Introduction to INCO TERMS and LCs (5)

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Presentation given at Birla Institute of Management ,Mysore on 19th January 2013.

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  • This term may be used irrespective of the mode of transport, including multimodal transport. A Carrier means any person who, in a contract of carriage, undertakes to perform or to procure the performance of transport by rail, road, air, sea, inland waterway or by a combination of such modes. If the buyer (importer) nominates a person other than a carrier to receive the goods, the seller (exporter) is deemed to have fulfilled his obligation to deliver the goods when they are delivered to that person.
  • The FAS term requires the seller (exporter) to clear the goods for export. However, if the parties wish the buyer (importer) to clear the goods for export, this should be made clear by adding explicit wording to this effect in the contract of sale. This term can be used only for sea or inland waterway transport.
  • If the parties do not intend to deliver the goods across the ship's rail, the CPT term should be used. This term can be used only for sea and inland waterway transport.
  • This term can be used only for sea and inland waterway transport.
  • This term can be used only for sea and inland waterway transport.
  • However, if the parties wish the seller (exporter) to be responsible for the unloading of the goods from the arriving means of transport and to bear the risks and costs of unloading, this should be made clear by adding explicit wording to this effect in the contract of sale. This term may be used irrespective of the mode of transport when goods are to be delivered at a land frontier. When delivery is to take place in the port of destination, on board a vessel or on the quay (wharf), the DES or DEQ terms should be used
  • Introduction to INCO TERMS and LCs (5)

    1. 1. Introduction to INCOTERMS and LETTER OF CREDIT Prof CA N. Venkatakrishnan ATBHAVAN’S PRIYAMVADA BIRLA INSTITUTE OF MANAGEMENT, MYSORE 19TH JANUARY 2013
    2. 2. INTERNATIONAL FINANCIAL MANAGEMENT - Challenges World as a Global village Free flow of goods and services –seamless Quantum jump in International trade and commerce New forms of trade-Internet / e-commerce Dynamic and Complex International markets Creative Financial Management Financial Engineering!
    3. 3. Process of Exports Select Product ConsumerOrganisation Select MarketPromotional Activities Agents
    4. 4. Basis for Trade Terms of Trade/ Contract Terms of Payment Obligations
    5. 5. INCO TERMS INCO Terms introduced by International chamber of commerce in 1936. Incoterms or International commercial terms are a series of international sales terms widely used throughout the world. INCOTERMS are designed to create a bridge between different members of the industry by acting as a uniform language they can use. Effective January 1 of 2000, the ICC once again updated Incoterms to follow the modern trends in international trade.
    6. 6. INCO TERMS Incoterms 2000 are internationally accepted commercial terms defining the respective roles of the buyer (Importer) and seller (Exporter) in the arrangement of transportation and other responsibilities and clarify when the ownership of the merchandise takes place. These terms are incorporated into export- import sales agreements and contracts worldwide and are a necessary part of foreign trade.
    7. 7. INCO TERMS OBJECTIVES; The main objective of Incoterms 2000, defines the responsibilities and the obligations of a seller (Exporter) and a buyer (Importer) within the framework of international contracts of trade concerning loading, transport, type of transport, insurances and delivery.
    8. 8. INCO TERMS Its first function is about a distribution of transport charges. The second function of the Incoterms 2000 is to define the place of transfer and the transport risks involved in order to justify the ownership for support and damage of goods by shipments sent by the seller (exporter) or the buyer (importer) in an event of execution of transport.
    9. 9. INCO TERMS1) EXW - Ex Works (named place.. say Bengaluru): Ex works means that the seller (exporter) delivers when he places the goods at the disposal of the buyer (importer) at the sellers premises or another named place (i.e. works, factory, warehouse, etc.) not cleared for export and not loaded on any collecting vehicle.
    10. 10. INCO TERMS 2)FCA - Free Carrier (named place..say Bangalore): Free Carrier means that the seller (exporter) delivers the goods, cleared for export, to the carrier nominated by the buyer (importer) at the named place. It should be noted that the chosen place of delivery has an impact on the obligations of loading and unloading the goods at that place. If delivery occurs at the sellers premises, the seller (exporter) is responsible for loading. If delivery occurs at any other place, the seller (exporter) is not responsible for unloading.
