Structured trade finance

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Structured Trade Finance

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Structured trade finance

  1. 1. Author: Partho Chakraborty STRUCTURED TRADE FINANCEDefinitionStructured trade and commodity finance is defined as cross-border trade finance inemerging markets where the intention is to get repaid by the liquidation of a flow ofcommodities. It is an increasingly important area of emerging-markets lending, but itspotential pitfalls have given it a poor image among parts of the financial community.However, compared to any other form of lending or investing in the emergingmarkets, structured trade and commodity deals have demonstrated an enviable trackrecord of "survivability" under extreme testing.By John MacNamara in his book Structured trade and commodity finance: What can go wrong andhow to avoid itCase Study EXPORT & LOCAL BILL DISCOUNTING LINKED TO BACK-TO-BACK L/CPlayersSimrone Pharmaceuticals Industries Ltd., Mumbai, IndiaSimrone’s Overseas Buyers (4 No – 3 in Africa & 1 in Europe)Simrone’s Local Suppliers (10 No)ICICI Bank, Mumbai, IndiaRoleSimrone: They are India based manufacturers and exporters of PharmaceuticalsSimrone’s Overseas Buyers: They are Africa and Europe based buyersSimrone’s Local Suppliers: They are India based manufacturers of goods onbehalf of Simrone. Simrone out sources the production to themICICI Bank: They are India based banker of Simrone, arranging the bills of Simroneto be negotiated and will open the Back-to-Back L/C in US$ for Simrone.Commodity: Pharmaceutical ProductsTotal Amount: US$ 527,442 (Export L/Cs) Rs. 89,46,810 (Domestic Sales)This current order position is for 90 days and will be repeated each quarter. 1
  2. 2. Author: Partho Chakraborty Details of Export L/C and Back-to-Back L/CS. Name of Country L/C L/C Value Value Per Tenor Back to Tenor ofNo. Overseas Buyer Opening Confirming in US$ Shipment of First Back L/C Back to Bank Bank in US$ L/C in Value Back L/C Days (US$) in Days1. Super Uganda N.A. N.A. 202,600 67,533 + N.A. 47,273 + 40 Pharmaceuticals 67,533 + 47,273 + Ltd. 67,534 47,2742. Noble Azania Tanzania Barclays Barclays 31,557 31,557 90 22,090 120 Ltd. Bank, Bank, UK Tanzania3. Karnag Zambia First Alliance Citibank, 73,285 36,643 + Sight 25,650 + 50 International (Z) Bank, New York 36,642 25,650 Ltd. Zambia4. Ayusa Yugoslavia Central Natwest 220,000 180,000 + Sight 126,000 + 50 International European Bank, UK 40,000 28,000 Bank, Yugoslavia TOTAL 527,442 527,442 369,210 Back-to-Back L/C Amount: 1. For Export L/Cs: US$ 369,210 (70% of US$ 527,442) in equivalent Rupees 2. For Domestic Sales: Rs. 62,62,767 (70% of Rs. 89,46,810=00) Tenor: 1. The first L/C will be at Sight from Karnag, Zambia and Ayusa, Yugoslavia. The L/C from Noble, Tanzania will be for 90 days usance. There will be no L/C from Super, Uganda. Super will release the payment on faxing him the Bill of Lading. 2. The Corresponding Back-to-Back L/C will be for 50 days usance for Sight L/C’s and 120 Days usance for 90 Days L/C. For Super, Uganda the back-to- back L/C will be for 40 days usance. 3. The Rupees transaction will be without L/C. It would be a Purchase Order from German Remedies with a Credit Period of 30 days to make payment after receipt of goods 4. The Corresponding Back to Back L/C will be for 75 days Time Frame 1. 15 Days for Domestic Supplier to Manufacture & Supply the Goods 2. 21Days to Export the Goods Security: 1. Promoter’s Personal Guarantee 2. PDC’s 3. Asset Collateral (Land, Building) 4. Cash Margin: 20% 2
