Documentsunder letter of credit (ii) Purchase/ discount of foreign bills (iii)Advance against bills sent on collection basis (iv) Advanceagainst goods sent on consignment basis (v) Advance againstexport incen-tives (vi) Advance against undrawn balances (vii)Advance against retention money (viii) Post-shipment exportcredit guarantee and export finance guarantee and (ix) Postshipment credit in foreign clemency. Deferred credit facilities areoffered for export of engineering goods, turnkey projects andconsultancy projects.Export Import Bank plays an important role in promotingexports from India through its various financing schemes. Itrefinances to commercial banks in respect of credit extended bythem to exporter, gives loans to Indian companies for financingexports under deferred payment, provides lines of credit and

Africa project development Facility.

Enables Indian Consultancy firms undertake specific assignments in Sub-Saharan Africa through grant financing.

EC Investment partners Facility

Enables setting up of joint ventures in India between Indian companies and enterprises in the European Community

For Commercial banks Refinance of Export credit

Enables bank to offer credit to Indian exporters of eligible goods, who extend term credit over 180 days to importers overseas.

Small scale industry Export Bills Rediscounting

Enables bank to rediscount exports bills of their SSI customers with usance not exceeding 90 days.

Relending facility Enables banks overseas to make available term finance to their clients for import of eligible Indian goods.

Refinance of Term Loans to EOUs

Enables banks to offer credit to eligible export oriented units to acquire indigenous and imported machinery and other assets for export production.

Bulk Import Finance

Enables banks to offer finance to importers for bulk import of consumable inputs.

Guarantee cum Refinance Supplier’s Credit

Enables banks to protect their own cash flow as also its Exporter client’s cash flow on account of default by overseas buyer. Protects the bank by not treating the advance as a non-performing asset for provisioning purpose.

For Overseas Entities Lines of Credit

Enables overseas financial institutions, foreign governments, their agencies to onlend term loans to finance import of eligible goods from India.

Buyer’s Credit Enables overseas buyer to import eligible goods from India on deferred credit terms.

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Nbuyer’s credit to overseas entities. The bank also advises Indianexporters on matters pertaining to terms of payment, exportfinancing, etc. Factoring and Forfaiting are the recent develop-ments in export financing.

Terminal Questions1. What is the purpose of extending packing credit to

exporters? Explain the procedures of packing credit.2. What do you mean by pre-shipment finance? Enumerate

the methods of pre--shipment finance. Describe theprocedure of pre-shipment credit in foreign currency.

3. What is post - shipment finance? Explain various methodsof post-shipment finance.

4. Explain the procedures of export under Deferred payments.5. Describe the role of Export Import Bank of India.6. Write short notes on:

i. Pre-shipment Credit in Foreign Currencyii. Post-Shipment Credit in Foreign Currencyiii. Buyer’s Creditiv. Factoringv. Forfaiting

7. State whether following statements are True or False.i. Generally the amount of packing credit will not exceed

FOB value of the export goods or domestic valuewhichever is less.

ii. Banks are authorized to extend packing credit for afurther period of 180 days.

iii. Pre-shipment credit in foreign currency can not begranted on exports Asian Clearing union countries.

iv. Whenever exporter wants he can avail the postshipment advance against bills sent on collection basis.

v. Advances against the export incentives are given at thepre-shipment stage as well as the post shipment stage.

Answersi. true ii. false iii. false iv. false v. true.

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Learning Objectives• Objectives• Introduction• Importance of Institutional Infrastructure• Govt. Policy Making and Consultations• Indian Trade Promotion Organisation (ITPO).• Indian Institute of Foreign Trade (11FT).• Indian Institute of Packaging (lIP).• Indian Counsel of Arbitration (ICA).• Federation of Indian Export Organisation (FIEO).• Marine Products Exports Development Authority

(MPEDA).• Export Processing Zones (EPZ).• 100% Export Oriented Units (EOUs).• Facilities for Units in EOUs, EPZs,EHTPs & STPs.• M. Visvesvaraya Industrial Research & Development Center

(MVIRDC).• Chamber of Commerce (COC).• Question Bank.

ObjectivesAfter studying this unit, you should be able to:• explain the importance of the institutional infrastructure for

export promotion in India• describe the role of government policy making and

consultative body in the export• promotion• explain the functions of export promotion councils and

commodity boards• describe the role of various service institutions engaged in

export promotion• explain the importance of government trading

organisations engaged in the export of specifiedcommodities .

IntroductionExport business requires special knowledge and businessacumen. Exporters need guidance and assistance at differentstages of the export effort. For this purpose, the Governmentof India have set up several institutions whose main functionsare to help the exporter in his work. In this unit, you will learnthe role of these institutions in export promotion.

Importance of InstitutionalInfrastructureExport marketing effort is of vital importance for the successof apart-promotion programme in any country. For undertak-ing international marketing operations” an exporter needs

special guidance and assistance in critical areas like packaging,market promotion and publicity, quality certification, riskcoverage, market intelligence, finance and credit support etc. It isonly with the support and services rendered by specialisedinstitutions, exporter is able to successfully convert his ‘produc-tion’ into ‘sales in international market. Consequently, anycountry, including India, engaged in the task of export promo-tion, has to establish specialised institutions for strengtheningexport-marketing effort for the country as a whole. This alongwill have the way for creating an export environment andexport- culture, on the foundation of which the exportmarketing effort at the corporate level can be effectively launchedon an intensive and sustained basis.With this object in view, Government of India have establisheda number of specialised institutions in the country for provid-ing the necessary services and assistance to individual corporateunit for a successful export effort. In view of the widelydiversifying nature of the export markets in different parts ofthe world and an equally diverse and varied nature of productsand services traded in international market, Government ofIndia have established specialised institutions at production/industry level for assisting exporters from different. sectors.Institutions engaged in export efforts fall in six distinct tiers. Atthe top is the Department of Commerce of the Ministry ofCommerce. This is the main organisation to formulate andguide India’s trade policy. At the second tier, there are deliberateand consultative organisations to ensure that export problemsare comprehensively dealt with after mutual discussions be-tween the Government and the Industry. At the third tier arethe commodity specific organisations which deal with problemsrelating to individual commodities and/or groups of com-modities. The fourth tier consists of service institutions whichfacilitate and assist the exporters to expand their operations andreach out more effectively to the world markets. The fifth tierconsists of Government trading organisations specifically set upto handle export/ import of specified commodities and tosupplement the efforts of the private enterprise in the field ofexport promotion and import management. Agencies forexport promotion at the State level constitute the sixth tier. Letus now discuss each of them in detail.

Government Policy Making andConsultationsAppropriate government policies are important for successfulexport effort. In view of the increasingly important and criticalrole of foreign trade in economic development, a separateMinistry of Commerce has been entrusted with the responsibil-ity of promoting India’s interest in international market. TheDepartment of Commerce, in the Ministry of Commerce hasbeen made responsible for the external trade of India and allmatters connected with the same. The main functions of theMinistry are the formulation of international commercial policy,

LESSON 32:EXPORT PROMOTION ORGANISATIONS

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Nnegotiation of trade agreements, formulation of country’sexport-import policy and their implementation. It has created anetwork of commercial sections in Indian embassies and highcommissions in various countries for export- import tradeflows. It has set up an “Ex-porters Grievances Redressal Cell”to assist exporters in quick redressal of grievances.Board of Trade: For ensuring a regular consultation, monitor-ing and review of India’s foreign trade policies and operations,Government of India have set up a Board of Trade withrepresentatives from Commerce and other important Minis-tries, Trade and Industry Associa-tions, and Export ServiceOrganisations. It is an important national platform for a regulardialogue between the Government and the trade and industry.The deliberations in the Board of Trade provide guidelines tothe Government for :appropriate policy measures for correctiveaction.Cabinet Committee on Exports: With a view to ensureregular and effective monitoring of India’s foreign tradeperformance and related policies, Cabinet Committee onExport has also been set up.Empowered Committee of Secretaries: For speedier andquicker decision-making, an Empowered Committee ofSecretaries has also been established to assist the CabinetCommit-tee on Exports.Grievances Cell: Grievances Cell has been set up to entertainand monitor disposal of grievances and suggestions received. Itis a cell meant for speedy redressal of genuine grievances.Grievances Committees headed by Director General of ForeignTrade and head of concerned Regional Licensing Authority havebeen constituted in the respective licensing offices. The Com-mittee also include representatives of FIEO, concerned ExportPromotion Council/Commodity Board and other departmentsand organisations. The grievances may be addressed to theGrievance Cell of the concerned Licensing Authority in theprescribed Performa.Director General of Foreign Trade (DGFT): DGFT is animportant office of the Ministry of Commerce, to help theformulation of India’s Export-Import policy and implementa-tion thereof. It has set up regional offices in almost all Statesand Union Territories of India. These offices are known asRegional Licensing Authorities. There is an Export Commis-sioner in the DGFT office who functions as a nodal point forall export promotion schemes. The Regional Licensing officesalso act as Export facilitation centres.Director General, Commercial Intelligence & Statistics(DGCI& S): DGCI& S has been entrusted with the task ofcompilation and publication of data on India’s Foreign Trade.It brings out various publications relating to Foreign Trade ofIndia. The major publications are as under:i. Monthly Statistics of Foreign Trade of Indiaii. Monthly Press Notes on Foreign Trade’.iii. Monthly Brochure of Foreign Trade Statistics of India

(Principal Commodities and Countries)iv. Indian Trade Classification based on Harmonised

Commodity Description and Coding Systemv. Indian Trade Journal

Ministry of Textiles: Ministry of Textiles is another Ministryof Government of India which is responsible for policyformulation, development, regulation and export promotionof textile sector including sericulture, jute and handicrafts, etc. Ithas a separate Export Promotion, . Division, offices, advisoryboards, development corporations, Export PromotionCouncils, and Commodity Boards. The advisory boards havebeen constituted to advise the govern-ment in the formulationof the overall development programmes in the concernedsector. It also devises strategy for expanding markets in Indiaand abroad. The four advisory boards are as under:i. All India Handloom Boardii. All India Handicrafts Boardiii. All India Powerloom Boardiv. Wool Development BoardThere are Development Commissioners, Handicrafts andHandlooms, who advises on matters relating to the develop-ment and exports of these sectors. There are TextileCommissioner and Jute Commissioner who advise on thematters relating to the growth of exports of these sectors.Textile Committee has also been set up for ensuring of textilemachine manufac-tured indigenously, especially for exports. Italso issues certificates of origin and other special certificates.States Cell: The cell has been created under Ministry ofCommerce. Its functions are to act as a nodal agency forinteracting with state Government or Union Territories onmatters concerning exp0l1 or import from the State or UnionTerritories. It provides guideline to State level exportorganisations. It assists them in the formation of export plansfor each cases.Development Commissioner , Small Scale IndustriesOrganisation: The Directorate has the headquarter if! NewDelhi and extension centres located in almost an States andUnion Territories. They provide export, promotion servicesalmost at the doorsteps of the small scale industries and cottageunit. The important functions are:i. to help the small scale industries to develop their export

capacitiesii. to organise export training programmesiii. to collect and disseminate informationiv. to help such units in developing their export marketsv. to take up the problems and other issues. related to small

scale industriesBesides, there are Directorates of Industries, National SmallIndustries Corporation and State Corporations for the promo-tion or exports from small scale industries.

Technical and Specialised ServicesAssistanceExport marketing effort at the individual corporate level alsoneeds to be reinforced through a number of technical andspecialised service inputs. These cover important and crucialareas like packaging, quality control, risk coverage, promotionand finance. Let us now discuss them in detail.

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Indian Trade Promotion Organisation(ITPO)Indian Trade Promotion Organisation was set up by theMinistry of Commerce, Government of India, on 1 st January1992 with its headquarters at New Delhi after the merger ofTrade Development, Authority (TDA) and Trade Fair Authorityof India ,(TFAI). It has five regional offices at Mambai,Bangalore, Kolkata, Kanpur and Chennai and four in Germany,Japan, UAE and USA.As a premier trade promotion agency of the Government ofIndia, the ITPO provides a road spectrum of services to tradeand industry so as to catalyse the growth of bilateral trade,particularly India’s exports and technological upgradation andmodernization of different industry segments.

Functions of Indian Trade PromotionOrganisationa. Organises Trade Fairs and Exhibitions :- It organises

various trade fairs and exhibitions at its exhibition complexin Pragati Maidan and other centres in India. It also extendsthe use of Pragati Maidan for holding pf trade fairs andexhibitions by other fair organisers both from India andabroad.

b. Involves the State Governments :- It enlists theinvolvement and support of the State Governments for thepromotion of India’s foreign trade. It promotesestablishment of facilities and ,infrastructure for holdingtrade’ fairs in state capitals or other suitable locations inIndia, in consultation with the State Governmentsconcerned.

c. Assists in Technological Upgradation and ProductDevelopment :- It provides assistance to Indiancompanies’ in locating suitable foreign collaborators fortransfer of technology, joint ventures, marketing tie-upsand investment promotion. It also assists Indiancompanies in product development and helps them toadapt to meet buyer’s requirements.

d. Helps in establishing Overseas Contacts :- It helps inestablishing a durable contacts between Indian suppliersand overseas buyers. It organises ‘buyer-seller meets with aview to bring buyers and sellers together. It also invitesoverseas buyers and organises their meetings with Indiansuppliers..

e. Other Services:-• To identify and nurture specific export products with

long-range growth prospects.• To conduct in-house and need-based research on trade

and export promotion.• To participate in overseas trade fairs and exhibitions.• To organize seminars, conferences and workshops.• To encourage and involve small and medium scale

units in export promotion efforts.

Indian Institute of Foreign Trade (11FT)Indian I Institute of Foreign Trade was set-up in 1963 by theGovernment of India a’s an autonomous body registeredunder the Societies Registration Act. It was set up with the

prime objective of professionalising the country’s foreign trademanagement and increase exports by developing humanresource, generating, analysing and disseminating data andconducting research.

Functions of Indian Institute of ForeignTradea. Training :- The IIFT has been recognised as a centre of

excellence for imparting training and education ininternational business. Its specialisation in intentionalbusiness and a global outlook makes it unique amongmanagement schools in the country. It offers an inspiringlearning environment, which transforms the’ bright youngstudents into talented creative professionals.

b. Collects and Supplies Information :- 11FT conducts,market studies and surveys in the overseas markets. It triesto find out demand for Indian products in overseas market.It supplies this information to the exporters. The exporterscan use such information while making their exportmarketing decisions.

c. Organises Seminars and Workshops :- 11FT organisesseminars and workshops in a number of export marketingareas, such as export pricing, export promotion, etc.Exporters can take advantage of such workshops andseminars by taking active part them.

d. Trade Delegations :- 11FT sends delegates abroad to studyoverseas markets and also to interact with overseasimporters. At the same time, it invites delegates fromabroad, who can study Indian market conditions and canalso interact with Indian exporters.

e. Publications:. A large part of the lIFT’s research work ispublished in the form of study reports, monographs,status papers, etc. for wider dissemination among thebusiness community, government departments andacademic fields. The institute publishes :-• Foreign Trade Review (FTR), a quarterly journal.• Focus WTO, a bimonthly magazine.• Technology Exports, quarterly newsletter.

f. Research and Consultancy :- IIFT has so far brought outover 570 research studies and surveys. It also acts as aconsulting house for solving the problems of the exportersand importers. It analyses the international businessenvironment and develops appropriate corporate strategiesfor the overseas markets.

g. Management Development Programmes :- Combining aunique ‘blend of research and consultancy, lIFT has been apacesetter in addressing to the needs of business executivesby continuously aligning the focus of its ManagementDevelopment Programmes with the changing realities. As aresult, its intensive short duration programmes havereceived the most enthusiastic response.

Indian Institute Packaging (LIP)The Indian Institute of Packaging was set up as a nationalinstitute jointly by the Ministry of Commerce, Government ofIndia, and the Indian Packaging industry and allied interests in1966, with its head quarters and principal laboratories at

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NMumbai and regional laboratories at Kolkata, Delhi andChennai.It is a training cum research institute pertaining to packagingand testing. Over the years, it has built up a very strong andcapable expertise in various fields of packaging sciences andtechnologies. It has excellent infrastructural facilities, which caterto the various needs of the package manufacturing and packageuser industries, both with regard to the domestic distributionand export market requirements.

Functions of Indian Institute ofPackaginga. Training Programmes :. It organises a number of training

programmes pertaining to packaging and also providessuggestions in regard to packaging.

b. Testing Facilities :. It also undertakes testing o f packagingmaterials and packages to ensure export quality.

c. UN Certification :- All dangerous goods packages need aUN certification mark before they can be dispatched. IIP isthe only authorised body in India to give this certification.

d. Environmental Cell :- The institute has an environmentcell, which guides exporters as to what type of material canbe used or incorporated in the packaging of their productsso as to reduce environmental threats.

e. Research and Development:- It undertakes research anddevelopment programmes for creating and ,improvingoverall infrastructural facilities for achieving packagingimprovement so as to prevent losses during transportation

f. Collection and Dissemination of Information :. Itcollects information on various packing and packagingstrategies and disseminate them to the exporter for theirbenefits. An up-to-date information 01:1 packagingdevelopments can be availed on its website, “http:/ /www.iip-in.com...

g. International Recognition :- The institute is internationalorganisations. It is recognised by Industrial DevelopmentOrganisation (UNIDO) and Centre (ITC) for consultancyand training.

h. International Membership :- It is a member of the AsianPackaging Federation (APF); the Institute of PackagingProfessionals (IOPPA), USA; the , Institute of Packaging(lOP) UK; Technical Association for Pulp and PaperIndustry (TAPPI) and the World Packaging Organisation(WPO).

i. Other Functions :-• It also carries out graphic designing for international

products.• It advises the government of India for all export

related packages.It is not binding or compulsory for an organisation or companyto be a member of lIP. However, on being a member one canavail the benefits of services provided by lIP, specially testingfacilities for packages to ensure high quality.

Indian Council of Arbitration (ICA)Indian Council of Arbitration (ICA) was set up in accordance tothe recommendations of the Committee on Commercial

Arbitration constituted by the Ministry of Commerce, Govern-ment of India. It was set up on 15th April 1965 as anautonomous non-profit organisation registered under theSocieties Registration Act, 1860. The main objective of theCouncil is to promote the use of commercial arbitration,particularly in the course of India’s export trade.ICA is a member of the Federation of International Commer-cial Arbitral Institution and has’ mutual co-operationagreements with the International Court of Arbitration, theLondon Court of Arbitration and apex arbitration bodies inThailand, Republic of Korea, Yugoslavia, Bulgaria, Romania,Malaysia, Australia, USA, Denmark, Mauritius, Russia, Ger-many, Egypt, Switzerland, Japan, Philippines, Sri Lanka, SouthAfrica and more.

Functions of Indian Council ofArbitrationa. The council provides arbitration facilities for all types of

domestic and international commercial disputes.b. It. uses its network of offices for conciliation of

international trade complaints received from Indian andforeign parties, for non-performance of contracts or non-compliance with arbitration awards.

c. It organises arbitration meetings, conferences, trainingprogrammes, etc., for company executives, businessmen,lawyers, arbitrators, etc., from time to time in different partsof the country.

d. It conducts research and publishes informative literature ondifferent aspects of commercial arbitration, including aquarterly Arbitration Journal.

e. It provides information arid advice to interested partiesregarding the drafting of trade contracts, arbitration lawsand facilities and dispute settlement procedures in India andin other parts of the world.

f. It keeps abreast of the latest developments, in the field ofinternational commercial arbitration and maintains co-operative links with national and international arbitrationbodies throughout the world.

Federation of Indian Export Organisation(FIEO)Federation of Indian Export Organisations (FIEO) is an apexbody of various export promotion organisations. It was set upin October 1965. It represents the Indian entrepreneurs’ spiritof enterprise in the global market. It has kept pace with thecountry’s evolving economic and trade policies and has providedthe content, directing and thrust to India’s expanding interna-tional trade. As the apex body of all Indian export promotionorganisations, FIEO works as a partner of the Government ofIndia to promote Indian exports.

Functions of Federation of Indian ExportOrganisationa. International Linkage:-

• It has forged strong links with counterpartorganizations in several countries as well asinternational agencies to enable direct communicationsand interaction between India and world businessmen.

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• It is registered with UNCTAD as a national non-government organisation, and has direct access toinformation and data originating from UN bodies andworld agencies like the IMF, ADB, ESCAP, WorldBank, FAO, UNIDO and others,

b. Dissemination of Information :-• It has bilateral arrangements for exchange of

information as well as for liaisoning with severaloverseas chambers of commerce and trade andindustry associations.

c. Liaisoning with the Government :-• It sends representations on policy matters to Central

and State (Regional) Governments.• It helps in. establishing contacts between the

government and commercial bodies both in India andoverseas’.

d. Market Development Assistance (MDAJ) :- The Ministryof Commerce, Government of India, through FIEO,reimburses certain percentage of the expenditure incurred bythe recognised exporters, such as all types of export houses,on sales-cum-study tours, participation in exhibitions andfairs abroad, advertisements in foreign media, etc.

e. Market Research and Development Department :- TheMarket Research and Development department offers thefollowing services to the exporters community :-• Arranging meetings with diplomats, incoming

delegations and buying missions.• Inviting delegations.• Organising trade fairs and exhibitions in India as well

as abroad.• Opening foreign offices and warehouses.• Organising seminars for promotion of international

trade.• Opening new FIEO offices abroad.

f. Publicity Department :- The Publicity department of FIEOperforms the following functions :-• Bringing out various special supplements in Indian

and overseas dailies in order to project the selectedfinished products in India and abroad.

