Exports to India: An Overview of Market Opportunities


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Kegler Brown, in conjunction with Ohio Development Services Agency, presented "Exports to India: An Overview of Market Opportunities" on April 10, 2014. The seminar focused on business and export opportunities in India.

Speakers included Ron Somers, president of the US-India Business Council, Vinita Bahri-Mehra, Asia-Pacific team leader + global business attorney at Kegler Brown, Martha Gabrielse, relationship executive - international banking at JPMorgan Chase, and Prem Behl, managing director of the Ohio India Office.

A networking lunch of traditional Indian food followed the presentations.

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Exports to India: An Overview of Market Opportunities

  1. 1. z
  2. 2. “A perspective on CGLG/Ohio India trade mission 2014” Prem Behl Managing Director CGLG/Ohio India Office 10 April 2014
  3. 3. INDEX 1. India: An Introduction 2. India-US Bilateral Trade 3. India Trade Mission 2014 4. About Exhibitions India Group
  4. 4. INDIA An Introduction
  5. 5. • 28 states, 7 union territories • Area: 3.3 million sq. km. (1.27 million sq. miles) • Bordered by: - China, Nepal, Bhutan (north) - Afghanistan, Pakistan (north-west) - Myanmar, Bangladesh (east) - Sri Lanka (south) • Coastline: 7,517 km (4,670 miles) GEOGRAPHIC PROFILE
  6. 6. • Population: 1.2 billion - 65% in the 15-65 age group - 30% urban, 70% rural • Sex ratio: 940 females per 1000 males DEMOGRAPHIC PROFILE 30% 65% 5% Distribution by Age Group 0-14 15-65 Above 65 • Literacy rate: 74% • Languages: - Officially recognized: 22 - National language: Hindi - Business language: English • Religions: - Hinduism, Islam, Christianity, Sikhi sm, Buddhism, Jainism and others
  7. 7. • Federal union • Secular state • Largest democracy in the world • Parliamentary form of government POLITICAL PROFILE President: Shri Pranab Mukherjee Prime Minister: Dr. Manmohan Singh Government: Led by the United Progressive Alliance (UPA)
  8. 8. ECONOMIC PROFILE Gross Domestic Product (GDP), 2012-13 • Nominal: US$ 1.85 trillion, 10th largest in the world • PPP terms: US$ 4.70 trillion, 3rd largest in the world • GDP growth rate: 5 % • The services sector continues to be a star performer with a 60% share in GDP Per Capita GDP, 2012-13 • Nominal: US$ 1,501 • PPP terms: US$ 3,829 Agriculture , 14% Industry, 2 6% Services, 6 0% Sectoral composition of Indian GDP: 2012-13
  9. 9. ECONOMIC PROFILE • During FY 2012-13, India attracted FDI worth US$ 22.42 billion. • World’s 3rd most attractive destination for investment by MNCs. World Trade: India is - • The world’s 19th largest exporter with total exports of US$ 300.4 billion in FY 2012-13 • The world’s 10th largest importer with total imports of US$ 490.7 billion in FY 2012-13 305.9 300.4 489.3 490.7 0 100 200 300 400 500 2011-12 2012-13 India-US Bilateral Trade (in US$ billion) India's Exports India's Imports
  10. 10. INDIA-US BILATERAL TRADE Prospects for Export Growth
  11. 11. INDIA-US BILATERAL TRADE • From a modest US$ 5.6 billion in 1990, the bilateral trade between India- US has increased to US$ 63.7 billion in 2013, representing an impressive 1037.5% growth in a span of 23 years. • Bilateral trade in 2013 (January – December) increased by 2 per cent over the previous year to US$ 63.70 billion. Source: US Department of Commerce, US Census Bureau 36.15 21.50 57.65 40.52 22.10 62.62 41.83 21.87 63.70 0 10 20 30 40 50 60 70 India's exports to USA India's imports from USA Total bilateral trade India-US Bilateral Trade (in US$ billion) 2011 2012 2013
  12. 12. INDIA-US BILATERAL TRADE (US IMPORTS)(US EXPORTS) Product Percentage Precious stones & metals 20.0 Textiles 16.2 Pharmaceutical 10.7 Mineral Fuel, Oil 9.7 Organic chemicals 6.6 Machinery 5.0 Lac, Gum, Resins 3.0 Electrical Machinery 2.8 Others 26.0 Product Percentage Precious stones & metals 22.7 Aircraft, spacecraft, Parts 11.2 Machinery 10.0 Electrical machinery 7.0 Mineral Fuel, Oil 6.4 Optical instruments & equipment 6.1 Organic chemicals 4.0 Others 32.6 Percentage Share of Major Items (Jan-Nov 2013)
  13. 13. INDIA-OHIO TRADE Growth in Ohio’s Exports • India is Ohio’s 21st largest export market in 2013 • Ohio’s exports to India was US$ 388 million in 2013 Industrial Machinery, 26% Plastics & Articles Thereof, 12% Optic/Medical Instruments, 11%Chemical Products, 7% Electrical Machinery, 7% Others, 37% Ohio’s Top Exports to India
  15. 15. CGLG/OHIO INDIA TRADE MISSION 2014  Mission Participation Fee US$ 900 per person  Brief Market Research and Appointment Setting Fee US$3,000 per company  Grant funding available in many states  Main goal: To assist SMEs from the Great Lakes region or Canada looking to export products and services to India Website: http://www.cglg.org/projects/INDIA2014mission/i ndex.aspx http://development.ohio.gov/bs/bs_trademission s.htm April 22-May 1, 2014