  3. 3. Author: Partho ChakrabortyRequirement:Simrone has 4 overseas buyers located in Africa and Europe. They have 10 localsuppliers of raw materials. Their overseas buyers on a continous basis place theorders against which Simrone sources the materials on a back-to-back basis.Simrone needs a limit to be set in place as the Export L/C’s varies pertransaction. Thus the back-to-back L/C’s cannot be accurately quantified. Butby and large it will be as mentioned above. A Revolving Limit can beconsidered with a Cap.Transaction:Export L/C’sThis transaction has 2 legs. The first leg is to open a Back-to-Back L/C and thesecond leg is to Discount the Bills backed by the Export L/C. 1. Simrone and Overseas Buyer enter into a contract where Simrone will sell the Pharmaceutical goods and Overseas Buyer will buy the same. 2. Simrone and Domestic Suppliers enter into a contract where Simrone will outsource the production to the Domestic Manufacturers. 3. The Overseas Buyer sends a Purchase Order to Simrone 4. Against the first Purchase Order, Simrone sends a Purchase Order to Domestic Suppliers 5. The Overseas Buyers open a L/C favouring Simrone. 6. Against this L/C ICICI Bank will open a Back-to-Back L/C on the Domestic Suppliers. 7. The Domestic Suppliers send the goods to Simrone. 8. The Domestic Suppliers then present the documents to their bank for payment. 9. The Domestic Suppliers bank pays the Domestic Supplier and sends documents to ICICI Bank to be forwarded to Simrone for acceptance. 10. Simrone accepts the documents and takes delivery of the goods. 11. Simrone exports the goods and sends documents to ICICI Bank for payment against the first L/C. 12. ICICI Bank discounts the L/C backed bills and pays Simrone. 13. ICICI Bank sends the documents to Overseas Buyer through their bankers for acceptance. 14. The Overseas Buyer accepts the documents and takes delivery of the goods 15. On due date the Overseas Banks remits the funds to ICICI Bank 16. Transaction EndsNote: 1. The tenors will vary as for Sight L/C’s it will be less and for Usance L/C’s it will be more. 2. The transaction for Super Pharmaceuticals Ltd., Uganda will be as follows 3
  4. 4. Author: Partho ChakrabortySuper Pharmaceuticals Ltd., Uganda 1. Simrone and Super enter into a contract where Simrone will sell the Pharmaceutical goods and Super will buy the same. 2. Simrone and Domestic Suppliers enter into a contract where Simrone will outsource the production to the Domestic Manufacturers. 3. Super sends a Purchase Order to Simrone. 4. Against this Purchase Order ICICI Bank will open a Back-to-Back L/C on the Domestic Suppliers. 5. The Domestic Suppliers send the goods to Simrone. 6. The Domestic Suppliers then present the documents to their bank for payment. 7. The Domestic Suppliers bank pays the Domestic Supplier and sends documents to ICICI Bank to be forwarded to Simrone for acceptance. 8. Simrone accepts the documents and takes delivery of the goods. 9. Simrone exports the goods. 10. Simrone faxes the Bill of Lading to Super for Payment and sends documents to ICICI Bank for onward dispatch to Super. 11. Super credits the account of Simrone with ICICI Bank. 12. ICICI Bank sends the documents to Super through their bankers for acceptance. 