2. 2
Opening of credits– various issues
While opening Credits ensure
Know your customer norms
IEC code.
Margin requirement if any
Deferred fund based exposure
Requires Appraisal and sanction by bank
Opinion report on suppliers (large value imports)
Application cum guarantee
Price quote, opinion report on supplier, import license
if required for imports in India
sn
3. 3
Letters of credits - critical issues & Types
Opening of LCs for imports? EXIM Policy & Credit angle
permitted items,
previous devolvement if any is crtical
Selection of advising bank for the credit
Issue of amendments to a credit
Consent of beneficiary for amendments
Basic Details of LCs and Operational Aspect
Parties to Letters of Credit
Types of LCs and their features
Obligations of various parties to LCs
sn
4. 4
International Chamber of Commerce
International Chamber of Commerce is the
voice of world business. (iccwbo.org)
It
Sets rules and standards
Promotes growth and prosperity
Spreads business expertise
Defends multilateral trading system
ICC is Paris based.
ICC is the main business partner of the
United Nations and its agencies.
sn
5. 5
UCPDC 600 – Uniform Customs and
Practice for Documentary Credits
URR 725 - Uniform Rules for Bank to Bank
Reimbursement
URC 522 – Uniform Rules for Collection
INCOTERMS 2000 – International
Commercial Terms
ISBP Guidelines
International Chamber of Commerce
sn
6. sn 6
Mechanics of Documentary
Credit
CONTRACT
DOCS
GOODS
DOCS
GOODS
EXPORTER
IMPORTER
DOCUMENTS
DOCUMENTS
PAYMENT
PAYMENT
Letter of
Credit
Negotiating Bank
Reimbursing Bank may also be involved
Advising bank
Confirming Bank
OPENING BANK
7. 7
Any arrangement, that is IRREVOCABLE , thereby
constitutes a definite UNDERTAKING of the
ISSUING BANK to HONOUR
a COMPLYING PRESENTATION.
ARTICLE 2 OF UCP 600
sn
8. 8
Parties to a credit
Applicant : Buyer who initiates the process
The party on whose request the Credit is issued.
Beneficiary : Seller to whom the guarantee issued
The party in whose favour a Credit is issued.
Issuing bank : Issues guarantee of payment
The bank that issues a credit at the request of an
applicant or on its own behalf.
Advising bank : Guarantees authenticity of credit
The bank that advises the credit at the request of the
Issuing Bank
sn
9. 9
Confirming bank : Adds its own guarantee to that of the issuing
bank
The bank that adds its confirmation to a credit upon the issuing
bank’s authorisation or request.
Nominated Bank : Makes payment of proceeds to seller and
claims reimbursement from opening bank
The bank with which the credit is available or any bank in case
of credit available with any bank.
Transferring Bank : A nominated Bank that transfers the credit
(in case credit is available with any bank, then issuing bank has
to specifically authorise a bank to transfer the credit and that
bank transfers the credit. Issuing bank can also be the
transferring bank.)
Rights and liabilities governed by provisions of UCPDC 600.No
party has a right to claim or liability to pay, unless under a
complying presentation.
Parties to a credit
sn
10. 10
Complying presentation
a presentation that is in accordance with
• the terms and conditions of the credit,
• the applicable provisions of these rules (UCP 600) and
• international standard banking practice.
Honour
a. to pay at sight if the credit is available by sight payment.
b. to incur a deferred payment undertaking and pay at maturity if
the credit is available by deferred payment.
c. to accept a bill of exchange ("draft") drawn by the beneficiary and
pay at maturity if the credit is available by acceptance.
sn
11. 11
Article 7 - Issuing Bank Undertaking
The issuing bank must honour a complying presentation if the credit is
available by:
sight payment, deferred payment or acceptance with the issuing
bank;
sight payment with a nominated bank and that nominated bank
does not pay;
deferred payment with a nominated bank and that nominated
bank does not incur its deferred payment undertaking or, having
incurred its deferred payment undertaking, does not pay at
maturity;
acceptance with a nominated bank and that nominated bank
does not accept a draft drawn on it or, having accepted a draft
drawn on it, does not pay at maturity;
negotiation with a nominated bank and that nominated bank
does not negotiate.
sn
12. 12
b. An issuing bank is irrevocably bound to honour as of the time
it issues the credit.
c. An issuing bank undertakes to reimburse a nominated bank
that has honoured or negotiated a complying presentation and
forwarded the documents to the issuing bank.
Reimbursement for the amount of a complying presentation
under a credit available by acceptance or deferred payment is
due at maturity, whether or not the nominated bank prepaid or
purchased before maturity.
An issuing bank's undertaking to reimburse a nominated bank is
independent of the issuing bank's undertaking to the beneficiary.
Article 7 - Issuing Bank Undertaking
sn
13. 13
Article 9 Advising of Credits and Amendments
If a bank is requested to advise a credit or amendment but
cannot satisfy itself as to the apparent authenticity of the credit,
the amendment or the advice, it must so inform, without delay,
the bank from which the instructions appear to have been
received. If the advising bank or second advising bank elects
nonetheless to advise the credit or amendment, it must inform
the beneficiary or second advising bank that it has not been able
to satisfy itself as to the apparent authenticity of the credit, the
amendment or the advice.
A bank utilizing the services of an advising bank or second
advising bank to advise a credit must use the same bank to
advise any amendment thereto.
sn
14. 14
Article 10 -Amendments
The terms and conditions of the original credit (or a
credit incorporating previously accepted amendments)
will remain in force for the beneficiary until the
beneficiary communicates its acceptance of the
amendment to the bank that advised such amendment.
The beneficiary should give notification of acceptance or
rejection of an amendment. If the beneficiary fails to give
such notification, a presentation that complies with the
credit and to any not yet accepted amendment will be
deemed to be notification of acceptance by the
beneficiary of such amendment. As of that moment the
credit will be amended.
sn
15. 15
Article 10 -Amendments
A provision in an amendment to the effect
that the amendment shall enter into force
unless rejected by the beneficiary within a
certain time shall be disregarded.
Partial acceptance of an amendment is not
allowed and will be deemed to be notification
of rejection of the amendment.
sn
16. 16
Types of credit
Security to beneficiary
Confirmed and unconfirmed
Mode of settlement
Payment/ deferred payment
Acceptance
Negotiation
Involving middlemen
Transferable
Back to back
Involving advances
Red Clause Credit
Green Clause Credit
Involving repeated transactions
Revolving
Stand by
sn
17. 17
Availability of Credit
Purpose of credit is to assure payment to the exporter.
Payment can be made by opening bank, confirming
bank or a nominated paying bank
Payment On presentation of documents by
opening bank
Deferred payment Fixed period after receipt of docs by
opening bank
Acceptance On due date of draft accepted by
opening bank
Negotiation By nominated bank if specified;
any bank if freely negotiable
sn
18. 18
Transferable credits
Credit has to be opened as transferable
The beneficiary is normally a trader or agent
He transfers credit to his supplier - second beneficiary.
Transferred by a bank at the request of first beneficiary
Second beneficiary can supply goods and negotiate
documents as if he had received the credit.
He may pay commission to first beneficiary for the order
There can be more than one second beneficiary.
No third beneficiary is permitted.
sn
19. 19
Transferable credits
The following parameters may be changed while
transferring a credit
Amount of credit, unit price and quantity of goods
Date of expiry, last date of shipment and last date of
negotiation can be brought forward
% of insurance cover may be increased.
First beneficiary has the right to substitute
documents negotiated by second beneficiary and
claim difference amount from that bank.
sn
20. Buyer
Merchant
First Benef
Seller / Second
Beneficiary
Issuing/ Buyer’s
Bank
Advising bank
Merchant’s bank
Nominated Bank
Transfering Bank
Advising/
Supplier’s Bank
LC
Application
Transferable LC
Transferable
LC
Req.
for
transfer
Of
LC
to
2
nd
benef
Transfer of LC
LC
Goods
Documents
Payment
Documents
Payment
Documents
Payment
Documents
Payment
Documents
Transferable Letter of Credit
20
sn
21. 21
Back to back credits
Exporter receives a credit from his buyer ( Selling credit)
He has to procure goods from other suppliers
He opens a credit for purchase of the goods ( buying credit)
Second credit is said to be back to back to the first one.
Bill proceeds of the export LC (Selling LC) will be used to meet
liabilities under the second (Buying LC)
Amount of back to back credit will be lower.
Usance period of the back to back credit should be equal to or
more than that of the export credit.
Bank still at risk if the customer fails to export
No concession in margin and security norms.
sn
22. Buyer
Merchant
Benef/ applct
Seller
Issuing/ Buyer’s
Bank
Advising bank
Merchant’s bank
Confirming Bank
Issuing Bank
Advising/
Supplier’s Bank
LC
Application
LC & Req. to add
confirmation
Confirmed
LC
LC
Application
LC
LC
Goods
Documents
Payment
Documents
Payment
Documents
Payment
Documents
Payment
Documents
Back-to-Back Letter of Credit
22
sn
23. 24
Revolving credits
Credit is opened to cover a series of regular transactions
over a longer period
Beneficiary will submit a series of documents
Maximum value of each document will be fixed and is the
revolving limit
LC amount is the maximum value of documents that can be
handled under the credit.
The credit may be reinstated automatically or after payment
of earlier bill.
It can be opened as cumulative or non cumulative.
Normally usance drafts are not allowed
sn
24. 25
Standby letters of credit
Credit is issued for a particular amount and for a particular period
Trade takes place on running account basis.
Beneficiary does not submit documents to bank.
