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INCO TERMS
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INTERNATIONAL COMMERCIAL TERMS
A codification of international rules for the
uniform interpretation of common contract
clauses in export/import transactions
developed and issued by the International
Chamber of Commerce (ICC).
It defines trade contract responsibilities
between buyer and seller
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EX WORKS
Means that the seller fulfills his obligation to deliver when he
has made the goods available at his premises (i.e. works,
factory, warehouse, etc.) to the buyer
He is not responsible for loading the goods on the vehicle
provided by the buyer or for clearing the goods for export,
unless otherwise agreed
The buyer bears all costs and risks involved in taking the
goods from the seller's premises to the desired destination.
This term thus represents the minimum obligation for the
seller
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FREE CARRIER (forwarder)
"Free Carrier" means that the seller fulfills his obligation to
deliver when he has handed over the goods, cleared for
export, into the charge of the carrier named by the buyer at
the named place or point.
This term may be used for any mode of transport, including
multimodal transport.
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FREE ALONGSIDE SHIP - FAS
"Free Alongside Ship" means that the seller fulfills hisobligation to deliver when the goods have beenplaced alongside the vessel on the quay at thenamed port of shipment
This means that the buyer has to bear all costs andrisks of loss of or damage to the goods from thatmoment.
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FREE ON BOARD- FOB
"Free on Board" means that the seller fulfills his obligation to
deliver when the goods have passed over the ship's rail at the
named port of shipment
This means that the buyer has to bear all costs and risks of
loss of or damage to the goods from that point.
The FOB term requires the seller to clear the goods for export
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CFR - COST AND FREIGHT (... named port of
destination)
- Means that the seller must pay the costs and freight necessaryto bring the goods to the named port of destination
CIF - COST, INSURANCE AND FREIGHT (...named port of destination )
- Means that the seller has the same obligations as under CFR butwith the addition that he has to procure marine insurance against
the buyer's risk of loss of or damage to the goods during the
carriage.
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CPT - CARRIAGE PAID TO (... named place of
destination)
- Means that the seller pays the freight for the carriage of the goodsto the named destination
- Prepaid vs. Collect
CIP - CARRIAGE AND INSURANCE PAID TO (... namedplace of destination)
- Means that the seller has the same obligations as under CPT
but with the addition that the seller has to procure cargo
insurance against the buyer's risk of loss of or damage to thegoods during the carriage.
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DAF - DELIVERED AT FRONTIER (... named
place)
- Means that the seller fulfills his obligation to deliver when thegoods have been made available, cleared for export, at the
named point and place at the frontier, but before the customs
border of the adjoining country
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DES - DELIVERED EX SHIP
Means that the seller fulfills his obligation to deliver when
the goods have been made available to the buyer on board
The ship has cleared the border but uncleared for import at
the named port of destination.
The seller has to bear all the costs and risks involved in
bringing the goods to the named port of destination
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DEQ - DELIVERED EX QUAY
Means that the seller fulfills his obligation to deliver whenhe has made the goods available to the buyer on the quay(wharf) at the named port of destination, cleared forimportation
The seller has to bear all risks and costs including duties,taxes and other charges of delivering the goods thereto.
This term can only be used for sea or inland waterwaytransport.
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DDU - DELIVERED DUTY UNPAID
Means that the seller fulfills his obligation to deliverwhen the goods have been made available at the namedplace in the country of importation.
The seller has to bear the costs and risks involved in
bringing the goods thereto (excluding duties, taxes andother official charges payable upon importation) as wellas the costs and risks of carrying out customs formalities.
The buyer has to pay any additional costs and to bear anyrisks caused by his failure to clear the goods for import in
time. This term may be used irrespective of the mode of
transport.
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DDP - DELIVERED DUTY PAID
means that the seller fulfills his obligation to deliverwhen the goods have been made available at the namedplace in the country of importation.
The seller has to bear the risks and costs, including
duties, taxes and other charges of delivering the goodsthereto, cleared for importation.
This term may be used irrespective of the mode oftransport.