  16. 16.  Multi-sector trade mission to India  New Delhi, Bangalore and Mumbai  Customized one-on-one business appointments with interested distributors, agents and other prospective business partners set up by the Ohio India Office (average 3 – 4 appointments per day)  Brief market overview including industry sector information and target company profiles  In-country business briefing  In-country staff support of Ohio India Office  Group airport-hotel-airport ground transportation in all three cities  Assistance with hotel bookings CGLG/OHIO INDIA TRADE MISSION 2014
  17. 17. Itinerary April 22 & 23 Depart U.S. for India Arrive New Delhi, India April 24 Individual Business Appointments in New Delhi April 25 Individual Business Appointments in New Delhi April 26 & 27 Free Weekend in Agra April 28 Individual Business Appointments in Bangalore April 29 Individual Business Appointments in Bangalore Depart for Mumbai April 30 Individual Business Appointments in Mumbai May 1 Individual Business Appointments in Mumbai PM: Depart for U.S. CGLG/OHIO INDIA TRADE MISSION 2014
  18. 18. ABOUT US The Exhibitions India Group
  19. 19. Exhibitions India Group is: • A trade promotion organization established in 1987, creating opportunities for trade, investments, joint ventures, technology transfers etc. • An organizer of trade fairs in India with allied businesses in sales representation, consulting, publishing, conferences, travel & hospitality and display design • Headquartered in New Delhi with branch offices in Ahmedabad, Bangalore, Chennai, Hyderabad and Mumbai • The only trade fair organizer in India to have both ISO 9001:2008 & ISO 14001:2004 certifications • Certified for transparency in international transactions by Trace International, Inc. (USA) ABOUT US
  20. 20. www.exhibitionsindiagroup.com ABOUT US
  21. 21. ABOUT US • Council of Great Lakes Governors (CGLG) India Trade Office: Set up in July 2012, the CGLG India office works to promote exports from the State of Wisconsin, USA to India through market research, business matching, trade show participation, delegation visits etc. • Ohio Development Services Agency India Office: Representing the business interests of the State of Ohio, USA in India since January 2008. The Ohio India Office assists Ohio companies to introduce or expand their exports in the Indian market. Comnet Consultants represents:
  22. 22. ABOUT US Consultancy Services: Comnet Consultants provides the following services to companies seeking to access the Indian market: • Customized Market Research Reports • Partner Search: Qualified contacts of potential distributors, representatives, agents, prospective customers, JV partners etc. • Due diligence review of potential partners • Trade mission appointment facilitation and in market support to companies • Facilitate participation at Indian trade shows • Other Services: – Facilitate contact with local law firms, accountancy firms etc. – Identify local marketing tools such as trade shows, periodicals, etc. – Monthly Newsletters – Media Promotion – HR consulting, etc.
  23. 23. Prem Behl Managing Director CGLG/Ohio India Office 217-B, Second Floor, Okhla Industrial Estate Phase 3, New Delhi 110020 E-mail: premb@eigroup.in Phone: +91 11 4279 5000 THANK YOU
  24. 24. Why India? Spring 2014 A Case for Deeper Economic Partnership
  25. 25. Pakistan China Nepal India Myanmar Bangladesh Afghanistan Bhutan POK
  26. 26. 26/11 Terrorist Attack on Mumbai
  27. 27. $1.7 Trillion in Infrastructure Required Over Next 5 Years 20,000 Km of road projects 350,000 MW of new power plants Greenfield development of 25 new airports Upgrade of 25 existing airports A deep water navy 12 new port/container projects 20,000 MW of nuclear power A new air force
  28. 28. The Next North Sea Krishna-Godavari Gas Discovery Largest Refinery in the World Jamnagar
  29. 29. The Next North Sea ? Krishna-Godavari - Exports of U.S. LNG
  30. 30. Organized Retail Enters India Unshackling India’s Farm-to-Market Supply Chain
  31. 31. 300 Million Middle Class
  32. 32. Manufacturing Hub of South Asia Skilled Manpower, a Growing Middle-Class, and a Massive Market
  33. 33. Can India Sustain its Competitive Edge ? #1 in Generic Pharmaceuticals IPR Protections will need strengthening if India is to become the Innovation Nation of the 21st Century Compulsory Licensing looms on the horizon, which must be resisted PHARMACEUTICALS
  34. 34. TELECOM  10 million new cell phone users each month!  But can transparency issues be overcome as new spectrum is allocated?  Will LCR policies trigger unintended consequences?
  35. 35.  IT is growing at impressive rates.  But will India adopt Safety and Security Testing barriers that discourage investment?  Will the U.S. enact discriminatory immigration provisions? INFORMATION TECHNOLOGY
  36. 36. India’s Century
  37. 37.  Coherent democracy; Pluralist/Secular WHY INDIA ? Indo-U.S. Relations Can Shape the Destiny of the 21st Century  1/5th World’s Population; 2nd largest military in the world  Common Values: Fighting Terrorism, Trafficking, Narcotics  Ideological Partner: Nepal, Sri Lanka, Bangladesh, Pak, China  Common Law Judicial System  2nd largest number of Doctors, Engineers, PhDs in the world  100,000 Students to U.S. Each Year  3 million Americans of Indian Origin  Politically significant; Politically integrated  54% of Indian Population is under the Age of 25
  38. 38. NaMo Wave? ≈ 240 and counting… 28 45 Magic number: 272 25 29 36 3 38 1 10 1 33 4 8 2 5 ? ? ? 0 ?
