Structured trade finance

Author: Partho Chakraborty

STRUCTURED TRADE FINANCE
Definition

Structured trade and commodity finance is defined as cross-border trade finance in
emerging markets where the intention is to get repaid by the liquidation of a flow of
commodities. It is an increasingly important area of emerging-markets lending, but its
potential pitfalls have given it a poor image among parts of the financial community.
However, compared to any other form of lending or investing in the emerging
markets, structured trade and commodity deals have demonstrated an enviable track
record of "survivability" under extreme testing.
By John MacNamara in his book Structured trade and commodity finance: What can go wrong and
how to avoid it

Case Study

EXPORT & LOCAL BILL DISCOUNTING LINKED TO BACK-TO-BACK L/C

Players

Simrone Pharmaceuticals Industries Ltd., Mumbai, India
Simrone’s Overseas Buyers (4 No – 3 in Africa & 1 in Europe)
Simrone’s Local Suppliers (10 No)
ICICI Bank, Mumbai, India

Role

Simrone: They are India based manufacturers and exporters of Pharmaceuticals
Simrone’s Overseas Buyers: They are Africa and Europe based buyers
Simrone’s Local Suppliers: They are India based manufacturers of goods on
behalf of Simrone. Simrone out sources the production to them
ICICI Bank: They are India based banker of Simrone, arranging the bills of Simrone
to be negotiated and will open the Back-to-Back L/C in US$ for Simrone.

Commodity: Pharmaceutical Products

Total Amount: US$ 527,442 (Export L/Cs)
Rs. 89,46,810 (Domestic Sales)

This current order position is for 90 days and will be repeated each quarter.

1


Details of Export L/C and Back-to-Back L/C

S. Name of Country L/C L/C Value Value Per Tenor Back to Tenor of
No. Overseas Buyer Opening Confirming in US$ Shipment of First Back L/C Back to
Bank Bank in US$ L/C in Value Back L/C
Days (US$) in Days
1. Super Uganda N.A. N.A. 202,600 67,533 + N.A. 47,273 + 40
Pharmaceuticals 67,533 + 47,273 +
Ltd. 67,534 47,274
2. Noble Azania Tanzania Barclays Barclays 31,557 31,557 90 22,090 120
Ltd. Bank, Bank, UK
Tanzania
3. Karnag Zambia First Alliance Citibank, 73,285 36,643 + Sight 25,650 + 50
International (Z) Bank, New York 36,642 25,650
Ltd. Zambia
4. Ayusa Yugoslavia Central Natwest 220,000 180,000 + Sight 126,000 + 50
International European Bank, UK 40,000 28,000
Bank,
Yugoslavia
TOTAL 527,442 527,442 369,210

Back-to-Back L/C Amount:

1. For Export L/Cs: US$ 369,210 (70% of US$ 527,442) in equivalent Rupees
2. For Domestic Sales: Rs. 62,62,767 (70% of Rs. 89,46,810=00)

Tenor:

1. The first L/C will be at Sight from Karnag, Zambia and Ayusa, Yugoslavia. The
L/C from Noble, Tanzania will be for 90 days usance. There will be no L/C
from Super, Uganda. Super will release the payment on faxing him the Bill of
Lading.
2. The Corresponding Back-to-Back L/C will be for 50 days usance for Sight
L/C’s and 120 Days usance for 90 Days L/C. For Super, Uganda the back-to-
back L/C will be for 40 days usance.
3. The Rupees transaction will be without L/C. It would be a Purchase Order
from German Remedies with a Credit Period of 30 days to make payment
after receipt of goods
4. The Corresponding Back to Back L/C will be for 75 days

Time Frame

1. 15 Days for Domestic Supplier to Manufacture & Supply the Goods
2. 21Days to Export the Goods

Security:
1. Promoter’s Personal Guarantee
2. PDC’s
3. Asset Collateral (Land, Building)
4. Cash Margin: 20%

2


Requirement:

Simrone has 4 overseas buyers located in Africa and Europe. They have 10 local
suppliers of raw materials. Their overseas buyers on a continous basis place the
orders against which Simrone sources the materials on a back-to-back basis.
Simrone needs a limit to be set in place as the Export L/C’s varies per
transaction. Thus the back-to-back L/C’s cannot be accurately quantified. But
by and large it will be as mentioned above. A Revolving Limit can be
considered with a Cap.