    11. 11. INCO TERMS 3)  FAS - Free Alongside Ship (...named port of shipment.. say Chennai) Free Alongside Ship means that the seller  (exporter) delivers when the goods are placed  alongside the vessel at the named port of  shipment. This means that the buyer (importer)  has to bear all costs and risks of loss of or damage  to the goods from that moment.
    12. 12. INCO TERMS 4)   FOB - Free On Board (...named port of shipment..say Chennai..) Free on Board means that the seller (exporter)  delivers when the goods pass the ships rail at the  named port of shipment. This means that the buyer  (importer) has to bear all costs and risks of loss of  or damage to the goods from that point. The FOB term requires the seller (exporter) to  clear the goods for export. If the parties do not  intend to deliver the goods across the ships rail,  the FCA term should be used. This term can be used only for sea or inland  waterway transport.
    13. 13. INCO TERMS 5)   CFR - Cost & Freight (...named port of destination.. say Chennai) Cost and Freight means that the seller (exporter)  delivers when the goods pass the ships rail in the  port of shipment. The seller (exporter) must pay  the costs and freight necessary to bring the goods  to the named port of destination but the risk of loss  of or damage to the goods, as well as any  additional costs due to events occurring after the  time of delivery, are transferred from the seller  (exporter) to the buyer (importer). The CFR term requires the seller (exporter) to  clear the goods for export. 
    14. 14. INCO TERMS 6)   CIF - Cost, Insurance & Freight (...named port of destination.. say CHENNAI..): Cost, Insurance and Freight means that the seller  (exporter) delivers when the goods pass the ships rail in  the port of shipment. The seller (exporter) must pay the  costs and freight necessary to bring the goods to the  named port of destination but the risk of loss of or  damage to the goods, as well as any additional costs  due to events occurring after the time of delivery, are  transferred from the seller (exporter) to the buyer  (importer). However, in CIF the seller (exporter) also has to procure  marine insurance against the buyers risk of loss of or  damage to the goods during the carriage 
    15. 15. INCO TERMS Consequently, the seller (exporter) contracts for  insurance and pays the insurance premium. The buyer  (importer) should note that under the CIF term the seller  (exporter) is required to obtain insurance only on  minimum cover. Should the buyer (importer) wish to  have the protection of greater cover, he would either  need to agree as much expressly with the seller  (exporter) or to make his own extra insurance  arrangements. The CIF term requires the seller (exporter) to clear the  goods for export. If the parties do not intend to deliver  the goods across the ships rail, the CIP term should be  used.
    16. 16. INCO TERMS 7)   DAF - Delivered at Frontier (...named place.. say SINGAPORE): Delivered at Frontier means that the seller (exporter)  delivers when the goods are placed at the disposal of  the buyer (importer) on the arriving means of transport  not unloaded, cleared for export, but not cleared for  import at the named point and place at the frontier, but  before the customs border of the adjoining country. The  term "frontier" may be used for any frontier including that  of the country of export.  Therefore, it is of vital importance that the frontier in  question be defined precisely by always naming the  point and place in the term.
    17. 17. INCO TERMS 8)   DDU - Delivered Duty Unpaid (...named port of  destination, say CHENNAI):  Delivered duty unpaid  means that the seller (exporter) delivers the goods to the  buyer (importer), not cleared for import, and not  unloaded from any arriving means of transport at the  named place of destination.  The seller (exporter) has to bear the costs and risks  involved in bringing the goods thereto, other than, where  applicable, any "duty" (which term includes the  responsibility for and the risks of the carrying out of  customs formalities, and the payment of formalities,  customs duties, taxes and other charges) for import in  the country of destination. Such "duty" has to be borne  by the buyer (importer) as well as any costs and risks  caused by his failure to clear the goods for import in  time. 
    18. 18. INCO TERMS 9)DDP - Delivered Duty Paid (...named port of  destination, say Chennai..): Delivered duty paid  means that the seller (exporter) delivers the goods to  the buyer (importer), cleared for import, and not  unloaded from any arriving means of transport at the  named place of destination.  The seller (exporter) has to bear all the costs and risks  involved in bringing the goods thereto including, where  applicable (Refer to Introduction paragraph 14), any  "duty" (which term includes the responsibility for and  the risk of the carrying out of customs formalities and  the payment of formalities, customs duties, taxes and  other charges) for import in the country of destination.
    19. 19. INCO TERMS Whilst the EXW term represents the minimum  obligation for the seller (exporter), DDP  represents the maximum obligation.  This term should not be used if the seller  (exporter) is unable directly or indirectly to  obtain the import license.