  39. 39. z presented by Vinita Bahri-Mehra April 10, 2014 Preparing for Export Success in India – A Legal Perspective
  40. 40. z U.S./India Exporting at a Glance + U.S. Exports to India in C-Y 2012: $41.5 billion (a 7.8% increase) + Imports from India in C-Y 2012: $60.52 billion (a 9.5% increase) + Total Bilateral Trade in C-Y 2012: $102 billion (a 9.7% increase) + India has emerged as the 18th largest export market for U.S. + India has emerged as the 12th largest market for Ohio exports + India‘s GDP growth for F-Y 2013-2014 5%/6% + Indian firms eager to buy American products and services + India‘s WTO commitments → resulted in opening of markets
  41. 41. z Some Success Stories +2nd largest small car market in the world +One of three countries that makes its own supercomputers +2nd largest group of software developers after the US +100 of the Fortune 500 have R&D facilities in India +Indian students represent 15% of all international students in U.S. higher education
  42. 42. z Top 5 Keys to Successful Exporting to India 1. Strategic Planning – Finding Partners and Agents 2. Due Diligence 3. Geographic Diversity 4. Consistent Follow Up 5. Patience and Commitment
  43. 43. z
  44. 44. z Why India? + India is the 4th largest economy in the world as measured by purchasing power. + India has a consumer base of 1.2 billion people. + The youngest population of the world – hence sustainable, long term growth is assured. + Modern (organized) retail converging with the consumption boom will open up many opportunities for small and mid-size consumer companies. + Rapid growth in the number of middle class consumers. + Eager and savvy consumer market with growing buying potential.
  45. 45. z + 100% foreign investment permitted in most sectors on automatic basis except: + Banking (74%) + Telecom services (74%) + Civil Aviation (49%) + Insurance (49%) +Retail trading: + New – Single Brand up to 100% + Multi-Brand – 51% + 100% FDI is allowed in cash and carry wholesale formats, B2B sales. India‘s FDI Regime
  46. 46. z + Certain sectors where FDI is prohibited: + Atomic Energy + Lottery business, Gambling and Betting + Agriculture + Railway Transport + Arms and Ammunition + Coal and Ignite + Certain sectors where there are minimum capitalization requirements: + Non-banking financial services activity (certain activities – fee based and fund based). + Real estate construction and development projects. India‘s FDI Regime
  47. 47. z Information Technology + Software and Services - $50 billion + IT-enabled Services - $17 billion + E-Commerce - $8.9 billion Biotechnology + $4.5 billion by 2012 Retail + $300 billion by 2012 Healthcare + $16 billion potential Energy Potential Investment Opportunities
  48. 48. z Markets with Significant Export Potential + Airport and Ground Handling Equipment + Computers and Peripherals + Education Services + Electric Power Generation, Distribution and Transmission + Equipment + Machine Tools + Medical Equipment + Mining and Mineral Process Equipment + Oil and Gas Field Machinery + Pollution Control Equipment + Safety and Security Equipment + Telecommunications Equipment + Textile Machinery + Water Treatment
  49. 49. z Investing in India Strategic Investor (FDI) Financial Investor (FII or FVCI) Operate as a Foreign Company Operate as an Indian Company Acquisition of shares/business assets of an existing Indian Company Invest in a U.S. company with a services fulfillment subsidiary in India Invest in a Caymans or Mauritius company with a services fulfillment sub in India Direct investment in an India company from outside India (Mauritius/Singapore subs) Direct investment in an Indian company from outside India through a venture capital fund registered with the SEBI Liaison Office Branch Office Project Office Joint Ventures Wholly owned Subsidiary Private Public Structuring Investments – FDI
  50. 50. z Other Entry Routes A. Direct Sales from U.S. (using freight forwarder). +Key considerations: + Use accurate Incoterms 2010 for international sale or, even better, spell out in detail who is responsible for what. + Most common terms: + EXW, FOB, CIF, DDU, DDP +Payment Terms + NOT Incoterms! + The Incoterms generally indicate WHAT must be paid by each party not WHEN it must be paid. + Do not confuse liability with responsibility.
  51. 51. z Other Entry Routes +Payment Terms + Usually determined in the purchase contract + Major options, based upon increasing risk + Paid in advance (if exceeds 200,000 additional criteria to be fulfilled and imports to be made in 6 months). + Letter of credit (can be issued up to USD 20 million per transaction for one year). + Documents against payment. + Open account (remittance against imports should be completed no later than 6 months, except for payments withheld for guarantee performance, disputes, etc.) + Interest on import bills allowed if overdue for less than 3 years at rate prescribed for trade credit from time to time.
  52. 52. z +Decide on-Who is the ―importer of record‖? +Exporting directly can suit high value products or services. However, winning new customers is likely to require significant investments in building relations and several visits. Other Entry Routes
  53. 53. z Other Entry Routes B. Technology Collaborations and Trademark License + Foreign entities can provide technical know-how and/or license their trademark to Indian companies against payment of fee and royalty. + Key considerations. + Protection of Intellectual Property. + Registration of trademarks, copyrights and patents (―first to file‖ – jurisdiction). + Trade Secrets: No statutory protection of trade secrets or confidential information. However, several court precedents enforce confidentiality agreement through mandatory injunctions. + Indian IP laws do not provide for automatic assignments. + Advantage of lower withholding taxes on royalty income stream.