Transaction:
Export L/C’s
This transaction has 2 legs. The first leg is to open a Back-to-Back L/C and the
second leg is to Discount the Bills backed by the Export L/C.
1. Simrone and Overseas Buyer enter into a contract where Simrone will sell the
Pharmaceutical goods and Overseas Buyer will buy the same.
2. Simrone and Domestic Suppliers enter into a contract where Simrone will
outsource the production to the Domestic Manufacturers.
3. The Overseas Buyer sends a Purchase Order to Simrone
4. Against the first Purchase Order, Simrone sends a Purchase Order to
Domestic Suppliers

5. The Overseas Buyers open a L/C favouring Simrone.
6. Against this L/C ICICI Bank will open a Back-to-Back L/C on the Domestic
Suppliers.
7. The Domestic Suppliers send the goods to Simrone.
8. The Domestic Suppliers then present the documents to their bank for
payment.
9. The Domestic Suppliers bank pays the Domestic Supplier and sends
documents to ICICI Bank to be forwarded to Simrone for acceptance.
10. Simrone accepts the documents and takes delivery of the goods.
11. Simrone exports the goods and sends documents to ICICI Bank for payment
against the first L/C.
12. ICICI Bank discounts the L/C backed bills and pays Simrone.
13. ICICI Bank sends the documents to Overseas Buyer through their bankers for
acceptance.
14. The Overseas Buyer accepts the documents and takes delivery of the goods
15. On due date the Overseas Banks remits the funds to ICICI Bank
16. Transaction Ends

Note:

1. The tenors will vary as for Sight L/C’s it will be less and for Usance L/C’s it will
be more.
2. The transaction for Super Pharmaceuticals Ltd., Uganda will be as follows

3


Super Pharmaceuticals Ltd., Uganda

1. Simrone and Super enter into a contract where Simrone will sell the
Pharmaceutical goods and Super will buy the same.
3. Super sends a Purchase Order to Simrone.
4. Against this Purchase Order ICICI Bank will open a Back-to-Back L/C on the
Domestic Suppliers.
payment.
9. Simrone exports the goods.
10. Simrone faxes the Bill of Lading to Super for Payment and sends documents
to ICICI Bank for onward dispatch to Super.
11. Super credits the account of Simrone with ICICI Bank.
12. ICICI Bank sends the documents to Super through their bankers for
acceptance.
13. The Overseas Buyer accepts the documents and takes delivery of the goods

Domestic Transaction

German Remedies Ltd., Mumbai

1. Simrone and German enter into a contract where Simrone will sell the
Pharmaceutical goods and German will buy the same.
3. German sends a Purchase Order to Simrone.
4. Against this Purchase Order ICICI Bank will open a Back-to-Back L/C on the
Domestic Suppliers.
payment.
9. Simrone sends the goods to German and sends documents to ICICI Bank for
payment against the Purchase Order.
10. ICICI Bank sends the documents to German through their bankers for
acceptance.
11. German accepts the documents and takes delivery of the goods
12. ICICI Bank pays Simrone a further 15% of Invoice Value.
13. On due date the German remits the funds to ICICI Bank

4


14. ICICI Bank deducts its charges and credits the balance to the account of
Simrone

Indicative Cost:

EXPORT TRANSACTION
There are various costs here as some L/Cs are Back-to-Back L/Cs against Sight
L/Cs and some are Back-to-Back L/Cs against Usance L/Cs. Also there is a case of
Back-to-Back L/C against Overseas Factoring.

Receipts: ICICI Bank - 1st Leg against Sight L/Cs

S.No. Particulars Amount (Rs)

1. Export L/C Advisory Fees – 3 L/Cs (Flat Fee) 4,000=00
2. Back to Back L/C opening Charges for
a) Commitment Charges - 0.25% per quarter 24,122=75
b) Usance Charges - 0.10% usance per month 19,298=20
c) Commission – 0.15% (Flat Fee) 14,473=65

TOTAL 61,894=60

Receipts: ICICI Bank - 1st Leg against Usance L/Cs


1. Export L/C Advisory Fees – 1 L/Cs (Flat Fee) 1,000=00

TOTAL 11,901=42

Receipts: ICICI Bank - 1st Leg, where there are no L/Cs



TOTAL 39,993=24

Total Receipts: ICICI Bank – 1st Leg: Rs. 1,13,789=26

5


Receipts: Simrone - 2nd Leg


1. Reimbursement of Export L/C Value
a) Sight L/Cs of Karnag (Less 9.5% Per Annum for 25 days) 34,43,911=52
b) Sight L/Cs of Ayusa (Less 9.5% Per Annum for 25 days) 1,02,71,784=72
c) Usance L/Cs of Noble (Less 9.5% Per Annum for 90 days) 14,47,953=50
d) Payments by Super 95,22,200=00
TOTAL 2,46,85,849=74

Payments: Simrone - 2nd Leg


1. Payments to ICICI – 1st Leg 1,13,789=26
2. Management Fee @ 0.5% Flat on US$ 369,210 86,764=35
3. Reimbursement of Back to Back L/C 1,73,52,870=00
TOTAL 1,75,53,423=61