13. The Overseas Buyer accepts the documents and takes delivery of the goods 14. Transaction EndsDomestic TransactionGerman Remedies Ltd., Mumbai 1. Simrone and German enter into a contract where Simrone will sell the Pharmaceutical goods and German will buy the same. 2. Simrone and Domestic Suppliers enter into a contract where Simrone will outsource the production to the Domestic Manufacturers. 3. German sends a Purchase Order to Simrone. 4. Against this Purchase Order ICICI Bank will open a Back-to-Back L/C on the Domestic Suppliers. 5. The Domestic Suppliers send the goods to Simrone. 6. The Domestic Suppliers then present the documents to their bank for payment. 7. The Domestic Suppliers bank pays the Domestic Supplier and sends documents to ICICI Bank to be forwarded to Simrone for acceptance. 8. Simrone accepts the documents and takes delivery of the goods. 9. Simrone sends the goods to German and sends documents to ICICI Bank for payment against the Purchase Order. 10. ICICI Bank sends the documents to German through their bankers for acceptance. 11. German accepts the documents and takes delivery of the goods 12. ICICI Bank pays Simrone a further 15% of Invoice Value. 13. On due date the German remits the funds to ICICI Bank 4
  5. 5. Author: Partho Chakraborty 14. ICICI Bank deducts its charges and credits the balance to the account of Simrone 17. Transaction EndsIndicative Cost:EXPORT TRANSACTIONThere are various costs here as some L/Cs are Back-to-Back L/Cs against SightL/Cs and some are Back-to-Back L/Cs against Usance L/Cs. Also there is a case ofBack-to-Back L/C against Overseas Factoring.Receipts: ICICI Bank - 1st Leg against Sight L/CsS.No. Particulars Amount (Rs)1. Export L/C Advisory Fees – 3 L/Cs (Flat Fee) 4,000=002. Back to Back L/C opening Charges for a) Commitment Charges - 0.25% per quarter 24,122=75 b) Usance Charges - 0.10% usance per month 19,298=20 c) Commission – 0.15% (Flat Fee) 14,473=65 TOTAL 61,894=60Receipts: ICICI Bank - 1st Leg against Usance L/CsS.No. Particulars Amount (Rs)1. Export L/C Advisory Fees – 1 L/Cs (Flat Fee) 1,000=002. Back to Back L/C opening Charges for a) Commitment Charges - 0.25% per quarter 5,191=15 b) Usance Charges - 0.10% usance per month 4,152=92 c) Commission – 0.15% (Flat Fee) 1,557=35 TOTAL 11,901=42Receipts: ICICI Bank - 1st Leg, where there are no L/CsS.No. Particulars Amount (Rs)1. Back to Back L/C opening Charges for a) Commitment Charges - 0.25% per quarter 16,663=85 b) Usance Charges - 0.10% usance per month 13,331=08 c) Commission – 0.15% (Flat Fee) 9,998=31 TOTAL 39,993=24Total Receipts: ICICI Bank – 1st Leg: Rs. 1,13,789=26 5
  6. 6. Author: Partho ChakrabortyReceipts: Simrone - 2nd LegS.No. Particulars Amount (Rs)1. Reimbursement of Export L/C Value a) Sight L/Cs of Karnag (Less 9.5% Per Annum for 25 days) 34,43,911=52 b) Sight L/Cs of Ayusa (Less 9.5% Per Annum for 25 days) 1,02,71,784=72 c) Usance L/Cs of Noble (Less 9.5% Per Annum for 90 days) 14,47,953=50 d) Payments by Super 95,22,200=00 TOTAL 2,46,85,849=74Payments: Simrone - 2nd LegS.No. Particulars Amount (Rs) 1. Payments to ICICI – 1st Leg 1,13,789=26 2. Management Fee @ 0.5% Flat on US$ 369,210 86,764=35 3. Reimbursement of Back to Back L/C 1,73,52,870=00 TOTAL 1,75,53,423=61Net Earnings to Simrone: Rs. 71,32,426=13Receipts: ICICI Bank - 2nd LegS.No. Particulars Amount (Rs) 1. Spread on Sight L/Cs (1% for 25 days) 9,572=50 