EX WORKS REPRESENT LEAST BURDEN ON SELLERWHEREAS DDP REPRESENTS MAXIMUM OBLIGATION
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FOBFASFCA
Bill of
Lading
Ex-worksFactory
loading
Export
clearance
Insurance
+
CFR
CIF
Customs
DAF before the
customs borderDESunloading
DEQ
+
DDU
Bringing goods to the
named destination
without custom
clearance
DDP
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COMMON PAYMENT TERMS
Cash in Advance
Letter of Credit
Documents againstPayment/DA
Open Account
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CASH IN ADVANCE
Receive cash from the buyer before shipping
Telegraphic Transfer
Demand Draft
*In case of HUGE payments (importer may demand
a bank guarantee)
**if exporter is in a strong trading position &
particular product is not available
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Parties to a Letter of Credit
Applicant/Importer Importer is the Opener on whose behalf
or account, the letter of credit is issued by
his bank (Issuing Bank)
Exporter
Exporter is the Beneficiary of the letter of
credit who is entitled to receive thepayment of his bills according to the terms
of Letter of Credit.
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Intermediary Bank/Confirming Bank
Usually a branch or the correspondent of the
opening bank in the exporting country
Advising or Notifying Bankmerely forwards the
credit, without any obligation on its part
Confirming Bank adds its own undertakings to
the credit while advising it to the beneficiary
Parties to a Letter of Credit
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LETTER OF CREDIT
In short, an L/C is
A formal document of payment
Opened by a party wishing to import
Communicated through banking channels
Paid by the opening bank within a specified
timeframe upon presentation of docs
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LETTER OF CREDIT
(1) Contract
(5) Shipment
EXPORTER- SELLER
(BENEFICIARY)
IMPORTER - BUYER
(APPLICANT)
EXPORTERS BANK
(NEGOTIATING/
CONFIRMING BANK)
IMPORTERS BANK
(L/C ISSUING BANK)
(2) Application
(3) L/C
(4) Advising(6) Documents
for negotiation
(7) Dispatch of Documents -
Claim Reimbursement
(9) Remit the payment
(8) Retirement
Documentary Credit Cycle
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L/C PAYMENT PROCEDURE Buyer and Seller agrees on terms and conditions of the sale
Buyer instructs its bank to open an L/C incorporating previously agreed terms of sale
The buyer's bank prepares a Letter of Credit (L/C), including all instructions to the seller's bank
concerning the shipment and sends the L/C to the seller's bank, requesting confirmation
The seller may request confirmation from a confirming bank for added security
The Seller's bank prepares a letter of confirmation to forward to the seller along with the L/C
The seller reviews carefully all conditions in the L/C, specially shipment schedule in consultation withhis freight forwarder
The seller arranges the goods and hand over to freight forwarder for delivery at appropriate port orairport
Once goods are loaded/shipped, the forwarder completes necessary documentation and hand themover to the seller.
The seller then presents the documents to his bank, informing full compliance with terms andconditions of L/C
The seller's bank reviews the documents.
The documents are airmailed to the buyer's bank for review and passing necessary documents tobuyer.
The buyer's bank sends the draft to buyer for payment/acceptance
Buyer pays bank/sends acceptance
The buyer gets the documents needed to claim the goods.
The seller's bank gets payment and pays seller immediately or at a later date
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L/C PAYMENT PROCEDURE
The buyer's bank prepares and issues an L/C(including all instructions concerning the shipment)
to the seller's bank, requesting confirmation
Buyer instructs its bank to open an L/C incorporatingpreviously agreed terms of sale
Buyer and Seller agrees on terms and conditions of
the sale
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L/C PAYMENT PROCEDURE
The seller reviews carefully all conditions in the L/C,specially shipment schedule in consultation with his
freight forwarder
The Seller's bank prepares a letter of confirmation toforward to the seller along with the L/C
The seller may request confirmation from aconfirming bank for added security
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L/C PAYMENT PROCEDURE
The seller then presents the documents to his bank,informing full compliance with terms and conditions
of L/C
Once goods are loaded/shipped, the forwardercompletes necessary documentation and hand them
over to the seller.
The seller arranges the goods and hand over to
freight forwarder for delivery at appropriate port orairport
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L/C PAYMENT PROCEDURE
The buyer gets the documents needed to claim thegoods.
The documents are airmailed to the buyer's bank forreview and passing necessary documents to buyer
The seller's bank reviews the documents
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L/C PAYMENT PROCEDURE
The seller's bank gets payment and pays seller.
Buyer pays bank
The buyer's bank returns accepted draft and informsbuyer.