If there is a default, he can claim funds from opening bank giving a
certificate of default
No quibbling over discrepancies and documents
Opening bank will pay on demand
Works like a bank guarantee
UCPDC is applicable if so declared in the credit
sn
26. The latest version also called UCPDC-600 by
International Chambers of Commerce Paris
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UCPDC - 600
An Introduction to
Uniform Customs and Practices for
Documentary Credits – no 600
The latest version also called UCPDC-600 by
International Chambers of Commerce Paris
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What is UCP ?
It stands for Uniform Customs and practices that
govern the operation of letters of credit.
Who publishes these rule ?
Published by International Chamber of commerce .
Though not having any legal status but mutually and
voluntarily accepted worldwide. Present publication
named as UCP 600 is effective from 01.07.2007
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How many articles there are in UCP 600 ?
There are 39 articles which deal with various aspect of
Documentary credit as under
Article Related Areas
1- 5 General Provisions and Definitions
6- 13 Liabilities and Responsibilities
14-17 Examination of Documents
18-28 Documents
29-33 Miscellaneous Provisions
34-37 Disclaimers
38-39 Transferable Credit & Assignment
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Article 1 : UCP 600 is applicable when the text of the
credit expressly indicates that it is subject to these rules.
They are binding on all parties thereto unless expressly
modified or excluded by the credit
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ARTICLE 2
Advising bank : the bank that advises the credit at the
request of the issuing bank
Applicant: means the party on whose request the credit is
issued
Banking day : a day on which a bank is regularly open at
the place at which an act subject to these rules is to be
performed
Beneficiary : the party in whose favor a credit is issued
Complying presentation : a presentation in accordance
with the terms and conditions of the credit, the applicable
provisions of these rules and international standard
banking practice
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Confirmation : a definite undertaking of the
confirming bank, in addition to that of the issuing bank,
to honor or negotiate a complying presentation
Confirming bank : the bank that adds its confirmation
to a credit upon the issuing bank's authorization or
request
Credit : any arrangement, however named or described,
that is irrevocable and thereby constitutes a definite
undertaking of the issuing bank to honor a complying
presentation
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Honor:
a. to pay at sight if the credit is available by sight payment.
b. to incur a deferred payment undertaking and pay at
maturity if the credit is available by deferred payment.
c. to accept a bill of exchange ("draft") drawn by the
beneficiary and pay at maturity if the credit is available by
acceptance.
Issuing bank: bank that issues a credit at the request of
an applicant or on its own behalf
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Negotiation : the purchase by the nominated bank of
drafts (drawn on a bank other than the nominated bank)
and/or documents under a complying presentation, by
advancing or agreeing to advance funds to the beneficiary
on or before the banking day on which reimbursement is
due to the nominated bank.
Nominated Bank : the bank with which the credit is
available or any bank in the case of a credit available with
any bank.
Presentation : either the delivery of documents under a
credit to the issuing bank or nominated bank or the
documents so delivered.
Presenter : a beneficiary, bank or other party that makes
a presentation.
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ARTICLES 3 : INTERPRETATION
words in the singular include the plural and in the plural
include the singular
A credit is irrevocable even if there is no indication to that
effect
A document may be signed by handwriting, facsimile
signature, perforated signature, stamp, symbol or any
other mechanical or electronic method of authentication
A requirement for a document to be legalized, visaed,
certified or similar will be satisfied by any signature,
mark, stamp or label on the document which appears to
satisfy that requirement
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Branches of a bank in different countries are considered to
be separate banks
"on or about“ : an event is to occur during a period of five
calendar days before until five calendar days after the
specified date, both start and end dates included.
"to", "until", "till", "from" and "between” a period of
shipment include the date or dates mentioned, and
the words "before" and "after" exclude the date
mentioned
"from" and "after" when used to determine a maturity
date exclude the date mentioned
"first half" and "second half" of a month respectively as
the 1st to the 15th and the 16th to the last day of the
month, all dates inclusive
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"beginning“: 1st to the 10th,
"middle" : 11th to the 20th
"end" :the 21st to the last day of the month, all dates
inclusive
ARTICLE 4 Credits v. Contracts :A credit by its nature is
a separate transaction from the sale or other contract on
which it may be based . Banks are no way concerned with
or bound by such contract. An issuing bank should
discourage any attempt by the applicant to include, as an
integral part of the credit, copies of the underlying
contract, proforma invoice and the like
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ARTICLE 5 :Documents v. Goods, Services or
Performance Banks deal with documents and not with
goods, services or performance to which the documents
may relate
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UCP 600 - Article 6
Availability, Expiry Date and Place for Presentation
a. A credit must state the bank with which it is available or
whether it is available with any bank. A credit available
with a nominated bank is also available with the issuing
bank.
b. A credit must state whether it is available by sight
payment, deferred payment, acceptance or negotiation
c. A credit must not be issued available by a draft drawn
on the applicant
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d.
i. A credit must state an expiry date for presentation. An
expiry date stated for honor or negotiation will be deemed
to be an expiry date for presentation.
ii. The place of the bank with which the credit is available
is the place for presentation. The place for presentation
under a credit available with any bank is that of any bank.
A place for presentation other than that of the issuing
bank is in addition to the place of the issuing bank.
e. Except as provided in sub-article 29 (a), a presentation
by or on behalf of the beneficiary must be made on or
before the expiry date.
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Article 7 :Issuing Bank Undertaking
Honor complying presentation made to nominated bank
or to issuing bank itself
Reimburse nominated bank that has honored/negotiated
and forwarded
For usance L/C, reimbursement is due at maturity of
deferred payment undertaking or acceptance, whether or
not nominated bank prepaid or purchased before
maturity
Issuing bank’s undertaking to reimburse nominated bank
is independent of its undertaking to beneficiary
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Article 8 – Confirming Bank Undertaking
Honour a complying presentation, or negotiate without
recourse
Reimburse nominated bank that has honored/negotiated
and forwarded complying documents to confirming bank
Irrevocably bound as of the time of confirmation
For usance L/C, reimbursement is due at maturity of
deferred payment undertaking or acceptance, whether or
not nominated bank prepaid or purchased before
maturity
Confirming bank’s undertaking to reimburse nominated
bank is independent of its undertaking to beneficiary
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Article 9 - Advising of Credits and Amendments
By advising an L/C, the advising bank signifies:
Its without any undertaking to honor or negotiate
It has satisfied itself as to the apparent authenticity of the
L/C or amendment
The advice accurately reflects the L/C’s terms and
conditions
An advising bank may utilize the services of another bank
to advise the credit - second advising bank
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Article 10 – Amendments
Amendment must be agreed to by the issuing bank, confirming bank, if
any, and the beneficiary
Issuing bank/Confirming bank is irrevocably bound as of time of issuance
and advising of amendment
Confirming bank must inform issuing bank of election not to extend
confirmation to an amendment and may advise beneficiary of amendment
without it’s confirmation
Notification of acceptance or rejection received should be given by second
advising bank to the advising and the advising bank to the issuing bank
Partial acceptance of amendments = Notice of rejection
Disregard any provision that the amendment shall be in force unless
rejected by beneficiary within certain time
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Acceptance of Amendment by Performance
Presentation that complies with the credit and not yet accepted
amendment – deemed to be beneficiary’s acceptance of the
amendment
Complying Complying
Date: 1 JUL 07
US$150,000
Ship by 20 AUG 7
Partial shipments
allowed
Date: 4 JUL 07
Amt. reduced to
US$100,000
Ship by 20 JUL 07
US$100,000
Shipped 20 JUL 07
Original L/C AMENDMENT
Document
Deemed
accepted
?
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Article11 – Tele-transmitted and Pre-Advised Credits
and Amendments
Authenticated tele-transmission of credit and
amendment deemed to be operative, unless otherwise
stated.
If tele-transmission states “full details to follow” (or
words of similar effect), issuing bank must then issue the
operative credit or amendment in terms not inconsistent
with the tele-transmission
Preliminary advice of issuance of a credit or amendment
obligates the issuing bank to issue the operative credit or
amendment
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Article 12 – Nomination
Nomination does not obligate nominated bank to
honor
By nominating a bank to accept a draft or incur a
deferred payment undertaking, an issuing bank
authorizes that nominated bank to prepay or
purchase a draft accepted or a deferred payment
undertaking incurred by that nominated bank
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Article 13 – Bank to Bank Reimbursement
Agreements
If a credit states that reimbursement is to be obtained
from a reimbursing bank, it must state if the
reimbursement is subject to the ICC rules for bank-
to-bank reimbursements in effect on the date of
issuance of the credit.
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Article 14 - Standard for Examination of
Documents
Must examine documents on their face to determine
compliance
Other than the commercial invoice, description of goods,
services or performance, may be stated in general terms
Disregard documents not required by L/C and may be
returned
Disregard non-documentary condition
Documents may be dated prior to issuance date of LC,
but not later than date of presentation
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Reasonable Time :Max. of FIVE banking days following
day of presentation. Not curtailed or affected by other
events.
Period for Presentation : Presentation including an
original transport document must be made not later than
21 calendar days after date of shipment
Transport document - Subject to Articles 19-25
Data in Documents : must not conflict with data in that
document, other stipulated documents or the L/C
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Unspecified Issuer or Content : Other than invoice,
transport document or insurance document, banks will
accept the document if (1) its content appears to fulfill the
function, and (2) it complies with 14(d)
Example: L/C calls for Inspection Certificate
First & last is the correct format while the 2nd does not comply.
Goods have been
inspected and are
certified to be in
Order
Signed & Dated
Goods are certified
to be of Singapore
origin
Signed & Dated
.
Goods have been
inspected and are
certified to be in
order.