  54. 54. z Other Entry Routes C. Agency Relationship: + Creation: + Relationship between Agent and Principal is primarily contractual in nature and governed by terms of contract entered into between them. + The Indian Contract Act, 1872 (Act) provides the framework of rules and regulation that govern formation and performance of an agency contract. + NO WRITTEN CONTRACT: One may be implied, provisions of Chapter X of the Act (i.e. agency law) will provide the framework for governance of performance of the relationship. + Agency contract should contain limitations, termination events, territory, products or goods, commission structure and time of payment. + Depending upon conduct of the parties----exclusivity can be presumed.
  55. 55. z Other Entry Routes + Termination: + If Agency is fixed for a term, it can be terminated before the expiring of the term in accordance with an express reservation in the contract or for sufficient cause. + Reasonable notice must be given of termination without case. + Right to indemnity and/or the right to compensation to the Agent in the event of termination of the agency contract is subject primarily terms and conditions of the agency contract. + Unless the contract provides payment or full indemnity, the indemnity payable to the Agent is generally equitable. + No limitation on amount of indemnity/compensation to which an Agent is entitled – it is the Court, which determines the amount of indemnity/compensation that may be paid. + However, Agent needs to prove he has actually incurred a loss or that loss is eminent.
  56. 56. z Other Entry Routes + Right to indemnity under agency law entitles an Agent to the following: + Commission remuneration and all expenses incurred. + Right to lien over Principal property – received by Agent, until amount due to Agent for commission, disbursements and services in respect for same has been paid. + Statute of Limitation: + Agent must bring a suit for claiming compensation and indemnity within a period of 3 years from the date of cause of action.
  57. 57. z Other Entry Routes D. Distributor/Franchisee Relationship: +Relationship between Distributor/Franchisee & Principal is contractual in nature and governed by the terms of the contract. +No specific law in India which governs the payment of indemnity/compensation to the Distributor/Franchisee and it is open to parties to determine the conditions and amount of compensation. +Avoidance of Permanent Establishment (“PE”) status is critical. +Restrictive Covenants (i.e. non-compete and non-solicitation) difficult to impose post-termination/expiration of the agreement.
  58. 58. z + Import/Export Process and Timeline: + Assumption: standard container of goods to a large city port in India.) + India stands at 134 ranking of 189 economies on the ease of trading across borders. + Indicator: + Number of Documents to export (e.g. bill of lading, export declaration forms, commercial invoice): 9 + Time to Export: 16 days + Cost to Export: $1170 per container. + Procedures to Export: + Document Preparation: 8 days + Custom Clearance: 2 days + Ports and Terminal Handling: 3 days + Inland Transportation: 3 days Other Entry Routes
  59. 59. z + BIS/EAR 2011 rules and regulations implementing changes to Export Controls on India (“Final Rule”) + Final rule adds India to country group A:2; the group consisting of countries adhering to Missile Technology Control Regime. + Results in elimination of license requirements to export or re-export certain controlled products (i.e., classified as EAR99) to India. + However, no unlicensed exports to prohibited parties or for prohibited end- users. + Final rule does not impact license requirement for export of defense articles to India subject to jurisdiction of ITAR and Arms Export Control Act. Key Considerations: All U.S. Exports are Subject to U.S. Export Control Regulations
  60. 60. z + Labeling is an important element for products being exported to India. All packets or even containers should carry pertinent declarations. + English or Hindi is the favorable language for labeling. + Custom authorities have to ensure that all pre-packaged commodities (especially those intended for direct retail sale) have all the legally required information before they enter the retail market or sold for consumption. Key Considerations: Labeling and Marking Requirements
  61. 61. z +Peak rates reduced from 350% (June 1991) to an average 10% currently for some products. +India‘s tariffs still very high – range from 12.5% - 150% based upon classification of goods in accordance with Harmonized System or HS. +Exports to India are zero-rated for VAT. All import and export of goods to/from India are exempted from sales tax. Key Considerations: Import Tariffs
  62. 62. z + Basic Customs Duty (BCD): This duty is levied either as 1) a specific rate based on the unit of the item (weight, number, etc.), or more commonly, 2) ad-volorem, based on the assessable value of the item. In some cases, a combination of the two is used. + Additional Customs Duty (ACD): This duty is typically referred to as Countervailing duty or (CVD) and is levied on the assessed value of goods plus BCD. It is payable only if the imported product is such as if produce in India it would be liable for an excise duty. + Special Additional Customs Duty (known as Special CVD): Special CVD tax is applicable on all items (to offset the disadvantage to like Indian goods due to high excise duty on their input). It is levied at the rate of 4 percent of the BCD and the ACD on all imports. Types of Custom Duties:
  63. 63. z + Anti-dumping Duty: This is levied on specified goods imported from specified countries, including the United States, to protect indigenous industry from injury. + Safeguard Duty: The Indian government may by notification impose a safeguard duty on articles after concluding that increased imported quantities and under current conditions will cause or threaten to cause serious injury to domestic industry. Types of Custom Duties:
  64. 64. z Types of Custom Duties: + Customs Education Cess: Effective, 2004, India introduced a new education cess (duty) assessment. The current rate is 3 percent of BCD and ACD. + Customs Handling Fee: The Indian government assesses a 1 percent customs handling fee on all imports in addition to the applied customs duty. + Total Duty Payable = BCD + ACD + Special CVD + Education Cess + Customs Handling Fee.