2. Spread on Usance L/C (1% for 90 days) 3,707=95 3. Management Fee @ 0.5% Flat on US$ 369,210 86,764=35 TOTAL 1,00,044=80Total Receipts: ICICI Bank: Rs. 2,13,834=06DOMESTIC TRANSACTIONReceipts: ICICI BankS.No. Particulars Amount (Rs)1. Back to Back L/C opening Charges for a) Commitment Charges - 0.25% per quarter 15,656=92 b) Usance Charges - 0.10% usance per month 8,788=30 c) Commission – 0.15% (Flat Fee) 9,394=15 TOTAL 33,839=37Receipts: Simrone - 2nd LegS.No. Particulars Amount (Rs)1. Reimbursement by German (Less 11% Per Annum for 75 days) 87,41,778=94 TOTAL 87,41,778=94 6
  7. 7. Author: Partho Chakraborty Payments: Simrone - 2nd Leg S.No. Particulars Amount (Rs) 1. Payments to ICICI – 1st Leg 33,839=37 2. Management Fee @ 0.5% Flat on Rs. 62,62,767 31,313=84 3. Reimbursement of Back to Back L/C 62,62,767=00 TOTAL 63,27,920=21 Net Earnings to Simrone: Rs. 24,13,858=73 Receipts: ICICI Bank - 2nd Leg S.No. Particulars Amount (Rs) 1. Spread on PO of German (2% for 75 days) 37,278=38 2. Management Fee @ 0.5% Flat on Rs. 62,62,767 31,313=84 TOTAL 68,592=22 Total Receipts: ICICI Bank: Rs. 1,02,431=59 Flowchart: Export Transactions under Sight and Usance L/C’s 27 SIMRONE’S 26 OVERSEAS BUYER’S OVERSEAS BUYERS BANK 7 5 1 3 8 28 6 25 29 30 22 9SIMRONE 11 ICICI BANK, MUMBAI,PHARMACUETICALS 18 INDIAINDUSTRIES LTD.,MUMBAI, INDIA 19 2 4 12 23 24 20 10 17 21 31 14 13 SIMRONE’S DOMESTIC 15 DOMESTIC SUPPLIER’S BANK 16 SUPPLIERS 7
  8. 8. Author: Partho ChakrabortyNote: 1. The Goods from the Domestic Suppliers in India are sent by Road 2. The Goods exported to Overseas Buyer are sent by Air/ShipTable.STEP DAY EVENT NO. NO. 1. 1 Contract Between Simrone and Overseas Buyer 2. 2 Contract between Simrone and Domestic Supplier 3. 3 Overseas Buyer sends a Purchase order to Simrone 4. 4 Simrone sends a Purchase Order to Local Supplier 5. 6 Overseas Buyer requests their bank to open a L/C favouring Simrone 6. 6 Buyer’s Bank opens L/C favouring Simrone and sends it to ICICI Bank 7. 6 Overseas Buyer’s Bank gives a copy of the L/C to Buyer 8. 6 Overseas Buyer faxes L/C copy to Simrone 9. 7 ICICI Bank notifies Simrone of receipt of L/C 10. 7 ICICI Bank opens a Back to Back L/C favouring Domestic Supplier and sends it to their Banker 11. 7 ICICI Bank gives a copy of the L/C to Simrone 12. 7 Simrone Faxes the L/C copy to Domestic Supplier 13. 8 Domestic Supplier’s Banks notifies Domestic Supplier of the receipt of L/C 14. 23 Domestic Supplier sends the goods to Simrone by Road 15. 24 Domestic Supplier presents documents to his bank for payment 16. 25 Domestic Supplier’s Bank pays Domestic Supplier 17. 25 Domestic Supplier’s Bank sends the documents to ICICI Bank for acceptance by Simrone 18. 27 ICICI Bank receives documents and notifies Simrone for acceptance 19. 27 Simrone accepts Bill of Exchange at the counters of ICICI Bank and takes the other documents to clear his consignment 20. 27 Simrone takes custody of goods 21. 27 ICICI Bank notifies Domestic Supplier’s Bank on acceptance of Bill of Exchange by Simrone 22. 48 After Processing and Packaging, Simrone exports the exports to Overseas Buyer 23. 49 Simrone presents the documents to ICICI Bank for payment 24. 50 ICICI Bank purchases/negotiates the documents and pays Simrone, less their 25. 50 charges and costs ICICI Bank sends the documents to Buyer’s Bank for acceptance by Overseas Buyer 26. 53 Overseas Bank receives documents and notifies Buyer for acceptance 27. 