INSPECTION
CERTIFICATE
INSPECTION
CERTIFICATE
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Addresses of Beneficiary & Applicant
Need not be the same between stipulated documents &
the credit; but
Must be within the same country as in the credit
Disregard contact details of beneficiary and applicant
(fax, phone, email) stated in the credit
However, if they form part of consignee and notify party
details in transport document, applicant’s contact details
must be as stated in credit
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SHIPPER, CONSIGNOR, TRANSPORT DOCUMENT ISSUER
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Article 15 – Complying Presentation
a. When an issuing bank determines that a presentation is
complying, it must honor.
b. When a confirming bank determines that a
presentation is complying, it must honor or negotiate and
forward the documents to the issuing bank.
c. When a nominated bank determines that a
presentation is complying and honors or negotiates, it
must forward the documents to the confirming bank or
issuing bank.
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Article 16 – Discrepant Documents, Waiver and Notice
Nominated/Confirming/Issuing bank may refuse to honor or
negotiate discrepant documents
Issuing bank, in its sole judgment approach applicant for
waiver
Notice of refusal must be given no later than close of the fifth
banking day following day of presentation
Failing to act in accordance with this article precludes the
bank from claiming the presentation does not comply
After providing notice of refusal
The bank may return documents to presenter at any time
Issuing bank or confirming bank may claim refund for any
reimbursement made, with interest
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Single Notice of Refusal must state:
the bank is refusing to honor or negotiate,
each discrepancy in respect of the refusal, and
one of the following:
1. The bank is holding documents pending presenter’s further
instructions
2. The issuing bank is holding documents until it receives
waiver from applicant and agrees to accept it, or receives
further instructions from presenter prior to agreeing to
accept the waiver
3. The bank is returning the documents
4. The bank is acting in accordance with instructions
previously received from the presenter
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Important Timelines (UCP 600 – 14,15,16)
Document Examination:
Max. 5 banking days following the day of presentation
Complying Presentation:
When an issuing bank determines that a presentation is
complying, it must honor
Refusal:
Notice of refusal by the close of the fifth banking day
following the day of presentation
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Article 17 – Original Documents and Copies
At least one original must be presented
Original Document = apparent original signature, mark,
stamp or label of issuer of the document
Also an Original = written, typed, perforated or stamped
by the document issuer’s hand; or on original stationery;
or states that it is original
L/C requires copies of documents, either originals or
copies is acceptable
Documents “in duplicate”, “in two fold” or “in two copies”,
presentation of at least one original and remaining
number in copies is acceptable
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Article 18 – Commercial Invoice
Issued by beneficiary, made out in the name of applicant, and
need not be signed (except as provided in article 38 –
Transferable L/C)
Invoice amount in excess of L/C – May be accepted by the
nominated bank, but must not be honored or negotiated in
excess of L/C amount
Description of goods, services or performance must
correspond with L/C description
Must be in the same currency as L/C
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Article 19 – Transport Documents Covering at Least Two
Different Modes of Transport
Must appear to indicate name of carrier
Signed by carrier, master or named agent If signed by agent,
need to specify for whom - carrier or master - it is signed
Article 20 – Bill of Lading
Article 21 – Non-Negotiable Sea Waybill
Article 22 – Charter Party Bill of Lading
Article 23 – Air Transport Document
Article 24 – Road, Rail or Inland Waterway Transport
Documents
Article 25 – Courier Receipt, Post Receipt or Certificate of
Posting
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Article 26 – “On Deck”, “Shipper’s Load and Count”, “Said
by Shipper to Contain” and Charges Additional to
Freight
Transport document indicating goods are or will be loaded on
deck not acceptable
Transport document indicating goods may be loaded on
deck is acceptable
“Shipper’s Load and Count” and “said by shipper to contain”
is acceptable
Transport document bearing reference to charges additional
to freight is acceptable
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Article 27 – Clean Transport Document
Clean transport is one bearing no clause or notation
expressly declaring a defective condition of goods or
their packaging
The word “clean” need not appear on a transport
document, even credit requires “clean on board
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Article 28 – Insurance Document and Coverage)
Insurance document – Insurance Policy ,
Insurance certificate or declaration under open
cover
Issued and signed by insurance company,
underwriter or their agents or their proxies
Signature by agent or proxy indicated as being for
or on behalf of insurance company or underwriter
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Insurance Document and Coverage
All originals must be presented, if the document indicates
that more than one original has been issued
Cover Note not acceptable
Insurance policy is acceptable in lieu of insurance
certificate or declaration under open cover
Issued no later than shipment date, or it appears from the
document that cover is effective from a date no later than
shipment
Insurance coverage expressed in the L/C as percentage of
goods/invoice value (e.g. 110% of CIF value) is deemed to
be minimum coverage required
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Article 29 – Extension of Expiry Date or Last Day for
Presentation
Expiry date or last day for presentation falls on a day the
bank is closed for reasons other than “Force Majeure”, it
will be extended to the first following banking day
Nominated bank must provide the issuing bank or
confirming bank with a statement that presentation was
made within the time limits extended
Latest date for shipment will not be extended
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Article 30 – Tolerance in Credit Amount, Quantity
and Unit Prices
Words “about” or “approximately” used in conjunction
with credit amount, quantity or unit prices, are to be
construed as allowing a tolerance not to exceed 10%
more or 10% less
Quantity not in terms of stipulated number of packing
units or individual items has a tolerance not to exceed 5%
more or 5% less, providing credit amount is not over
drawn
Even when partial shipment is not allowed, a tolerance
not to exceed 5% less than the credit amount is allowed,
provided the quantity is shipped in full and that any unit
price is not reduced.
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Article 31 – Partial Drawings or Shipments
Partial drawings or shipments are allowed
Presentation of multiple sets of transport docs evidencing
shipment on the same means of conveyance (e.g. vessel,
aircraft) from different ports/places on different dates and
for the same journey to the same destination – not partial
shipment
Take latest of the shipment dates as date of shipment
Presentation of multiple sets of transport docs evidencing
shipment on more than one means of conveyance within
the same mode of transport (e.g. shipment by truck) will
be regarded as partial shipment, even if shipped on the
same day for the same destination
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Multiple courier receipts not regarded as partial
shipment, if stamped/signed by same courier at same
place & date and for same destination
Article 32 – Installment Drawings or Shipments
Any installment not drawn or shipped, credit ceases to be
available
Article 33 – Hours of Presentation
Banks have no obligation to accept presentation outside
of its banking hours
Article 34 – Disclaimer on Effectiveness of
Documents
Banks are not liable or responsible for any fraudulent
documents or the accuracy and representation of any
documents
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Article 35 – Disclaimer on Transmission and Translation
When act in accordance with instruction or on own
initiative, banks are not liable or responsible for any loss
in transit, mutilation or other errors arising in the
transmission of any messages or delivery of letters or
documents
Complying documents lost in transit, between:
Nominated bank and issuing/confirming bank, or
Confirming bank and issuing bank
Issuing/confirming bank must honor or negotiate, or
reimburse
Banks are not obligated to translate and may transmit
credit terms without translating them
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Article 36 – Force Majeure
A bank assumes no liability or responsibility for the
consequences arising out of the interruption of its
business by Acts of God, riots, civil commotions,
insurrections, wars, acts of terrorism, or by any strikes or
lockouts or any other causes beyond its control.
A bank will not, upon resumption of its business, honor
or negotiate under a credit that expired during such
interruption of its business
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Article 37 – Disclaimer for Acts of an Instructed Party
Issuing bank or advising bank not liable or responsible for
instructions not carried by another bank
Bank instructing another bank to perform services is liable
for that bank’s charges
Issuing bank is liable for charges that cannot be collected or
deducted from the proceeds
Applicant is bound by and liable to indemnify a bank against
all obligations and responsibilities imposed by foreign laws
and usages
L/C or amendment should not stipulate that advising to
beneficiary is conditional upon the receipt by advising bank
or second advising bank of its charges
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Article 38 : Transferable Credits
A bank is under no obligation to transfer a credit except to the
extent and in the manner expressly consented to by that bank
Transferable credit means a credit that specifically states it is
"transferable". A transferable credit may be made available in
whole or in part to another beneficiary ("second beneficiary") at
the request of the beneficiary ("first beneficiary").
Transferring bank means a nominated bank that transfers the
credit or, in a credit available with any bank, a bank that is
specifically authorized by the issuing bank to transfer and that
transfers the credit. An issuing bank may be a transferring
bank.
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Transferred credit means a credit that has been made
available by the transferring bank to a second beneficiary.
Unless otherwise agreed at the time of transfer, all charges
(such as commissions, fees, costs or expenses) incurred in
respect of a transfer must be paid by the first beneficiary
credit may be transferred in part to more than one second
beneficiary provided partial drawings or shipments are
allowed
A transferred credit cannot be transferred at the request
of a second beneficiary to any subsequent beneficiary. The
first beneficiary is not considered to be a subsequent
beneficiary
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Any request for transfer must indicate if and under what
conditions amendments may be advised to the second
beneficiary. The transferred credit must clearly indicate
those conditions
If a credit is transferred to more than one second
beneficiary, rejection of an amendment by one or more
second beneficiary does not invalidate the acceptance by
any other second beneficiary, with respect to which the
transferred credit will be amended accordingly. For any
second beneficiary that rejected the amendment, the
transferred credit will remain unamended
Presentation of documents by or on behalf of a second
beneficiary must be made to the transferring bank.
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Article 39 – Assignment of Proceeds
The fact that a credit is not stated to be
transferable shall not affect the right of the
beneficiary to assign any proceeds to which it may
be or may become entitled under the credit, in
accordance with the provisions of applicable law.
This article relates only to the assignment of
proceeds and not to the assignment of the right to
perform under the credit.
79. BASIC DOCUMENTS
22-Jan-23
80
INTERNATIONAL TRADE CALLS FOR
EXECUTION OF MORE DOCUMENTS THAN IN
DOMESTIC TRADE.