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Types of letters of credit
a. SIGHT L/C
b. USANCE L/C
c. REVOCABLE L/C
d. IRREVOCABLE L/C
e. CONFIRMED IRREVOCABLE L/C
f. UNCONFIRMED IRREVOCABLE L/C
g. WITH & WITHOUT RECOURSE L/C
h. BACK TO BACK L/C
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Types of letters of credit
i. TRANSFERABLE L/C
j. ANTICIPATORY L/C RED CLAUSE, GREEN CLAUSE
k. REVOLVINGL/C
l. DEFERRED PAYMENT L/C
m. TRANSIT L/C
n. RESTRICTED & UNRESTRICTED L/C
o. NEGOTIABLE L/C
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Sight L/C (L/C at Sight)
Involves payment to exporter against Sight Draft
Payment is made against Usance Draft
Usance Draft is jointly accepted by Issuing Bank and
Importer which can be discounted through any
commercial bank before due date
Usance L/C
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Revocable L/C
can be amended/cancelled by the issuing bankw/o the consent of the beneficiary, often at the
request and on the instructions of the applicant.
NO security of payment
Does not constitute a legally binding
undertaking/limitedutility/not much in use
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Irrevocable Letters of Credit
It constitutes a legally binding undertaking of the
issuing bank for the payment bills drawn under the
credit, PROVIDED the beneficiary presents the
stipulated documents to the credit nominated bank or
to the issuing bank and complies with all the
conditions of the credit
CANTbe modified OR cancelled w/o approval of the
beneficiary, therefore, widely accepted
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*Exporters payment is confirmed even if
the importer or the issuing bank defaults.
Confirmed Irrevocable L/C
opened by the issuing bank whoseauthenticity has been confirmed by the
advising bank
the advising bank adds its confirmation to the
credit
+
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opened by an issuing bank in which the advising
bank does not add its confirmation to the credit
The promise to pay comes from the issuing bank
only, UNLIKE in a confirmed irrevocable L/C where
both issuing & advising bank promise to pay the
beneficiary.
Unconfirmed Irrevocable L/C
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With Recourse L/C
If the buyer fails to pay the bank after the
specified period, the bank can have
recourse on the exporter
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Without Recourse L/C
the bank has NO recourse on the exporter, IF thebuyer fails to pay the bank after the specified
period
THE BEST L/C CONFIRMED IRREVOCABLE
WITHOUT RECOURSE L/C because in this case the
Indian bank has added obligation to pay
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Back to Back L/C
the exporter uses his L/C as a cover foropening an L/C in favour of the local
suppliers
Its preferred over Transferable L/C to
maintain secrecy of the identity of
ultimate buyer
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Transferable L/C
In this the beneficiary is entitled to request the
paying, accepting, negotiating bank to pay, accept,
negotiate bills tendered by one or more OTHER
PARTIES. E.g. LI & FUNG
For partial transfer to one SECOND BENEFICIARY
or more than one second beneficiaries, the credit
must permit partial shipment
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Anticipatory L/C
This credit provides for advance payment, or atleast part payment to the beneficiary against his
undertaking to effect the shipment and submit the
bill and/or documents in terms of credit within the
validity
Ultimate liability lies with the applicant (buyer)
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Anticipatory L/C - Red Clause
Since the clause is printed /typed usually in red
ink, its called Red Clause credits.
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The Green Clause is an extension of the Red
Clause
it envisages the credit given to the exporter tocover the period of storage of goods at the sea
port
Green Clause L/C
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Revolving Letters of Credit
In revolving L/C, the amount involved whenutilized is reinstated, without issuing another L/C
and usually under the same terms and
conditions.
It can be revocable / irrevocable and may be
revolving in relation to time or value within a
given overall period of validity.
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Deferred Payment L/C
the exporter supplies plant, machineries, capitalgoods, etc.
Importer pays in installments over a period
ranging from 1 to 7 years or even more
no draft is drawn, payment by the opening bank
is determined in accordance with the terms laid
down in the credit
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Transit L/C
It is issued in one country with the beneficiary in
another country but is advised through and
usually confirmed by a bank in London
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Restricted & Unrestricted L/C
If no specific bank is designated to pay, accept or
negotiate, the credit is termed as unrestricted or
open or general credits
if a specified bank is designated to pay, accept or
negotiate, the credit is termed as restricted orspecial
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Negotiable L/C
Issuing Bank authorises the Negotiating Bank to
honour the drafts drawn under the terms of
credit
Exporter submits docs to his bank
Negotiating bank examines docs 1)sends docs
to issuing bank 2)pays the exporter even before
issuing bank sees the docs**
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Negotiable L/C
** if Issuing Bank doesnt pay, exporter will have
to REFUND the payment
L/C states that payment is allowed by
negotiation
Name of bank may or may not be stated
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Contents of L/C
Be Sure to Verify:
Correct name and address of the exporter
Correct name and address of the importer
Type of L/C
Amount of L/C
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How credit shall be available e.g. by sight
payment, deferred payment, acceptance or
negotiation
Name of drawee of the draft and tenor of the
draft
Description of goods, quantity or items and the
unit price
Contents of L/C
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List of documents required to be submitted by
the beneficiary
Whether docs required are obtainable andaccording to terms of sale
Port of discharge and the place of final
destination
Contents of L/C
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CONTENTS OF L/C
Terms of delivery i.e. FOB, CFR, CIF, etc.