Net Earnings to Simrone: Rs. 71,32,426=13

Receipts: ICICI Bank - 2nd Leg

1. Spread on Sight L/Cs (1% for 25 days) 9,572=50
2. Spread on Usance L/C (1% for 90 days) 3,707=95
3. Management Fee @ 0.5% Flat on US$ 369,210 86,764=35
TOTAL 1,00,044=80

Total Receipts: ICICI Bank: Rs. 2,13,834=06

DOMESTIC TRANSACTION

Receipts: ICICI Bank


TOTAL 33,839=37

Receipts: Simrone - 2nd Leg

1. Reimbursement by German (Less 11% Per Annum for 75 days) 87,41,778=94

TOTAL 87,41,778=94

6


Payments: Simrone - 2nd Leg

1. Payments to ICICI – 1st Leg 33,839=37
2. Management Fee @ 0.5% Flat on Rs. 62,62,767 31,313=84
3. Reimbursement of Back to Back L/C 62,62,767=00
TOTAL 63,27,920=21

Net Earnings to Simrone: Rs. 24,13,858=73

Receipts: ICICI Bank - 2nd Leg

1. Spread on PO of German (2% for 75 days) 37,278=38
2. Management Fee @ 0.5% Flat on Rs. 62,62,767 31,313=84
TOTAL 68,592=22

Total Receipts: ICICI Bank: Rs. 1,02,431=59

Flowchart:

Export Transactions under Sight and Usance L/C’s

27

SIMRONE’S 26 OVERSEAS BUYER’S
OVERSEAS BUYERS BANK
7
5

1 3 8 28 6 25 29

30
22 9
SIMRONE 11 ICICI BANK, MUMBAI,
PHARMACUETICALS 18 INDIA
INDUSTRIES LTD.,
MUMBAI, INDIA 19

2 4 12 23 24
20 10 17 21 31

14
13
SIMRONE’S DOMESTIC
15
DOMESTIC SUPPLIER’S BANK
16
SUPPLIERS
7


Note:

1. The Goods from the Domestic Suppliers in India are sent by Road
2. The Goods exported to Overseas Buyer are sent by Air/Ship

Table.
STEP DAY EVENT
NO. NO.
1. 1 Contract Between Simrone and Overseas Buyer
2. 2 Contract between Simrone and Domestic Supplier
3. 3 Overseas Buyer sends a Purchase order to Simrone
4. 4 Simrone sends a Purchase Order to Local Supplier
5. 6 Overseas Buyer requests their bank to open a L/C favouring Simrone
6. 6 Buyer’s Bank opens L/C favouring Simrone and sends it to ICICI Bank
7. 6 Overseas Buyer’s Bank gives a copy of the L/C to Buyer
8. 6 Overseas Buyer faxes L/C copy to Simrone
9. 7 ICICI Bank notifies Simrone of receipt of L/C
10. 7 ICICI Bank opens a Back to Back L/C favouring Domestic Supplier and sends it to
their Banker
11. 7 ICICI Bank gives a copy of the L/C to Simrone
12. 7 Simrone Faxes the L/C copy to Domestic Supplier
13. 8 Domestic Supplier’s Banks notifies Domestic Supplier of the receipt of L/C
14. 23 Domestic Supplier sends the goods to Simrone by Road
15. 24 Domestic Supplier presents documents to his bank for payment
16. 25 Domestic Supplier’s Bank pays Domestic Supplier
17. 25 Domestic Supplier’s Bank sends the documents to ICICI Bank for acceptance by
Simrone
18. 27 ICICI Bank receives documents and notifies Simrone for acceptance
19. 27 Simrone accepts Bill of Exchange at the counters of ICICI Bank and takes the other
documents to clear his consignment
20. 27 Simrone takes custody of goods
21. 27 ICICI Bank notifies Domestic Supplier’s Bank on acceptance of Bill of Exchange by
Simrone
22. 48 After Processing and Packaging, Simrone exports the exports to Overseas Buyer
23. 49 Simrone presents the documents to ICICI Bank for payment
24. 50 ICICI Bank purchases/negotiates the documents and pays Simrone, less their
25. 50 charges and costs
ICICI Bank sends the documents to Buyer’s Bank for acceptance by Overseas Buyer
26. 53 Overseas Bank receives documents and notifies Buyer for acceptance
27. 53 Overseas Buyer accepts the Bill of Exchange at the counters of Overseas Bank and
takes the other documents to clear his consignment
28. 53 Overseas Buyer takes delivery of goods
29. 53 Overseas Buyer’s Bank notifies ICICI Bank that documents have been accepted by
Overseas Buyer
30. 73/128 On due date Overseas Buyer’s Bank remits funds to ICICI Bank
31. 75/145 ICICI Bank remits funds to Domestic Supplier’s Bank
32. 75/145 TRANSACTION ENDS