OPERATIONAL/COMMERCIAL REQUIREMENTS
REGULATORY REQUIREMENTS
80. OPERATIONAL REQUIREMENTS
22-Jan-23
81
DOCUMENTS USED OR EXECUTED TO SATISFY
THE NORMAL COMMERCIAL REQUIREMENTS
ARE REFERRED TO AS OPERATIONAL
DOCUMENTS.
FINANCIAL DOCUMENTS
COMMERCIAL DOCUMENTS
TRANSPORT DOCUMENTS
RISK COVERING DOCUMENTS
81. FINANCIAL DOCUMENTS
22-Jan-23
82
BILL OF EXCHANGE
PERFORMS THE FOLLOWING FUCTION
COLLECTING PAYMENT
DEMANDING PAYMENT
EXTENDING CREDIT
PROMISE OF PAYMENT
RECEIPT OF PAYMENT
DEPENDING UPON THE TENOR BE CAN BE CLASSIFIED IN
TO TWO CATEGORIES
SIGHT BILL OF EXCHANGE
USANCE BILL OF EXCHANGE
82. DRAFT/BILL OF EXCHANGE
22-Jan-23
83
The draft/bill of exchange must be drawn by the beneficiary of the credit
/any other person authorized in this regard and properly signed.
The draft/bill of exchange should be drawn on the bank, stipulated in the
credit.
The amount of bill of exchange/draft should be for 100% of invoice
value, or if otherwise specified in letter of credit, according to the terms
specified. The amount must not exceed the amount available under the
credit. The amount in words and figures must agree.
The required set of draft/bill of exchange (e.g. first and second of
exchange) should be submitted.
The tenor of the bill of exchange must be as stipulated in the credit.
83. 22-Jan-23
84
The draft/bill of exchange must bear the reference to the credit
under which it is drawn mentioning the name of the issuing
bank’s branch, credit number, date and such other particulars as
required in the letter of credit.
The draft/bill of exchange should be drawn or endorsed in favour
of the bank.
The draft/bill of exchange must bear a date.
The draft/bill of exchange must not be dated after the latest date
for negotiation permitted under the credit.
The draft/bill of exchange should be signed by the drawer.
The draft/bill of exchange should be drawn unconditionally and
should be free from any extraneous conditions.
The draft/bill of exchange should be drawn for a specified
amount and should be consistent with the terms of drawing
permitted in the credit.
The draft/bill of exchange should, unless otherwise specified ,
be drawn in the same currency as invoice/LC.
84. COMMERCIAL DOCUMENTS
22-Jan-23
85
COMMERCIAL INVOICE
NO STANDARD FORMAT
CONTAINS COMMERCIAL DETAILS SUCH AS
DATE,NAME &ADDRESS,ORDER/PROFORMA
NO.,DESCRIPTION,QUANTITY,TERMS OF SALE,VALUE
OF GOODS,SHIPPING MARKS.
SPECIAL TYPE OF COMMERCIAL INVOICE
COSULAR INVOICE
CUSTOMS INVOICE
LEGALISED OR VISAED INVOICE
85. COMMERCIAL INVOICE
22-Jan-23
86
The invoice should be addressed to the party
mentioned in the credit.
The invoice should be made out by the beneficiary
or other authorized person(s) as stipulated in the LC .
The invoice need not be signed.
The required number of copies should be
submitted.
The invoice should be in the prescribed form and
certified/ attested by Chambers of Commerce or the
Representative Authority of the Government of the
importing country, in the exporting country, wherever
required in terms of credit.
The goods must be described exactly as in the
credit and the terms of sale i.e. f. o. b., c & f, c. i. f.
etc., quality, quantity, grade, packing, cost, must be
precisely the same as required in the credit.
86. 22-Jan-23
87
The number of packages shipped, gross and net weights,
shipping marks mentioned in invoice must tally with those on the
shipping documents.
Bill of lading number and date, order number, import licence
number and date, if any, should be given on the invoice,
wherever required in credit. Particulars must tally with those
stated in shipping documents.
The amount of the invoice must be within the amount
authorized in the letter of credit.
The invoice must be dated not later than the expiry date of the
credit.
Any discount/commission shown in the invoice must be in
terms of credit and subject to compliance of FEMA Regulations.
The invoice should be drawn in the same currency as LC
unless otherwise specified.
Arithmetic calculations should be accurate.
It should not include any charges, which are not permitted by
LC. As per stipulations of LC, the gross value of invoice should
not exceed the credit amount.
87. INSURANCE DOCUMENTS
22-Jan-23
88
The documents presented must be that as called for in the credit.
A certificate or cover note cannot be accepted unless specifically
authorized in the credit.
It must be issued only by Insurance Company or underwriters or
their agents.
It should not be issued by brokers.
It must be signed by the issuer.
It must bear the date of issuance.
It must indicate the name of the assured.
It must indicate the mode of conveyance (Air, Sea, Road etc.)
and if possible the name of the vessel, voyage number etc.
All the risks required to be covered in the credit should have
been covered.
The value of the insurance policy/certificate must be as per
requirements of the credit but in any case not less than invoice
value of the goods.
88. 22-Jan-23
89
Unless otherwise specified, it should be issued for an
amount equivalent of 110% of CIF/CIP value of the
goods. If such value is not determinable from the
documents on their face, it should be for the minimum
amount of the negotiation requested for or the amount
of invoice value whichever is greater.
Insurance policy/certificate must be in the same
currency as in the letter of credit but in any case not
less than invoice value of the goods and the claims
should be payable at the centre stipulated in the
credit.
The insurance policy/certificate must not be dated
later than the date of the bill of lading or date of
shipment unless the insurance documents presented
establish that the cover is effective at the latest from
the date of shipment or dispatch.
89. 22-Jan-23
90
Insurance policy/certificate should be in negotiable
form and should be properly endorsed.
The insurance policy must be properly stamped.
If the name of the steamer is mentioned in the
insurance policy, it must agree with the name given in
the bill of lading.
The insurance policy/certificate must bear a
description of merchandise which conforms to the
terms of the credit and allows identification with the
other documents presented.
If transshipment is to take place, the insurance
documents must cover transshipment. (It may be
noted that the normal “Institute warehouse to
warehouse clause” covers customary trans-
shipment).
90. 22-Jan-23
91
If the credit permits shipping on deck and bill of lading indicates
shipment of goods on deck, the insurance policy must cover the
risk.
In case of exports contracted on f.o.b. or c & f terms, it should be
ensured that the shipment has been adequately insured against
all risks of loss or damage during the entire course of transit and
that such insurance cover incorporates “Seller’s interest clause”
in the relative policy, permitting claims being paid to exporter in
India, in the event of loss/damage to the shipment before
ownership of goods passes to the buyer.
If it is issued in more than one original, all originals must be
submitted (no. of negotiable copies issued are indicated in the
insurance policy / certificate).
It should be endorsed in blank by the assured, if required as per
terms of LC.
It should indicate the port of shipment and destination or point of
insurance coverage and point of termination of insurance
coverage.
It should not contain any clause affecting the interest of the
assured/assignees.
91. CERTIFICATE OF ORIGIN
22-Jan-23
92
INDICATES THE COUNTRY WHERE GOODS
ORIGINALLY PRODUCED/MANUFACTURED
MAY BE A PART OF INVOICE
USED BY CERTAIN COUNTRIES FOR NOT
USING THE GOODS SUPPLIED BY ENEMY
COUNTRY
TO AVOID INTERMEDIARY TRADE
92. PACKING LIST
22-Jan-23
93
SHOWS THE NUMBERS OF PACKAGES WITH
DISTINCTIVE MARKS.
NEEDE BY IMPORTER WHEN IMPORTING
DIFFERENT TYPES OR SIZES OF
MERCHANDISE TO IDENTIFY THE GOODS.
ALSO USED BY THE CUSTOM TO CHECK THE
GOODS
93. WEIGHT CERTIFICATE
22-Jan-23
94
DOCUMENT TO CERTIFY THE WEIGHT OF
THE GOODS.
SOMETIMES COUNTERSIGNED BY THE
INDEPENDENT AGENCY.
GENERALLY REQUIRED IN CASE OF BULK
ITEMS SUCH AS IRON ORE,FOOD ITEMS.
94. CERTIFICATE OF INSPECTION
22-Jan-23
95
DOCUMENT CERTIFYING HAVING INSPECTED THE
GOODS
REQUIRED BY IMPORTER
IN INDIA EXPORT INSPECTION COUNCIL
PROVIDES THE PRESHIPMENT INSPECTION
CERTIFICATE
95. TRANSPORT DOCUMENTS
22-Jan-23
96
VARIOUS TYPES OF TRANSPORT DOCUMENTS
ARE USED IN INTERNATIONAL TRADE
BILL OF LADING
AIRWAY BILL
POSTAL RECEIPT
COURIER RECEIPT
MULTIMODAL TRANSPORT DOCUMENT
96. BILL OF LADING
22-Jan-23
97
IS AN EVIDENCE OF CONTRACT OF
AFFREIGHTMENT
IS A RECEIPT OF GOODS
IS A DOCUMENT OF TITLE TO GOODS
97. TYPES OF BILL OF LADING
22-Jan-23
98
RECEIVED FOR SHIPMENT B/L
ON BOARD B/L
SHORT FORM B/L
CLEAN B/L
CLAUSED B/L
THROUGH B/L
STRAIGHT B/L
99. 22-Jan-23
100
The complete set of bills of lading i.e. all the original
negotiable copies must be submitted unless the credit
provides otherwise. It should be noted that a shipping
company would deliver the goods against the first presented
and correctly endorsed negotiable copy.
