How to use transferable LC more effectively? An LC is issued in favour of the seller, who ships the goods and claims payment under LC. It is typically applicable when the Seller is the manufacturer of the goods. But the buyer can do the business with an intermediary trader, who is not a manufacturer of the goods and operates on a narrow margin, with a limited WC. Therefore, the trader seeks a means of finance for their purchase without engaging their own resources. Transferable LC meets the above needs as LC issued in favour of the trader can be used as a means of paying the sources from which the trader obtains goods. It is a very good product for exporters, engaged in the trading business, to increase their export/sales business. I have covered the following topics : • Understanding transferable LC • Need of transferable LC • Advantage of transferable LC • Risk and cost of transferable LC • Transferable LC – How does it work? • Important points of transferable LC • Flow- Chart of transferable LC

2.  Understanding transferable LC
 Need of transferable LC
 Advantage of transferable LC
 Risk and cost of transferable LC
 Transferable LC – How does it work?
 Important points of transferable LC

3.  Transferable LC means a LC that specifically states it
is "transferable". (UCP600, Article 38.b)
 A transferable LC may be made available in whole or
in part to another beneficiary ("second beneficiary")
at the request of the beneficiary ("first beneficiary").
(Article 38.b)
 If a transferable LC is desired and it is to be established by
SWIFT MT 700, the Field 40a ‘form of LC’ should be input
as ‘irrevocable transferable’ and, accordingly, the SWIFT
transmission will indicate that the LC is irrevocable and
transferable.

4.  Transferring bank means a nominated bank that transfers the LC
or, in a LC available with any bank, a bank that is specifically
authorized by the issuing bank to transfer and that transfers the
LC. (Article 38.b)
 An issuing bank may be a transferring bank. (Article 38.b)
 Transferred LC means a LC that has been made available by the
transferring bank to a second beneficiary.(Article 38.b)
 Transferable LC is so critical that an entire Article i.e. Article 38
has been dedicated to it under UCP 600.

5.  A LC is issued in favour of the seller, who ships the
goods and claims payment under LC. It is typically
applicable when Seller is the manufacturer of the
goods.
 But when the buyer does business with an
intermediary trader, who obtains the goods from
another source or even several other sources. In this
case, the intermediary trader will have to buy the
goods before supplying them to the buyer.

6.  Such intermediary traders operate on a narrow
margins: do not carry stocks of goods and have limited
Working Capital.
 Therefore, they seek a means of finance for their
purchase without engaging their own resources.
 Transferable LC meets the above needs as LC issued in
favour of the trader can be used as a means of paying
the sources from which the trader obtains goods.

7.  Under a transferable LC, the final buyer instructs its bank to
issue a LC in transferable form in favour of the intermediary
trader from whom the goods are bought (known as the ‘first
beneficiary’).
 This enables the intermediary trader to request the bank at
which the LC is available to transfer it in whole or in part to the
trader’s supplier (known as the ‘second beneficiary’).
 The value of the parts of the LC transferred to the trader’s
suppliers represents the price that the trader is paying for the
goods. The balance represents the trader’s profit or ‘margin’.

8.  The Intermediary trader (first beneficiary) could be acting as an
agent of the buyer. The agent could be in a better position than
the buyer to identify the right source of supply (in terms of
integrity of seller, quality of goods adherence to schedule etc.).
 The agent not only identifies the right sources, but also takes
care of the procedures and formalities at the supplier’s end.
 Further a single beneficiary may not be in a position to meet the
entire requirement of the buyer, therefore, buyer has to deal with
multiple beneficiaries. Transferable LC helps the buyer to avoid
the pain of dealing with several beneficiaries as the agent takes
care of the same.

9.  It provides security to the trader’s suppliers for payment because
part of the LC itself is transferred to each supplier.
 Each supplier (second beneficiary) obtains the right to claim
payment directly from the bank at which its portion of the LC is
available against presentation of complying documents.
 Thus, the supplier obtains a large measure of control over the
payment procedure.
 A transferable LC is also beneficial for the trader because it
allows the trader to provide suppliers a LC security without
using trader’s own banking facilities.

10.  A transferable LC involves extra risks and costs to the original applicant
(the buyer to whom the goods are finally destined). The buyer accepts the
risk of receiving goods from a third party unknown supplier without
having previous business dealings.
 If a LC is transferred, more people are involved and documents have to be
examined accordingly and mailed twice before they reach the issuing bank.
 This increases the risk of loss and error along the way, and the greater
difficulties involved in controlling the operation carried out under a
transferable LC may also increase the risk of fraud.
 A large part of this risk ultimately falls on the original applicant, who
undertakes to reimburse the issuing bank provided that a complying
presentation has been made.

11.  The Applicant (Buyer) and the Beneficiary
(Intermediary Trader) conclude their individual
contract and agree that the applicant will request
its bank to issue a LC, in favour of the beneficiary,
that is designated as “transferable”.
 The Applicant requests its WC Bank to issue an
irrevocable transferable LC.

12.  The LC issuing bank verifies Applicant’s LC limit
and sends the LC to an advising bank in the
beneficiary’s country and nominates a transferring
bank.
 The advising bank advises the LC to the first
beneficiary (Intermediary Trader).

13.  The first beneficiary requests the bank authorised to transfer
(which, in most cases, will be the advising bank) to transfer part
of the LC to a supplier (second beneficiary) in the same country
or in another country, from whom the goods are to be obtained,
to fulfil its contract with the applicant.
 At the request of the first beneficiary, the transferring bank, if
agreeable, makes the transfer part of the LC available to the
second beneficiary. (Article 38.a)
 A bank is under no obligation to transfer a LC except to the
extent and in the manner expressly consented to by that bank.