  65. 65. z Taxation in India + Dividends declared can be repatriated freely through an authorized Indian bank. + Dividends are tax-free in the hands of shareholders. + A distribution tax of 16 % is payable by company. + Corporate income tax rate for foreign companies is 41.2%. For domestic companies, 30.99%. + Withholding tax on royalties/technical fees/interest income. + Domestic tax law – 10% [effective AY 2014-2015, it will become 25%)
  66. 66. z Taxation in India +Indo-U.S. DTAA – 10% for right to use of any industrial, commercial or scientific equipment. +20% in any other case. (First five years of agreement). +15% in any other case (subsequently). +Computed on ―gross amount‖. + Currently, tax rate of domestic law could be utilized as it is less than DTAA. +Submission of a Tax Residency Certificate (TRC) a must. +Furnishing of PAN required to receive payments from India
  67. 67. z Taxation in India + Service tax rate is 12.36%. + Computed on the ―Gross Amount‖ charged by the service provider. + Sales tax rate (CST): Levied at 2% + Sales tax rate (VAT): Varies from state to state, depending upon classification of goods. Two basic rates 5% and 14.5%. + Excise Tax: Impose on good manufactured locally varies from 8% to 10-12%. + Tax incentives are available during a limited time for 100% Export-Oriented Unit, under Software Technology Park Scheme and Special Economic Zones Units, etc. + Incentive for acquisition and installation of new plant or machineries by manufacturing company.
  68. 68. z Taxation in India +Elaborate Transfer Pricing Regulations + These rules govern minimum profit margin to be maintained by the Indian companies in transaction associated enterprises. + Valuations prescribed in case of export of goods to a related party. +Avoidance of Permanent Establishment (“PE”) status is critical.
  69. 69. z +Legal Jurisdiction: Drafting choice of law and forum provision is crucial. +Remember, certain issues may be subject to a law different from one agreed upon by parties. For example: IP transfer, registration, protection in vendor territory, real estate, labor laws, bankruptcy, enforcement of foreign judgment/award. +Litigation vs Arbitration +If the parties want to quickly end disputes arising from the contract, an arbitration clause is necessary to avoid lengthy civil procedures. Contract: Enforcement In India
  70. 70. z Practical Tips: + Negotiations: Contract negotiations can be expected to go more slowly in India – particularly if dealing with India bureaucracy. + Different Approach to Communication: Indian parties may not disagree with you directly about contractual issues. Instead, they may suggest that the matter be discussed at another time or find some way to avoid an outright negative response. + Flexibility: It is recommended that U.S. companies build considerable flexibility into their approach so that prices and other contract conditions can be adjusted. + Believe: Relationships and respect. Building a lasting and trusting relationship is very important for a successful business venture in India. Contract: Enforcement In India
  71. 71. z +There are some internal barriers that might provide obstacles in doing business or establishing business in India. It is necessary to be cognizant about them in order to be well prepared. For example: + Corruption (FCPA) (PCA) + Infrastructure mess + High tariffs and protectionist policies + Local content requirement + Powers of states + Slow Reform Process Practical Advice: Identify the Obstacles
  72. 72. z Things to Ponder + Have knowledge of Indian business and market – Evaluate Product Strategies and related Pricing. + Analyze and identify the region/state most appropriate for your business needs. + Do Business in India…the Indian Way: „Think Global, Act Local‟ + The Indianized Chinese + Kellogg's – no to cold cereals? + KFC – Tandoori Chicken preferred to the ‗KFC experience‘ + McDonalds – ‗McVeggie Burger‘ & ‗McAloo Tikki‘ + Domino‘s – ‗Pepper Paneer‘ & ‗Chicken Chettinad‘ + Pizza Hut/Pizza Express – spicing it up + Due Diligence is the Key.
  73. 73. z Legal Advice +This presentation is designed to provide an overview of a number of legal principles and considerations. +As each legal issue is fact dependent, this presentation should not be used or viewed as legal advice, and your legal counsel should be consulted on the application of your particular factual situation to the current law. +Copyright: 2014 Kegler, Brown, Hill + Ritter LPA
  74. 74. z Thank You! Vinita Bahri-Mehra, Director Asia-Pacific Team Leader Kegler Brown Hill + Ritter vmehra@keglerbrown.com keglerbrown.com/bahrimehra 614-255-5508 614-464-2634 (fax)
  75. 75. April 2014 B E S T P R A C T I C E S F O R E X P O R T E R S LCs, Guarantees and ECA Financing STRICTLYPRIVATEANDCONFIDENTIAL
  76. 76. English_Commercial Bank This presentation was prepared exclusively for the benefit and internal use of the J.P. Morgan client to whom it is directly addressed and delivered including such client‘s subsidiaries, (the ―Company‖) in order to assist the Company in evaluating, on a preliminary basis, certain products or services that may be provided by J.P. Morgan. This presentation is for discussion purposes only and is incomplete without reference to, and should be viewed solely in conjunction with, the oral briefing provided by J.P. Morgan. It may not be copied, published or used, in whole or in part, for any purpose other than as expressly authorized by J.P. Morgan. The statements in this presentation are confidential and proprietary to J.P. Morgan and are not intended to be legally binding. Neither J.P. Morgan nor any of its directors, officers, employees or agents shall incur any responsibility or liability to the Company or any other party with respect to the contents of this presentation or any matters referred to in, or discussed as a result of, this document. J.P. Morgan makes no representations as to the legal, regulatory, tax or accounting implications of the matters referred to in this presentation. IRS Circular 230 Disclosure: JPMorgan Chase & Co. and its affiliates do not provide tax advice. Accordingly, any discussion of U.S. tax matters included herein (including any attachments) is not intended or written to be used, and cannot be used, in connection with the promotion, marketing or recommendation by anyone not affiliated with JPMorgan Chase & Co. of any of the matters addressed herein or for the purpose of avoiding U.S. tax-related penalties. J.P. Morgan is a marketing name for the treasury services businesses of JPMorgan Chase Bank, N.A. and its subsidiaries worldwide. In the United Kingdom, JPMorgan Chase Bank, N.A., London branch and J.P. Morgan Europe Limited are authorized by the Prudential Regulation Authority. Subject to regulation by the Financial Conduct Authority and to limited regulation by the Prudential Regulation Authority. JPMorgan Chase is licensed under US patent numbers 5, 910,988, and 6, 032 and 137. © 2013 JPMorgan Chase & Co. All rights reserved. BESTPRACTICESFOREXPORTERS&IMPORTERS