The bill of lading should have been manually signed.
(Signatures by rubber stamp are not acceptable.) Bill of
lading should normally be signed by the master of the ship
or on his behalf by the authorized agent.
The bill of lading must be clean i.e. it should not contain any
super imposed clause indicating any defect in the goods or
in their packing. Any such mention will render the bill of
lading “unclean”, “dirty”, “foul” which is not a good tender
under a credit, unless specifically authorized in the credit.
100. 22-Jan-23
101
The bill of lading must indicate that the goods are shipped
“on board” a named vessel, “Received for shipment” bills of
lading should not be accepted unless specifically provided
for in the credit. If “received for shipment” bill of lading is
over-stamped “on board”, the bill of lading is acceptable, as
being “on board” bill of lading, provided the over-stamping is
authenticated and dated. The date so indicated should be
within the latest date of shipment stipulated under the credit.
The date of bill of lading should not be after the stipulated
last date of shipment in the credit. It should also not be
prior to the date of issuance of letter of credit.
101. 22-Jan-23
102
The shipping marks in the bill of lading should be identical
with those on other documents. The general description of
the goods in the bill of lading must be in accordance with
that called for in the credit.
Number of packages and weight in the bill of lading should
be the same as shown in commercial invoice and other
documents.
“Shipper”, “consignee” and “to be notified” parties in the bill
of lading must be in accordance with the stipulations of the
credit.
Bill of lading must be made out to the order of the party
named in the letter of credit.
102. 22-Jan-23
103
If the goods are being shipped on “c.i.f.” or “c&f” basis, the
bill of lading must evidence “freight paid”. Where freight
pre-paid bills of lading are required, clauses like “freight to
be pre-paid” or “freight pre-payable” will not be accepted as
constituting evidence of the payment of freight.
The port of shipment or the port of destination should be as
required in the credit.
The bill of lading alongwith other documents must be
presented within the time specified in the credit.
103. 22-Jan-23
104
Bill of lading must;
Be issued by a named carrier or his agent.
Bear a distinct number.
Indicate the place of issuance.
Indicate the date of issuance.
Indicate the name of consignor.
Indicate the name of consignee.
Indicate brief description of goods being carried.
Must indicate whether “freight Prepaid” or “freight
Payable”.
104. 22-Jan-23
105
Unless specifically authorized in the credit, bills of lading of
the following nature should not be accepted:
Bill of lading issued by forwarding agent.
Bill of lading issued under and subject to the
conditions of a charter party.
Bill of lading covering shipment by sailing
vessel.
Bill of lading evidencing goods shipped “on
deck”.
105. 22-Jan-23
106
Bill of Lading can (unless otherwise prohibited or is
inconsistent with other terms of LC)
Be a short form or Blank backed B/L.
Indicate a place of taking in charge different from
the port of loading and/or a place of final destination
different from the port of discharge.
Indicate that the goods are carried in containers
trailers/or ‘LASH’ barges.
Be issued by freight forwarder provided it is issued in
his capacity as a carrier or his agent.
Contain a notation that the goods may be carried on
deck provided it does not specifically state that they
are or will be loaded on deck.
106. 22-Jan-23
107
Indicate that the goods will be transshipped
provided the same B/L covers the entire carriage.
Be a “Freight Payable” B/L.
Evidence freight prepayment by a stamp or
otherwise on B/L to that effect like “Freight
Prepaid.
Bear reference by stamp or otherwise to costs
additional to freight charges.
107. OTHER ASPECTS OF B/L
22-Jan-23
108
If a B/L is issued as “ON Board” B/L, it must indicate
the name of the carrying vessel.
A Charter party B/L need not show the name of
carrier.
A transport document issued by a freight forwarder
can be accepted provided freight forwarder has
issued the same in his capacity as a carrier or his
agent and all other requirements are met with.
A B/L received for shipment can be treated as an “On
Board” B/L if received for shipment B/L is affixed with
“On Board” notation duly signed or initialled and
dated by the carrier or his agent.
If LC calls for a “Marine B/L” without specifying
whether it should be “On Board” or “ Received for
shipment”, only “ On Board” B/L will be accepted.
108. 22-Jan-23
109
Date of issue of B/L or “ On Board” notation
should be dated prior to the shipment date
permitted under LC.
Shipping marks, Gross/net weight etc. specified
on B/L must correspond to those specified in
other documents.
109. AIRWAY BILL
22-Jan-23
110
AN ACKNOWLEDGEMENT ISSUED BY AIRLINE OR
THEIR AUTHORISED AGENTS
NOT A TITLE TO GOODS
IT IS NOT NECESSARY FOR THE CONSIGNEE TO
PRODUCE THE AIRWAY BILL FOR DELIVERY
AIRLINES NORMALLY NOTIFY THE CONSIGNEE
AND DELIVER THE GOOD
110. AIR CONSIGNMENT NOTE
22-Jan-23
111
OTHERWISE CALLED AS AIR RECEIPT
GENERALLY ISSUED BY THE FORWARDING
AGENTS
HOUSE AIRWAY BILL
ISSUED BY CARGO CONSOLIDATING AGENT
MASTER AWB ISSUED BY THE AIRLINE IN THE NAME
OF CONSOLIDATING AGENT
NOT A SAFE DOCUMENT
111. 22-Jan-23
112
It must show the name of the carrier.
It must be issued by a named carrier or his agent.
It must indicate the place of issuance.
It must indicate the date of issuance.
It must be signed by a named carrier or his agent (In
case of HAWB by the
Air Cargo consolidator himself ).
It must indicate the name of the consignor.
It must indicate the name of the consignee (and not
that of the consignor or his order)
It must indicate port of loading and discharge.
112. POSTAL RECEIPT
22-Jan-23
113
ISSUED BY POSTAL AUTHORITIES
IT IS AN ACKNOWLEDGEMENT OF RECEIPT
OF GOODS
NOT A DOCUMENT OF TITLE TO GOODS
NOT A SAFE DOCUMENT
113. COURIER RECEIPT
22-Jan-23
114
DOCUMENT EVIDENCES THE RECEIPT OF
THE GOODS
MULTIMODAL TRANSPORT DOCUMENT
USED WHEN MORE THAN ONE MODE OF TRANSPORT
IS USED.
IS A RECEIPT OF GOODS
IS A NEGOTIABLE INSTRUMENT
SAFER THAN THROUGH B/L
114. RISK COVERING DOCUMENTS
22-Jan-23
115
INSURANCE POLICY
IS A CONTRACT OF INSURANCE
MARINE INSURANCE IS MOST COMMON
BASIC COVER IS PERILS OF SEA.
SPECIFIC POLICY
OPEN POLICY
115. 22-Jan-23
116
It must give brief description of goods being carried and not inconsistent
with other documents.
Must comply with all other specific requirements of LC.
Must indicate notify parties as stipulated in the LC.
It should not be a charter party AWB.
It should not be claused.
Unless prohibited by the terms of LC.
It can be short form AWB or Blank backed AWB.
It can bear reference by stamps or otherwise to cost anything additional to freight charges.
It can contain words like “said by shipper to contain” or “shippers load and count” etc.
116. 22-Jan-23
117
It can show the consignor as a third party other than
beneficiary.
It must show the shipping marks of packages, number of
packages, gross weight, net weight etc.
It must indicate whether freight is prepaid or payable at
destination.
In case of HAWB ( if specified) it must show the name of
Airlines, Master Airway Bill number, the flight number,
consolidator’s IATA registration number.
It should be remembered that unless credit calls for flight
date even if flight date is shown on AWB, the date of issue
of AWB is considered as date of shipment.
118. Letter of Credit
Opening/establishing import LC and subsequent amendments.
Basic documents needed for establishing LC.
Crystalization of import bills under LC and payment thereof
Scrutiny of LC opening application and related documents.
Standby LC and Guarantee facilities
Buyers credit and suppliers credit for import of goods.
119. Topics to be Covered
Opening/establishing import LC and subsequent amendments.
Basic documents needed for establishing LC.
Crystallization of import bills under LC and payment thereof
Scrutiny of LC opening application and related documents.
Standby LC and Guarantee facilities
Buyers credit and suppliers credit for import of goods.
120. BRIEF OUTLINE OF UCPDC600
Article 1 to 5 includes:-
definition
interpretation
independence of LC and underline contracts
Articles 6 to 10 includes:-
Availability, expiry date and place, obligation of issuing and Conf. Bank, advising
credit and amendments.
121. Contd……
Article 11 to 17 includes Preadvice credit, nominated Bank, reimbursement Arrangement,
complying, presentation, original document, etc
Article 18 deals in Commercial invoice
Article 19 to 27 includes Transport documents
Article 28 deals in Insurance documents
Article 29 to 33 deals in Extension, tolerance, partial and installment drawings and hours of
presentations
ART 34 to 37 deals in Disclaimers
Article 38 to 39 deals in Transferability and assignment of proceeds.
122. OPENING AND ESTABLISHNING OF LC
CONTD…
Proper investigation into the antecedents and respectability of the importer is essential in order
to safeguard any eventuality which may arise later on while undertaking import business on
behalf of them.
The status of the supplier should be verified and whether the supplier is an associate of the
importer should be considered.
If the beneficiary and the importer of LC are associate concerns there is a possibility that the LC
may be used by the Benf. as a means of finance.
LC may be opened inbfavour of an associate concern only after satisfying that the opener and the
associate concern are well known for their integrity and credit worthiness.
The goods to be imported are easily marketable.
Post import Credit facilities whether required or not should be examined before hand.
An integrated view of the entire transaction upto the point of recovery and advance must be
taken by the bank.
123. Economic viability of the import is a guiding factor in assessing whether the underlying
transaction is profitable.