    20. 20. EXW Ex WorksFAS Free Alongside ShipFCA Free CarrierFOB Free On BoardCFR Cost and Freight The former acronym of Cost andFreight was C&F)CIF Cost, Insurance and FreightCIP Carriage and Insurance Paid ToCPT Carriage Paid ToDAF Delivered At FrontierDDP Delivered Duty PaidDDU Delivered Duty UnpaidDEQ Delivered Ex QuayDES Delivered Ex Ship
    21. 21. LETTER OF CREDIT A letter of credit is a document that a financial institution or similar party issues to a seller of goods or services which provides that the issuer will pay the seller for goods or services the seller delivers to a third-party buyer. Letters of credit are used primarily in international trade for large transactions between a supplier in one country and a customer in another.   The parties to a letter of credit are the supplier, usually called the beneficiary, the issuing bank, of whom the buyer is a client, and sometimes an advising bank , of whom the beneficiary is a client. 
    22. 22.  After a contract is concluded between buyer and seller, buyers bank provides a letter of credit to seller   Advice Seller’s Bank Buyer’s Bank Letter of Credit advised through Bank Seller Buyer Carrier
    23. 23.  Seller hands over the goods (or consigns) to a carrier in exchange for a bill of lading  Seller’s Bank Buyer’s Bank Seller Buyer Goods Carrier
    24. 24.  Seller provides bill of lading & other documents as per the L/c to bank in exchange for payment. Sellers bank exchanges bill of lading for payment from buyers bank. Buyer‘s Bank exchanges bill of lading for payment from the buyer  Seller’s Bank Buyer’s Bank Documents reach the Buyer through Bank Seller Buyer Carrier
    25. 25.  Buyer provides bill of lading to carrier and takes delivery of goods  Seller’s Bank Buyer’s Bank Seller Buyer Hands over Bill of Lading Carrier Buyer Collects the Goods
    26. 26. LETTER OF CREDIT a) Irrevocable LC-- Irrevocable LC is one which cannot be  revoked or cancelled without the consent of the  beneficiary. This form LC is generally used by Importers  and Exporters as this gives more security to both the  parties. b) Confirmed LC-- is a LC which is confirmed by a third  bank other than an opening bank and the negotiating  bank. Sometimes the beneficiary wants the LC of buyers  bank to be confirmed by a bank in his country. This  process is called as confirmation.  It  means that the confirming bank undertakes that in the  event of proper presentation of  documents as required  under the LC, it will make payment irrespective of the fact  whether the buyer’s bank reimburses the same or not.  It charges its commission for confirmation. 
    27. 27.  c) Transferable LC - In Transferable LC, the buyer  can transfer a part of the value of LC or the full value  of LC in favour of one or more beneficiaries.  Transferability should be  expressed specifically in the  LC.  Since the buyer relies on the integrity of beneficiary,  transferability in favour of someone  unknown has  some risks . Normally Transferable LCs are taken by middlemen  who do not want to the buyer and seller to know each  other  and also want to make a margin without both  the parties being aware of the same.  Usually transferability in several lots is possible but the  transferee again transferring the credit is not possible.
    28. 28.  d) Back to Back LCs - In back to back Lcs, Beneficiarys banks open several LCs within the value of the mother LC. This is also known as countervailing LCs. The terms and conditions of the second LC are exactly the same as that of the first LC. The second LC may be a Domestic LC. Any change is the second LC is possible only when the opener of the original LC agrees to such a change in the mother LC.
    29. 29.  e) Sight LC or DP LC - Sight LC or Document against LC means that as soon as the Bill of Exchange (BE) of the seller is presented to the buyer ,he should make payment for the same. And only then the documents would be handed over to the buyer. Thus no credit is given to the buyer.
    30. 30.  f) Usance LC OR DA LC – Usance LC or Documents against Acceptance means that payment can be made after a particular period from presentation of Bill of Exchange presented to him . By DA or Usance ,credit is given to the buyer.
    31. 31. CONCLUSION INCOTERMS and LETTERS OF CREDIT form the edifice of International Trade and Financial Management . A good understanding of these concepts is very important for anyone who is in the International business.
    32. 32. SampleLetters of Credit
    33. 33.  "In the international market place, the size of a company is notan important factor, Desire & Knowledge are"
    34. 34. Thank You

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