  77. 77. Seller Most Protection Least Protection Most Protection Least Protection Buyer CASH IN ADVANCE LETTER OF CREDIT DOCUMENTARY COLLECTION OPEN ACCOUNT International sales add complexity and risk  Buyer (relationship standing, credit position)  Geo-political risks in buyer‘s country  Economic risks  Regulations (OFAC, sanctions, local law) Factors to consider  Commodity price volatility  Financing requirements (both of buyer and seller)  Cost of bank services  Taxes, duties and tariffs Most common payment methods 1 BESTPRACTICESFOREXPORTERS&IMPORTERS
  78. 78. J.P. Morgan – Classical and Export Finance Products Trade Channel ●  Electronic / Web-based system for managing all global trade needs through a single portal  Automation and process streamlining Classical Trade Export Finance Standby Letters of Credit ●●  Performance / Bid / Advanced Payment Bonds  International SBLC and Local Guarantee re- issuance  Intellectual property protection  Collateralization options Import Letters of Credit ●●●  Classical and private label import LCs  Documentary collections and open account payment processing Export Letters of Credit ●●●  Advising & Negotiation  Confirmations (country risk mitigation)  Letter of Credit Discounting Export Credit Agency Backed Financing ●●●  US Ex-Im Guaranteed Financing  Multi-lateral Agency Backed Financing Legend: Issues Addressed ● Credit Risk Mitigation ● Liquidity & Working Capital Management ● Legal & Compliance ● Technology Integration 2 BESTPRACTICESFOREXPORTERS&IMPORTERS
  79. 79. Agenda Page 3 Export Letters of Credit 3 Standby Letters of Credit & Guarantees 8 Export Credit Agency Financing 17 BESTPRACTICESFOREXPORTERS&IMPORTERS
  80. 80. Commercial Letter of Credit: Process Advising/Confirming Bank 2.LCApplication 1. Sales Contract 3. Issue Letter of Credit 5. Shipment of Goods 4a.PaymentGuarantee 7. Documents sent 8c. Payment sent 4.Confirms&AdvisesLC 8a.Releasesdocuments 6.PresentsDocuments Beneficiary 8b.Sendsfunds 8d.PaymentSent Buyer/Applicant Issuing Bank Seller/Beneficiary 4 EXPORTLETTERSOFCREDIT
  81. 81. Commercial Letter of Credit: Characteristics  Commercial Letters of Credit:  Facilitate the exporting or importing of goods – Sellers of goods get paid for the goods that they sell – Buyers of goods ensure they receive what they ordered  Provide a source of financing  Offer the most protection to the seller/exporter  Three independent ―agreements‖ underpin a letter of credit  Sales Contract between buyer and seller  Application and Reimbursement Agreement between buyer/applicant and issuing bank  Letter of Credit between issuing bank and beneficiary  Banks deal in documents only – buyer‘s recourse for problems with goods (commercial dispute) is to the sales contract  Documents presented under an LC must comply with the terms and conditions stated therein, otherwise there is no obligation to honor Characteristics 5 EXPORTLETTERSOFCREDIT
  82. 82. Commercial Letter of Credit: Types Confirmed Unconfirmed Payment - TimePayment - Sight Implication: Constitutes a definite undertaking of confirming bank. Independent of the issuing bank‘s obligation  Removes Issuing Bank risk  Reduces Country risk (political, economic, FX)  Confirmation expedites payment  Payment obligation moves to beneficiary‘s domicile Implication: No obligation to ―pay‖ at sight or ―accept‖ and pay at maturity time drafts. Further, no obligation to pay at maturity credits that provide for ―deferred payment‖  Purpose: Authenticate issuer‘s credit Acceptance: Payment made at some specified time after presentation of conforming document(s)  Provides short term financing—up to 12 months tenor  Defined in LC  Accepting bank obligated to pay at maturity  Can be discounted to exporter for earlier payment Deferred:  Commitment to pay on a specified date Payment effected when documents are presented which are in compliance with the terms and conditions of the credit  Payment may or may not occur immediately  If payable in the US  If payable in a foreign country  LC terms may contain special provisions about timing 6 EXPORTLETTERSOFCREDIT
  83. 83.  Ensure LC is workable  Match LC terms to contract/sales terms  Check for appropriate Incoterms  Check names and addresses  Validate merchandise description  Confirm that shipping/delivery dates are workable  Read all document requirements & conditions  Exporter should be able to prepare/obtain all documentation easily  No buyer controlled documents  LC should have only what is necessary  Be aware of third party documents  Legalization of documents  Bills of lading  Inspection requirements  Other third party certificates Commercial Letter of Credit: Managing Documents Documents Discrepancies  Discrepant documents  Cause payment delays  Cause payment rejections  Eliminate your risk protection  Add extra time and cost to the transaction  Most common discrepancies  Late Shipment  Late Presentation  Credit Expired  Credit Overdrawn  Missing Documents  Beneficiary‘s options if documents are discrepant  Correct documents  Cable for authority to honor on approval basis  Request payment under reserve/guarantee  Do not send documents on collection 7 EXPORTLETTERSOFCREDIT
  84. 84. Agenda Page 8 Standby Letters of Credit & Guarantees 8 Export Letters of Credit 3 Export Credit Agency Financing 17 BESTPRACTICESFOREXPORTERS&IMPORTERS