The additional collaterals should be examined and realizable value should be taken into
account. In some cases the imported goods cannot be sold without the consent of licensing
authority.
Though the goods are cleared by bank but approval from lisencing authority is required which
can be a long drawn process. In addition the duty and other taxes payable should be taken into
consideration.
Thus the total value of the transaction arrived and the financial strength should be examined in
that respect.
For some lisence issued under export incentive scheme clearance of goods is allowed only
against a BG for a specified export performance. Bank should consider at this time of sanction
the terms on which the bank should issue the guarantee on arrival of goods.
124. The importer is to furnish information regarding the tenure, tenor and usuance of the draft to
be drawn under LC.
The margin required should be considered in the lights of the points mentioned above and have
sufficient cover against exchange rate fluctuation.
In case of capital goods the backup finance should be provided by Bank or SFC or by any term
lending institution.
There must be any definite commitment by term lending institution and the sanction letter in
this regard.
If sanctioned by bank of its own it is generally given by regional office or by corporate office.
125. Scrutiny of import LC application form
While opening LC for import of goods services it’s a definite commitment given to the Ben of the
LC that payment for such import/services would be made on the Ben’s submitting shipping
documents drafts, invoice, insurance policy etc to the opening bank.
Hence the opening bank has to ensure whether the goods to be imported and payment thereof
is allowed into India are as per FTP.
The applicant should be a regular customer and who are known to be participating in trade.
The LC application form should be signed and stamped as per Stamp Act of the concerned state.
The application form must be completed in all respect.
126. Status report of the Beneficiary must be obtained from concerns like DUN and
BRADSTREET etc.
LC should be opened on the basis of underlying sell contract. The other
documents are purchase order of the importer and confirmation of the overseas
seller.
Proforma invoice of the ben duly accepted by the importer.
The sell contract should have the following.
Name of the seller, buyer, description of goods, services, quantity specification,
unit price of value, terms of payment.
127. The application should state whether it should be on DP/DA terms and should tally with the sell
contracts.
Standard documents- draft, commercial invoice, BL/AWB, post parcel courier receipts, additional
documents like certificate of origin, WN, PL, certificate of quality or analysis, etc.
Freight to be paid or payable should be examined as per terms of contract. The goods are to be
consigned In the name of the opening bank.
And the applicant should be made as ‘’notify’’ party. The last date of shipment is another
important clause which should be well before the expiry of the LC.
If the contract is under CIF proper insurance policy with 110% value of the invoice should be
made payable in the country of the applicant and particular risk to be covered.
128. CRYSTALLIZATION OF IMPORT BILL
In case of DP bill the crystallization means delinking the foreign currency liability
of the bill which is the tenth day of the receipt of the bill by the bank.
Thereafter if the bill remains unpaid it is to be treated as overdue. In case of DA
bill it will be overdue on the date of the maturity.
In case of bills drawn under LC it is the primary responsibility of the opening
bank to honour their payment commitment and subsequently they should take
up the matter with the applicant for the recovery of the dues.
129. LC Amendments
Art-10 LC neither be amended nor cancelled without the agreement of the issuing bank, Conf bank
and ben, issuing bank and advising bank are bound by such amendments.
However ADV bank may choose not to add confirmation in such amendments. The ben should give
notification for acceptance or rejection of such amendments.
If the ben fails to give such notification and a presentation that complies with the credit and to any
not yet accepted amendment will be deemed to be notification of acceptance by the ben.
As of that moment the credit will be amended.
A bank that advises an amendment should inform the bank from which it received the amendment of
any notification of acceptance or rejection.
Partial acceptance of an amendment is not allowed and will be deemed to be notification of rejection
of the amendment.
A provision in an amendment to the effect that amendment shall enter into force unless rejected by
the ben within a certain time shall be disregarded.
130. Trade credit policy
rupee(Inr) denominated trade credit. RBI allowed the following importer to raise the trade credit
in rupee(Inr) within following framework.
1)for import of permissible items (except gold) permissible under FTP
2)for non-capital goods up to one year from the date of shipment or upto the operating cycle
which ever is lower and upto five years for capital goods from the date of shipment.
3)Ad category 1 can allow upto US 20Mio equivalent per import transaction
4)AD category 1 Bank can give guarantee / letter of comfort for a period upto three years from
the date of shipment.
Overseas lenders ar eligible to hedge there exposure in rupee through permitted derivative
products in the onshore market with a ad category 1 bank in india.
131. BUYERS CREDIT
The importer (buyer) raises a loan from a bank in the exporters country under the export credit
scheme in force.
The loan is drawn to pay the exporter in full and thus for the exporter the transaction is a cash
sell.
Another form of buyer credit arrangement is for a bank in the exporters country to establish a
line of credit in favour of a bank or a financial institutions in the importers country.
The latter makes available loans under the line of credit to its importer clients for the purchase
of capital goods from the credit giving country. In India EXIM bank makes available
supplier/buyer credits and also extends line of credit to foreign Financial Institutions to promote
export of capital goods from India.
132. Suppliers credit
The exporter supplier extend a credit to the buyer importer of capital goods. The terms can be
down payment with balance payable in installments. The interest on such deferred payments
will have to be paid as per agreement. The deferred payments are supported by PN/BE often
carrying guarantee of the importer banks.
To finance the credit given to the importer under such arrangement the exporter raises a loan
from his banker under the export credit schemes in force. In general the export credit insurance
is an inherent part of this mechanism.
133. Standby letter of credit
It is often used to cover NON PERFORMANCE SITUATION. It acts like a substitute for
guaranteeing. It is used to support payment when due or after default of obligations based
on money loaned or after default or obligations based on money loan or advanced or upon
the occurrence or non occurrence of another contingency.
Banks can establish SBLC for the following transaction.
It is a substitution of guarantee which AD’s are permitted under FEMA 1999.such as issuing
guarantee in respect of any debt, obligation or other lability incurred by:
a)an exporter or account of export into India
b) owed to a person resident in India by a person resident outside India for a bonafide
transaction duly covered by counter guarantee of a bank of international repute/ resident
abroad.
134. c)exporters may also opt to receive standby SBLC from India.
SBLC in respect of imports are allowed when required by applicants who are independent power
producers/importers of crude oil and petroleum products.
Special category of importers viz export house/ trading house/ star trading house 100% EOU.
PSU/PE with good track record.
Invocation of SBLC by the ben should be supported by proper evidence.
The ben should furnish declaration that the claim is made on account of failure of importer
Copy of invoice/ bill should accompany.
135. GUARANTEE
Section 126 of the Indian contact act defines guarantee as a contract to perform the promise or
discharge the liability of a third person in case of his default. Bank should confine themselves to
the provision of financial guarantees and excercise due caution with regard to performance
guarantee business.
BG should be for shorter maturities. A prudent credit decision should be taken while extending
BG without having sufficient collateral.
136. Issuing of foreign outward guarantee
The standard practice of establishing of international guarantees followed by international banks
is by instructing the correspondent bank at the place (or country) of the beneficiary to issue the
guarantee as per the text furnished against counter guarantee.
In the counter guarantee our bank will undertake to meet the claim of the correspondent
bank(guarantee issuing bank on behalf of our bank) in the event of beneficiary invoking their
guarantee within its validity.
Our counter guarantee will provide a claim period say 30 days from the date of expiry of the
original guarantee for lodging the claim by the correspondent bank.
139. Export Incentives at Glance
1 Advance Authorization Scheme
2 Advance Authorization for Annual Requirement
3 Export Duty Drawback for Customs, Central Excise, and
Service Tax
4 Service Tax Rebate
5 Duty-Free Import Authorization
6 Zero duty EPCG (Export Promotion Capital Goods) Scheme
7 Post Export EPCG Duty Credit Scrip Scheme
8 Towns of Export Excellence (TEE)
9 Market Access Initiative (MAI) Scheme
10 Marketing Development Assistance (MDA) Scheme
11 Merchandise Exports from India Scheme (MEIS)
140. Introduction & Objectives
As a part of economic reforms, the government has
formulated many economic policies which have led to
the country’s gradual economic development.
objective of these benefits is to simplify the whole
export process and make it more flexible.
Since the initiation of the liberalization plan in the
1990s, the economic reforms have emphasized the
open market economic policies
141. Classification of Export Incentives
1. Exports from India Scheme
Merchandise Exports from India Scheme (MEIS)
Service Exports from India Scheme (SEIS)
2. DUTY EXEMPTION & REMISSION SCHEMES
Advance Authorization Scheme
Advance Authorization for annual requirement
Duty Free Import Authorization (DFIA) Scheme
Duty Drawback of Customs
5 Interest Equalisation Scheme (IES)
142. Classification of Export Incentives
3. EPCG SCHEME
Zero duty EPCG scheme
Post Export EPCG Duty Credit Scrip Scheme
4. EOU/EHTP/STP & BTP SCHEMES-nil sub
5. OTHER SCHEMES
Towns of Export Excellence (TEE)
Market Access Initiative (MAI) Scheme
Marketing Development Assistance (MDA) Scheme
Status Holder Scheme
Gold Card Scheme
143. Some Abbreviations used in PPT
Export Oriented Unit (EOU) Scheme,
Electronic Hardware Technology Park (EHTP)
Scheme
Software Technology Park (STP) Scheme
Export of Special Chemicals, Organisms,
Materials, Equipment and Technologies
(SCOMET)
BTP=Bio-Technology park
Domestic Tariff Area-(DTA)
144. EXPORT PROMOTION SCHEMES
Foreign Trade Policy 2015-20 and other schemes
provide promotional measures to boost India’s exports
with the objective to offset infrastructural
inefficiencies and associated costs involved to provide
exporters a level playing field.