14.  The fact that a LC is designated as transferable does not give the
first beneficiary the right to insist that it should be transferred to
another beneficiary.
 Rather, it grants the transferring bank a discretion to transfer it
or not. The transferring bank accordingly has no obligation to
transfer the LC if it does not wish to do so.
 If it agrees to carry out a transfer, it also has an absolute
discretion to decide on the extent of the transfer to which it will
consent and the manner in which it is prepared to carry it out.

15.  The transferred part of the LC is advised to the second
beneficiary.
 The name of the first beneficiary may be substituted for that of
the applicant in the LC. (Article 38.g)
 The second beneficiary ships the goods in accordance with the
requirements of the transferred LC.
 The second beneficiary prepares the documents as per
transferred LC. The documents include the second beneficiary’s
invoice, together with the second beneficiary’s draft, if called for.

16.  Presentation of documents by or on behalf of a second beneficiary must be
made to the transferring bank. (Article 38.k)
 The second beneficiary presents the documents to the transferring bank.
 The second beneficiary’s invoice and draft show the first beneficiary’s
sources of supply and the amount that the first beneficiary has paid for the
goods.
 To avoid the applicant obtaining this information, invoice and draft of
second beneficiary are substituted for those of the first beneficiary. Thus,
the invoice and draft (if any) of the first beneficiary, together with all of the
other documents, are sent to the issuing bank by the transferring bank /
nominated bank.

17.  After receipt of documents, LC issuing bank scrutinizes
the same. When an issuing bank determines that a
presentation is complying, it honours.
 The transferring bank / nominated bank receives the full
bill amount as per original LC from the LC issuing bank.
 Thus, first beneficiary gets his profit margin amount (total
original LC value minus second beneficiary’s bill amount)
and second beneficiary gets value for his supplied goods.

18.  A transferable LC may be transferred in part to more than one
second beneficiary provided partial drawings or part shipments
are allowed. (Article 38.d)
 A transferable LC may be transferred in full or part. (Art 38.d)
 A transferred LC cannot be transferred at the request of a second
beneficiary to any subsequent beneficiary. Thus, transferable LC
can be transferred only once. (Article 38.d)
 The first beneficiary is not considered to be a subsequent
beneficiary. (Article 38.d)

19.  The terms of the transferred LC must be the same as the original
LC including confirmation, if any, except for the following, any or
all of which may be reduced or curtailed while effecting the
transfer to the second beneficiary (Article 38.g):
 (i) amount of the LC
 (ii) any unit price stated therein
 (iii) the expiry date
 (iv) the period for presentation
 (v) the latest shipment date or given period for shipment
 It should be noted that this provision permits reduction or
curtailment only. None of the listed items may be increased or
extended.

20.  Increase in insurance amount (Article 38.g):
 In cases in which the goods are being shipped on Incoterms such as
CIP or CIF, the beneficiary is obliged to insure the goods against
loss or damage during the transport movement.
 In case the insurance cover amount is not mentioned in LC, both the
Incoterm and the UCP require cover equivalent to 110 per cent of the sale
price.
 On transfer of LC with reduced amount, the percentage for which
insurance cover must be effected may be increased to provide the amount
of cover stipulated in the original LC or in the UCP.
 Thus, a higher percentage insurance cover may be required under the
transferred LC in order to cover the amount of insurance required under
the original LC.

21.  Let us understand this insurance coverage increased part by an example:
 Original LC value USD1,000
 Insurance of 110%(Article 28.f.ii)(based on LC value USD1,000) = USD1,100
 Transferred LC value USD900
 Despite the reduction in LC amount, if stipulated terms of insurance coverage
remains as 110%, then total insurance cover would be 110% of USD900 i.e.
USD990, whereas the requirement for insurance cover as per original LC is
USD1,100.
 Therefore, there is a need to increase the insurance coverage percentage in
transferred LC from 110% to 122.22 % so to get the insurance cover of USD1,100
(i.e. 122.22% of USD900). Insurance required under transferred LC to meet original LC
value = 122.22%

22.  The first beneficiary has the right to substitute its own invoice and
draft, if any, for those of a second beneficiary for an amount not in
excess of that stipulated in the LC. (Article 38.g)
 If the first beneficiary is to present its own invoice and draft, if any,
but fails to do so on first demand, or if the invoice presented by the
first beneficiary create discrepancies that did not exist in the
presentation made by the second beneficiary and the first beneficiary
fails to correct them on first demand, the transferring bank has the
right to present the documents as received from the second
beneficiary to the issuing bank, without further responsibility to the
first beneficiary. (Article 38.i)

23. [18] Payment under
transferred LC
[1] Sale Contract [1] Purchase Contract
[4] Transferable LC transmitted
[7] LC transferred to 2nd
Beneficiary
[2]
Applicant
(Buyer)
requests
for
issuance
of
Transferable
LC
[3] Transferable LC issued, if
LC limit is available
[5]
Transferable
LC
advised
to
1
st
Beneficiary
[6]
1
st
Beneficiary
requests
for
transfer
of
LC
[8]
Transferred
LC
advised
to
2
nd
Beneficiary
[9] Shipment of goods to Applicant by 2nd beneficiary as per Transferred LC terms
[13] Documents presented under
original transferable LC
[16] Payment under
original transferable LC
[11] Docs verified and
presented under
transferred LC
[14]
If
complying
presentation,
issuing
bank
honours
[15]
Applicant
gets
the
documents
and
pays
on
due
date
[17]
Payment
to
1
st
beneficiary
for
his
profit
margin
[12]
Documents
(invoice
and
Draft)
substituted
by
1
st
Beneficiary
[19]
Payment
to
2
nd
beneficiary
for
the
document
presented
under
transferred
LC
[10]
Presentation
of
documents
by
2
nd
beneficiary

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