• Creating and telecasting episodes in NEPC channel topromote India’s prominent brands in variouscountries covered by the channel.

• It has published Directory of Foreign Buyers andDictionary of Indian Exporters.

• It publishes a fortnightly magazine, “FIEO News”, tocover developments in the field. of international tradeconcerning India.

Marine Products Exports DevelopmentAuthority (MPEDA)Marine Products Export Development Authority (MPEDA)was constituted in 1972 under the Marine Products ExportDevelopment Authority Act 1972. The headquarter of MPEDAis located at Kochi in Kerala. The Authority operates twooverseas trade promotion offices, one at Tokyo (Japan) and the

other at New York (USA). The role envisaged for the MPEDAunder the statue is comprehensive, which covers organisation,coordination, regulation and growth of the export of marineproducts with special reference to the quality, processing,packaging, storage, transport, shipment, marketing extensionand training in various aspects of the industry.

Functions of Marine Products Exports DevelopmentAuthority

a. To promote seafood exports by liaisoning. with Indianexporters and overseas importers.

b. To develop contacts with government agencies and officialsto remove identified constraints.

c. To promote the image of Indian sea products in overseasmarkets through publicity campaigns.

d. To create awareness on the capabilities of Indian processing,packaging, quality and inspection procedures.

e. To find suitable joint venture. partners for deep sea fishing,aquaculture projects, processing and marketing value addedproducts, etc.

f. To implement development measures vital to the industrylike distribution of insulated fish boxes, putting up fishlanding platforms, improvement of peeling sheds,modernisation. of industry such as upgrading of platefreezers, installation of machinery, generator sets, ice makingmachineries, quality control laboratory, etc.

h. To promote brackish water aquaculture for production ofprawn for export.

i. Promotion of deep-sea fishing projects through testfishing, joint venture and equity participation.

j. To undertake various market promotion programmes, suchas :-• Conducting overseas market survey.• Collecting data and maintenance of data bank. -’• Providing assistance for market development.• Undertaking publicity through media and producing

literature and films on trade promotion.• Sponsoring of sales team and delegations abroad.• Inviting overseas importers and experts for export

promotion visits to India.• Organising buyer-seller meets in overseas markets.• Participating in overseas trade fairs and exhibitions.• Organising trade fairs and exhibitions in India. For

example, MPEDA organises seafood trade fair andexhibition every alternate year in India.

Export Processing Zones (EPZS)Export Processing Zones (EPZs) are industrial estates, whichform enclaves from the Domestic Tariff Areas (DTA) and areusually situated near seaports or airports. They are intended toprovide an internationally competitive duty free environmentfor export production at low cost. This enables the products ofEPZs to be competitive, both quality-wise and price-wise, in theinternational market. There are seven EPZs in India at :-a. Kandla (Gujarat).

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Nb. Santacruz (Mumbai).c. Falta (West Bengal).d. Noida (UP).e. Cochin (Kerala).f. Chennai (Tamilnadu).g. Visakhapatnam (Andhra Pradesh).Government has also permitted’ development of EPZs byprivate, state or joint sector. The Inter-Ministerial Committeeon private EPZs has already cleared three proposals for settingup of private EPZs in Mumbai, Surat and Kancheepuram.

Difference Between EPZS and SEZSThe main difference between the SEZ and the EPZ is that theSEZ is an integrated township with fully. developed infrastruc-ture on international standards whereas EPZ is just anindustrial part. In fact,-all existing EPZs have been asked toconvert themselves into SEZs. However, some units are notinterested in the conversion on account of the sale into DTA atconcessional rate of duty is not available inSEZs. The Govern-ment has asked such units to move out to the Domestic TariffArea (DTA).

Facilities Available to Units in EPZSa. Each zone provides basic infrastructure such as developed

land for construction of factory sheds, standard designfactory buildings providing ready-built sheds, roads, power,water supply and drainage.

b. Customs clearance is arranged within the zones at no extracharge.

c. Provision has also been made for locating banking, postoffice facilities and offices of clearing agents in the ServiceCentre located in each Zone.(For more details refer EOU/SEZ/EHTP/STP units)

100% Export Oriented Units (100% EOUS)The Export Oriented Units (EOUs) Scheme, introduced in early1981, is complementary to the EPZ scheme. It adopts the sameproduction regime but offers a wider option in location withreference to factors like source of raw materials, port, hinterlandfacilities, availability of technological skills, existence of anindustrial base and the need for a larger area of land for theproject.EOUs have been established with a view to generating addi-tional production capacity for exports by providing anappropriate policy framework, flexibility of operations andincentives.(For more details refer to EOU/SEZ/EHTP/STP units)

EOUs, EPZs, Electronic Hardware Technology ParkUnits (EHTPs) and Software ‘Technology Park Units(STPs)Units undertaking to export their entire production of goodsand services may be set up under :-a. The Export Oriented Unit Scheme;b. The Export Processing Zone Scheme.c. The Electronic Hardware Technology Park Schemed. The Software Technology-Park Scheme.

Activities Undertaken BV Such Unitsa. Manufacturing, servicing, repairing; remaking,

reconditioning, re-engineering including making ,of gold/silver/platinum/jewellery and articles thereof;-

b. Agriculture including agro-processing, -aquaculture, animalhusbandry, bio-technology, floriculture, horticulture,pisiculture,viticulture, poultry, sericulture and granites;

b. Export of all products except goods mentioned asrestricted and prohibited items of exports in ITC (HS)Classification of Export and Import items.

c. Software units may undertake export using datacommunication links or in the form of physical exportsincluding export of professional services.

d. Units for generation distribution of power can also besetup in EPZs.

e. No trading unit is permitted

Facilities for Units Located under EOU/EPZ/STP/EHTPSchemes

a. Importability or Procurement of Goods from DomesticTariff Areas :- An EOU/EPZ/EHTP/STP unit canimport or procure from the domestic sources, free of duty,all its requirements of capital goods, raw materials,consumables, spares, packaging material, office equipments,etc.• No licences are required for such import or domestic

procurement.• Such units can utilise goods imported or domestically

procured ,over a period of 2 years.b. Exemption from Duties ;. They are exempted from most

of the duties and levies such as state levies including salestax, anti-dumping duties, etc.

c. Income Tax Concession :- They are also entitled forconcessions in respect of payment of income tax undervarious sections of the Income Tax Act, 1961.

d. Exemption from Industrial Licensing :- They areexempted from industrial licensing for manufacture ofitems reserved for Small Scale Industry sector.

e. Sub-contracting:- They can, with the permission of theCustoms Authorities, sub-contract part of the productionand production process in DTA.

f. Inter-Unit Transfer :-They can supply to other EOU/SEZ/EHTP/STP units without payment of duty and suchsupplies are counted towards fulfilment of exportobligation.

g. Supplies from DTA :- Supplies form DTA to EOU/SEZ/EHTP/STP units are regarded as ‘Deemed Exports’ andthe DTA supplier is eligible for the deemed export benefits.

h. DTA Sale :- Units, other than gems and jewellery units,may sell goods and services upto 50% of. FOB value ofexports, subject to fulfilment of minimum NFEP onpayment of applicable duties. No DTA sale is permitted incase of motor cars, alcoholic liquors, tea (except intent tea)and books.

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i. Export Obligation :- They can achieve export performanceand Net,Foreign Exchange Earning as a Percentage ofexports (NFEP) cumulatively over a period of 5 years.Virtually no penal action is taken for shortfalls during thefirst three years of operation.

j. 100% Foreign Equity :- 100% Foreign Direct Investment(FDI) in the manufacturing sector is permissible to theEOU/SEZ/EHTP/STP units. For FDI in services andtrading sector, the sectoral norms as notified by theDepartment of Industrial Policy and Promotion areapplicable.

k. Other Entitlements:-• Can procure duty-free inputs for supply of

manufactured goods to advance licence holders.• Are exempted from State Trading regime except in

limited cases.• Can club their exports with exports of their parent

company for purposes of Obtaining Trading orExport House status.

• Manufacturers processors who have acquired qualitystatus with specified certification from identifiedagencies are eligible for double weightage forrecognition as status holder.

• Can repatriate their profits freely without any dividend-balancing requirement.

l. Visvesvaraya Industrial Research & Development CentreThe World Trade Centre, Mumbai has been named as the M.Visvesvaraya Industrial Research and Development Centre afterthe name of Dr. M. Visvesvaraya, an engineer and a scientist. Itwas established in 1970 as a non-profit company licensed underSec. 25 of the Companies Act. The Council of Managementcomprising of industrialists, representatives from Central andState governments and apex Trade Promotion Organisations,governs it.MVIRDC became of a member of WTCA in 1971 after whichit was known as WTC, Mumbai. It consists of three centrallyair-conditioned building. The arcade comprises of various stateEmporia, banks, offices, shops and showrooms. It also housesthe prestigious Expo-Centre (exhibition hall). Centre- Icomprises of areas leased to various organisations connectedwith world trade, business and industry such as EXIM bank,RBI, EPCs, etc. It also houses WTC offices as well as meetingrooms. Centre-II has been entirely leased out to the IndustrialDevelopment Bank of India. (IDBI)

Functions of World Trade Centrea. Trade Information Services :- WTC offers the IMPEX

Data Bank facility. It is India’s first ever computeriseddatabase on imports and exports. It comprises of detailson export and import transactions. It helps in identifyingproducts in demand for export or import, locate markets,evaluate competitive prices, understand the market players,etc.

b. WTCA Online :- WTCA online is a unique internet basedwebsite, providing a one-stop source for global businessinformation through strategic alliances with leading

information and service providers. WTCA online offersquality products representing the best international tradeinformation and services at discounted prices.

c. Trade Education Services’:- World Trade Institution(WTI), the educational wing of WTC Mumbai, was. set upin 1991. It was the pioneer in introducing a six monthsPost Graduate Diploma in Foreign Trade (PGDFT) andPost Graduate Diploma in Foreign Exchange and RiskManagement (PGDFERM). It has been certified as ‘BestPractice Institute’ by WTCA, New York.

d. Foreign Trade Facilitation Cell :- A Foreign TradeFacilitation Cell has been set up in order to :-• To give advice on starting of import/ export business

and authorities to be approached for solving import/export problems.

• To make recommendations to the government inregard to the EXIM Policy and procedure.

e. International Trade Library :- It is an exclusive source ofbusiness information. Businessmen and students can easilyaccess various sources of trade information through thelarge collection of trade directories, journals and relatedpublications. Market reports on different products by ITCand cm are the main strengths of this library.

f. Business Services :- Specific business meetings can be“Organized for the visiting overseas businessmen for theirproducts of interest. A minimum two weeks advance noticeis required. WTC also offers state of the art supportfacilities, video conferencing, Temporary office space,meeting rooms, translation capabilities, etc.

g. Research and Development :- The Centre has conductedresearch work on diverse topics like Multimodal Transport,Agro-based Industries, European Union Market, etc. As afollow up to such studies the Centre has brought outresearch publications. Current thrust of Centre’s researchactivity is on the implications of the WTO agreements onIndia’s foreign trade.

h. Other Services :- Apart from the above services, the WTCalso provides exhibition facilities, facility of WTC clubs(lounge and dining services for members and guests)different publications’ such as Trade Promotion Bulletin(monthly), Current Research and Development Briefs(Monthly), WTC Intercom (Quarterly), etc.

Chamber of Commerce (COC)Manufacturers, industrialists and traders in different regions asper their needs and requirements establish the Chamber ofCommerce and Industry. The membership of Chamber ofCommerce is open to all. They playa prominent role in theexport promotion activities of trade and industry. They arrangeperiodic meetings which help in :-a. An exchange of information and compilation of data,

indicating the present state of the export activities in aparticular trade or industry.

b. An exchange of views and formulation of specific remedialpolicies, which will be taken up with the Government.

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NMembership of the Chambers and Associations is open to allmembers of trade and industry. The discussions therein areamongst professional people who have a thorough knowledgeof a trade or an industry. This can be an excellent forum toproject practical, viable and sound suggestions for removingimpediments or changing policies in the national interest.Many of these Chambers or Associations have separate sectionsor cells dealing with the export trade, which are helpful ininterpreting government policies to members, disseminatingdata on export markets and also making representations to thegovernment.

Question BankQl. What are the common functions of Export Promotion

Council?Q2. What is the difference between EPCs and Commodity

Boards?Q3. What are the functions of Commodity Boards?Q4. Why were Export Inspection Agencies constituted?Q5. What role does Indian Trade Promotion’ Organisation

play in export promotion?Q6. Write note on Indian Institute of Foreign Trade.Q7. Explain the role of Indian Institute of Foreign Trade in

promotion of exports.Q8. What role does Indian Council of Arbitration play in

export promotion?Q9. Explain the role of Federation of Indian Export

Organisation in export promotion? Q.10 What areExport Processing Zones? How do they help inpromoting exports?

Qll. What is 100% EOU? What are its benefits?Q12. Write a brief not on All India Handicrafts Board.Q13. Write a not on MPEDA.

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Learning Objectives• Introduction• Objectives Of State Trading• Functions• Advantages• State Trading In India• Export Development Measures• Weakness & Future Plans Of Stc• Future Of Stc• Chart On Stc• Question Bank

IntroductionThere is no precise definition of State trading. There are varioustypes of’ government participation in foreign trade, all of whichcan be defined as State trading. For example, in the centrally-planned economies the entire foreign trade is nationalised andis, therefore, conducted directly by government departments orgovernment-owned corporations. On the other hand, there arecountries, which are essentially free enterprise economies, butexport and import of specific commodities are entrusted togovernment trading organisations or departments. Forexample, import of raw and unmanufactured tobacco is a Statemonopoly in France. The Government Food Agency of Japanregulates the import, export and internal distribution of rice;wheat and barley. Similarly, Japan Monopoly Corporation whichis a State body has the exclusive rights of tobacco importation.The Australian Wheat Board has the exclusive rights for exportsof wheat. There are many such instances all over the world. ,The third variety of State trading is found in mixed economicslike India. In I India, State participation in foreign trade ismostly done through government-owned trading organisationsor through government departments. The government-ownedtrading corporations are, h9wever, commercial entities registeredunder the Companies Act and have, the same rights andobligations as any private sector firm.

Rationale of State TradingState hading is resorted to for a number of reasons. In thecentrally. planned economies, foreign trade as a matter of Statepolicy is nationalised. Foreign trade in those countries is to beconducted by State trading organisations because otherwise thecentral planning mechanism will not function properly. In thedeveloped free enterprise economies, State trading sometimes ispractised as a source of revenue. That is why it is found thattrade in products like alcohol and tobacco is subject to Statemonopoly. Similarly, trade in drugs and arms and ammunitionis managed through State bodies in the interest of health andnational security of the country. State trading in a number ofagricultural products is quite common because State interven-tion is necessary to avoid large fluctuations in the prices and

preventing deterioration in the income of the agriculturalproducers.State trading, however, is more commonly practised in thedeveloping economies. The reasons behind this are varied. First;such countries may not have adequately developed private sectortrading bodies which can effectively participate in internationalcommerce and also protect the national interest. Secondly, theprivate sector bodies, though possessing adequate trading ex-pertise, will be solely motivated by profit consideration.However, it may be necessary from the national standpoint topromote new export items and cultivate new export marketsever. by sustaining short-terms losses. This can be done only bygovernment bodies having act developmental role and whichare backed by the government so that the financial losses do nothamper the pursuit of long-term objectives. Thirdly, thecentrally-planned economies have emerged as important exportmarkets for a large number of developing countries includingIndia. Since the foreign trade of these countries is in-variablyconducted through State trading organisations, it is found thatgovernment trading bodies are in a better position to negotiatewith their counterparts in the centrally-planned economies.

Canalisation of ImportsState participation in imports in generally motivated by someother considerations. These are:a. to reap the advantage of bulk buying,b. to mop up any excess profit which the private sector firms

might enjoy in import business, andc. to ensure proper internal distribution of the imported

items and to maintain stable domestic price level.

Advantage of Bulk BuyingThere are essentially three elements which can be associated withthe advantage of bulk purchase. First, a bulk purchaser may getbetter discount and trading terms. Secondly, since the bulkpurchaser will be a monopolist, the possibility that prices ofcommodities, in short supply can be pushed up by competitivebidding by the Indian importers, is eliminated. Thirdly, sincethe international markets of many importable items aremonopolistic, State trading will give rise to countervailingpower which may mitigate to some extent the ill effects of themonopolistic market structure.

Mopping up of Excess ProfitsIn a situation where demand for imports exceeds the supply ofimports, there is bound to be a premium on importedmaterials. If the import licence is issued to an importer, thepremium will accrue to him. Further, ‘the extent of thepremium will be determined by the market forces. The higher isthe excess demand for imports, the higher will be the premium.If the premium is high it means not only a correspondinglylarger windfall profit to the importer but also a rise in the cost

LESSON 33:STATE TRADING IN INDIA

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Nof production of those items which use the imported materialas input. Both these problems can be solyed through State.trading for two reasons: First, because the State tradingorganisations having the monopoly right to import aregovernment organisations, the premium will accrue to thegovernment. Secondly, the magnitude of the premium will alsonot be a problem because the government can decide on theprices at which the State trading organisations will release theimported materials in the domestic market.

Maintenance of Internal DistributionIf foreign exchange availability poses no problem and theimport trade is completely free, internal distribution ofimported items at fair and equitable prices will not create anyproblem. But since such conditions generally do not prevail in adeveloping country, sporadic scarcity of imported items willoccur. ‘To avoid these problems, it may be necessary to handover the import of essential items to government tradingorganisations which can plan the import operation in such away that a steady in flow will be. maintained. This will avoidsudden scarcities and consequent spurt in domestic prices.

Objectives of State TradingA country may undertake state trading to achieve one or moreof the following objectives:i. To achieve its political objectives,ii. To boost its export trade,iii. To enlarge domestic planning programmes by purchasing

products required to fill a gap in the plans and bycontrolling outside economic forces that may affect theseplans,

iv. To improve the country’s balance of internationalpayments;

v. To control foreign exchange,vi. To maintain national security and defence by furthering

military preparedness and by preventing potential enemiesfrom receiving strategic materials,

vii. To acquire specific products either because they can beobtained at lower cost or because they are scarce at home orabroad,

viii. To advance domestic interests by improving bargainingpower in trade or by protecting trade against foreigncompetition.

Function of the State TradingCorporationAt the outset, the main function of STC was to deal withbilateral trading practices, especially in the socialist countries. Buttoday it has become a premier trading house having branches inalmost all the trading countries of the world. It deals in nearly300 commodities spread over 84 countries of the world.

Trading Activities of the STCa. Direct Trading :- Direct trading includes those goods

where STC has monopoly to deal with. Such goods areprocured, packed and shipped by STC while import itemsare purchased from the foreign countries by STC officeslocated there.

b. Indirect Trading :- In the case of indirect trading, thecontracts for the sale or the purchase of commodities arenegotiated by STC while the actual fulfilment of thecontracts is entrusted to the private businessmen enrolledby the STC.

c. Canalised Trade :- Canalised trade includes the import orexport of certain items through the concerned agencies ofSTC. The canalised items of export include sugar, castor oil,molasses, groundnut extractions, etc. Canalised items ofimports include edible’ oils, writing and printing paper,non-edible oils, etc.

d. Export Promotion Measures:-• It provides financial and raw material assistance.• It participates in trade fairs and exhibitions.• It undertakes product research.• It undertakes market research.

e. Other Activities :- STC also performs servicing functions,thereby bringing buyers and sellers together and assistingthem in fulfilling contracts.• It helps the government departments and, industrial

concerns in processing supplies of plant and machineryfrom abroad.

• In some cases, it settles trade disputes between theIndian and foreign parties.

The corporation is successful in introducing several newcommodities for exports and in developing new markets forIndian goods. In recent years, the STC is also taking activeinterest in marketing research, advertising and sales promotion.,However, it is a public sector organisation with usual difficul-ties and limitations of its own.

Services Rendered by the State TradingCorporationa. To the Indian Industry :- STC helps thousands of Indian

manufacturers to find markets abroad for their products’. Itassists them in making the best use of raw materials andproduction infrastructure, guides and helps them in theirmarketing efforts. Some of the services offered by STC tothe Indian manufacturers include :-• Provides financial assistance to the Indian exporters on

easy terms.• Imports machinery and raw materials for export

production.• Assists in the areas of marketing, technical know-how,

quality control, packaging, documentation, etc.• Supply of imported goods in small quantities as per

the requirements of buyers.• Helps in exhibiting the products .of small scale

manufacturers in the international trade fairs andexhibitions.

• Market intervention on behalf of the Government:b. To the Overseas Buyers :- STC acts as an expert guide for

the overseas buyers interested in Indian goods. It helpsthem in finding the best Indian manufacturers, undertakesnegotiations, fixes delivery schedules, overseas quality

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control, etc., and tries to provide a complete satisfaction tothe overseas buyers.

c. To the Indian Consumers :- Indian consumers are alsobenefited from STC’s expertise and infrastructure. STCimports essential commodities in order to cover shortfallsarising in the domestic market during the periods ofscarcity. Generally, it imports the items of daily requirementssuch as sugar, wheat, pulses, etc., so as to stabilise theirprices.