Brief of these measures stated next slide onwards
145. Merchandise Exports from India
Scheme (MEIS)
This scheme applies to the export of certain goods to
specific markets. Rewards for exports under MEIS will
be payable as a percentage of realized FOB value.
Under this scheme, exports of notified goods/
products to notified markets as listed in Appendix 3B
of Handbook of Procedures, are granted freely
transferable duty credit scrips on realized FOB value of
exports in free foreign exchange at specified rate.
146. Merchandise Exports from India
Scheme (MEIS)
Such duty credit scrips can be used for payment of
basic custom duties for import of inputs or goods.
Exports of notified goods of FOB value upto Rs
5,00,000 per consignment, through courier or foreign
post office using e-commerce shall be entitled for
MEIS benefit.
List of eligible category under MEIS if exported
through using e-commerce platform is available in
Appendix 3C.
147. Service Exports from India Scheme
(SEIS)
Service providers of notified services as per Appendix
3D are eligible for freely transferable duty credit scrip
@ 5% of net foreign exchange earned.
148. Advance Authorization Scheme
As per scheme, businesses are allowed to import input
in the country without having to pay duty payment, if
this input is for the production of an export item.
Moreover, the licensing authority has fixed the value
of the additional export products to not below than
15%.
The scheme has the validity period of 12 months for
imports and 18 months for carrying out the Export
Obligation (EO) from the date of issue typically.
149. Advance Authorization Scheme
Under this scheme, duty free import of inputs are
allowed, that are physically incorporated in the export
product (after making normal allowance for wastage)
with minimum 15% value addition.
Advance Authorization (AA) is issued for inputs in
relation to resultant products as per SION or on the
basis of self declaration, as per procedures of FTP.
150. Advance Authorization Scheme
AA normally have a validity period of 12 months for the
purpose of making imports and a period of 18 months
for fulfillment of Export Obligation (EO) from the date
of issue.
AA is issued either to a manufacturer exporter or
merchant exporter tied to a supporting
manufacturer(s).
151. Advance Authorization for annual
requirement
Exporters who have a previous export performance for
at least two financial years can avail the Advance
Authorization for Annual requirement scheme or
more benefits.
Exporters having past export performance (in at least
preceding two financial years) shall be entitled for
Advance Authorization for Annual requirement. This
shall only be issued for items having SION.
152. Duty Free Import Authorization
(DFIA) Scheme
This is another benefit the government has introduced
by combining the DEEC (Advance License) and DFRC
to help exporters get free imports on certain products.
DFIA is issued to allow duty free import of inputs, with
a minimum value addition requirement of 20%. DFIA
shall be exempted only from the payment of basic
customs duty. DFIA shall be issued on post export
basis for products for which SION has been notified.
Separate schemes exist for gems and jewellery sector
for which FTP may be referred.
153. Duty Drawback of Customs Central
Excise, and Service Tax
Under these schemes, the duty or tax paid for inputs
against the exported products is refunded to the
exporters.
This refund is carried out in the form of Duty
Drawback.
In case the duty drawback scheme is not mentioned
in the export schedule, exporters can approach the tax
authorities for getting a brand rate under the duty
drawback scheme.
154. Duty Drawback of Customs Central
Excise, and Service Tax
The scheme is administered by Department of
Revenue. Under this scheme products made out of
duty paid inputs are first exported and thereafter
refund of duty is claimed in two ways:
i) All Industry Rates : As per Schedule
ii) Brand Rate : As per application on the basis
of data/documents
155. Interest Equalisation Scheme (IES)
The Government announced the Interest Equalisation
Scheme @ 3% per annum for Pre and Post Shipment Rupee
Export Credit with effect from 1st April, 2015 for 5 years
available to all exports under 416 tariff lines [at ITC (HS)
code of 4 digit] and exports made by Micro, Small &
Medium Enterprises (MSMEs) across all ITC(HS) codes.
With effect from November 2, 2018, the rate of Interest
Equalisation for MSME has been increased to 5%.
The Scheme has also been extended to Merchant
Exporters who will now avail the benefit @ 3% for all
exports under 416 tariff lines w.e.f. January 2, 2019.
156. EPCG SCHEME- Zero duty EPCG
scheme
Under this scheme import of capital goods at zero
custom duty is allowed for producing quality goods
and services to enhance India’s export
competitiveness.
Import under EPCG shall be subject to export
obligation equivalent to six times of duty saved in six
years.
Scheme also allows indigenous sourcing of capital
goods with 25% less export obligation.
157. EPCG SCHEME- Zero duty EPCG
scheme
In this scheme, which applies to exporters of electronic
products, import of capital goods for production, pre-
production, and post-production is allowed at zero
percent customs duty if the export value is at least six
times the duty saved on capital goods imported.
The exporter needs to verify this value(Export
Obligation) within six years of issuing date.
158. EPCG Scheme –variant-Post Export
EPCG Duty Credit Scrip Scheme
A Post Export EPCG Duty Credit Scrip Scheme shall be
available for exporters who intend to import capital
goods on full payment of applicable duty in cash.
Under this export scheme, exporters who aren’t sure
about paying the export obligation can obtain an
EPCG license and pay the duties to the customs
officials.
Once they fulfill the export obligation, they can claim
a refund of the taxes paid.
159. EOU/EHTP/STP & BTP SCHEMES
Units undertaking to export their entire production of
goods and services may be set up under this scheme
for import/ procurement domestically without
payment of duties.
For details of the scheme and benefits available
therein FTP may be required.
160. OTHER SCHEMES- Towns of Export
Excellence (TEE)
Towns that produce and export goods above a
particular value in the identified sectors would be
known as towns of export status.
Towns will be given this status based on their
performance and potential in exports to help them
reach new markets.
Selected towns producing goods of Rs. 750 crores or
more are notified as TEE on potential for growth in
exports and provide financial assistance under MAI
Scheme to recognized Associations.
161. Market Access Initiative (MAI)
Scheme
An effort to provide financial guidance to eligible
agencies for undertaking direct and
indirect marketing activities like market research,
capacity building, branding, and compliances in
importing markets.
Under the Scheme, financial assistance is provided for
export promotion activities on focus country, focus
product basis to EPCs, Industry & Trade Associations,
etc.
162. Market Access Initiative (MAI)
Scheme
The activities are like market studies/surveys, setting
up showroom/warehouse, participation in
international trade fairs, publicity campaigns, brand
promotion, reimbursement of registration charges for
pharmaceuticals, testing charges for engineering
products abroad, etc.
Details of the Scheme see FTP
163. Status Holder Scheme
Upon achieving prescribed export performance, status
recognition as one star Export House, two Star Export
House, three star export house, four star export house
and five star export house is accorded to the eligible
applicants as per their export performance
Such Status Holders are eligible for various non-fiscal
privileges as prescribed in the Foreign Trade Policy.
In addition to the above schemes, facilities like 24X7
customs clearance, single window in customs, self
assessment of customs duty, prior filing facility of
shipping bills etc are available to facilitate exports.
164. Gold Card Scheme
The Gold Card Scheme was introduced by the RBI in
the year 2004.
The Scheme provides for a credit limit for three years,
automatic renewal of credit limit,
additional 20% limit to meet sudden need of exports
on account of additional orders,
priority in PCFC,
lower charge schedule and fee structure in respect of
services provided by Banks,
relaxed norms for security and collateral etc,.
165. Gold Card Scheme
A Gold Card under the Scheme may be issued to all
eligible exporters including those in the small and
medium sectors who satisfy the pre-requisite
conditions laid by individual Banks.
166. Marketing Development Assistance
(MDA) Scheme
This scheme aims to promote export activities abroad,
assist export promotion councils to develop their
products and other initiatives to carry out marketing
activities abroad.
169. Roadmap
FEMA regulations relating to import
Buyers credit and suppliers credit
External Commercial borrowings
170. Imports – Regulatory checklist
DGFT – Foreign Trade Policy
Normal banking practices & UCP guidelines for
letters of credit
Compliance with IT Act where applicable
Compliance with R&D cess Act for import of
drawings and designs
Compliance with KYC norms
A-I form to be used for imports in excess of USD
500
EC Copy of Import Licenses for items in negative
list
171. FEMA Obligations
Forex can be used either for the purpose furnished by buyer or for any purpose for
which forex can be purchased- Sec 10 (6) of FEMA
AD can open LCs, make remittances etc for all permissible imports
Evidence of Import of goods to be obtained when Fx used for import
Modes of payment – remittances from India or credit to account of overseas
supplier in India
Remittances against Imports to be normally completed within 180 days from date
of shipment
Import of books to be allowed - no time restriction provided interest if any is as
applicable under Trade credit
Delegation to ADs to allow delayed remittances – financial difficulties, disputes
etc.
Interest on delayed import bills, usance bills, overdue interest upto three years in
terms of interest applicable to trade credits
172. Definition
Deferred payment arrangements, including suppliers and
buyers credit, providing for payments beyond a period of six
months from date of shipment up to a period of less than
three years, are treated as trade credits for which the
procedural guidelines laid down in the Master Circular for
External Commercial Borrowings and Trade Credits may be
followed. (Imports)
Trade Credits (TC) refer to credits extended for imports
directly by the overseas supplier, bank and financial
institution for maturity of less than three years. (ECBs and
TCs)
173. Advance Remittances
AD can allow upto USD 100,000 without guarantee
Discretion to allow upto USD 5 million without guarantee –
track record and own guidelines
For PSUs waiving guarantee beyond USD 100,000 requires
approval from MoF.