Status of transshipment, allowed or not
Status of partial shipment, allowed or not
Last date of sending shipment
Time period for presentation of docs fornegotiation by exporter after dispatch of goods
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Date and place of expiry of L/C
Transfer of L/C allowed or not
Mode of advice of L/C i.e. by mail or tele-
transmission
CONTENTS OF L/C
Guidelines for the Beneficiary when
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Guidelines for the Beneficiary when
reviewing the L/C
Consult banker to validate L/C
Terms & conditions in L/C should be as per export
contract
Docs required can be obtained and presented
Last date of shipment and time allowed for
presentation of docs is feasible
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- DOCUMENT AGAINST PAYMENT
- DOCUMENT AGAINST ACCEPTANCE
Document Collection
D t i t P t
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Documents against Payment
1) The exporter makes shipment and sends the
shipment
2) Exporter sends shipping documents to the
his/her bank for collection
3) The exporter's bank sends the shipping
documents along with a COLLECTION LETTER to
the importer's bank
D t i t P t
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4) The importers bank sends a COLLECTION
NOTICE to the importer.
5) The importer makes payment upon receiving the
collection notice
6) The importers bank receives payment, hands
over the original shipping documents
7) Importer takes physical possession of goods
Documents against Payment
D t i t A t
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Documents against Acceptance
Everything is the same as DP except.
When the importers bank sends a COLLECTION
NOTICE to the importer, the importer gives theACCEPTANCE to pay at a later date I/O making
payment upon receiving the collection notice
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Risks under D/P and D/A??
LIQUIDITY CRUNCH
exchange control undertaking - realise export
proceeds within a period of 6 months or due date
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The possible options:
Re-negotiate with importer, offer discount
Bring the goods back to India
Look for an alternate importer in the same
country or in another country
Go to importing country, sell goods locally
Abandon the goods
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Precautions :
Obtain credit report on the importer through
bank
Consign goods to the importers bank I/O the
importer
Should obtain Credit Risk Insurance Policy
OPEN ACCOUNT
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OPEN ACCOUNT
Ship the goods
forward the shipping docs directly to buyer
await payment
RISK vs TERMS of PAYMENT
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RISK vs. TERMS of PAYMENT
Comparison of Various Methods of
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Comparison of Various Methods of
Payment
Method
Goods
Available
to Buyer
Usual Timeof Payment
Risk toExporter
Risk toImporter
Cash In
Advance
After
Payment
Before
Shipment
Very Low Maximum-Relies
on exporter to
ship goods as
ordered
Letter of
Credit
Confirmed
Unconfirmed
(Advised)
Documentary
CollectionSight Draft
Documents
against
Payment
After
Payment
On
presentationof draft to
importer
If draft unpaid,
goods mustbe returned or
disposed of,
usually at loss
Assured of
quantity, alsoquality, if goods
are inspected
before shipment
After
Payment
When
documents
are available
at shipment
Very Low Assured of
quantity and also
quality at
shipment if
inspection report
is required
Comparison of Various Methods of
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Method
Goods
Available To
Buyer
Usual Time
Of Payment
Risk To
Exporter
Risk To
Importer
Documentary
Collection Time Draft
Documents against
Acceptance
Before payment On maturity of
draft
Relies on importer
to pay draft
MinimalCan check
shipment for
quantity and quality
before payment
Consignment Before payment,
exporter retains
title until goods
are sold or used
After use;
inventory and
warehousing cost
to exporter
Substantial risk
unless through
foreign branch or
subsidiary
Very Low
Open Account Before payment As agreed Relies on importer
to pay as agreed -complete risk
Very Low
Co pa so o a ous et ods o
Payment