Advantages of State TradingOne of the important features in most countries in the post-war years has been the rapid extension of the function of thestate in commercial fields. In most countries trade is closelyregulted by the state, while in others it is partly or whollyconducted by state organs. In India, too, the trend towardsstate participation is becoming increasingly significant.The controls over international trade are, in some respect, themost dangerous of all, and they stem from state trading. Privateenterprise economies have a considerable admixture ofgovernmental trade. State trading may be assumed for pur-poses of governmental responsibilities for defence, the desire toprotect important sources of taxation and control publicmorals. The limitation of foreign exchange and shipping, plusthe need for saving manpower were responsible for statetrading and bulk purchases during the war and in the warperiod of reconstruction. There was an element of monopolyselling and monopoly buying. The argument for the perpetua-tion of the system rested on economies of scale. If foreignproducers, for example have assured markets in governmentalbulk purchase contracts, they would cease to worry aboutmarketing problems and would concentrate on efficientproductions, passing on a part of the gains of efficiency to theconsumer in the form of lower prices of goods.Few countries are willing however, to allow a foreign govern-ment to deal directly with private producers in importantmarkets without intervention. Such foreign government mayyield to the big buyers to squeeze down prices, and improvetheir terms of trade. This calls for an organisation on theselling side. With both the buyer and seller orgainsed, thereshould solution and which frequently results in a stalemate, andalways leads to complaints

State Trading in IndiaState trading in India has a fairly long history. State trading inimports is first discussed followed by a discussion on Statetrading in exports.-

State Participation in ImportsThe advisability of taking over imports’ of certain specifieditem was first considered by the Government of India in 1948.The context was the abnormal increase in the price of EastAfrican cotton of which India was a bulk importer. The marginbetween the prices at which the import was negotiated by theGovernment and the domestic price thereof was so high thatsuggestion was made that the Government of India shoulddirectly import the East African cotton so that the marginbetween the domestic price and the c.i.f. price could accrue to theGovernment. The Government, however, took a decision not

to take over import trade in East African cotton.1 Since thenState trading in imports was discussed by various committeesand by 1956 the Government had come to the conclusion thatthere should be government corporations which were to beentrusted with the function of import of specific items. Twofactors persuaded the Government that canalisation of importsfor some items . was necessary. The first factor was the graduallyincreasing trade with the’ socialist countries. Private traders inIndia had not the expertise in dealing with the Governmenttrading organisations in these countries, and therefore,faced problems while negotiating export import contracts. Sinceunder the rupee-payment arrangement exports and importshave to balance; the Government of India have the responsibil-ity to see that the import plan is fulfilled. A State tradingorganisation, through which imports could be canalised, wouldbe an effective instrument to achieve this result. The secondfactor was the artificial scarcity created by small importers whohad been given import licences to make abnormal profits.The State Trading Corporation of India (STC) was set up bythe Govern-ment of India in 1956 which was designated as thesole import agency of such items as the, Government maydecide from time to time. STC, however, would import otheritems as well apart from the canalised items. The functions ofthe STC as given in the Memorandum of Association are asfollows:i. To organise and undertake trade with the State trading

countries as well as other countries in commoditiesentrusted to the company for such purpose by the UnionGovernment from time to time and to undertake thepurchase, sale and transport of such commodities in Indiaor anywhere else in the world.

ii. To undertake at the instance of the Union Governmentimport and/or internal distribution of any commodities inshort supply with a view to stabilising prices andrationalising distribution, and

iii. To generally implement such special arrangement forimports, ex-ports; internal trade and/or distribution ofparticular commodities as the Union Government mayspecify in the public interest.

Very high margin of profit earned by the importers of certainconsumer commodities like cassia, betel nuts, cloves, etc., forwhich adequate foreign ex-change could not be allocated due totight foreign exchange position, prompted the Government totake the decision of complete import canalisation of itemswhere either the speculative profit or profit due to a widedisparity between the domestic demand-supply position waslikely to be high. The success of the State canalising agency inarranging bulk import by items, initially canalised, such as rawsilk, caustic soda, soda ash, etc. at favourable prices also gave theGovernment more confidence in enlarging the sphere ofimport canalisation.By canalising the import of speculative items, the Governmentmanaged to appropriate the. profit which otherwise would havegone to the quota holders. The profit made in these operationshelped the Government to pursue another policy objective, viz.,export promotion. The State Trading Corporation was directed

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Nby the Government to push up export of items which aredifficult to sell, and therefore may involve financial losses.“In order to offset the losses on export of difficult-to-sellitems. import of certain scarce commodities, such as betelnuts,cloves, copra, etc., are canalized through the State TradingCorporation. When imports of these items……. Are canalisedthrough the STC, the corporation mops up a portion of thelarge profit which is available on these commodities…….”!The maintenance of an equitable distribution of importedmaterials as well as to keep the interests of the unorganisedsector of the industry in fact are also considerations which forcethe Government to use the instrument of import canalisation.Stabilisation of raw material prices is another objective whichwas sought to be achieved through the instrument of importcanalisation. Import of mercury was canalised in 1961. Thedomestic sale price of mercury had shot up in 1960 to Rs. 3,500per flask against a of. price of only Rs. 1,000 per flask. Thereason of such an abnormal rise in price was speculation. Thecanalisation of import through the State Trading Corporationimmediately produced the desired result. The State TradingCorporation fixed its sale price at Rs. 1,800 per flask and thedomestic sale price stabilised at Rs. 2,200 per flask. However, forthe manufacturers of caustic soda, who needed mercury as abasic raw material, the STC charged significantly lower price, viz.,a 15 per cent markup on the of. price of Rs. 800-900 per flask.For others, the price was Rs. 1,800 as indicated above. Thus,canalisation in effect achieved two objectives: first, to ensuresupply of imported raw material at reasonable prices to thedomestic I manufacturers, and secondly, to mop up the excessprofit which inevitably I would be there, when adequate foreignexchange could not be allocated for ‘ the importation of anitem.The following items have been canalised for import (subject tochanges from time to time):Newsprint, Wool, Palm oil (edible), Rayon grade woodpulp,Synthetic ~ rubber, Caprolactum, Alkaloid benzene, Endrinetechnical, Chlorine diphosphate, Palm oil (soap), Sunflowerseed oil, Sisal/manila hemp, Paraxylene, Tallow, Carbaryltechnical, Tetracycline HCL, Poly filament yarn, Ampicil trihyd,Art silk yarn, Chloram powder, Pot. Chloride, Soyabean oil,DMT, ME glycol, Cement, Sugar, White printing paper, Non-ferrous metals, Asbestos fibre, Antimony metals, Mercury andAG fluorspar.

Impact of CanalisationAnalysing the impact of canalisation, the Ministry of Com-merce submitted before the Estimates Committee:“The effect of canalisation of import through State agencies hasresulted in savings in foreign exchange on imports on accountof bulk purchases and also on account of bulk shipments andin supply of raw materials to consumers in the country atreasonable rates”

Other Advantages are Stated to be

a. import and distribution in a planned and phased manner,b. long-term supply arrangements,

c. self-generation of foreign exchange through special linkarrangements,

d. equitable distribution in India through’associations/consortia”.2

However, views of the trade and industry in respect of importcanalization were not always favourable.A major complaint of industry and trade has been regarding thepricing policy and the high service charges. It has been pointedout that in the case of some items, specially raw materials, t9iprices charged by the STC have been excessive. Anothercomplaint has been the absence of close liaison betweenindustry and trade and the State trading agencies. At present,trade and industry have no means of knowing how exactly arethe State trading agencies- fixing their prices.Anlaysing the Indian situation, Mr. Boothaligam, DirectorGeneral, NCAER, and a former Secretary to the Government ofIndia, submitted before the Estimates Committee:“Canalisation could be justified and be beneficial only in areaswhere two tests can be met. The first is that the organisationmust be equipped to work and actually work in such a mannerthat bulk purchases are made economically taking advantage offavourable changes in the world market. The second is that thefinal user must get his material at least as cheaply and as quicklyas he might have if allowed to import himself.”To conclude, the observations made by the Estimates Commit-tee may be noted:“The Committee agrees that canalisation is no doubt a questionof policy which only the Government is competent to decide.They would, however, suggest that the canalisation of importof a commodity may be done if it serves public interest. Theywould also stress that before canalisation of import ofcommodities was decided upon, all the important factors,including the capacity of the Corporation, should be taken intoconsideration. They recommended that after canalisation isdecided upon, the Government must exercise vigilance to seethat it served the purpose for which it was undertaken”.

Canalisation of ExportsThe basic objectives of State trading in exports are as fo11ows:a. It was observed in the case of certain products that there

was secular decline in the total value of exports. It wasthought that a govern-ment trading organisation would beable to reverse this trend by concerted action.

b. In some cases the inter se competition among the Indianexporters was resulting in lower unit value realisation. Entryof State trading organisation in the international marketthrough which exports were to be canalised could result inthe improvement of unit value realisation. .

c. There are certain products for which. there maybe apremium in Lie international market. By canalising exportof such products, excess profits from export operation canbe mopped up by the Govern-ment.

d. Another objective of canalisation was to eliminate underinvoicing. It was found that sometimes the Indianexporters were quoting lower prices in their invoices whilethe world prices for such products were considerably higher.

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This led to the suspicion that the country had been losingforeign exchange because of the malprac-tices adopted bycertain exporters.

e. Canalisation was also thought of as an instrument toimprove the bargaining power of Indian exporters. It wasfound that the principal buyers in Western Europe and theUnited States were large corpora-tions and to negotiatecontracts with them would require the exist-ence of anequally large counterpart in India which would be able tosupply exportable products in bulk quantities. Especially forproducts which originate in the small-scale sector, acoordinating agency like the STC would be helpful inpromoting export of such products.

The following items have been canalized for export (subject tochanges from time to time):Sugar, Semi-processed leather, Castor oil, Footwear leather,Cement and clinker, Rice basmati, Shellac/lac, Opium crude,Salt, Lemongrass oil, Canvas/ Plastic footwear, Molasses,Groundnut extractions, Barytes, Chrome ore, Silimanite andProcessed mica.The State trading organisations have also a promotional role sofar as exports are concerned. As regards non-canalised items, thebasic objectives of the State trading corporations are:1. To function as catalytic agency for promoting new items of

export. For example, in 1981-82 several new items wereintroduced in international markets by the STC includingrayon viscose fabrics to the USA, textile fabrics and threadsto Vietnam, green tea to Algeria and stereo musicequipment to Hungary. Algeria and Libya have beenidentified as potential markets for a number of agriculturalcommodities.

2. To form consortia. of manufacturers specialising indifferent’ lines, like railway wagons, readymade garments,plywood, etc.

3. To provide support to traditional items, viz., jute, coffee,coir, etc.

4. To identify new export markets. STC developed several newmarkets during 1981-82 including Saudi Arabia and Malaysiafor mango pulp, Hungary and GDR for fashion garments,the UK for golf shoe uppers, Spain for footballs andUganda for bicycle and bicycle parts. STC has exploredSouth Korea and Hong Kong for export of Indian goodsto third countries. STC is negotiating with Hong Kong forexport of building materials and textiles for export to theUSA and African countries.

5. To introduce products in international markets particular-lythose manufactured by the small-scale and cottage sectorsuch as sandalwood, billets, silver jewellery, kuth oil, driedmush- room, etc

6. To introduce product adaptation and development keepingin line with the changes in the international markets. Forexample, Mica Trading Corporation is trying to exportfabricated mica as the demand for the traditional product,viz., processed mica, is declining over the years.

Performance of the State TradingCorporation

Performance Indicators

Exports from IndiaSTC exports a diverse range of items to a number of destina-tions throughout the world. Exports by STC vary fromtraditional agricultural commodities to sophisticated manufac-tured products.Besides, negotiating, contracting and shipping, STC seeks tointroduce new products, explore new markets and undertakewide ranging ancillary functions such as product development,financing, quality control and import of machinery and rawmaterials for export production.STC makes use of its world-wide connections, abundantexperience, up-to-day information about the market trends andlong term perspective on various commodities to ensurecompetitive prices, right quality and adherence to deliveryschedules to the buyers abroad.

Principal Items of Exports

Imports into IndiaSTC imports a number of essential commodities to cover thedomestic shortfalls and hold the price line. STC serves thenational objective by arranging timely imports at most competi-tive prices. In the process, the Corporation makes best use ofits strength in handling bulk imports, vast infrastructure andabove all an experience of over four decades in fulfilling theneeds of the industry.

Principal Items of Imports

Export Development MeasuresThe export development measures undertaking by STC during1989-90 included the following;• STC provided financial and raw material assistance for the

export of ibuprofen, thermoplastic wovens, phosphorourcompounds and mercury salts. Oxalic acid / diethyl oxalate.

Annual Turnover (2000-2001) Rs. 1040 Crore (US$ 228 million) Equity Rs. 30 Crore (U8$ 6.6 million) Profit after tax (2000-2001) Rs. 3 Crore (U8$ 0.7 million) Net Worth (as on 31.3.2001) Rs. 421 Crore (U8$ 92 million)

Agricultural Commodities Manufactured goods Wheat, Rice & 8ugar Chemicals, Drugs & Medical Disposables Spices & Cashew Engineering & Construction Materials Tea & Coffee Consumer Products Tobacco and Rubber Textiles Garments Opium Leatherware Groundnuts Processed Foods Castor oil & Seeds Jute Goods

Agricultural Commodities Manufactured goods Edible Oils Hydrocarbons Sugar Gold & Silver Wheat Urea Fatty Acids Scientific Instruments Pulses Instruments for Police & Hospitals

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N• During the Year, STC participated in 23 fairs, exhibitions

and buyer/seller meet in India and abroad including IITF ‘89, New Delhi in which STC’s stall was awarded GoldMedal for best display.

• STC’s Design and Development Cells based in New Delhiand Agra developed a number of new samples of footwearand shoe uppers for display in various international fairsand exhibitions and for negotiations of export orders onbehalf of the small scale industry. Testing facilities forleather items were also provided in STC laboratories to helpthe small scale industry in quality control.

• A number of machines were installed in design-cum-Development Cell at Jalandhar for testing the quality ofgoods and other material being used for manufacture ofsports items.

• For the first time, STC undertook the task of purchasingsoyabeans in the mandis, prcessing and selling the oildomestically and exporting soyabean meal.

Offshore TradeThe Corporation’s offshore trade during 1989-90 increased toRs.14 cores from Rs 4 crores in 1988-89. The main items andmarkets for which trading were undertaken were. That rice toDubai and Yemen, Iranian cement to Nepal, IndonesianCondensed milk to Maldives and Chemicals and pharmaceuti-cals to Poland from Germany.Foreign Exchange Earnings/OutgoThe Total exchange earnings and outgo during the year are givenbelow.• Foreign exchange earnings by way

Of exports (FOB Value) 731.82• Foreign exchange outgo;

• Imports (CIF Value) 610.51• Interest 50.06• Other expenses 7.25

STC set a target of Rs 580 crores for exports for the year 1990-91 During the year emphasis was laid on direct buying andselling.Salient features of the export strategy adopted by STC for 1990-91 are given below:1. STC continued to make efforts to strengthen supply base

for selected commodities to be identified as thrust areas.2. STC took action to underwrited part or whole of

production of identified units for export of manufacturedproducts.

3. STC financed export oriented projects and convertedfinancially weak companies into exporting. Items addedwere tea and castor oil.

4. STC took up development of Brand Marketing in selectareas e.g sports goods.

5. An attractive package of services offered to the associatessuch as:I. Development of infrastructural services for the

associates by way of import, bulk purchasing locallyand warehousing.

II. Financial assistance for expansion of capacity.III. Setting up of testing laboratories to ensure consistent

quality export.

Weaknesses and Future Plans Of STCSome of the major weaknesses of the STC pointed out by astudy con-ducted by the Indian Institute of Management,Ahemdabad, were:i. Though the objectives with which STC was established are

known and clear, STC management has rarely taken anymajor entrepreneurial decision on its own.

ii. There seem to be no guidelines or criteria for choice by STCmanagement of new product/markets.

iii. Not much expertise has been developed to locate anddevelop sources of supply of exportable products.

iv. Also not much expertise is developed in procuring importsfrom sources of supply abroad.

v. Much of the expertise is in operating as an agent, inprocessing’ indents and tenders and in transportation anddistribution; not In-merchan-dising, procurement ormarketing.

The setback in the exports of non-canalised items can beattributed to the STC’s failure to develop and appropriatesupply base and take adequate promotional steps amongimporters.In recent years, STC has taken some major steps to improve itsworking. They are: -a. Diversifying the product range-:it has continued to add new

items to its export basket like moccasins, orthopedic shoes,sports shoe uppers, compressors, RD. pipes, cocoa beans,peacock feathers and clutch and security bags. It would layemphasis on value added products like computer software,Maruti vehicles, scooters and mopeds, consumer electronicsand packaged tea.

b. Trying to spearhead the national effort to identify newmarkets for Indian commodities and manufactured goodsand establish itself in these markets on a long-term basis.

c. Developing a reliable supply base for production of qualitygoods in association with the State undertakings, co-operative organizations and others in selected and identifiedsector. . If necessary, STC shah undertake investments fordevelopment of such production base. The STC has alsodecided to enter into joint ventures to develop captivesupply sources for exports.

d. Establishment of 100 per cent export-oriented productionunits the product ranges identified so far are leatherproducts, sports goods and engineering goods. These willbe mainly set up with foreign technical and equityparticipation and 100 per cent. buyback arrangements.

e. Improvement in quality, grading packaging, etc.f. Participation in fairs/exhibitions in India and abroad.g. Evolution of a scheme to supply raw materials at

international prices for export production.

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Corporate PlanThe STC has drawn up a corporate plan with the main objectiveof achieving a turnover of Rs 5,000 crores by the year 1999-2000. The major strategies to be followed in this regard include:• Increased emphasis on direct buying and selling.• Strengthening overseas marketing network.• Entering into joint ventures.• Undertaking OGL imports.• Expanding domestic trade.• Undertaking infrastructure development.• Exploring new lines of business.• Organisational restructuring.• Strengthing of information base.With its long experience of exporting a wide range of prod-ucts/com-modities to over a hundred developing anddeveloped countries and a sound infrastructure, STC should~ot merely act as canalising agency but should organise itself asan effective trading house on the lines of Japanese tradinghouses. It should provide new dimensions and leadership asthe biggest export house in the country.

Future of State Trading in IndiaWith the Government’s new economic policy taking shape, it isnow evident that canalisation, except of very few sensitivecommodities, will not be there in the country’s export-importpolicy. This, to a large extent, has already eroded the base andprofitability of the State Trading enterprises-a trend which willget strengthened in the coming years. These organisations will,therefore, have to redefine their role and create capacity toemerge as global traders without the support of any monopolybusiness on the Government account. Both MMTC and STChave initiated measures in this direction but these have notbecome very successful. For example, while canalised exportsconstituted per cent of MMTC’s total exports in 1991-92, thisincreased to 59 per cent in 1995-96. However, in the case ofSTC, although is total turnover during 1995-96 amounted toRs. 1,685 crores as compared to Rs. 1,861 crores during theprevious year, the non-canalised turnover increased by 5 per centfrom Rs. 847 crores in 1994-95 to Rs. 892 crores in 1995-96.STC has made rapid strides in offshore trading, a new area ofgrowth identified by it. It earned Rs:65 crores in 1994-95. Thetrading covered items like wheat, sugar and rubber. Oneoffshore deal struck by it relates to supply of wheat, valued atRs. 60 crores, to Sri Lanka, the origin of wheat being the USAThe STC has supplied sugar to Commonwealth of Indepen-dent States after getting the commodity from the EuropeanCommunity and South America. Rubber, on the other hand,has been obtained from Sri Lanka and sold to Iran.Since the canalised business has virtually come to’ a standstilldue to decanalisation, the STC has been finding avenues togenerate profits from sources like offshore trading, apart fromdirect exports of a number of items like leather productsincluding shoes, and other consumer goods. It is also engagedin the import of industrial raw materials for supply to actualusers in the country mainly for export production.

With a view to developing captive sources of supply forexports,. the STC has entered into a number of joint ventures.It has also set up warehouses overseas for developing exportson a sustained basis. The MMTC has also decided to set upjoint ventures in various fields of its activities.Since the Government wants the STC and MMTC to functionas internation-al trading houses in competition with the privatesector, it is strongly felt by these organisations that the Govern-ment should give them autonomy in their business operations,including investment in joint ventures to improve the turnover.

Recent Policy Stance on State TradingGovernment of India’s policy on State trading has undergone asea change “from 1985 onwards. Abid Hussain Committee(whose recommendations were discussed earlier in the chapteron India’s Trade Policy) recommended that State trading inimports should be restricted to only very sensitive items, suchas crude petroleum or in those cases where economies of bulkprocurement are clearly evident. In other cases, imports shouldnot be canalised. Similarly in the case of exports, canalisationshould be used only when very specific social objectives are to beachieved. As a result, the number of canalised items, bothexport and import, has been progressively reduced. In the latestExport-Import Policy (1997-2002), only 6 export products arecanalised. These include, among others, petroleum products,onions and niger seeds. On the import side, 8 products arecanalised. Principal among these products are petroleumproducts, edible oils, oilseeds and cereals.The major State trading organizations in India are:1. The State Trading Corporation of India Ltd. (STC).