Advance remittance for diamond imports from specified
mining companies without limits subject to:
Recognition of importer by Gem and Jewellery EPC
Good track record of realisation and requirement in sale contract
No conflict diamonds
KYC, due diligence, commercial judgment of AD
Half yearly statement to RBI of advance remittances without
guarantee in excess of USD 5,000,000
174. Adv Remittances – Aircraft
AD can permit remittances upto USD 50 mio
for import of aircraft waiving requirement of
guarantee subject to:
KYC, due diligence, commercial judgment
Payment in terms of sale contract and direct to
manufacturer
Documentary evidence of import within specified
time - undertaking
Approval of DGCA
Ensure refund in case of non import
175. Service imports
Advance Remittance: No ceiling for amounts with
guarantee
May permit USD 500,000 without guarantee in case
of service contracts
Obligation to ensure fulfillment of contract
BPOs may be allowed to make remittances towards
the cost of equipment for their overseas sites for
setting up International Call Centres subject to:
Approval of Ministry of IT for setting up ICC
Remittance in terms of contract direct to overseas supplier
Evidence of import – certificate from CEO/ Auditor
176. Trade Credit
Suppliers credit and buyers credit upto 3 years
SC and BC 3 years and above – ECB
AD can approve TC upto 20 million per import
For non CG for maturity upto one year from date of shipment
For CG for maturity upto 3 years from date of shipment
No rollover and extension beyond the periods
No TCs beyond USD 20 million without prior approval of RBI
All in cost ceiling currently at LIBOR + 200 bps ( all
inclusive
ADs can issue guarantees/ LoCs etc for facilitating
TCs
Reporting to RBI
177. Direct receipt of import bills
Should be received through AD normally
Exceptions
Value of import does not exceed USD 300,000
Bills received by WOS of foreign cos.
Bills received by Status holders, 100% EOUs, SEZ units, PSU
All limited companies
Specified sector – Diamonds upto USD 300,000 with
documentary evidence of import
Direct receipt by AD from overseas supplier – AD satisfied of
financial standing etc., report on overseas supplier for imports
exceeding USD 300,000
178. Documentary Evidence of import
Physical imports in excess of USD 100,000
EC copy of BE for HC, EC copy for Warehousing in case of EOUs
Customs assessment certificate or postal appraisal certificate for postal
imports
If remittance on DA basis insist on D/E of import before remittance
Alternate documents
Certificate from CEO/auditor of company if amount less than USD
1,000,000
Listed company with net worth over Rs 100 cr/ PSU etc
Academic bodies like IIT/ IISc etc
Non physical imports – CA certificate
Issue of acknowledgement, instructions for preservation,
reporting in BEF etc.
179. Import of gold, precious metals etc
Direct import of gold allowed by EOUs, SEZ
units etc and nominated agencies
Total trade credit not to exceed 90 days from
date of shipment
AD to ensure KYC/AML
Credentials of supplier to be checked
Large unusual transactions to be watched
Import by nominated agencies etc. on
consignment basis or unfixed price basis
180. Import Factoring
Financial service that enables purchase of goods
from overseas supplier on short term credit of upto
180 days on open account terms without the need for
opening a letter of credit (LC).
Import factoring works on a two factor platform
Supplier approaches Export factor in his country to
request a credit line on India buyer
Export factor applies to import factor for evaluation of
credit risk, collection and due date payment
Both factors are generally members of FCI
181. Merchanting Trade
Goods involved permitted to be imported
All regulation for export and import except
GR and BE to be followed
Entire transaction to be completed within 6
months
Forex outlay not to exceed 3 months
Payment received on export leg in time
No trade credit can be availed at any stage
182. External Commercial borrowings
(ECB)
Commercial loans in the form of bank loans, buyers’
credit, suppliers’ credit, securitized instruments
availed of from non-resident lenders with minimum
average maturity of 3 years
FCCBs, FCEBs need to follow ECB guidelines
Preference shares, debentures and such capital
market instruments with debt characteristics need to
adhere to ECB Guidelines to the extent applicable
Companies in real sector – industrial and
infrastructure and specified service sectors can raise
ECB under Automatic route
183. ECB – Automatic route
Eligible borrowers :
Corporates - includes software, hotels and hospitals, but excludes
financial intermediaries. Individuals and trusts not eligible
Units in SEZ for own use only
NGOs in microfinance with a borrowing relationship with AD and fit
and proper status certified by AD
IFCs upto 50% of owned funds
Recognised lenders:
Internationally recognised sources like international banks, capital
markets, multilateral financial institutions, export credit agencies,
suppliers of equipment, foreign equity holders (subject to conditions)
Overseas organisations lending to NGOs in MF and individual
lenders require due diligence certificate from their overseas bank
184. ECB – Infrastructure Finance cos
NBFCs engaged in financing infrastructure and
classified as such by RBI vide DNBS.PD. CC No.
168 / 03.02.089 /2009-10 dated Feb 12, 2010 can
avail ECB under Automatic route upto 50% of
owned funds
Compliance with terms of circular dated Feb 12, 2010
Hedging of risk in full
Total outstanding ECBs not to exceed 50% of owned
funds
185. Maturity & Amount
Corporates other than in service sector USD 500 mio per
financial year
Corporates in hotels, software and hospitals USD 100 mio per
financial year
NGOs in Microfinance USD 5 mio per fin year
Of the eligible amount a maximum amount of USD 20 mio
can have average maturity of 3 years to 5 years
All ECBs above USD 20 mio must have average maturity of
5 years and above
All in cost ceilings as prescribed from time to time
186. End use
Investment [such as import of capital goods, new projects, modernization /expansion of
existing production units in the real sector - industrial sector including small and
medium enterprises (SME), infrastructure sector and specific service sectors, namely
hotel, hospital and software - in India.
Overseas investments in JVs WOS
Acquisition of shares in disinvestment of PSUs
Payment for 3G license etc.
For onlending to SHGs etc by NGOs in MF
Premature buyback of FCCBs as and when permitted
DON’Ts
No onlending, investment in capital market or acquisition of company – part of whole –
permitted out of ECB funds
No investment in real estate
No working capital, refinancing Rupee loans, general corporate purpose etc permitted
No issue of guarantees by AD
187. ECBs – security
Choice of security left to borrower
AD delegated powers to convey no objection
to borrowers under FEMA for creation of
charge on immovable assets, financial
securities, personal guarantees etc. subject to:
ECB compliant with Guidelines
Requirement of the security in the loan agreement
Loan registered with RBI
NOC to include conditions specified by RBI
188. ECBs – Misc provisions
Parking of ECB proceeds – abroad in specified assets or
banks or remitted to India to be retained as Rupee deposit till
actual requirement
Prepayment can be permitted by AD upto USD 500 mio
subject to compliance of min average maturity
Refinancing of existing ECB with another provided lower all
in cost and maintenance of original maturity
Buyback of FCCBs
Servicing ECB
Note to obtain LRN before drawdown
189. ECBs – Approval route
Eligible borrowers:
Financial institutions dealing exclusively in infrastructure or
exports
Banks and FIs participating in steel and textile restructuring
package approved by GOI
NBFCs in infrastructure beyond Auto Route
FCCBs by HFCs
SPVs set up for infrastructure financing and notified
Multi state co-op societies in mfg
SEZ developers for infrastructure as defined
Corporates who have violated norms or are under ED
investigation etc
Cases falling outside purview of Auto Route
190. ECBs- Approval Route
Recognised lender – on similar lines as Auto Route
Maturity and Amount – Amounts in excess of USD 500 mio
in a financial year can be considered under Approval Route.
Maturity restrictions apply
Cost – same as auto route
Guarantee for ECB for SME only considered under Approval
Route
Prepayment in excess of USD 500 mio
Buyback of FCCBs outside Auto route
Cases considered by Empowered Committee
Reporting and dissemination of information – form 83, ECB
and ECB 2
191. Structured Obligations
Rupee denominated structured obligations can be
credit enhanced by international banks, FIs, JV
partners etc. under approval route
Credit enhancement permissible for domestic debt
raised in the capital markets by Indian companies
engaged exclusively in infrastructure and
infrastructure financing companies classified as such
by RBI:
Credit enhancement by multilateral regional financial institutions
and Govt owned FIs
Minimum average maturity of 7 years
Guarantee fee / all in cost – 2%
193. The theories of Adam Smith, Ricardo and
Hecksher-Ohlin make strong cases for
unrestricted trade within their views
In contrast, the Mercantilism theory, as well
as to a certain extent the New Trade theory
can be inferred that government support and
intervention is required to promote exports
through subsidies and to limit imports
through tariff and quotas
194. Mercantilism theory-generally silent on
pattern of international trade
Other theories ,taken together offer an
explanation to various patterns of
international trade
195. Taken together, except mercantilism, other
theories of comparative advantage,
Hecksher-Ohlin, New trade theory and
Porters theory/diamond of national
comparative advantage explain the
important factors affecting or encouraging
international trade
196. Comparative advantage- productivity
differences are important
H-O explains that factor endownments are
important
New trade theory explains that increasing
returns to specialization and first mover
advantage have their importance
Porter=all above factors are important and
that they affect the four components of the
national diamond
197. Countries best interest served by running a
surplus balance of trade
Trade is a zero-sum game
One country gains therefore the other loses
198. Countries differ in their ability to produce
goods efficiently
Country should specialize in producing goods
where it has an absolute advantage
And
Import goods in areas where other countries
have absolute advantage
199. A. Makes a case for a country to specialize in
producing those goods which it can produce
most efficiently
B. Buy or import goods they produce less
efficiently from other countries
Both A and B even though it means buying
goods from other countries that it could
produce more efficiently than others
200. Suggests that unrestricted free trade brings
about increased world production i.e. that a
trade is positive sum game
Comparative advantage also advocates that
opening countries to free trade stimulates
economic growth which creates dynamic
gains from trade
The empirical evidence appears consistent
with this conclusion