53 Overseas Buyer accepts the Bill of Exchange at the counters of Overseas Bank and takes the other documents to clear his consignment 28. 53 Overseas Buyer takes delivery of goods 29. 53 Overseas Buyer’s Bank notifies ICICI Bank that documents have been accepted by Overseas Buyer 30. 73/128 On due date Overseas Buyer’s Bank remits funds to ICICI Bank 31. 75/145 ICICI Bank remits funds to Domestic Supplier’s Bank 32. 75/145 TRANSACTION ENDSNote: 1. Under Step No. 30 and 31, the days mentioned are 73/128 and 75/145, where 73 and 75 are for Export Sight L/C’s and 128 and 145 are under Export Usance L/C 8
  9. 9. Author: Partho Chakraborty 2. The Computation of Payments under Step 30 and 31 are calculated from The B/L Date Flowchart: Export Transactions where there are NO L/C’s 28 SUPER STANDARD PHARMACUETICALS 27 CHARTERED BANK, LTD., KAMPALA, 24 KAMPALA, UGANDA UGANDA 22 1 3 29 21 23 25 18 19 20SIMRONE 14 ICICI BANK, MUMBAI,PHARMACUETICALS 7 INDIAINDUSTRIES LTD.,MUMBAI, INDIA 5 2 4 8 15 26 16 6 13 17 30 10 9 SIMRONE’S DOMESTIC 11 DOMESTIC SUPPLIER’S BANK SUPPLIERS 12 Note: 1. The Goods from the Domestic Suppliers in India are sent by Road 2. The Goods exported to Super Pharmaceuticals, Uganda are sent by Air/Ship 9
  10. 10. Author: Partho ChakrabortyTable.STEP DAY EVENT NO. NO. 1. 1 Contract Between Simrone and Super 2. 2 Contract between Simrone and Domestic Supplier 3. 3 Super sends a Purchase order to Simrone 4. 4 Simrone sends a Purchase Order to Local Supplier 5. 4 Simrone requests ICICI Bank to open a L/C favouring Domestic Supplier 6. 4 ICICI Bank opens a Back to Back L/C favouring Domestic Supplier and sends it to their Banker 7. 4 ICICI Bank gives a copy of the L/C to Simrone 8. 4 Simrone Faxes the L/C copy to Domestic Supplier 9. 5 Domestic Supplier’s Banks notifies Domestic Supplier of the receipt of L/C 10. 20 Domestic Supplier sends the goods to Simrone by Road 11. 21 Domestic Supplier presents documents to his bank for payment 12. 22 Domestic Supplier’s Bank pays Domestic Supplier 13. 22 Domestic Supplier’s Bank sends the documents to ICICI Bank for acceptance by Simrone 14. 24 ICICI Bank receives documents and notifies Simrone for acceptance 15. 24 Simrone accepts Bill of Exchange at the counters of ICICI Bank and takes the other documents to clear his consignment 16. 24 Simrone takes custody of goods 17. 24 ICICI Bank notifies Domestic Supplier’s Bank on acceptance of Bill of Exchange by Simrone 18. 45 After Processing and Packaging, Simrone exports the exports to Super 19. 45 Simrone faxes the Bill of Lading to Super 20. 46 Simrone presents the documents to ICICI Bank for forwarding it to Super 21. 46 ICICI Bank sends the documents to Super through their banker 22. 46 Super requests their banker to pay Simrone through ICICI Bank 23. 46 Super’s Banker remits the funds to ICICI Bank favouring Simrone 24. 46 Super’s Bankers gives a copy of remittance to Super 25. 46 Super Faxes the copy of Remittance to Simrone 26. 48 ICICI Bank receives the remittance sent by Super’s Banker and credits the account of Simrone less their charges and costs 27. 49 Super’s Bankers notifies Super of receipt of Documents 28. 49 Super takes the documents from their bankers 29. 49 Super takes delivery of goods 30. 60 ICICI Bank remits funds to Domestic Supplier’s Bank 31. 60 TRANSACTION ENDSNote: Super Pharmaceuticals Ltd. Bankers are Standard Chartered Bank, Kampala, Uganda 10