Organisation Chart of STC

Exp-

orts

Imports

Domestic Trade

Chairman & Managing Director

Vigilance Internal Audit Mangement Services Trade & Export Development Practice Management Board Secretariat and Parliament cell

Exective Director Finance

Executive Director

Executive Director Marketing

Executive Director marketing

Finance & Accounnt Insurance legal

Personnel & Codification Industrial Relations General Administration Protocol & Travel Public Relations & Advtg. Building Cell Hindi Cell housing Colony Library Securlty

Drugs & Chemicals Sugar Alcohol Molasses Leatherware Shellac

Agricultural Products Soyabean Meal/ Other Extractions Coffee Tea Castrol Oil Tobacco

Consumer products Fresh & Processed Foods Meat 7 Marlne Products Engg. & Construction Material Cement Cashew Joint Ventures Counter Trade rmy Software Textiles & Garments and Jute Sports Goods Grants By Govt of India

Forest Products Rubber Chemicals

Edible Oils Fatty Acids Pulses

Newsprint General Import

Imported Cars Import of OGL Items In Chemical Drugs & Plastics Timber

Bearn/Seed Processing & Oil Sale Pulses

Executive Director Personal

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N2. The Projects and Equipment Corporation of India Ltd.

(PEC).3. MMTC Ltd.4. The Tea Trading Corporation ofIndia (TICI).5. Spices Trading Corporation Ltd.Thus over the years the turnover of the STC has increasedmanifold. The increase in exports has been significant after1971-72. They reached the maximum of Rs. 796 crores in 1983-84 after which there has been a decline. As a result of effortsmade by STC to promote non-canalised trade, an all time highexport turnover of Rs 806 crores was achieved in 1994-95. Onthe other hand, there was almost a continuous increase inimports till 1984-85. Imports declined as canalisation policychanged.One important point to be noted is that in imports, thepercentage of canalised items is far higher than the percentageof non-canalised items. The percentage of canalised itemsvaried between 74 and 94 in exports and between 72 and 97 inimports during the period 1972-73 to 1976-77. This is becausethe STC’s efforts are mostly guided by the policies of theGovernment of India from time to time and it is left withlimited scope for showing its initiative in there areas. But inrecent years, the percentage of canalised items has gone down inexports, but in imports, canalised items still predominate.

ProductsOver a period, the products handled by STC have also shownan increase. STC-The Merchant of India, an STC publication,refers to 17 agricultural commodities, 8 consumer products, 15items of army software, 3 items of con-struction material, 6major and a number of miscellaneous engineering items, 10items of fresh and processed foods, 7 items of leather, 3 itemsof meat and marine products, 19 items of textiles and gar-ments, alcohol, sugar, molasses and castor oil. The importitems include edible oil (6 items), cement, explosives, natural .rubber, standard and glazed newsprint and white printingpaper.The major items of export in 1994-95 were cereals, coffee,cashew kernels, leather, drugs and chemicals, engineering andconstruction material, sugar, textiles and garments. The majoritems of imports were edible oils and sugar.The STC has developed a sound infrastructure for developmentof exports in the form of 17 branches in India and 17 overseasoffices and a large force of trained marketing personnel.STC’s Indian branches playa vital role in port clearance, storage,move-ment and distribution of imported items, in addition toprocurement and ship-ment operations for export items. Theforeign branches provide valuable support in identification ofnew products and markets, assessment of market potential,quality and packaging needs, preparation of new productdevelopment strategy and assistance in carrying out negotiationsfor import and export.

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Introduction

Short Notes

• HHEC• PEC• MMTC• CCI

IntroductionGovernment of India’s policy on State trading has undergone asea change “from 1985 onwards. Abid Hussain Committee(whose recommendations were discussed earlier in the chapteron India’s Trade Policy) recommended that State trading inimports should be restricted to only very sensitive items, suchas crude petroleum or in those cases where economies of bulkprocurement are clearly evident. In other cases, imports shouldnot be canalised. Similarly in the case of exports, canalisationshould be used only when very specific social objectives are to beachieved. As a result, the number of canalised items, bothexport and import, has been progressively reduced. In the latestExport-Import Policy (1997-2002), only 6 export products arecanalised. These include, among others, petroleum products,onions and niger seeds. On the import side, 8 products arecanalised. Principal among these products are petroleumproducts, edible oils, oilseeds and cereals.The major State trading organizations in India are:1. Handicraft and handloom Exports Corporation of India

Ltd. (HHEC).2. The Projects and Equipment Corporation of India Ltd.

(PEC).3. MMTC Ltd.4. Mica Trading Corporation Of India Ltd. (MITCO).5. Spices Trading Corporation Ltd.Thus over the years the turnover of the STC has increasedmanifold. The increase in exports has been significant after1971-72. They reached the maximum of Rs. 796 crores in 1983-84 after which there has been a decline. As a result of effortsmade by STC to promote non-canalised trade, an all time highexport turnover of Rs 806 crores was achieved in 1994-95. Onthe other hand, there was almost a continuous increase inimports till 1984-85. Imports declined as canalisation policychanged.One important point to be noted is that in imports, thepercentage of canalised items is far higher than the percentageof non-canalised items. The percentage of canalised itemsvaried between 74 and 94 in exports and between 72 and 97 inimports during the period 1972-73 to 1976-77. This is becausethe STC’s efforts are mostly guided by the policies of theGovernment of India from time to time and it is left withlimited scope for showing its initiative in there areas. But in

recent years, the percentage of canalised items has gone down inexports, but in imports, canalised items still predominate.

Chairman-cum-Managing Director

Organization ChartProductsOver a period, the products handled by STC have also shownan increase. STC-The Merchant of India, an STC publication,refers to 17 agricultural commodities, 8 consumer products, 15items of army software, 3 items of con-struction material, 6major and a number of miscellaneous engineering items, 10items of fresh and processed foods, 7 items of leather, 3 itemsof meat and marine products, 19 items of textiles and gar-ments, alcohol, sugar, molasses and castor oil. The importitems include edible oil (6 items), cement, explosives, andnatural. Rubber, standard and glazed newsprint and whiteprinting paperThe major items of export in 1994-95 were cereals, coffee,cashew kernels, leather, drugs and chemicals, engineering andconstruction material, sugar, textiles and garments. The majoritems of imports were edible oils and sugar.The STC has developed a sound infrastructure for developmentof exports in the form of 17 branches in India and 17 overseasoffices and a large force of trained marketing personnel.STC’s Indian branches playa vital role in port clearance, storage,move-ment and distribution of imported items, in addition to

LESSON 34:STATE TRADING ORGANISATION IN INDIA

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Nprocurement and ship-ment operations for export items. Theforeign branches provide valuable support in identification ofnew products and markets, assessment of market potential,quality and packaging needs, preparation of new productdevelopment strategy and assistance in carrying out negotiationsfor import and export.

Handicraft and Handloom Exports Corporation ofIndia Ltd. (HHEC)The Handicraft and Handloom Exports Corporation of IndiaLtd. (HHEC) was set up in 1962. It undertakes the export ofhandicrafts (including woolen carpets), handloom products(inducting ready-to-wear garments) and gold jewellery. TheHHEC is a wholly owned subsidiary of the STC. It acts as asupplementary agency to provide private sector agenciesparticipating in the exports of handicrafts and handloomproducts. In 1976 the HHEC has started its wholly ownedsubsidiary called the Central Cottage Industries Corporation ofIndia (CCIC). It has also established showrooms at New York,Boston, Paris and Tokyo.A Central Public Sector Undertaking under the administrativecontrol of the Ministry of Textiles, Government of Indiaestablished with the twin objectives of:I. To undertake export of Handicrafts, Handlooms Products,

Khadi & Products of Village Industries from India.II. Export Promotion and Trade development of Handicrafts

and Handlooms products (including hand-knotted woolencarpets and ready made garments) and also to undertakeexport of gold and silver jewellery/articles and import ofbullion, timber and other raw Material.

India has a rich history of handicrafts that has evolved over thecenturies. The entire wealth of timeless Indian handicrafts havesurvived through ages. The legacy of Indian culture promiseseverything- beauty, dignity, form and style. The magnetic appealof Indian culture resides in its exclusivity, its mystical tone thatleaves people amazed at their sight.HHEC has been involved for the past 4 decades in develop-ment and exports of handicrafts utilising the crafts skills fromall over India to create visually appealing and economicallysuitable products for the world markets.

Main Functions of Handicraft and handloomsExports Corporation of India

i. The HHEC studies consumer preferences abroad andintroduces new products with special attention to quality.

ii. It provides information and financial facilities in the formof loans to those engaged in the manufacturing ofhandicrafts and handloom products for exports.

iii. It participates in the trade fairs and exhibitions abroad andalso arranges visits of foreign trade delegations.

iv. Its “Sonar” retail outlets offer to public a variety ofhandicrafts not usually available in the market.

v. It is doing good business in the USA and West Europeanmarkets as regards handicrafts and handloom goods.

About HEPC - A Gateway to Handloom ExportersHandloom Export Promotion Council (HEPC) is a statutorybody constituted under The Ministry of Textiles, Government

of India to promote the exports of all handloom products likefabrics, home furnishings, carpets and floor coverings, etc.HEPC was constituted in the year of 1965 with 65 membersand its present membership is around 2000 spread all over thecountry. The Handloom industry mainly exports fabrics, bedlinen, table linen, toilet and kitchen linen, towels, curtains,cushions and pads, tapestries and upholstery’s, carpets and floorcoverings, etc. The basic objective of HEPC is to provide allsupport and guidance to the Indian Handloom exporters andInternational buyers for trade promotion and Internationalmarketing. HEPC has its head office at Chennai and regionaloffices at New Delhi and Mumbai.

AdministrationHEPC is incorporated as a non profit making company undersection 25 of the Companies Act, 1956 and governed by theMemorandum and Articles of Association framed by theCouncil. It is administered by an Executive Committeeconsisting of elected representatives from the export trade,exofficio members and nominated Government officials. TheCommittee is headed by Chairman. The Chairman and ViceChairman hold office for a period of two years. The secretary(Executive Director) of the Council, an IAS cadre officerappointed by the Government, assists the Council to run theadministration.

Our Objectives

1. Organizing participation in trade fairs, exhibitions andbuyer-seller meets in India and Abroad.

2. Providing guidance, consultancy and support to handloomexporters to promote handloom exports.

3. Conducting propaganda regularly and popularise IndianHandloom products abroad though various means ofpublicity.

4. Collect, collate and disseminate trade data and commercialintelligence to exporters.

5. Facilitate the upgrading, popularisation and adoption oftechnology, quality and design improvement, standards andspecifications, product development, diversification andinnovations, etc.

6. Undertaking market studies in individual foreign countries.7. Sending trade missions to the foreign countries.8. Bringing out useful publications like colour catalogue,

colour trends catalogue, importers and exporters directoriesetc.

9. Laying down standards of quality and packaging in respectof Indian Handlooms for export.

10. Approving agents, representatives or correspondence inforeign markets for continuously and regularly reporting theprice, market preferences and reception accorded to IndianHandloom products.

11. Undertaking or assisting in research on schemes oftechnological nature designed to improve the efficiency ofthe handloom sector.

12. To advise the Government, local authorities and publicbodies on the policies adopted by them in relation to their

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effect on industry or commerce and other measure includingdirect and indirect taxations in so far as such policies ormeasure having a bearing directly or otherwise on export ofIndian Handloom products

Inquiring and investigating into complaints received fromforeign buyers or Indian exporters and act as arbitrators if askedfor it.

Our Strategies

a. Arrange for the participation of member exporters in theimportant trade fairs, organising buyer-seller meet (BSM),business missions.

b. Provide financial grants to the exporters with marketdevelopment assistance for under taking sale-cum- studytours, participation in international fairs, publicity etc.

c. Popularise Indian Handloom products abroad throughwebsite publicity, advertisements in commercial portals,trade magazines, conducting exclusive hand woven shows,and through Council publications.

d. Dissemination of trade information like market studies,colour trends, design trends, export trends, standards andspecifications, Government policies, circulars etc. throughpublications and news letters.

e. Conducting workshops, seminars on upgrading technologyin pre-loom, loom, post loom practices to improve qualityand productivity, popularising modern dyeing practices,product innovations, diversifications and improvement,quality compliance, better merchandising practices, packagingmethods and so on to improve the competitiveness ofIndian Handloom products.

f. Promote product innovation, diversification andimprovement in the selected handloom clusters underDevelopment of Exportable Products and Marketingscheme (DEPM) for promoting the production ofexportable products.

g. Providing design support to develop new designs, fabricsimulation colour printouts, peg plan graph outputs, layoutinformation and computer aided colour matching etc. to theexporters.

h. Generating and dissemination of trade enquiries forfacilitating International buyers to source the handloomproducts from Indian Handloom exporters.

i. Liaison with Government for strengthening infrastructurefacilities in handloom export production centres, takeefforts to improve forward and backward linkages inhandloom sector.

j. Serve as a link between trade and Government to formulateappropriate policies to promote handloom export growth.

k. Inquiries into the complaints made against exporters andtake up the exporter’s problems related to the buyers withrespective embassies.

About EPCH - A Gateway to Handicrafts ExportersExport Promotion Council for Handicrafts (EPCH) has beenestablished under the Exim Policy of Govt. of India in 1986-87and is a non-profit earning organization. EPCH is an apex

organization of trade, industry and government sponsored byministry of Textile, government of India for promotion ofhandicraft from country and projected India’s image abroad as areliable supplier of high quality of handicraft goods & servicesand ensured various measures keeping in view of observanceof international standards and specifications.The Council has created necessary infrastructure as well asmarketing and information facilities, which are availed both bythe member exporters and importers.

EPCH CouncilThe Council is run and managed by team of professionalsheaded by Executive Director. The Committee of Administra-tion consist of eminent exportersExport Promotion Council for Handicrafts has a rarestdistinction of being considered as MODEL COUNCIL whichis self sustaining and where all the promotional activities areself financed.Export of Handicraft:-A rising trend of the export ofhandicrafts (other than hand knotted carpets) was merely Rs.387.00 crores during the year of establishment of the Co

ManagementThe Council is run and managed by team of professionalsheaded by Executive Director. The Committee of Administra-tion consist of eminent exporters, professionals and seniorGovt. officials. The Export Promotion Council for Handicraftshas a rarest distinction of being considered as MODELCOUNCIL which is self sustaining and all the promotionalactivities are self financed.uncil i.e. 1986-87 rose to level of Rs.8343 crores in 2002-2003.

Project and Equipment Corporation of India Ltd.(PEC)The Projects and Equipment Corporation of India (PEC) wasformed in April 1971 as a wholly owned subsidiary of the STC.It took over the Railway Equipment and Engineering Divisionof the STC.

Main Objectives of Project and Equipment of IndiaLtd

a. To boost the export of engineering and railway equipmentin established markets.

b. To boost the exports of turnkey projects in the field ofrailway systems, public utilities and industrial plants.

c. To penetrate new marketsd. To promote the export of non-traditional and new

products

Minerals and Metals Trading Corporation of India(MMTC)MMTC is an independent corporation, set up in October 1963in the public sector by transferring to it all activities of STCrelating to trade in minerals and metals. MMTC was set up bythe Government as a conalising agency for export and importof minerals, metals and fertilizers, over the years the Corpora-tion has been discharging the service responsibility efficiently byimbibing confidence in the customer community. Simulta-neously with this, responding to the customer community.

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NSimultaneously with this responding to the imperative need forgenerating foreign exchange to this, responding to the impera-tive need for generating foreign exchange to bridge thelwidening trade gap, the corporation started channelising itsorganizational and marketing acumen for development ofexports in noncanalised areas. The results have been highlyimpressive. MMTC’s socialized exports which were a meagerRs. 40 million in 1983-84 registered accelerated growth andincreased more than 125 folds to Rs. 5250million in 1989-90.Corporation’s total exports have crossed the 10,000 millionrupee mark. MMTC’s total turnover during the magical mark ofRs. 50,000 million. With the bonus issue the original capital ofRs. 30 million contributed by the government have now grownto Rs. 500 million and net worth to Rs. 2,828 million. It is thefirst international trading company of India to be given thecoveted status ‘Super Star Trading House’ and it is the firstPublic Sector Enterprise to be accorded the status of ‘GoldSuper Star Trading House’ for long standing contribution toexport.

Activity Profile of MMTCGoing Place:- MMTC is a state owned enterprise dischargingan important responsibility that of finding markets for India’sexports and meeting India’s requirements of essential Goods.Towards this end MMTC has a wide spectrum of activities.These cover international marketing, trade finance, distribution,infrastructure development and new joint collaborations withother important manufacturing companies to set up projects inIndia and abroad.Between these activities MMTC has been able to harness India’srich potential in international trading.

Activities and Services

i. Exports of primary and manufactured products.ii. Import of Industrial commodities.iii. Trade and counter trade.iv. Agents and representatives for domestic produces.v. Domestic trade services.vi. Investments in joint ventures.

Trading Groups

i. Minerals Group: mineral based products.ii. Metals Group: ferrous and non-ferrous metals and metal-

based products.iii. Fertilisers Group: fertiliser raw material, intermediates and

finished fertilisers.iv. Export Trade Group: light engineering products, gems and

jewellery, handicrafts, agro products and counter trade.MMTC’s imports have been steadily rising. From a level of Rs.210,000 million in 1985 – 86, imports have risen to Rs. 350,000million in 1989 – 90. The intensity of exports has also beensteadily rising. There is however, a broad measure of agreementthat imports do not offer any substantial scope for pruningeven in the face of severe balance of payments pressure. Mostof MMTC’s imports are essential imports required for agricul-ture or industrial growth. A fair proportion of imports aredirectly related to exports and another significant proportion

pertains to capital goods imports. In the circumstances, the onlymeaningful solution available to MMTC is to meet thechallenge of balance of payments crisis and to plan for majorthrust in exports.

Review of OperationsThe year 1989 – 90 can truly be described as one of the mosteventful year for the MMTC. It has been a year of recordachievements. The Corporation’s turnover crossed the magicalfigure of Rs. 50,000 million recording an increase of 31% overthe previous year. This is indeed an outstanding achievementfor the corporation, considering that the turnover during 1988 –89 itself had registered an increase of 34% over the previousyear. During the last two years the turnover has gone up fromRs. 27,941 million to Rs. 50,973 million. The performance onthe export front has also been spectacular. From a level of Rs.7,284 million in 1987 – 88 the exports have jumped to Rs.11,483 in 1989 – 90.

ProfitabilityAnother record achievement is significant improvement in theprofitability of the Corporation during the year. Profit beforetax at Rs. 851million is the highest ever achieved by theCorporation in its 30-year’s history – an increase of 23% overthe previous highest level of Rs. 691 million reached in the year1988 – 89.

Foreign Exchange Earnings and OutgoDuring the year the outgo of foreign exchange on tradingactivities was Rs. 32,788 million compared to Rs. 23,371 millionduring the previous year. The inflow of foreign exchange wasRs. 11,021 million as against Rs. 8,642 million in 1988 – 89.After over 30 years as India’s leading trading house MMTC iscreating a new, more powerful role for itself. It’s now joininghands with others to set up joint ventures in India and abroad.This fusion of powerful conglomerates will add anotherchapter to India’s drive for achieving international recognition asan important sourcing centre.

Corporate Mission of the MMTCAs a-major trading company in Asia, MMTC aims at achievingsustainable and viable growth rate by achieving excellence in itsactivities, generating optimum profits through total satisfactionof shareholders, customer suppliers, employees and society.

1987 - 88 1988 – 89 1989 - 90 Percentage increase (+)/ decrease (-) for last 2 years

Exports

Canalised 3334 4778 6231 86.9 Non – canalised 3950 3947 5252 33.0

Total Exports 7284 8725 11483 57.6 Imports

Canalised 20697 29303 38149 84.3 Non – canalised 490 410 997 103.5

Total Imports 21187 29714 344 (-) 26.7 Domestic 470 361 344 (-) 26.7

Total Turnover 28941 38800 50973 76.1

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Main Functions of the MMTC

a. It organises and undertakes trade in metals and mineralsand other allied commodities as may be entrusted to itfrom time to time by the Government of India.

b. It explores new markets for metals, minerals and alliedcommodities in overseas markets with a view to diversifyingand expanding Indian exports.

c. It undertakes to procure and distribute, at the instance ofthe Union Government, minerals, ores and concentratedmetals with a. view to stabilising their prices.

d. It purchases or takes on lease any mines or mining rights,f8.llow land in the country or elsewhere and any interesttherein.