  85. 85.  Standby Letters of Credit and Guarantees are instruments of security issued by J.P. Morgan in favor of a beneficiary. J.P. Morgan can issue SBLCs or bank guarantees in support of contractual obligations.  Standby Letters of Credit (SBLCs) are intended to be used as secondary security. The underlying contract is the primary security. This differs from commercial LCs which are the actual vehicle for payment in a trade transaction.  Financial SBLCs support a financial obligation, including any investment evidencing an obligation to repay borrowed money  Performance SBLCs support an obligation to perform, including losses arising from default in completion of the underlying contract.  Guarantees are an independent undertaking by the issuer to make payment to the beneficiary on behalf of its customer, the applicant.  Payment is made on formal demand subject to the occurrence of a pre-defined event that results in nonperformance by the applicant of the underlying contract.  Guarantees are most commonly issued subject to local legislation and provide an issuer commitment that is legally independent of the underlying contract. Standby Letters of Credit and Guarantees: Introduction Characteristics 9 STANDBYLETTERSOFCREDIT&GUARANTEES
  86. 86. Standby Letters of Credit: Financial Types  Credit Guarantees  These are issued to financial institutions in favor of beneficiaries requiring some form of lending or financing whereby the issuing bank will fulfill a specified monetary obligation in the event of default by the obligor.  Advance Payment Guarantee  This protects beneficiaries when an advance payment is to be made towards the applicant, ensuring that the payment is refunded if the applicant does not fulfill the terms of the contract.  Payment Guarantee  Issued as a security for any payment obligations the applicant may have towards the beneficiary. In the event of payment default by the applicant, the beneficiary can claim payment under the guarantee.  Rental Guarantee  These are issued in favor of landlords as security towards unpaid rent or other costs incurred by the tenant during the tenancy period. Many European countries have standard wording for these guarantees. They are normally required to be issued by a local bank. 10 STANDBYLETTERSOFCREDIT&GUARANTEES
  87. 87.  Bid or Tender Bond  This is a safety mechanism that discourages companies from submitting frivolous bids. The beneficiary (contractor) is protected in the event the applicant: – Withdraws from the tender before its expiry – Attempts to amend the tender – Refuses to sign the contract when awarded the tender – Fails to furnish the required performance bond or any other guarantee.  Bid bonds are also used to guarantee that the applicant (bidder) has the finances and capabilities to undertake the contract. Unsuccessful bidders will have their guarantees returned while those bidders winning the contract will see their bid bond expire upon issuance of a performance bond.  Performance bond  Requested upon winning the contract, a performance bond guarantees the performance of the applicant under the contract from beginning to end. The bank issuing the guarantee undertakes to pay a certain sum of money to the beneficiary should the applicant default and not comply with their contractual obligations.  Retention bond  A type of performance bond that guarantees reimbursement of payment and correction of defects after a contractual obligation (i.e., job or project) has been completed and full pay  Maintenance / Warranty bond  This helps protect the beneficiary from a defect or malfunction after the project has been completed. This guarantee is generally valid till the end of the warranty period stipulated in the contract between the two parties.  Customs and tax deferment guarantee  Importers are allowed to defer paying import duty and import tax by establishing an account with the local tax authorities if they importer issues a guarantee to the local tax authorities. This tax deferment guarantee is generally valid for long periods of time or until it has been cancelled and returned by the authorities.  Shipping guarantee  This indemnifies a shipping company (beneficiary) against any liability when imported goods are released to a particular consignee (applicant) without access to title documents such as the bill of lading. The indemnity covers the cost of goods as well as freight, legal and other costs. The shipping guarantee will remain in force until the original bill of lading has been provided to the guarantor or otherwise cancelled by the beneficiary.  Airway release  Similar to the shipping guarantee, airway releases allow for the release of cargo or goods received by a freight forwarder at the airport on behalf of a consignee. Unlike shipping guarantees, airway releases may be cancelled upon providing proof of payment of the import invoice. Standby Letters of Credit: Performance Types 11 STANDBYLETTERSOFCREDIT&GUARANTEES
  88. 88. Standby Letters of Credit: Process Issuing Bank Contract/Bid Applicant Beneficiary3. Event of default (outside of SBLC)Applicant 12 STANDBYLETTERSOFCREDIT&GUARANTEES
  89. 89.  Determine who the issuing bank will be and obtain an appropriate application form  Determine the amount and currency of the letter of credit  Determine the expiry date of the letter of credit  Determine if a special format is required by the beneficiary and if so, provide a copy of that format with the application form  Determine the draw conditions meet your transaction requirements and are acceptable to the beneficiary. The requirements should be clear and consistent with the underlying contract  Determine details (beneficiary's name and address, accountee's name and address, contract number etc.) are accurate  Should the LC contain special terms and conditions:  Automatic Extension or Expiry Notice terms (determine if notice and extension period is sufficient)  Transfer terms  Automatic increase/decrease schedule or terms  Know the rules that will govern the SBLC. Should be either:  Uniform Customs and Practices (UCP) 600  International Standby Practices (ISP) 98  Determine date the Letter of credit must be delivered to the beneficiary  Determine how the letter of credit will be delivered (SWIFT, overnight courier, messenger, beneficiary pick-up, etc...) and provide the necessary contact information  Arrange for the letter of credit to be returned to the issuer immediately after the project / transaction is complete to avoid any delays in cancelling the letter of credit Standby Letters of Credit: Process Process notes 13 STANDBYLETTERSOFCREDIT&GUARANTEES