Note:
1. Under Step No. 30 and 31, the days mentioned are 73/128 and 75/145, where
73 and 75 are for Export Sight L/C’s and 128 and 145 are under Export
Usance L/C

8


2. The Computation of Payments under Step 30 and 31 are calculated from The
B/L Date

Flowchart:

Export Transactions where there are NO L/C’s

28
SUPER STANDARD
PHARMACUETICALS 27 CHARTERED BANK,
LTD., KAMPALA, 24 KAMPALA, UGANDA
UGANDA 22

1 3 29 21 23

25
18 19 20
INDUSTRIES LTD.,
MUMBAI, INDIA 5

2 4 8 15 26
16 6 13 17 30

10 9
11
SUPPLIERS
12

Note:

2. The Goods exported to Super Pharmaceuticals, Uganda are sent by Air/Ship

9


Table.
STEP DAY EVENT
NO. NO.
1. 1 Contract Between Simrone and Super
3. 3 Super sends a Purchase order to Simrone
5. 4 Simrone requests ICICI Bank to open a L/C favouring Domestic Supplier
their Banker
Simrone
Simrone
18. 45 After Processing and Packaging, Simrone exports the exports to Super
19. 45 Simrone faxes the Bill of Lading to Super
20. 46 Simrone presents the documents to ICICI Bank for forwarding it to Super
21. 46 ICICI Bank sends the documents to Super through their banker
22. 46 Super requests their banker to pay Simrone through ICICI Bank
23. 46 Super’s Banker remits the funds to ICICI Bank favouring Simrone
24. 46 Super’s Bankers gives a copy of remittance to Super
25. 46 Super Faxes the copy of Remittance to Simrone
26. 48 ICICI Bank receives the remittance sent by Super’s Banker and credits the account of
Simrone less their charges and costs
27. 49 Super’s Bankers notifies Super of receipt of Documents
28. 49 Super takes the documents from their bankers
29. 49 Super takes delivery of goods
30. 60 ICICI Bank remits funds to Domestic Supplier’s Bank
31. 60 TRANSACTION ENDS

Note:

Super Pharmaceuticals Ltd. Bankers are Standard Chartered Bank, Kampala,
Uganda

10


Flowchart:

Domestic Transactions where there are NO L/C’s

23
GERMAN REMEDIES GERMAN REMEDIES’
LTD., MUMBAI BANKERS
22
26

1 3 24 21 25 27

25
18 19 20
INDUSTRIES LTD.,
MUMBAI 5

2 4 8 15 20
16 6 13 17 28

10 9
11
SUPPLIERS
12

Note:

2. The Goods will be sent to German Remedies by Simrone by Road

11


Table.
STEP DAY EVENT
NO. NO.
1. 1 Contract Between Simrone and German
3. 3 German sends a Purchase order to Simrone
5. 4 Simrone requests ICICI Bank to open a L/C favouring Domestic Supplier
their Banker
Simrone
Simrone
18. 45 After Processing and Packaging, Simrone sends the goods to German
19. 46 Simrone presents the documents to ICICI Bank for payment
20. 46 ICICI Bank negotiates the documents and pays Simron, less their charges and costs
21. 46 ICICI Bank sends the documents to German’s Bank for acceptance by German
22. 47 German’s Bank receives documents and notifies German for acceptance
23. 47 German accepts the Bill of Exchange at the counters of their Bank and takes the
other documents to clear his consignment
24. 47 German takes delivery of goods
25. 47 German’s Bank notifies ICICI Bank that documents have been accepted by German
26. 75 On due date German requests their Bank to remit funds to ICICI Bank favouring
Simrone
27. 75 German’s Bank remits funds to ICICI Bank
28. 95 ICICI Bank remits funds to Domestic Supplier’s Bank
29. 95 TRANSACTION ENDS

Note:

German Remedies has a lot of bankers. The banker through whom the
documents to be routed would be informed subsequently

12


Note: Names, if any are Suggestive and are strictly not to be taken on Face
Value. It is only to give a feel and touch of how transactions can be
structured and names are indicative

This article is meant for education purposes only and it is not be
reproduced for any commercial purpose by print or electronic medium
whatsoever

This case study is written by:

Partho H. Chakraborty
A - 305, DSR Spring Beauty Apts., 124/1, ITPL Main Road, Brookefields, Kundalahalli, Bangalore -
560 037, India
Tel: +91 80 420 50293, Cell: +91 99863 22504
email: parthohc@airtelmail.in; parthohc@rediffmail.com
Skype: parthohc01

13

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