Organization Chart of MMTC

BOARD

CMD BOARD SECTT VIGILANCE GM EXPORT PRODUCTS - 1 CGM CPPM – 1 GM DIRECTOR DIRECTOR DIRECTOR DIRECTOR DIRECTOR (MINERALS) (METALS) (FERTILISERS) (FINANCE) (PERSONNEL) IRON ORE NFM FINISHED F & A PERSONNEL

FERTILISER & ADMIN RAW MATERIALS AND

INTERMIDIATE (FERT)

OTHER ORES IRM ALL OVERSEAS AUDIT PR & OL PROJECTS LINKED WITH FERTILISERS SHIPPING & STEEL LAW AGRO MARINE & TRANSPORTATION MINERALS JOINT VENTURES MSD & IN MINERAL COMPUTER RELATED AREAS INSURANCE INFRASTRUCTURE PROJECTS RELATING TO IRON ORE MITCOMICA & OTHER MINRALS CGM CGM CGM CGM CGM CGM CGM (F&A) (LAW) (MICA) (PERS (ARGO & MARINE

ADMIN & MINOR MIN)

GM GM GM GM GM GM (A/CS) IRON (OTHER (NFM) (STEEL (FERT RAW ORE MINERALS) & IRM) MAT.) GM (AUDIT) PURCHASE GM (EXPORT GR.) GM (STEEL)

GM (FERT)

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NMica Trading Corporation of India Ltd. (MITCO)During 1989 – 90, MITCO achieved record turnover of Rs.322.85 million. Its total exports of mica was Rs. 312.90 million– highest ever – registering an increase of about 28% over theprevious year export of Rs. 245.10 million. Export to GeneralCurrency Area increased by 36% from Rs. 125.50 million during1988 – 89 to Rs. 170.13 million in 1989 – 90. For the RPAcountries the growth rate was about 19% with exports increas-ing from Rs. 118.92 million during 1988 – 89 to Rs. 141.82million in 1989 – 90.The sales turnover of mica products during 1989 – 90, how-ever, stagnated around the previous year level of Rs. 15 milliondue to continued teething problems in marketing of micapaper. Report of mica paper increased marginally from Rs. 7.3million in 1988 – 89 to Rs. 7.8 million during 1989 – 90. Costdisadvantage vis – a – vis the long established competitors inthe developed countries was the major obstacle in boostingexport of this product. Efforts are being made to overcomethese problems through change in marketing strategy. With thecommissioning of the first phase of the Insulating MaterialsProject it has become possible to convert mica paper into heatermicanite sheets for which there is good demand. Samples ofheater micanite sheets have been sent to the prospective buyersfor evaluation. Second phase of the Insulating Material Projectis expected to be completed by the end of 1990.The proposed R & D Centre by MITCO has been registered asan approved centre by the Department of Science & Technologyand further steps are being taken for its implementation. Thegovernment have merged MITCO with its holding companyMMTC Ltd.

ConclusionsThe STC’s efficiency has varied directly with the quality of thepersons in actual charge of its operations. It handles a sizablevalue of India’s total foreign trade. Though the STC has notdone any harm to foreign trade interests, it should show greaterdetermination and drive in pushing the nation’s exports.From the beginning, the STC has met with severe hostilityfrom private traders and trading interest. All the traders havebeen unanimous in objecting to what they consider as anunwarranted intrusion of the state in the trade. Complaintsregarding wagon allotments in movement of goods have beenvoiced.The traders obviously view export and import from their pointof view: they should, in fact, change their attitude. However,care should be taken to ensure that existing channels do notabruptly dry up and adversely affect the country’s foreign trade.The choice of the name STC seems a bit tactless. The namecould have been India’s Commodity Exchange or India’sInternational Trade Centre, without explicitly thrusting forwardthe concept of the much argued and rather suspected StateTrading. The STC should not be judged on profit – and – lossaccount alone, but rather on the basis of its ability and successin fulfilling the objectives of maximisation of exports anddiversification of trade. It has created an awareness amongprivate traders that if they do not maintain a certain minimumcode of conduct, the state would step in to set matters right.

This awareness is perhaps the greatest contribution of the STCto the success of India’s foreign trade.There are certain inherent weaknesses in the STC because it islargely manned by bureaucrats who lack business experience andinitiative. Businessmen with practical knowledge must replacegovernment officials. The interlocking of the activities of theGovernment of India and the STC makes possible theconcealment of inefficiency under intricate official procedures.There is an urgent need for coordinating the trade conducted byprivate traders and the STC. Moreover, the STC offices abroadhave not been in a position to create an impact. There is,therefore, a need for creating a better image of India’s foreigntrade, not only in this country but in the markets of the worldas well.STC has been arranging imports of edible oils, chemicals, fattyacid, rubber, newsprint, etc., on a wide scale. To achieve itsstated objectives, it established as its subsidiaries CashewCorporation of India, Handicrafts and Handloom ExportCorporation, Project and Equipment Corporation, Tea TradingCorporation of India Ltd and Central Cottage IndustriesCorporation of India Ltd.With the new Exim policy liberalising the imports of certainitems for government departments, banks, and public sectorunits, the role and activities of STC have widened. It needs totake some more steps to diversify its operations. The new policyhas decanalised a number of items. The subsidiaries of the STChave helped in importing some essential materials in time.Their role in the promotion of export of handicraft, handloomitems, engineering goods and turnkey projects is praiseworthy.In the new policy the role of STC has been reduced to a mereexport house. Now it has to seen that in years to come whatcontribution STC could make in the export drive of India.

ArticleMMTC Keeps Exports to S. Korea Intact throughNovel TieupsMMTC Ltd. has managed to salvage its iron ore exports tocurrency crisis-hit South Korea through a $ 6 million revolvingline of credit from Indian Overseas Bank (lOB) in favour ofPohang Iron & Steel Company (Posco), the second largest steelproducer in the world. A similar facility from an internationalbank has also been worked out while MMTC is negotiating acredit arrangement from a Japanese trading company in a bid toassist Pasco.While helping Posco, which is all set to overtake global leaderNippon in a few years, the financing arrangements would alsoensure that MMTC’s exports to South Korea, valued at morethan $30 million, is not hit. The first shipment under therevolving line of credit extended by lOB was cleared on April 1,1998. Another shipment is expected to leave on April 20. Thetwo shipments together account for 2.80 lakh tonnes, valued ataround $6 million. Since lOB has provided a revolving creditfacility valid for 90 days, Posco could buy iron ore worth at least$18 million from MMTC if three cycles are completed within ayear.MMTC has a five-year agreement with South Korea to sell 2.3million tonnes of iron ore per annum. The public sector

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trading company sold iron ore worth $32 million to SouthKorea in 1997-98 despite the currency crisis which led to steepdevaluation of the Won, affecting Posco, which is the sole buyerfrom that country. Since Posco is a strong company, MMTC wasadvised to support it at the time of difficulty. Following theAsian currency crisis, the. South Korean major had expressed itsinability to pay on time for iron ore and sought supplies fromMMTC without an L/C (Letter of Credit).When MMTC approached Export Credit Guarantee Corpora-tion (ECGC) for insurance cover, the plea was turned down.After persuasion from the Government, ECGC agreed toprovide cover to shipments destined for South Korea whoserating has gone down after devaluation of the Won. However,ECGC is seeking a 3.86 per cent premium and the insurancepayable would be only 60 per cent of the value of shipment.The payment would be made only after a period of ninemonths. In other cases, the premium is lower while thepayment works out to 90 per cent of the shipment value andECGC pays the amount after three to four months.Since the ECGC option was not considered viable, MMTCworked out a credit arrangement with an international bankbased in the US. After the shipments w!>,re made, the bankmade payments to MMTC and recovered it from Posco after 90days. Now, MMTC is having talks with a Japanese tradingmajor for a different sort of arrangement following a successfulpact clinched by a private exporter. Trade sources said S.Salgoankar, a Goa-based exporter, has struck a deal with Itochuof Japan for supplies to Posco. According to this arrangement,touch would pay the exporter once the shipments are cleared.Payments from the South Korean company will be collectedafter 90 days or ltochu would buy steel against the credit.It is understood that MMTC is having talks with anotherJapanese trading company and had even considered the optionof buying steel from Posco through this arrangement. How-ever, the Steel Ministry has not cleared the proposal sincedomestic producers like Steel Authority of India (SAIL) arealready facing poor off take. Therefore, the current arrangementwould be to ensure that MMTC gets paid on delivery of ironore shipments while the Japanese trading company squares offthe deal with Posco later through cash payment or steelsupplies.The Hindustan Times, April 17, 1998.

Questions BankQ1. What are the functions of State Trading Corporation?Q2. What services are rendered by the state trading

Corporation to different entities.Q3. Analyses the achievements of STC in the field of imports

and export.Q4. Name the major STC organizations in India, Explain any

one of them.Q5. Write a note on MMTC and HHEM.Q6. Write a note on canalization of trade. What are its

objectives?Q7. What are the objectives of STC? To what extent it is

successful in achieving them?

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MMTC Ltd. has managed to salvage its iron ore exports tocurrency crisis-hit South Korea through a $ 6 million revolvingline of credit from Indian Overseas Bank (lOB) in favour ofPohang Iron & Steel Company (Posco), the second largest steelproducer in the world. A similar facility from an interna-tionalbank has also been worked out while MMTC is negotiating acredit arrangement from a Japanese trading company in a bid toassist posco.While helping Pasco, which is all set to. overtake global leaderNippon in a few years, the financing arrangements would also.ensure that MMTC’s exports to South Korea, valued at marethan $30 million, is not hit. The first shipment under therevolving line at credit extended by IOB was cleared an April 1,1998. Another shipment is expected to. leave an April 20. Thetwo. shipments together account for 2.80 lakh tonnes, valued ataround $6 million. Since IOB has provided a revolving creditfacility valid far 90 days, Pasco. could buy iron ore worth at least$18 million from MMTC if three cycles are completed within ayear.MMTC has a five-year agreement with South Korea to. sell 2.3million tonnes of iron are per annum. The public sector tradingcompany sold iron are worth $32 million to South Korea in1997-98 despite the currency crisis which led to steep devalua-tion at the Wan, affecting Pasco., which is the sale buyer fromthat country. Since Pasco. is a strong company, MMTC wasadvised to support it at the time of difficulty. Fallowing theAsian currency crisis, the. South Korean major had expressed itsinability to. pay an time for iron are and sought supplies fromMMTC without an L/C (Letter of Credit).When MMTC approached Export Credit Guarantee Corpora-tion (ECGC) for insurance cover, the plea was turned dawn.After pursuatian from the Government, ECGC agreed to.provide caver to. shipments destined far South Korea whoserating has gone dawn after devaluation of the Wan. However,ECGC is seeking a 3.86 per cent premium and the insurancepayable would be only 60 per cent of the value of shipment.The payment would be made only after a period of ninemonths. In other cases, the premium is lower while thepayment works out to. 90 per cent of the shipment value andECGC pays the amount after three to four months.Since the ECGC option was not considered viable, MMTCworked out a credit arrangement with an international bankbased in the US. After the shipments were made, the bankmade payments to. MMTC and recovered it from Pasco. after 90days. Now, MMTC is having talks with a Japanese tradingmajor for a different sort of arrangement following a successfulpact clinched by a private exporter. Trade sources said S.Salgoankar, a Goa -based exporter, has struck a deal with Itochuof Japan for supplies to. Pasco. According to. this arrangement,In touch would pay the exporter once the shipments are cleared.

Payments from the South Korean company will be collectedafter 90 days or Itochu would buy steel against the credit.It is understood that MMTC is having talks with anotherJapanese trading company and had even considered the optionof buying steel from Pasco. through this arrangement. How-ever, the Steel Ministry has not cleared the proposal since damestic producers like Steel Authority of India (SAIL) are alreadyfacing poor off take. Therefore, the current arrangement wouldbe to. ensure that MMTC gets paid an delivery of iron areshipments while the Japanese trading company squares off thedeal with Pasco. later through cash payment steel suppliesThe Hindustan Times, April , 1998.

LESSON 35:CASE- 18 - MMTC KEEPS EXPORTS TO S. KOREA

INTACT THROUGH NOVEL TIEUPS

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Learning Objectives• Introduction of Import• Liberalisation of Imports.• Types of Importers.• Special Schemes for Importers.• Import Procedure :-

• pre-import Procedure.• legal Dimensions of Import Procedure.

• Question Bank.

IntroductionIn 1992 import of goods and services into India were valued atRs. 50,000 crores. Merchandise imports exceeded exports. Thisflow of goods and services from abroad provides a wide verityof critical materials, parts and products not otherwise available.Additionally the flow provides a basis for foreigners to pay forIndian exports and provides Indian consumers with a wideselection of goods from which to purchase. The importfunction however often receives little attention because of theemphasis on the expansion of exports, except when importsdirectly compete with domestically produced products. Despitethe quantitative importance of the function and the critical needfor imported goods, the import function remains littleunderstood by many in universities, government and busi-nesses alike.Importing refers to the purchase of foreign products for use orsale in the home market. It involves searching foreign marketsfor acceptable products and sources of supply providing fortransfer of the product to home market, arranging financingnegotiating the import documentation and customs procedureand developing plans for use or resale of the item or service.Thus successful importing depends on more than goodbuying, it requires planning for acceptance of the product anddelivery of the promised benefits. The importing firm has theresponsibility to determine whether the foreign product orservice meet the needs of the home market.

Liberalisation of ImportsConsequent upon a comfortable balance of payments positionof the country, increasing necessity of imports for exportproduction and globalisation of Indian economy, the Govern-ment of India has liberalised the import regime from time totime. At present, practically, all controls ‘on imports have beenlifted. Under the new EXIM Policy 2002-07 announced onMarch 31,2002, the Government has initiated a comprehensive’package intended to make international trade a vital part ofdevelopment strategy. It has substantially eliminated licensing,quantitative restrictions and other regulatory and discretionarycontrols both on exports and imports.All goods may be imported freely in India without anyrestriction except to the extent such imports are regulated by the

provisions of the EXIM Policy 2002-07 or any other law for thetime being in force. Moreover, the customs duties on importshave been considerably reduced and rationalised during the lastfew years. The procedure for imports has been considerablysimplified and the bureaucratic controls have been reduced tothe bare minimum.’ Besides, availability of foreign exchange forimports has also been eased. Regulations regarding personalimports such as consumer goods, baggage etc., have beensubstantially liberalised.

The Import ProcessImporting has been considered in several place in this text. Thepresent chapter serves:i. to organize the various aspects of importing by

presentation of the import process,ii. to describe major importing institutions,iii. to portray probation confronting Indian importers.iv. To elucidate major facts of the custom law and procedure

andv. Because of its close relationship to customs arrangements.The discussion should aid you in conceptualizing the importprocess and should provide a somewhat different perspectiveon Indian commercial policy.Essentially the import process comprises the following fivestages:i. determining market demand and purchase motivation.ii. Locating and negotiating with sources of supply.iii. Securing physical distribution.iv. Preparing documentation and customs processing to

facilitate movement among countries and organization.v. Developing plan for resale or use.1. Determining Market Demand And Purchase Motiva-tion:- Importers can have a distinct advantage over foreigners inthe home market, because often they know or can more easilylearn the requirements and nuances of the market. They arecloser to the market, may live there and may be native to themarket. They are familiar with information sources andinstitutions. This knowledge can however be a disadvantagewhen familiarity leads to carelessness and individuals assume alevel of knowledge that does not really exist. Enthusiasticexclamations of family and friends over souvenirs from aboardare no substitute for careful market analysis.Home country manufacturers in fabricating their own finalproducts import raw material and component parts for use.The potential for such materials and parts is determined by theexpected sales of the manufacturers who use them. A carefulanalysis of trade report and business conditions will andimporters in determining the market potential for both finalproducts and components. Manufacturers may not only buy

LESSON 36:IMPORT TRADE PROCEDURES

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Ncrude materials from abroad but operate mines and processingplants abroad from which they import to meet their require-ments.2. Locating and Negotiating with sources of supply:-Importer must develop dependable supply sources in order toassure customers and themselves of their ability to deliverpromised goods at the negotiated time and place and in thecorrect quantity and quality. Various negotiated time and placeand in the correct quantity from a constant scouring of theforeign market by the importer, resident buyer, or middlemento the worshiped control of supplying firms. The choice amongthe various options is dependent on supply market characteris-tics, the product involved. And the importer’s ability to financeand manage the operation.The importer and the importer’s customers are interested insupply sources that are capable of producing the quantities andthe quality levels possible, sources should be operating in anenvironment that is conducive to satisfactory future perfor-mance if the relationship is expected to continue.Product quality is partly a technical matter of specifications orconformance to samples or description. It also has anotherdimension Foreign products may be perceived differently thanlocal ones. Some foreign products from some countries may beseen as being of higher quality than local products 9 (e.g. cars)while other foreign products may find it difficult to overcomean image of poor quality. The quality perception can changeover time, but importers should at least, be aware of thepotential differences perceived by their customers.Price financial arrangements, terms of trade, and promotionalaids are among other factors for negotiation. Even amongparent companies and their subsidiaries negotiation may beneeded to establish policy transfer pricing, priorities, productline, and deliveries.3. Physical Distribution:-The logistics of supply, includingdelivery dates, transportation modes, inventory policy andclaims servicing, may be the responsibility of either the buyer orseller or both-and may be subject to negotiation. Theseconsiderations affect the ability of a exporter to deliver goods tocustomers or the assembly line on time and they the final cost.Risk management policies will vary with the negotiated results.4. Documentation:- Documentation is important in interna-tional trade. The distances between trading partners and thesovereign rights of nations require more elaborate systems thanthose in domestic trade. Each business person desires toprotects a personal interest and each nation wishes to be certainits laws are upheld, its revenues protected, and its sovereigntymaintained its laws are upheld, its revenues protected, and itssovereignty maintained Previous chapters have indicated someof the documents needed to support these systems. Theindividual importer has little choice but to conform at least inthe short-run Failure to carry out the documents needed tosupport these systems. The individual importer has little choicebut to conform at least in the short-run. Failure to carry outdocumentation procedures can be costly and result in nodelivery. Exporters who require irrevocable confirmed letters ofcredit will not ship merchandise on revocable unconfirmedletters. Customs procedures are especially relevant.

5. Developing a Plan for Restate or Reuse :-Importers needto have a plan for resale or use of the goods they buy Other-wise, they may find themselves stuck with a product thatdoesn’t appeal to the local people or does not necessary fit theproduction and use systems of specific business or institution.It is advantageous, then, for the importer to have a plan forconvincing others of the merits of a product or service.

Types of ImportersFour basic types of importing institutions are found in themost countries: private industrialists end users, governmentagencies and facilititating agencies. These are augmented bymany agents of foreign suppliers.1. Private Industrialists:- Private industrialists who buy andsell for their own account. There are numerous private industri-alists may carry on a significant portion of the import businesswhile in India, the activities of industrialists are hampered bygovernment attempts to achieve economic development goals.Restrictions such as the following are not unusual:Private industrialists are precluded from importing any item onthe controlled list and they are often unable to get governmentapproval to import on deferred payment terms . for industrialraw material importation licensing has been liberalised by thegovernment of India.2.End Users:- End users are manufacturers public- utilities,hospitals, colleges, university etc, who buy for their own use.They purchase raw materials, supplies, machinery and equip-ment to facilitate their own operations and gear level of theirimporting to their expected level of operations. Imports of thisgroup often constitute the major source of imports for ourcountry.Traditionally Indian industrial buyers purchased from abroadonly the domestic suppliers could not service their require-ments. Recently however the growth of multinationalcompanies improved transportation and communicationsupply shortages and increased exposure to foreign firms haveled to increased use of foreign sources.The importation of goods from abroad has enabled many endusers to gain the advantages of technological developmentsabroad as the Europens, Japanese, and others have expandedtheir research and development. Often goods are available atlower prices than from domestic sources, thereby permittingdomestic manufacturers to be more competitive when theyincorporate materials and parts in their final product.3.Governmental agencies :- governmental agencies constitutea separate class of importers because of their operatingcharacteristics, usually being subject to an extensive budgetingprocess detailed procedures for bidding and bidding andordering and attempted close co-ordination with governmentaldevelopment and social plans. The exact role of governmentalagencies varies among countries.In India purchases by government agencies and governmentowned corporations account for a large percentage of allimports. This is true of all developing countries where theemphasis is on developmental plans and conservation offoreign exchange.

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4.Facilitating Agencies:-a. clearing agents: For the routine associated with clearing

merchandise through customs as well as resolvingcontroversies that may ensue an importer may engage theservices of a customhouse broker. These intermediaries areexport in the complicated paperwork connected withcustoms procedures. They often combine functions andserve also as forwarding agents.The clearing agent verifies the documents on shipmentsinto India, sees to the payment of duties and collects freightcharges and arranges for the shipment of goods from portsto importers. Not only must brokers have knoeledge ofdocuments, classifications and duty rates but they must alsobe familiar with countervailing duties. The value of theirservices is indicated by the fact that over 90% of all importsare processed customhouse brokers.

b. Customs Bonded Warehouses:- Importers may not always wantto take immediate possession of imported merchandise.They can postpone the payment of duty by storing dutiableimport in customs bonded warehouses where they mayclean sort repack and make certain changes in the conditionof merchandise.

Customs bonded warehouses are in the charge of a customsofficer who jointly with the proprietor has custody of all storedmerchandise subject to detailed customs regulations. Importedmerchandise may be withdrawn from the warehouse:1. for consumption2. for transportation and exportation or3. for transportation and warehousing at the another port.