  90. 90. Bank Guarantee: Process Issuing Bank Contract 2. SBLC Issuance 3.BankGuaranteeIssuance 1.SBLCApplicationand ReimbursementAgreement Applicant Beneficiary J.P. Morgan International or Local Bank 4. Event of default (outside of BG)6.Noticeofdraw 7a.Payment 7c.Payment 5.Drawing 6a. Notice of draw 7b. Payment Applicant 14 STANDBYLETTERSOFCREDIT&GUARANTEES
  91. 91. Bank Guarantee: Process  Obtain a copy of the required guarantee format from your customer prior to issuance in a language that is acceptable to you and your bank for review  Identify whether the beneficiary requires the local guarantee be issued by a specific bank  Determine how you will facilitate the issuance of the local guarantee (back to back letter of credit, cash collateral, local bank credit facility)  Engage the bank to review the required guarantee format. Most large banks will have an in-country correspondent that may be able to review and comment on the format and local requirements  Determine the required currency, amount and tenor of the guarantee  Verify the draw conditions meet your transaction requirements  Verify the details (beneficiary's name and address, accountee’s name and address, contract number etc.) are accurate  Know the rules that will govern the guarantee. Typically local guarantees are subject to that country’s laws; however, the preference is for the guarantee to be issued subject to the globally accepted ICC’s Uniform Rules for Demand Guarantees (URDG) 758  Determine date the local guarantee must be delivered to the beneficiary  Determine how the local guarantee will be delivered (through an agent, messenger, beneficiary pick-up, etc...) and provide the necessary contact information  Arrange for the local guarantee to be returned to the issuer immediately after the project / transaction is complete to avoid any delays in cancelling the guarantee Process notes 15 STANDBYLETTERSOFCREDIT&GUARANTEES
  92. 92.  Excessive Conditions:  Including copies of commercial documents as requirements for a drawing  Allowing for both Transfers and Assignment of Proceeds  Inclusion of contract or lease terms  Excessive Restrictions:  Specifying a particular date or short window for time for drawing that would impede beneficiary‘s ability to draw  Rules/Local Law:  US – LCs issued to the EPA or similar State and Federal Agencies must be issued in accordance with State or Federal Regulations which contain the format of the LC, which is not subject to change – JPM will not issue LCs for specific types of LCs subject to the laws of certain states based on prior case law or legal requirements  OTHER – SBLC states it is subject to the URDG (which is for guarantees), laws of a foreign country, or doesn‘t state any governing rules or law  Non-documentary Terms:  Avoid text such as, ―This Letter of credit will expire on the first to occur of completion of all contract terms or the expiration date‖ Completion of all contract terms is a non-documentary condition and the LC will remain available until it expires  Stating that the beneficiary must do something (such as send a notice) without indicating a document which evidences such action.  Ambiguity:  LC contains language that it is subject to UCP600 and ISP98  Guarantee contains language that it is subject to UCP600 and URDG758  Stating conflicting information within the text of the LC – Example: stating partial drawings are permitted, but including the full amount of the LC within the quoted demand statement SBLC and Guarantee: Best Practices Things to avoid 16 STANDBYLETTERSOFCREDIT&GUARANTEES
  93. 93. Agenda Page 17 Export Credit Agency Financing 17 Export Letters of Credit 3 Standby Letters of Credit & Guarantees 8 BESTPRACTICESFOREXPORTERS&IMPORTERS
  94. 94. Export Credit Agencies and the Trade Finance Spectrum  ECAs provide a broad array of products from smaller/short term facilities to larger/long term facilities  Different ECAs offer different schemes but all predicated on insurance or guarantee cover to banks offering short-to-medium term trade finance instruments (L/Cs, Guarantees, Promissory Notes, Bills) through to medium-to-long term export finance loans  Product focus of the ECA reflects national industrial composition  Product focus of bank reflects ECA appetite, regional strength and client drivers Cover in the event the exporter fails to indemnify the bank on bonding facilities. Some ECAs‘ schemes operate as an upfront pro rata risk share to provide capacity to the market for SME exporters or additional capacity where banks are full on lines for larger exporters Bank Guarantee Cover Cover in the event of loss from receivables discounting. Program driven by suppliers and can operate through L/C, drafts, PNs, accoun t receivables discounting, typically 1-5 year space Supplier Credits Cover in the event of loss from L/C Issuance, L/C Confirmation and/or L/C Discounting. Short to medium term cover for funded and unfunded facilities with more products being offered by ECAs post 2008 crisis and with advent of Basel III. L/C Cover Cover in the event of loss on working capital facilities extended by a bank to an exporter to support export activities. Working Capital Cover Cover in the event of borrower default (due to economic/ political risk) on loans extended to finance procurement of goods. ECA issues guarantee or insurance to lender on principal and interest obligations of borrower under a loan agreement. Typically 5-12yrs, or longer for some goods. Buyer Credits Short-term: Trade Products Medium-term: Supply Chain Finance Long-term: Export Finance 18 EXPORTCREDITAGENCYFINANCING
  95. 95. Lena Eliopoulos Daren Maloney Vice President Senior Vice President Global Trade Services Commercial Banking 312-954-5453 614-248-9785 Yelena.eliopoulos@jpmchase.com Daren.p.maloney@chase.com Contacts J.P. Morgan Contacts 19 EXPORTCREDITAGENCYFINANCING
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