  11. 11. Author: Partho Chakraborty Flowchart: Domestic Transactions where there are NO L/C’s 23 GERMAN REMEDIES GERMAN REMEDIES’ LTD., MUMBAI BANKERS 22 26 1 3 24 21 25 27 25 18 19 20SIMRONE 14 ICICI BANK, MUMBAI,PHARMACUETICALS 7 INDIAINDUSTRIES LTD.,MUMBAI 5 2 4 8 15 20 16 6 13 17 28 10 9 SIMRONE’S DOMESTIC 11 DOMESTIC SUPPLIER’S BANK SUPPLIERS 12 Note: 1. The Goods from the Domestic Suppliers in India are sent by Road 2. The Goods will be sent to German Remedies by Simrone by Road 11
  12. 12. Author: Partho ChakrabortyTable.STEP DAY EVENT NO. NO. 1. 1 Contract Between Simrone and German 2. 2 Contract between Simrone and Domestic Supplier 3. 3 German sends a Purchase order to Simrone 4. 4 Simrone sends a Purchase Order to Local Supplier 5. 4 Simrone requests ICICI Bank to open a L/C favouring Domestic Supplier 6. 4 ICICI Bank opens a Back to Back L/C favouring Domestic Supplier and sends it to their Banker 7. 4 ICICI Bank gives a copy of the L/C to Simrone 8. 4 Simrone Faxes the L/C copy to Domestic Supplier 9. 5 Domestic Supplier’s Banks notifies Domestic Supplier of the receipt of L/C 10. 20 Domestic Supplier sends the goods to Simrone by Road 11. 21 Domestic Supplier presents documents to his bank for payment 12. 22 Domestic Supplier’s Bank pays Domestic Supplier 13. 22 Domestic Supplier’s Bank sends the documents to ICICI Bank for acceptance by Simrone 14. 24 ICICI Bank receives documents and notifies Simrone for acceptance 15. 24 Simrone accepts Bill of Exchange at the counters of ICICI Bank and takes the other documents to clear his consignment 16. 24 Simrone takes custody of goods 17. 24 ICICI Bank notifies Domestic Supplier’s Bank on acceptance of Bill of Exchange by Simrone 18. 45 After Processing and Packaging, Simrone sends the goods to German 19. 46 Simrone presents the documents to ICICI Bank for payment 20. 46 ICICI Bank negotiates the documents and pays Simron, less their charges and costs 21. 46 ICICI Bank sends the documents to German’s Bank for acceptance by German 22. 47 German’s Bank receives documents and notifies German for acceptance 23. 47 German accepts the Bill of Exchange at the counters of their Bank and takes the other documents to clear his consignment 24. 47 German takes delivery of goods 25. 47 German’s Bank notifies ICICI Bank that documents have been accepted by German 26. 75 On due date German requests their Bank to remit funds to ICICI Bank favouring Simrone 27. 75 German’s Bank remits funds to ICICI Bank 28. 95 ICICI Bank remits funds to Domestic Supplier’s Bank 29. 95 TRANSACTION ENDSNote: German Remedies has a lot of bankers. The banker through whom the documents to be routed would be informed subsequently 12
  13. 13. Author: Partho ChakrabortyNote: Names, if any are Suggestive and are strictly not to be taken on Face Value. It is only to give a feel and touch of how transactions can be structured and names are indicative This article is meant for education purposes only and it is not be reproduced for any commercial purpose by print or electronic medium whatsoeverThis case study is written by:Partho H. ChakrabortyA - 305, DSR Spring Beauty Apts., 124/1, ITPL Main Road, Brookefields, Kundalahalli, Bangalore -560 037, IndiaTel: +91 80 420 50293, Cell: +91 99863 22504email: parthohc@airtelmail.in; parthohc@rediffmail.comSkype: parthohc01 13

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