Special Schemes for ImportersAs per the latest EXIM Policy 2002-07, import of goods ispermissible under the following ‘special schemes, designed forencouraging exports :-a. Export Promotion Capital Goods Scheme (EPCG) ;-

EPCG scheme was introduced by the EXIM policy of 1992-97 in order to enable manufacturer exporter to importmachinery and other capital goods for export production atconcessional or no customs duties at all. This facility issubject to export obligation, i.e., the exporter is required toguarantee exports of certain minimum value, which is inmultiple of the value of capital goods imported.

b. Duty Free Replenishment Certificate (DFRC) : DFRC isissued to a merchant exporter or manufacturer exporter forthe duty free in:1port of inputs such as raw materials,components, intermediates, consumables, Spare paJ1:S,including packing materials to be used for. exportproduction. Such certificate is subject to the fulf1lment oftime bound export obligation, arid is issued in respect ofproducts covered under the Standard Input Output Norms(SIONs).

c. Duty Entitlement Passbook Scheme (DEPB) ;- Underthe DEPB scheme, ‘an . exporter may apply for credit as aspecified percentage of FOB value of exports, . made infreely convertible currency. The credit shall be availableagainst such export products and at such rates as may be

specified by the Director General of Foreign Trade..(DGFT)by way of public notice issued in this behalf, for import’ “of raw materials, intermediates, components, parts,packaging materials, etc

d. Advance Licence :- An advance licence is issued for dutyfree import of components which are physicallyincorporated in the, products manufactured for export. Inaddition, fuel, oil, energy, catalysts, etc., which; areconsumed in the course of production process may also -beallowed.

Duty free import of mandatory spares up to 10% of the C.I.F.value of the licence which are required to be exported or‘supplied with the resultant product may also be allowed.Advance Licence can be issued for :--• Physical Exports.• Intermediate Supplies.• Deemed exports.

Pre-Import Procedurea. Selecting the Commodity :- An importer should select the

commodity for import after considering various commercialfactors as well as legal considerations including theregulations contained in the EXIM Policy. Imports may bemade freely except to the extent they are regulated by theprovisions of the EXIM Policy.. Prohibited goods cannotbe imported at all. Import of restricted items is permittedthrough licensing only while canalised items can be canalisedthrough specified State Trading Enterprises (STEs).

b. Selecting the Overseas Supplier :- Imports can be madefrom any country of the world except Iraq. However, thereshall be no ban on the import of items form Iraq in casewhere the prior approval of the concerned sanctioncommittee of the UN Security Council has been obtained.The information regarding overseas suppliers can beobtained from various trade directories, consulate generals,international trade fairs and exhibitions and chamber ofcommerce.

c. Capability and Creditworthiness of Overseas Supplier :-Successful completion of an import transaction mainlydepends upon the capability of the overseas supplier tofulfil his contract. Therefore, it is advisable to verify thecreditworthiness of the overseas supplier and his capacity tofulfil the contract through confidential ‘reports about himfrom the banks and Indian embassies abroad. It is.advisable to finalise contract through indenting agents ofoverseas suppliers situated in India.

d. Role of Overseas Suppliers’ Agents in India :- Somereputed overseas suppliers have their indenting agentsstationed in India. These agents procure orders from theIndian parties and arrange for the supply of goods fromtheir principal abroad. It is advisable to import throughsuch agents as they can be readily contacted in case there isany dispute regarding quality or quantity of goodsimported, receipt of payment, documentation formalities,etc.

e. Inquiry; Offer and Counter-offer :- It is advisable thatbefore finalising the terms of import order, one should call

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Nfor the samples or catalogue and other relevant literatureand the specifications of the items to be imported. Importof samples of goods is exempted from import dutiesunder ‘Geneva’ Convention of 7th November 1952. Aftersatisfying- himself with the samples and thecreditworthiness of the overseas supplier, the importershould proceed to fmalise the terms of the contract to beentered into.

Stages in an Import TransactionThe following stages mark the various steps involved inimporting goods into India under an import licence and quota:1. Placing the Indent:- The importer places order for thegoods he requires and for which he holds an import licence. Theorder is called indent and may be placed either directly orthrough specialized intermediaries called indent house. Theword indent is used for import of goods according to whichtwo or three copies of the order are prepared and indented isone which does not specify the price and other details of thegoods ordered but leaves them but leaves them to the discre-tion of the buyer in the exporting country. A If an indentspecifies the price at which goods are sought to be imported itmay give rise to negotiations between the parties. In such a casethe indent incorporating the price finally settled is called aconfirmatory indent.Though one order goods directly generally importers prefer tomake use of the services of indent houses for this purpose.The indent firms serves as middlemen between the exportersand importers and charge a certain %age of commission fromthe importer . in India many of the big indent houses havetheir offices in port towns like Bombay, Calcutta.The indent houses maintain close touch with the well knownforeign firms who send the samples of their products to them.Their salesmen take these samples to the intending importersand book orders from them. The details of the order takendown by the salesmen in their note books are entered in theindent form. Two copies of the indent form are sent to theimporter for his acceptance. The importer returns one of thecopies duly accepted and signed to the indent house which thensends a copy of the indent to its agent in the foreign countryconcerned.If an importer does not act through an indent house, he mayplace an order directly with the exporter.2.Obtaining Foreign Exchange:- The foreign exchangereserves of any country are controlled by the Government andare released through the central bank. In India, the exchangeControl Department of the Reserve Bank of India deals withapplications for the release of foreign currency. However animporter is able to get the foreign exchange only from anexchange bank approved and recognized by the Reserve Bankof India for dealings in foreign exchange. The importer has toproduce the import licence along with the prescribed form forsecuring foreign exchange required to pay for the goods orderedfrom another country. The exchange back through which thepayment is proposed to be routed puts its endorsement on theapplication form. On the strength of the application and thelicence and the exchange policy of the government of India inforce at the time of application the Reserve Bank of India

sanction the release of a certain amount of the desired foreigncurrency. This paves the way for the importer to go ached withthe other formalities in connection with an import transaction.It must be noted that while licence is issued by the Governmentfor all imports during the period of its validity exchange madeavailable only for a specific transaction for which an order hasbeen placed.3.Arrangement for Payment :- After the importer hassucceeded in securing the requisite amount of foreign exchangefrom the Reserve Bank of India, he has to make arrangementsfor paying for the goods ordered. This may be done throughan L/C where it is intended to enable the shipper to obtainpayment for the goods immediately on surrendering a docu-mentary bill to a bank in his own country.Another method will be to request the exporter to forward thedocumentary bill through his banker to the importer for beingdelivered to him either against acceptance of the bill of exchangeor against its payment. In such cases, when the shipper(exporter) has shipped the goods and the an advice note to theimporter stating the date of shipment the goods and theprobable 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, billof lading and certificate of origin are attached to this bill. Thatis way it is called the ‘Documentary Bill’ A Documentary Billmay either be D/A or D/P i.e. the banker through which it issent may be instructed to deliver the document against theacceptance of the bill by the importer or against the payment byhim.. (D/A=Documents against Acceptance: D/P = Docu-ments against payment)The bank’s branch in the importing country, or its agent thee,arranges for the bill to be presented to the drawee (importer).The attached documents are handed over to him immediatelythereafter if it is a D/A bill in case of a D/P bill, the bankdelivers the documents only after the importer pays the amountof the bill on maturity. Generally, indent house is mentioned asthe ‘Referee in case of need’ on the bill. In case, the importercannot comply with the requirements regarding acceptance orpayment the indent house does so on his behalf.4.Clearing the Goods:- Assuming that the importer has takenpossession of the various documents relating to the goodsshipped, he will have to comply with the formalities prescribedfor clearing the goods. When the ship carrying the goodstouches at a port, it is notified in the newspapers and theimporter has to secure the release of cargo from the custody ofthe customs authorities. The first thing for him to do is toobtain the ‘Endorsement for Delivery’ delivery or order on theback of the bill of Lading which is the document of title ofgoods. The shipping campus of the such endorsement only ifit is satisfied that the freight has been paid it freight has notalready been paid by the shipper or exporter, the importer willhave to make the payment on this score before he can be given agiven a green signal by the shipping company. The importerthen presents two copies of the Port Trust Dues Receipt andthree copies of the Bill of Entry to the Port Trust Office toobtain clearance regarding dock dues, etc. Thereafter, one copy

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of the first form and two copies of the second are presented tothe Customs office.Bill of Entry. The Bill of Entry, drown in triplicates, attests thefact that goods of specified quantity, value and description areentering the bounds of the country. Separate forms of the Billof Entry are used used for each one of the three classes ofgood: (i) free goods which are exempted from customs duty, (ii)goods for home consumption, and (iii) bonded goods.5.Payment of Customs Duties:- If the goods are free, noimport duty is to be paid at the Customs Office. On dutiablegoods, the importer or his agent will pay the import duty whichmay be specified, i.e. based on weight measurements etc. It maybe advalorem, i.e according to the tariff or the market value ofthe commodity or its invoice value.Payment of customs duty can also be made under the systemcalled the “Permanent Deposit System” Under this system, animporter may maintain a running account with the CustomsOffice and make deposits from time to time. The duty payableon a particular consignment of goods received at the customs ischarged to the account and the importer is informed of this.In case the importer is not in a position to pay the customsduty on the whole of imported goods, he may apply to thecustoms authorities to get when placed in the ‘BondedWarehouse’. He can then pay the duty on each installment ofgoods that he withdraws from time to time.To save themselves from the botheration of going through allthe above mentioned formalities, the importers may entrust thehob to clearing and forwarding agents. In such a case, theseagents will take it upon themselves to deliver the goods at theexporter’s warehouse. Clearing agents charge commission fortheir services.

Import Procedure SimplifiedAs per the new Import Policy 1992-1997 Import procedure hasbeen simplified:• Against seven application forms required for import of

various items in the negative list only one form will now berequired.

• Most of the imports are now free from licensing. However,where licensing is required-cases like duty-fee imports forexport production-considerable delegation of powers hasbeen made to the regional licensing authorities.

• Under the new procedure, import licences/customs clearancepermits will have validity of 12 months. However, capitalgoods licences and customs clearance permits will be validfor 24 months. Revalidation may be granted on merits.

• Other highlights of import procedure are: grant of licencesfor certain items of raw materials. Components andconsumables in the negative list of imports decentralizedapplication for second hand capital good upto a CIF valueof Rs 50 lakh to be considered by the regional licensingauthorities.

• Imports through courier service up to a value of Rs. 5000 ata time can be made in accordance with the policy.

• Licences for import of cloves, cinnamon and cassia to begranted to the extent of 10 per cent of best year’s imports

in value in any of the preceding 5 licensing years, subject tofulfillment of export obligation. Items qualifying forexports include tea, coffee, tobacco and certain spices.

• Dealers of books may be granted licences on the basis of 20per cent of the purchase turnover for import of fiction andother books.

• Import of motor vehicles including tourist coaches and air-conditioning units will be permitted within the entitlementof the licences given to hotels travel agent and touroperators.

• The import entitlement of any one licensing year can becarried forward either in full or in part and added to theentitlement of the two succeeding licensing years.

• A special licensing committee headed by the Chief controllerof Imports and Exports may consider applications foradvice on the grant of licence for import of restricted items.

• Import of spares for imported motor vehicles and tractorsupto a maximum value per year of Rs. 20000 (for motorvehicles ) and Rs.10000 for tractors for each imported vehiclecan be made without a licence.

• Similarly, aircraft après can also be imported without alicence on the basis of the manual of the aircraft or on therecommendations of the department of civil aviation.

• Goods imported without restrictions may be transferred toother. However, in the case of goods imported with actualused conditions can be transferred only with the priorpermission of the licensing authority.

• Import licences issued under various provisions of thepolicy will indicate the value both in rupees and in foreigncurrency at the exchange rate prevailing on the date of theissue of licence. No enhancement of rupee value will benecessary if the imports are covered by the amount offoreign currency indicated in the licence.

• Authorized dealers of foreign exchange will indicate thevalue in foreign currency as well as in rupees determined onthe basis of the market and official exchange rate in theletters of credit opened for import of freely importableitems or the items proposed to be imported against alicence.

Legal Dimensions of Import Procedurea. Finalisation of the Terms of Contract :- The import

contract should be carefully and comprehensively draftedincorporating therein, precise terms as well as all relevantconditions of the trade deal. There should not be anyambiguity regarding the exact specifications of the goodsand terms of the purchase including import price, mode ofpayment, type of packaging, port of shipment, deliveryschedule, licence and permits, discount and commission,insurance, arbitration, etc

b. Mode of Pricing and INCO TERMS :- While finalisingterms of import contract, the importer should, inter-alia, befully conversant with the mode of pricing and the mannerof payment for the imports. As regards mode of pricing,the overseas supplier should quote the terms prevailing ininternational trade. International Chamber of Commerce

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N(ICC), Paris, has given detailed definition of a few standardterms popularly known as ‘INCO TERMS’. These termshave almost universal acceptance.

c. Mode of Settlement of Payment :- There are mainly threemodes of settling international transactions dependingupon the creditworthiness of the importer or exporter,.demand for the commodity in the international market,exchange control regulations prevailing in the importer orexporter countries and other relevant factors :-• Advance Payment.• Payment or Acceptance against Documentary

Collections.• Payment under Letter of Credit.

d. Obtaining lEC Number :- In India, it is obligatory forevery importer and exporter to register themselves with theDirector General of Foreign Trade (DGFT) and obtainImport-Export Code (lEe) Number. The application form’-for obtaining IEC number should be accompanied by a feeof Rs. 1000 and two copies of passport size photographsof the applicant duly attested by the banker of the applicantand other relevant documents.

e. Obtaining Import Licence :- If the item to be importedfalls in the . prohibited list, then such item cannot beimported at all. However, if it falls in restricted list then thenecessary clearance must be obtained from appropriatelicensing authority. Similarly, if it is subject to thecanalisation through State Trading Enterprises (STEs), thenthe necessary formalities are to be completed pertaining tothe same.

f. Obtaining Foreign Exchange :- In India, all foreignexchange transactions are regulated by the Exchange ControlDepartment of the Reserve Bank of India (RBI). Therefore,every importer is required to make an application to theReserve Bank of India (RBI) for getting. sanction formaking overseas payments. The Exchange ControlDepartment scrutinises the application and if satisfied,sanctions necessary foreign exchange for the importtransaction.

g. Arranging Finance for Import :- It is advisable that thefinancial planning for imports should be done in advance inorder to avoid huge demurrages on the imported goodslying uncleared for want of payment. Banks normally donot extend any fund based assistance to importers.However, they enable industrial units and others to haveaccess to imported inputs and machinery by establishingletters of credit in favour of the overseas suppliers.

h. Obtaining Import L/C Limit:- Import L/C limits aresanctioned by the banks on submission of complete loanproposal as in the case of other types of credit facilities.This requires advance financial planning so as to retireimport bills under L/C on time. Any delay in retirement ofbills not only strains the relations is of the importer withhis bank but also results in additional costs by way of extracommission, penal interest, demurrage charges, etc.

i. Dispatching Letter of Credit :- If the’ term of paymentagreed between the importer and the overseas supplier is a

letter of credit then the importer should obtain the letter ofcredit from his bank and forward it to the overseas supplierwell within the time agreed for the same. The importermust see to it that the letter of credit has been prepared inthe strict conformity of the import contract entered betweenthem.

Import by Export Oriented Units/ ExportProcessing Zones UnitsThe Government of India decided to establish export process-ing zones in 1965 in order to provide all facilities to theexporters to promote exports from India. The entire schemewas reviewed in 1980 when it was decided by the Governmentto introduce the scheme of export oriented units and providethem with all facilities in order to achieve faster rate of growthin exports. The export oriented units could be established inthe export processing zones or outside the zones. The 100%EOUs located in export processing zones were known as EPZunits. Besides, the export processing zones the Governmentalso established specialised processing zones to promote theexport of elec-tronics hardware, and computer software. Forthis purpose electronics hard. ware technology parks andsoftware technology parks were established. The basic require-ment of the units to be established under these zones or forthe export oriented units outside the zones is that these unitsshall undertake to export their entire production of goods andservices.The units established as export oriented units or units in theexport processing zones may be engaged in the manufacture,services, trading, development of software, agriculture, agro-processing, aqua-culture, animal husbandry, bio-technology,floriculture, horticulture, pisciculture, viticulture, poultry,sericulture and granites. Such units are allowed to export allprod-ucts except banned items.

Duty Free ImportsThe most significant feature of the units in these zones orexport oriented units is that these units are allowed to makeduty free import of all types of goods including capital goodsrequired by the units for the manufacture of goods or tradingof goods or supply of services. The only condition is that theitems of import should not be banned under the ExportImport Policy 1997--2002.Such units are also allowed to import goods including capitalgoods required by them free of cost or on loan from theirclients in foreign countries. The units in the STP /EHTP /EPZare also allowed to import duty free all types of goods forcreating a central facility for use by software development unitsin STP /EHTP /EPZ.The EOU /EPZ/EHTP /STP units can procure the goodsfrom bonded warehouses in the domestic tariff area withoutpayment of import duty .The units are allowed to import evensecond hand capital goods or import goods on lease basis.The EOU /EPZ/EHTP /STP units are allowed to importwithout payment of import duty all other goods besides capitalgoods required by them for their activities. The list of itemspermitted for export is as follows:

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Capital goods, as defined in the Policy including the followingand their spares.

i. DG sees, captive power plants, transformers and accessories,ii. Pollution control equipment,iii. Quality assurance equipment,iv. Material handling equipment, like fork lifts and overhead

cranes,v. Un-interrupted Power Supply System (UPS), Special racks

for storage, storage systems, modular furniture, computerfurniture, anti-static carpet, teleconference equipment, servocontrol system, air-con-ditioners, panel for electrical SecuritySystems.

vii. Tools, jigs, fixtures, gauges, moulds, dyes, instruments andacces-sories; Raw materials, components, consumables,intermediates, spares and packing materials;

viii. Prototypes and technical samples for product diversification,development or evaluation;

viii.Drawings, blue prints, charts, microfilms and technical data;ix. Office equipment, including P ABX, fax machines, video

projection system; Spares and consumables for the above items.The facility of duty free import available to the EOO / EPZ/STP /EHTP is subject to fulfilment of export obligation bythese units. The obligations of these units are at two differentlevels as explained below:

Import of Commercial SamplesThe import of commercial samples is exempt from the levy ofimport duty as provided vide General Exemption No. 42(Notification No. 154/94-Cus dated 13.07.1994 - with latestamendment on 6.07.1999 vide notification no. 86/99-Cus). Thesamples may be paid for or imported free of any charge. The ex-emptions from import duty are different in both the cases.

Commercial Samples (Paid for)A bonafide commercial traveller or businessman may importcommer-cial samples without payment of import duty upto avalue. limit of Rs. 60,000 or 15 units in number, within aperiod of twelve months subject to the fol-lowing conditions:The samples are imported as a part of personal baggage or bypost or by air.1. The importer produces Importer-Exporter Code (1EC)2. Number at the time of importation.3. The goods are clearly marked as samples.4. The importer, at the time of importation:

Commercial Samples and Prototypes (Free ofCharge)A bonafide business firm may import, without payment ofimport duty, bonafide commercial samples and prototypes bypost or by air or by courier service upto a value limit of Rs.5,000 provided the said goods have been supplied free ofcharge. The postal charges or the air freight is not taken intoaccount for determining the value of commercial samples andprototypes.

Question BanksQ1. Name the different categories of importers.Q2. Explain the special schemes of import liberalisation in

India.Q3. Explain the main steps in pre-import procedure.Q4. What are the legal dimensions of import procedure?

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Learning Objectives• Introduction• Capital goods• Custom Clearance Procedure for Imported goods• Import Documents• Retirement of Import Documents• Classification of Goods for Import Policy & Assessment of

Duty.• Bill of Entry.• A Note on Forward Contract

IntoductionThe Export-Import policy offers facilities for the import of rawmaterials, parts, components other inputs and the capital goodsto facilitate production of goods for the purpose of promotionof exports.Many a time, an export firm is required to make import of thevarious inputs and machines for the purpose of exportproduction.The facility of import is allowed under the ‘following categories:1. Import of unrestricted items2. Import of restricted items3. Import of capital goodsThe present chapter deals with these facilities and explains thepro-cedure involved in customs clearance of the importconsignments.

1. Import of Unrestricted ItemsThe business firms having Importer- Exporter Code Numberare allowed to import the goods which do not attract any kindof restriction under the Export-/import Policy: 2002-07, asamended from time to time. There is no permission .orapproval required to import such items. The importer intend-ing to import la certain item should first of all, ascertain theITC(HS) classification number ‘of the item by referring to theITC(HS) Classifications of Import and Export Items. Thereaf-ter, relevant chapter as given in Schedule 1 ( Import Policy)should referred to find out the policy regarding import againstthe item at the desired TC(HS) number. If the item is unre-stricted for import, the only requirement make import in termsof procedure would be to pay for the import duty leviable thatitem and seek the customs clearance of the import consign-ment.

2. Import of restricted itemsAny business firm intending to import restricted items shall berequired to apply for import licence under the Negative List. (Negative List refers to the list of restricted items.) The details ofthese restricted items can be obtained by making a reference toSchedule l(lmport Policy) as given in the ITC(HS) Classification

of Import and Export Items. The importer has to give reasonsas to why he needs to import the restricted items. In otherwords, justification for the import has to be provided becauseimport licence cannot be claimed as a matter of right. It is aprivilege extended by the Government to the importer. If thelicensing authority is not satisfied then it may not grant theimport licence

Capital GoodsImport of Capital GoodsThe policy regarding the import of capital goods is very liberal.There are no restrictions for the import of New Capital Goods.The only require-ment is to arrange for the customs clearance ofthe import consignment against the payment of the applicableimport tariff.

Import of Second Hand Capital GoodsAs far as second hand capital goods are concerned, their importis allowed freely provided the second hand capital good is notmore than 10 years old. However, such goods shall not betransferred, sold or otherwise disposed off within a period of 2years from the date of import without the prior permission ofthe Director General Foreign Trade.

Warehousing of Imported GoodsAn importer may not like to clear or may have certain problemsin clear-ing the goods imported immediately on payment ofduty for home consump-tion. In such an eventuality, he can,subject to certain conditions being sat-isfied, deposit the goodsin a Public or Private Bonded Warehouse. The object ofwarehousing is to allow the facility of deferring payment ofduty on im-ported goods pending actual clearance for HomeConsumption on payment of duty or their re-export withoutpayment of duty to any foreign port.The importers are required to file a set of yellow coloured billof entry commonly known as warehousing or Into bond Billof Entry (B/E) if they want the facility of warehousing of theimported goods. The warehousing BIE is almost the same asHome Consumption Bill of Entry and the procedures for itsprocessing are also the same except that the payment of theduty is de-ferred.After the assessment of goods for the lievy of the import dutyis com. pelted, the scrutinizing appraiser debits the importlicence{s} where necessary, and the set of warehousing Bill ofEntry {WR B/E} undergoes usual counter checks by theAssistant Collector of Customs. The formalities of calculationof duty, licence, registration and its pre-audit are also gonethrough as in the case of a Borne Consumption, B/E.The W R Bill of Entry is thereafter audited by the InternalAudit Depart-ment and then sent to Import Bond Departmentwhere the importers file the requisite warehousing Bond u/s 59of Customs Act, 1962. The Bond after scrutiny is accepted by

LESSON 37:IMPORT TRADE DOCUMENTATION

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A.C. {Bond} and registered in the Bond Department and WRnumber is impressed on all copies of B.E. The original copy itkept in the Bond Department, while the others are handed overto importers I clearing agent. The goods are thereafter examinedby the Dock Appraising staff on the basis of orders of thescrutinising Appraiser on Duplicate copy, and if found in order,the same are allowed to be physically warehoused by the DockAppraiser under the escort of a Preventive Officer.

Clearance of Warehoused of Goods for HomeConsumption Under Ex-Bonds B/EIn order to clear the dutiable imported goods from warehouse,the Bonder is required to present an ex-bond bill of entry,printed on green paper in the Imported Bond Department. It isnot obligatory for the importer to take clearance of the entireconsignment which was warehoused under a particular IntoBond BIE while filing an Ex-bond Bill of Entry. Even Ex-bond Bills of Entry for part clearance can be submitted. Theimporter after getting the Ex-Bond BIE registered in theImport Bond Department submits it to Appraising Depart-ment alongwith Triplicate copy of related Into Bond BIE andinvoice/ packing list, for verification of the particulars furnishedon the BIE (made on the basis of Into Bond B/E). Theconcerned Group Appraiser classifies and reassesses, if neces-sary. Concerned group A.C. and calculation of import dutythereafter hand over the assessed BIE to the importers clearingagents for payment of duty and taking delivery of the goodsafter the usual counter check.

Custom Clearance Procedure forImported GoodsUnder the Ministry of Finance (Department of Revenue), thereindependent Boards of Revenue :-a. Central Board of Direct Taxes (for Income Tax, Wealth Tax

etc.)b. Central Board of Excise and Customs.The Customs administration vests with the Central Board forExcise and Customs, which shapes the policy and decides thefunctions of the customs formalities in the country, in terms ofthe provisions of the Customs Act 1962.All goods imported in India have to pass through the customsclearance after they cross the Indian border. The goods soimported are examined, appraised, assessed, evaluated and thenallowed to be taken out of customs charge for use by theimporter.The procedure for customs clearance in general for goodsimported ,in India is as follows :a. Import Manifest :- As per the section 30 of the Customs

Act, 1962, the persons in charge of a conveyance carryingimported goods should hand over, within 24 hours of thearrival of the conveyance, an import manifest to thecustoms. The import manifest is a complete list of all itemsthe conveyance carries on board, including those to betransshipped and those to be carried to the subsequentports of call.

b. Entry in the Import Department of Customs House :.On receipt of information regarding the arrival of thegoods, the importers or their agents have to make an entry

by filing a Bill of Entry, in a prescribed form in the’ ImportDepartment of Customs House. The, date of presentationof Bill of Entry is an important date as the rate of dutyapplicable to the imported goods will be the rate, which isin force on t1}e date of presentation.

c. Presentation of Bill of Entry for Appraisal :- After theBill of Entry is noted in the import department, the sameshould be presented to the Appraising Counters along withthe following necessary documents :-• Import licence,jf necessary.• Exporter invoice.• A copy of Letter of Credit.• Original Bill of Lading and its non-negotiable copy.• Two copies of Packing List. ‘• ‘Weight spe9ifications.,• Manufacturers test certificate.• Certificate of Origin.• Delivery order issued by Shipping company or its,

agent.• Freight and insurance amount certificate if the import

is on FOB terms• A declaration from importer that he has not paid nay

commission to agents in India.• Customs declaration• Catalogue/drawing, etc for machinery imported.In addition to the above, the following documents are alsorequired to be submitted wherever necessary:-• If the spare part are imported-exporters invoice

showing unit price and extended total of leach item;• If the second hand machinery is imported-chartered

Engineer’s Certificate;• If the steel is imported-Manufacturer’s Analysis

Certificate;• If Chemicals and allied products are imported-

Literature showing chemical consumption;• If the textiles items are imported- Textile

Commissioners endorsement or certificate.If the above documents furnished by the importer arefound to be adequate for acceptance of the declared valueand determination of classification and acceptance of ITCLicence, the Bill of Entry is completed by the AssistantCollector and sent to the Licence Section with an order tothe Dock Staff for examination of goods before clearance.

d. Clearance of Goods ;- After payment of duty (the originalcopy of Bill of Entry is retained in the Customs House) theimporter should obtain the duplicate copy of Bill of Entryon which order for examination of the goods is given byCustoms and get the goods examined. If the description ofgoods. is found to be correct, on the basis of declared andaccepted particulars, clearance of goods is allowed by theappraiser.

e. Warehousing the Goods;- The imported goods can bewarehoused at the port of shipment without the payment

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Nof duty by presenting a “Bill of Entry for Warehousing” tothe Bonds Department along with a bond for twice theamount of duty payable. Initially the facility is granted for 3months, which may be extended upto a period one year.The warehoused goods can be cleared in one or moreinstallments. For clearance of goods from the warehouse,the importer is required to present what is known as ‘Ex-bond Bill of Entry’.

f. Import Follow-up ;- Once an importer is allowed to remitforeign exchange out of the country he has an obligation toimport the permitted goods of equivalent value in thecountry. If no goods or goods for lesser values areimported, it would lead to leakage of foreign exchange.

Import DocumentsYou have learnt the export documents in detail. Let us nowdiscuss the import documents.1. Importer Exporter Code (IEC) Number: No person can

import goods without obtaining an Importer-ExporterCode (lEC) Number unless he has been specificallyexempted. The IEC Number is obtained from the RegionalLicensing Authority. You have already learnt the procedureof obtaining IEC Number in Unit .

2. Bill of Entry: It is a document on which clearance ofimported goods is effected. All goods discharged from avessel, from foreign or coastal ports are cleared on Bill ofEntry in the prescribed form. The Bill of Entry form hasbeen standardised by the Central Board of Excise andCustoms.

Four copies of bill of entry are submitted. Original andduplicate for customer departments, triplicate is owner’s copyand the fourth copy is for the purpose of foreign exchange tobe submitted to bank. There are three types of Bill of Entry asdiscussed below:i. Bill ofentry for home consumption (white in colour):

where an importer wants to get his goods cleared in one lot,he has to present the Bill of entry for home consumption.

ii. Bill of entry for warehousing (into bond, yellow incolour): Where an importer wants to shift goods to awarehouse and thereafter gets his goods cleared in smalllots, he has to present ‘into bond’ bill of entry. Reason maybe that he is unable to pay duty leviable on all goods at oneinstance or may be because of storage problem.

iii. Ex.-Bond Bill of Entry (Green in Colour): When animporter wants to remove goods from the warehouse, hehas to present an Ex-bond bill of entry which is green incolour.a. Bill of Entry is not required in the following cases:b. passengers baggage favour parcelsc. mail box and post parcelsd. boxes, kennels of cargos containing live animals or

birdse. unserviceable stores, e.g. dunnage wood, empty

bottles, drums etc. of reasonable valuef. ship’s stores in small quantities for personal use

g. cargo by sailing vessels from customs ports whenlanded at open bundles only

For imports through the medium of post there is no bill ofentry. Instead a way bill is r prepared by the foreign post officefor assessment of duty.

Retirement of Import Documentsa. Loading of Goods and Receipt of Shipment Advice :-

On loading of goods the overseas supplier dispatches theshipment advice to the importer informing him about theshipment of goods. The shipment advice contains invoicenumber, bill of lading, airways bill number and date, nameof the vessel with date, the port of export, description ofgoods and quantity and the date of sailing of the vessel.’

b. Retirement of Import Documents :- After shipping thegoods, the overseas. 40' supplier prepares the necessarydocuments as per the terms of contract’ and letter of creditand hands them over to his bank for their onwardnegotiation< to importer in the manner as specified in theL/C. The set normally contains bill of exchange,.commercial invoice, bill of lading, packing list, certificate oforigin, marine insurance policy, etc.

For the retirement of documents, the importer is required tosubmit the following documents to his bank :-a. A letter authorising his bank to debit the equivalent Indian

rupees to the value of documents including bank charges.b. Exchange control copy of the Import Licence, if applicable.c. Form Al duly completed for the remittance in foreign

excl1ange.d. Acceptance of the Bill of Exchange :- Bill of Exchange

accompanied by the above documents is known as theDocumentary Bill of Exchange. It is of two types :-• Documents against Payment (Sight Drafts) :- In

case of sight draft, the drawer instructs the bank tohand over .the relevant documents to the importeronly against payment.

• Documents against Acceptance (Usance Draft) :- Incase of usance draft, the drawer instructs the bank tohand over the relevant documents to the importeragainst his ‘acceptance’ of the bill of exchange.

e. Scrutiny of Documents Received under L/c :- Afterreceipt of import documents from the exporter’s bank, theimporter’s bank will scrutinise the documents as to theircorrectness as per the terms and conditions of L/C andhands over them to the importer after payment. Theimporter should also scrutinise the documents and ensurethat there are no discrepancies.

f. Appointment of C & F Agent :- In India, the procedurefor clearance of imported goods is very lengthy, timeconsuming and involves lots of legal formalities. Therefore,it is advisable to hire the services of C&F agents who arewell versed with such formalities. The C&F Agent preparesthe bill of entry containing details of goods to be clearedfrom the customs. In case, the C&F agent does not haverelevant information about the goods to be cleared, he

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prepares a bill of sight in order to enable himself tophysically check the goods imported and prepare bill ofentry on that basis.

Classification of Goods for Import Policyand Assessment of DutyMost of the goods imported are assessed and valued forcalculation of import duty provided they are imported in termsof the Import Policy and evaluated for calculation of customsduty by virtue of the nature of goods or by virtue of its enduse. The imported goods, which do not fall in parameter of theImport Policy, are’ normally confiscated or allowed to be clearedonly on payment of heavy penalty.

Types of Customs DutiesThe following types of Customs Duties are levied on goodsimported into or exported out of India :-a. Basic Duty ;- Basic duty is levied on all goods imported

into India as prescribed in Schedule-I of Customs TariffAct. This duty is levied as a percentage of value of goodsimported or at a specified rate.

b. Auxiliary Duty ;- This duty was levied in addition to thebasic duty prescribed under the Finance Act every year.However, with effect from 28th February 1993, thegovernment has withdrawn auxiliary duty.

c. Additional or Countervailing Duty ;- This duty is leviedon the total cost of imported goods at the rate equal toexcise duty on like goods when manufactured in India. Thisduty is levied to protect the domestic industry.

d. Specific Duty :- This duty is levied in order to counterbalance the excise duty leviable on the imports going intothe production of such goods in India.

Mode of Levy of Customs Duty

a. Specific Duties :- Specific duty is a duty imposed on eachunit of a commodity imported or exported. For example,Rs.5 on each meter of cloth imported or Rs.500 on eachT.V. set imported. In this case, the value of commodity isnot taken into consideration.

b. Advalorem Duties :. Advalorem duty is a duty imposedon the total value of a commodity imported or exported.For example, 5% of F.O.B. value of cloth imported or 10%of C.LF. value of T.V. sets imported. In this case, thephysical units of commodity are not taken intoconsideration.

c. Compound Duties :- Compound duty is the combinationof specific and advalorem duties. In this case, the quantitiesas well as the value of the commodity are taken intoconsideration while computing tariff. For example, 5% ofF.O.B. value plus,50 paise per meter of cloth imported.

Valuation of GoodsValuation of goods is done as per principles and down inCustoms Valuation Determination and Prices. of ImportedGoods) Rules, 1998.

Demurrage ChargesThe goods imported and discharged in the Customs area arestored in the warehouses of CWC or Port Trusts or other

designated authority. Initially, such goods are allowed to bestored freely for few days and thereafter demurrage or storagecharges are levied. The “Free Period” for different cargo isdifferent as under :-a. Commercial and Non-commercial Cargo :- 7 calendar

days from date of landing.b. Unaccompanied Baggage :- 14 calendar days from date of

landing.

Direct Delivery Facility for Imports by AirThe facility of ‘Direct Delivery’ of goods imported by air-isallowed in certain cases:a. Goods like fresh fruits, frozen food, life saving drugs and

appliances, TV films;b. Any cargo requiring special handling or storage; andc. Any cargo in respect of which order of the Deputy Collector

of Customs, Air Cargo Unit, have been obtained in advancepermitting direct delivery.

Bill of EntryThe bill of entry is a document, prepared by the importer or hisclearing agent in the prescribed form under Bill of EntryRegulations, 1971, on the strength of which clearance ofimported goods can be made.When goods are imported in a particular country, the importerhas to pay the necessary import duty. For this purpose,necessary information about the goods imported must be givento the customs authorities in a prescribed form called bill ofentry form. Bill of entry is a document, which states that thegoods of the stated values and description in the specifiedquantity have entered into the country from abroad. The bill ofentry is drawn in triplicate. The customs authorities may ask theimporter to supply other documents like invoice, -broker’s noteand insurance policy, etc., in’ order to verify the correctness ofthe information supplied in the bill of entry form.

Types of Bill of EntryFor the purpose of giving information in the bill of entryform, goods are classified into three categories namely :-a. Bill of Entry for Goods Imported for Home

Consumption (White coloured) :- This kind of bill ofentry is used for clearing imported goods by payingcustoms duty at the port.

b. Bill -of Entry for Bonded Goods’ (Yellow coloured) :-This kind of bill of entry is used when no duty is paid onimported goods and, therefore, they are transferred tocustoms recognised bonded warehouses.

c. Bill of Entry for Ex-bond Clearance for HomeConsumption (Green coloured) :- This kind of bill ofentry is used where the importer intends to clear thedutiable goods, either in part or full, from a bondedwarehouse by paying necessary duty.

Contents of Bill of EntryThe main contents of the Bill of Entry are :-a. Name and address of the importer.b. Name and address of the exporter.

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Nc. Import licence number of the importer.d. Name of the port/dock where goods are to be cleared.e. Description of goods.f. Value of goods.g. Rate and amount of import duty payable.h. Other relevant documents.However, no bill of entry is required in the following cases :-a. Passengers’ baggage;b. Favour parcels;c. Mail bags and Post parcels;d. Boxes, kennels of cages containing live animals or bird~;e. Post parcels, ship stores in small quantities for persona, use.f. Un-serviceable stores, such as, dunnage wood, empty

bottles, drums, etc., of reasonable value (below Rs. 50);g. Cargo by sailing vessels from Customs Ports when landed

at open bunders only.

Processing of the Bill of EntryOnce the Bill of Entry is completed by the Appraiser, and thesame has been countersigned by the Assistant Collector, then itis forwarded to the Licence Department for debit and audit, andthereafter returned to the importers for payment of duty in theAccounts / Cash department. After recovery of duty, theoriginal Bill of Entry is retained in the Accounts Departmentand the duplicate and other copies are returned to the importersfor getting the goods examined in the docks. In the Docks,Shed Appraiser / Examiner shall examine the goods, and if theconsignment is in order, he will give the out of charge forpayment of the Port Trust Charges. This procedure underwhich 80 to 90% of the consignments are being cleared isknown as the Second Check Proce-dure. As against this, in thealternative procedure what is known as the First Check Proce-dure, the Scrubnising Appraiser in the Group gives theexami-nation order. The goods are then examined in the docksand the Bill of Entry returned to the Scrutinising Appraiser forcompletion and licence debit. In this case, the Customs out ofcharge is given by the Accounts Department soon after therecovery of duty. This procedure is resorted to only in caseswhere the appraisers or the assessing Group finds it difficult tocomplete the assessment on the basis of the documents madeavailable.The import consignment can be opened only by the properofficer of the customs for examination of the goods lying in aCustoms Area. Examination of cargo for assessment purposeis chiefly the function of the Appraising Department havingspecial staff of examiners in the docks / Air Cargo shed.‘The result of the examination or weighments is noted on thereverse of the Bill of Entry. It is absolutely essential that recordsof examination and weighment should be made, attested anddated at the time of examination or weighment. If examina-tion or weighment takes place on more than one day, the resultof examination or weighment made on each day is clearlyrecorded. The Officer at the same time, obtains on the docu-ments the importer’s or his accredited representative’s signature

on the entries made from day-to-day showing the result ofweighment.

A Note on Forward ContractInternational contracts are either concluded in Indian rupees orin foreign currency. If the contract is concluded in terms ofIndian rupees, all relevant documents are prepared in Indianrupees and hence no conversion is involved. However, if thecontract is concluded in some internationally accepted currencythen the importers have to pay Indian rupees equivalent. to theamount of foreign currency.Where the international contract has been concluded in foreigncurrency, an importer is always at risk due to adverse fluctuationsin the exchange rates in the international market. Such risks canbe avoided by the following methods :-a. Invoicing the Goods in Indian Rupees :- The first remedy

to adverse movements in exchange rates is invoicing goodsin Indian rupees. However, foreign seller may not agree toinvoicing goods in Indian rupees.

b. Entering into a Forward Exchange Contract :- This isthe most commonly practised alternative for insuring therisks arising out of adverse movements in exchange rates.Under this adjustment, the importer enters into contractwith its bank to purchase from the bank, foreign exchangeat a future date or period and the bank agrees to sell thefirm the foreign exchange on that date or during the agreedperiod at certain predetermined rate agreed upon at the timeof entering into contract. Thus, the importer knows inadvance the exchange rate that he is going to pay on deliveryof import documents.

Question BankQ1. Describe the procedure for the retirement of import

documents.Q2. Explain the customs clearance procedure for imported

goods.Q3. Explain the different types and modes of levying import

duties.Q4. What is Bill of Entry? What is its significance?Q5. Write a note on Forward Contracts.

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Learning Objectives• Objective• Introduction• Import Financing• The Regulatory Framework• Exchange Control Regulations Concerning Imports• Methods of Import Finance

a. Financing Import under Letter of Creditb. Financing against Bills under Collectionc. Financing Imports against Deferred Paymentd. Financing under Foreign Credite. Import Loans by Export Import Bank of India

• Let Us Sum up• Answers to Check Your Progress• Terminal Questions

ObjectivesAfter studying this unit, you should be able to:• explain the nature and significance of import financing

decisions• describe the institutional regulatory framework of import

financing• discuss the exchange control regulations concerning

imports.• explain various methods of import financing

IntroductionImports play an important role in the economy of everycountry, rich and poor alike. Rich countries need to importcapital goods, raw materials and technology to ensure anoptimum utilisation of their production capacity. They need toimport a wide variety of consumer goods to enable their peopleto enjoy a high standard of living. Poor countries need toimport technology and capital equipment and some timestrategic raw materials to develop indus-tries for accelerating paceof their development. In India, for example, the pace ofindustrialization, level of exports and consequently the rate ofeconomic growth is heavily dependent upon imports. A lowlevel of imports usual1y indicates low purchasing power of itspeople and also emergence of recessionary trends in economy.At a firm’s level efficient management of import operations iscritical factors in determining the overall profitability of itsimports. Hence, a through understanding of import financingtechniques and practices is necessary for concerned managers. Inthis unit, you will learn the regulatory framework and relatedexchange control mechanism of import financing and variousmethods of import financing.

Import FinancingIndia followed a restricted import policy till mid eighties.Nothing could be imported without a licence involvingcumbersome procedures alongwith intricate documentation.Although some liberalization measures were taken in secondhalf of eighties, real breakthrough came only in 1991. Steadyprogress has been made in nineties in replacement of quantita-tive restrictions, licensing and discretionary control over importsby deregulation, simplification of procedures and protectionthrough tariff and exchange rates. Export Import policies of1992-97 and 1997-2002 were the steps in this direction.It is against the background of nature and significance ofIndia’s import trade, one has to understand import financingmethods and techniques. Import financing involves makingpayment to foreign entities for the goods purchased fromthem. From the management decision making viewpoint, itmeans making decision regarding terms of payment (Le.choosing one among several alternatives), arranging funds,involving choice of financial institution and the instrument tobe used for making payment and involving choice of intermedi-ary, through whom the payment is to be made.

The Regulatory Frame WorkThe principal objectives of India’s Export Import Policy is toaccelerate the country’s transac-tion to an internationally orientedeconomy with a view to derive maximum benefit from theexpanding global market. Various policy objectives are achievedbasically through three legislations.These are:1. Foreign Trade (Development & Regulation) Act, 1993

administered by Director General, Foreign Trade (DGFT)replacing the earlier legislation Import & Export (Control)Act, 1947, administered by the Chief Controller of Imports& Exports (CCIE).

2. Foreign Exchange Management Act, 1999 administeredby the Department of Economic Affairs, Ministry ofFinance and the Exchange Control Development of theReserve bank of India. FEMA has been brought is place ofForeign Exchange Regulation Act.

3. Indian Customs and Excise Act, 1962 administered byCentral Board of Excise and Customs.

The Foreign Exchange Dealers Association of India (FEDAI)frames the rules and operational procedures and changesrelating to imports. In addition, Uniform Customs & Practicefor Documentary Credit (UPDC) formulated by InternationalChamber of Commerce, Paris which has a global acceptance, isindispensable to cover transactions under documen-tary credits.India’s import policy is formulated within the framework ofobligations of the membership of World Trade Organisation(WTO). Hence, the policy does not have a discriminatory andrestrictive dimension. Whatever restrictions on imports

LESSON 38:IMPORT FINANCE

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Ncontinue are the ones which have -been allowed under theWTO regime. In line with WTO provisions for accordingpreferential treatment of imports from developing countries,India has signed several preferential treading arrangement withsome South Asian Countries and the products, which willattract concessional rate of duty, are also specified.Physical control over imports is exercised by DGFT and theCustoms Dept. RBI exercise financial controls through theguidelines provided to authorised dealers. Of late, tariffs ratherthan quantitative restrictions are being used to regulate importtrade.Under the present policy, all goods, except those appearing onNegative list can be freely imported in India. For goodsincluded in the restricted, or banned list, import licence may beissued by the Director General of Foreign Trade. An importlicence is an authorisation which includes a customs clearancepermit (CCP) indicating inter alia, quantity description and valueof the goods, actual user conditions if any, the minimumexport value if any, export obligation, if any, and value additionobligation, if any. Import licences which are issued on C.I.F.basis, is given in duplicate viz. Customs Copy (for clearancefrom customs) and Exchange Control copy for remittances.For exporting units, certain special facilities have been providedunder the present policy. Under the Export Promotion Capitalgoods (EPCG) Scheme, capital goods can be imported at aconcessional rate of custom duty, subject to an export obliga-tion to be fulfilled within a specified period of 5-8 years. Underthe Duty Exemption Scheme, the government permits importof raw materials. intermediates, components, consumables,spare parts, accessories, packing materials and computersoftware required for direct use in the product to be ex-portedduty free under different categories of licences. Advance licence isissued for inputs needed for export production. It can be issuedfor physical exports, intermediate supply and deemed exports.

Exchange Control RegulationsConcerning ImportsExchange control regulations refer to rules and regulationsframed and administered by the Reserve bank of India (RBI)under the provisions of Foreign Exchange Management Act,1999. These regulations aim at pooling resources for nationaldevelopment in the best interest of the country. Under theprovisions of the Act, RBI regulates sale and purchase offoreign currencies, Commercial banks with a licence to deal inforeign currencies, called authorised dealers (ADs) buy and sellforeign currencies in accordance with the guidance provided bythe RBI. Let us learn various regulations regarding payment ofimports.Mode of Payment: Exchange control regulations govern salesof foreign currencies to non -residents against import of goodsfrom any country except - Nepal and Bhutan. It may be pointedout that residents of these two countries are residents for thepurposes of exchange control regulations, hence, ADs cannotsell any foreign exchange for financing imports from these twocountries.Under the existing regulations, ADs provide foreign currenciesto importers:

i. for remittance to foreign supplies as advance payments.ii. Paying the foreign supplies in compliance of their

undertaking under the letter of credit.iii. discounting on purchasing except documents.iv. advances against shipping documents.Authorised dealers can open a letter of credit (L/C) to facilitateimports, subject to following regulations:a. Letters of credit may be opened by banks only on behalf of

their customers who maintain account with them.b. L/C should be opened in favour of overseas suppliers of

shipper of goods.c. Application for L/C must be accompanied by sale contract

and other documentary evidence relating to the order and itsconfirmation and import licence, if any.

Authorised dealers have been permitted to sell foreign curren-cies for making payment towards imports into India. For thispurpose, importers have to submit an application in form Agiving the necessary details including classification of goodsbased on Harmonized system. It is also obligatory on the partof an importer to submit exchange control copy of customsbill of entry to the authorised dealer through whom the relativeremittance was made as evidence that the relative goods forwhich the payment was made have actually been imported intoIndia within three months from the date of remittance.In respect of imports by post parcel, postal wrappers arerequired to be submitted as docu-mentary evidence in supportof imports into India.Currency of Payment: According to exchange control regula-tions, payment for imports should be made in a currencyappropriate to the country or through an account appropriate tothe country of origin of goods irrespective of the country fromwhere they are shipped or supplied. RBI has given a list ofpermitted currencies and approved methods of payment forimports in Exchange Control Manual for guidance of import-ers.Time limit for settlement of imports bills: Time limit forsettlement of import bill is 6 months from the date ofshipment, but authorised dealers can settle without reference toRBI even if the period of six months has expired, provided theAD is satisfied about the bonafides of the circumstances.

Methods of Import FinanceThe methods of import financing include: financing under L/C, financing against bills under collection, financing againstdeferred payment, financing under foreign credit and finance byEXIM Bank of India. Let us discuss them in detail.

1. Financing Import Under Letter of CreditLetter of credit can be defined as a commitment of bank to paythe seller of goods or services a certain amount provided hepresents stipulated documents evidencing the shipment ofgoods or the performance of services within a prescribed periodof time. As a credit instru-ment and as a means of making andsecuring payment, the letter of credit is an essential instrumentfor conducting world trade today. It fulfils all the requirementsprovided the conditions regarding its use are stated in clear andunambiguous terms.

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Import letters of Credit Financing Involves threePrincipal Stages

i. Requesting bank to open a letter of creditii. Retiring documents under letter of creditiii. Import Trust receipt facility.Each time a L/C is opened, the importers has ~o file a formalstamped “Letter of credit application and Agreement” in theprescribed form. The application should set forth the precise,terms and conditions under which the importer wishes hisbank to establish the credit, and describe the documentscovering the goods purchased which the bank is to receive inexchange for payments.As the correct opening of the credit is the first essential to theultimate success of the transaction and as the L/C will .beissued on the basis of information supplied by the importer inthe L/C application, it is absolutely necessary that the informa-tion supplied by him must be complete and precise, After duescrutiny of the application form, the relevant letters are issuedby the bankers subject to the Uniform Customs And Practicefor Documentary Credits, in order to guard against confusionand misunderstanding.Letters of credit may be opened by mail or Fax depending uponthe urgency of the situation. It may be revocable or irrevocable.Irrevocable L/C implies that the terms and conditions of thecredit can be amended only with the consent of all the con-cerned parties. At times, the importer may ask the issuing bankto get the credit confirmed by another bank. It means that inaddition to the issuing bank (the confirming bank) assumes thecommitment to pay provided the terms of the credit arefulfilled.L/C is sent by the issuing bank to a bank in the supplierscountry with a request to deliver the same to the supplier, calledthe beneficiary. If the beneficiary is satisfied with terms andconditions mentioned in L/C he ships the goods, obtains therequired documents and submits them to bank, usually hisown, unless a name has been specified in the credit. Bankscrutinizes the documents and if he finds them in conformitywith the L/C and the reimburse-ment instructions, he pays thesuppliers. Thereafter he sends the documents to the issuingbanker who again scrutinises the documents with references tothe terms of the credit. If he is satisfied, he pays the negotiatingbanker.After paying the negotiating banker the issuing banker releasesdocuments of title to the importer on his executing a stampedLetter of Trust (Trust Receipt). It means that the importerundertakes to deposit with the bank the sale proceeds immedi-ately on relisation but in no case later then period stipulated inthe trust letter. The import trust receipt facility is given by thebanks to first class customers only.Bankers also grant import loans to their approved customersand undertake the clearance of goods on their behalf. In suchcases, the bills received under letter of credit are retired to debitof loan account of the customer by the bank and the relativedocuments forwarded to an approved clearing agents forclearance of goods. After the goods are cleared, dispatched andRailway Receipts sent to the bank, the relative goods or Railway

Receipts are delivered to the importer after receiving the dueamount. Where arrangements exist, the goods may be stored inthe bank godown under bank’s lock and released againstproportionate payments as and when desired by the importer.

2. Financing against Bills under CollectionIn the case of imports not covered by letters of credit, thedocuments are forwarded by a bank in the supplier’s country,known as the collecting bank, for collection of proceeds fromthe importer and payment to the supplier through the remit-ting bank. In such cases, the collecting bank would examine thedocuments and the instructions stated in the covering scheduleto ensure that all the stated documents have been received intactand the bill of lading and the bill of exchange are endorsed inits favour or blank endorsed to enable the bank to handle thedocuments. The bank than presents the documents to theimporter on payment (in case of sight or D/P Bill) or againstwritten acceptance (in case of usance or d/p bill). Where theimporter is eligible to receive the documents only on payment,he can avail an import loan or a trust receipt facility, as discussedbefore. Obligations of various parties involved are provided inUniform Rules for Collection (URC) Publication No. 322 issuedby International Chamber of Commerce, ParisSometimes, shipping documents may be sent by the exporterdirectly to his importer. In such a case, the bank may receiveclean bills for collection of proceeds. I n such cases, banks arerequired to call for documentary evidence of imports such ascustom noted invoice, exchange control copy of bill of entryand import licence, if any.Payment for bills in respect of imports through post can alsobe arranged through a bank. In such cases, the relative postalreceipts must be produced as evidence of shipment throughpost and an undertaking to submit postal wrappers withinthree months from the date of wrappers.

3. Financing Imports against Deferred PaymentImports under deferred payment implies that the supplier hasagreed to supply goods on credit terms extending beyond sixmonths. In such cases, authorised dealer has to refer eachdeferred payment case to RBI for prior approval of advancepayment, bank guarantee and installments (principal andinterest) with documents viz. exchange control copy of importlicence, if any, contract copy and statement of desired facilities.Appraisal for issue of guarantees or loans is similar to termfinance. For importing under deferred payment, the importershould have sufficient cash generated to pay the dueinstalments. He should arrange for payment of advance anddown payments from his own resources which would coverbank’s margin requirement. Imported machinery has to behypothecated to the bank and the importer should counterguarantee the transaction.

4. Financing under Foreign CreditGovernment of India gets assistance in the form of loans anddevelopment credits from international financial institutions asalso foreign governments. These loans are of two types - tiedloans and loans in free foreign currencies. Terms and conditionsof each loan along with detailed instructions regarding theprocedure to be followed for opening letters of credit, submis-

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Nsion of documents etc. are set out in public notices issued byDGFT. RBI also issues circulars for each foreign credit givingimportant instructions relating to such imports.Payment under foreign credit may be made undera. letter of commitment method orb. reimbursement method.Under the letter of commitment procedure, remittances fromIndia for the relative imports are not permitted. The importerin India obtains a letter of commitment from the Governmentof India after furnishing a bank guarantee for payment of rupeeequiva-lent of the import value. The importer furnishes theletter of commitment to the bank opening L/C. Then theusual procedure follows. The shipping documents are deliveredto the importer on payment I acceptance. Where no L/C isopened at all and on receipt of document covering importsrupee deposits are made to Government account by theimporter through the bank.Under the reimbursement method, the aid giving the countrymakes available to the Govern-ment of India on production ofevidence of payment of imports. Hence, payment to thesuppliers is made by the L/C opening bank through thenormal banking channels and reimbursement is by the Govern-ment of India by submitting the required documents.

5. Import Loans by Export-Import Bank of IndiaBank finances imports from third countries required forexecuting projects overseas for which Indian exporters havewon contracts.Regarding imports into India, Exim Bank finances suchimports which are export. related, i.e. imports by ExportOriented Units, import of computer systems for developmentand export of software, import of plant, machinery, technologyfor up gradation/expansion of production capability for exportmarkets.Exim Bank also finances bulk imports of consumable inputsand canalized items. Under this scheme, promissory notesdrawn in favour of commercial banks by their importerborrowers are discounted, Exim bank will issue letter ofcommitment for finance on request from commer-cial bankindicating its requirement The quantum of finance depends onthe condition that import order should not be less than Rupeesone Crore.

Let Us Sum UpImports play an important role in economy of every country -rich and poor a like. Their role in India is particularly crucial inview of country’s continued dependence of foreign capital andtechnology. Hence, it is necessary to ensure that import opera-tions at firm’s level also are managed efficiently. Significantchanges in India’s import policy aiming at removing bottle-necks on account of red tape and lengthy documentation havetaken place in recent years.Import financing means making decisions regarding term ofpayment (choosing one among several alternatives) arrangingfunds, involving choice of financial institution and the instru-ment through which the payment is to be made. The choice isconditioned by regula-tory framework concerning imports andavailability of foreign currencies.

In India, Foreign Trade (Development and Regulation) Act1993, Foreign Exchange Manage-ment Act 1999 and IndianCustoms and Excise Act 1962 are the three legislations consti-tuting the regulatory framework. While Foreign Trade(Development & Regulation) Act and Indian Customs & ExciseAct regulate the physical importation, Foreign ExchangeRegulation Act regulates remittances on account of payment forimports. As a result of liberalisation in foreign trade sector,import licensing has been abolished and import licences areneeded only for terms included in the negative list on importsat concessional rates of import duty. Exchange control regula-tions have prescribed requirements regarding mode ofpayment, currencies to be used and the period within thepayments for imports have to be paid.Imports can be financed in several ways. Importer can requesthis banker to open a letter of credit in favour of his supplier.Under the system supplier gets paid immediately uponsubmission of specified documents to the- bank. Importerobtains release of these documents either upon payment ordebit to his loan account. He can ask the supplier to send thedocuments to the banker. Whom he instructs to make paymentby debiting his account. Importer gets a loan either on TrustReceipt or hypothecation of imported goods to pay for theimports. Where an importer contracts to pay instalments,permission of RBI needs to be taken. He can obtain a loanfrom the bank to pay for the jnstalment. Imports under creditextended International Financial Institutions and foreignGovernments can be financed either through commitment (i.e.Government of India commits a part of loan to the importerand gets paid in Indian rupees) or reimbursement method i.e.after paying the supplier, the bank gets reimbursed by loangiving agency. Export Import Bank of lndia lends to importersto finance their export related imports.

Reference : Case Studies on HSBCImport ServicesWith over 130 years of experience supporting importersglobally, HSBC is well positioned to fulfill your trading needs.A full range of import services is available, ensuring that yourimport documents are processed without delay by our experi-enced staff.Simply apply to us for import facilities, and we can beginhandling your imports immediately.

Our Range of Services IncludesLetter of creditImport CollectionsImport FinanceShipping GuaranteesLetter of credit:- For importers who are looking for newsuppliers, one of the primary considerations when deciding onthe payment terms is to ensure that the goods supplied are thegoods ordered. The two main instruments to ensure this aredocumentary collections, whereby the importer only makespayment in exchange for documents of title for the goodsshipped, and a Letter of Credit, where the importer requests hisbank to confirm payment for the goods, given certain condi-tions being met.

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Using HSBC to process your Letter of Credit and collectionsoffers a number of advantages both to you and your suppliers• Financial Strength

A Letter of Credit issued by HSBC has the backing of oneof the world’s largest financial services organizations. Thismeans that any LCs issued by us in your name will beuniversally acceptable both by your vendors and yourvendors’ banks.

• Global NetworkOur global network of over 9,500 offices in more than 80countries and territories means that wherever you trade, anHSBC representative is available overseas to assist yourtransactions. In addition, by routing your Letter of Creditthrough our overseas branches, we can ensure that the creditis advised to your supplier without delay. This is particularlyimportant if you need your goods in a hurry, or yourvendor needs some time to prepare the export documents.

• Expert AssistanceOur highly trained staff is available at any time to provideyou advice on any aspect of issuing a letter of credit andprocessing collections. We can also arrange training sessionsfor your staff at your offices

• Vendor supportBeneficiaries of an HSBC Letter of Credit are entitled to thesame high level of professional support and advice as ourcustomers. Our overseas trade services staff is available toexplain complex LC terms to your suppliers and to assistthem in preparing export documents and identifyingdiscrepancies. In addition, we are even prepared to provideexport finance to your supplier after completion of somesimple documentation*.

• Wide Range of Special LCs availableWith our wide range of specialist knowledge in Letters ofCredit, we can advise on and deliver a range of specializedinstruments: Standby Letter of Credit, transferable Letter ofCredit, Back-to-Back Letter of Credit, Revolving Letter ofCredit and Red Clause Credits.

Import Collection:- Collections offer a cost-effective but securemeans of trading internationally. Using these instruments, theimporter only effects payment in exchange for the documentsof title for the goods shipped. If these are found to beunacceptable, payment can be refused, giving the buyer piece ofmind.Using HSBC to process your collections offers the followingadditional benefits:• Global network

With a network of over 9,500 offices in more than 80countries and territories, chances are that your suppliers willbe able to easily dispatch their collections to us from one ofour branches. This ensures that your documents will arrivefaster, allowing settlement without delay.

• Financial strengthBy banking with one of the world’s largest financial serviceorganizations you can rest assured that your suppliers willget paid as soon as your account is debited. No hiddeninterest or payment delays.

• Expert assistanceOur highly trained staff is available at any time to provideyou advice on any aspect of issuing processing collections.We can also arrange training sessions for your staff at youroffices.

• Excellence in serviceWe have established strict service standards, which willensure that we will inform you within one working day ofany documentary collections drawn on you.

• TechnologyTo automate the collection generation process, we havedeveloped Electronic Direct Sends, a collection generatingsystem integrated with our EDI service, allowing collectionsto be generated and dispatched to you without delay.

Import Finance:- Whether you import using documentarycredits or collections, we are prepared to consider providingimport finance for you. Financing your imports with HSBCoffers a number of advantages:• Facilities structured around your Trade Cycle

Many banks treat import finance in the same manner as theytreat overdrafts. This means higher interest charges for you,and a risk that your facilities are fully utilized when ashipment comes in. With HSBC, your import financefacilities are carefully constructed around your actual tradingcycle after a consultation session with your corporaterelationship manager. This means your facilities will bestructured around the actual business you do, allowing youto enjoy lower interest rates, and finance will always beavailable to cover your shipments.

• Stronger Capital BaseWith HSBC, you have the backing of one of the world’slargest financial service institutions with over 130 years ofexperience financing trade. This means your facilities arestructured with the long term objectives of your business inmind and we will stand by you in market downturns. Inaddition, we can call upon the HSBC Group’s extensiveinternational resources to provide appropriate trade-financesolutions.

• Partnership PhilosophyHSBC has always sought to work with our clients based onour core philosophy of partnership and many of our largestclients today started their relationship with us as a smalltrader many years ago. The strengths of our partnershipshave been clearly demonstrated in the wake of the recentfinancial turmoil in Asia. We have continued to stand byour clients. As one of our customers recently commented,we don’t take the umbrella away when it rains.

• Experienced dedicated corporate relationshipmanagersA meeting with our corporate relationship managers ismore like a meeting with a consultant than with yourbanker. When you talk, we listen, and we put maximumeffort in identifying your requirements and developingsolutions.

Shipping Guarantee:- In certain situations your goods mayarrive in port before the shipping documents have beenprocessed through the banking system. In these circumstances,

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Shipping guarantees are only of value if they are issuedimmediately. HSBC can issue shipping guarantees as soonas the application is made*, meaning you can release yourgoods from the carrier immediately.

• Financial StrengthHSBC-issued shipping guarantees are universally acceptedby all shipping companies. This means you can always beassured that you will get your goods on time.Source: hsbc.com

Question BanksQ1. What is Import Financing?Q2. What do you mean by import Licence?Q3. What do you mean by Trust receipt?Q4. What do you mean by deferred payment?Q5. State whether following statements are true or False.

I. Time limit for settlement of import bill is 6 monthsfrom the date of shipment.

II. Uniform Custom and practice for DocumentaryCredit is not indispensable to cover transactionsunder documentary credit

III. Import licences are issued on CIF basis.IV. Authorised dealers can sell foreign exchange for

financing imports from Bhutan.V. Payment of import should be made in a currency

appropriate to the country.VI. Letter of credit can not be opened by mail.VII. After paying the negotiating bankers, the issuing

bankers release documents of title to the importer onexecuting a stamped letter of Trust.

VIII. When shipping documents are directly sent toimporter by exporter the bank receives clean bills forcollection of proceeds.

IX. Government of India gets assistance in the form ofloans and development credits from internationalfinancial Institutions.

Answers to Check Your Progressi. True vi. Falseii. False vii. Trueiii. True viii. Trueiv. False ix Truev. True

Terminal Questions1. What is importing financing? Describe the regulatory

framework related to import financing.2. Explain various exchange control regulations concerning

imports.

3. Enumerate the methods of import finance. Describe theprocedure of financing import under letter of credit.

4. Explain various methods of import finance alongwith thedocumentation procedure.

5. Write notes on:i. Financing against bill under collectionii. Financing under foreign currency Import loan by Exim

Bank of Indiaiii. Financing under deferred payment arrangement

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LESSON 39:

Abbreviations

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