Assignment Code: AED-01 / TMA / 2021 – 22

Course Code: AED-01

Assignment Name: Export Procedures & Documentation

Year: 2021 – 2022

Verification Status: Verified by Professor

Maximum Marks: 100

Attempt all the questions.

Q.1 Distinguish between Pre-Shipment Finance and Post-Shipment Finance? Explain various methods of post-Shipment finance available to Indian Exporters. (20)

Ans) The difference between Pre-shipment and Post-shipment is that pre-shipment offers the assistance of finance to the exporter before the goods are shipped while post-shipment is the financial assistance offered once the goods are shipped. The post-shipment patches the financial risk factor during the ‘in-between’ period of shipping and proceeds realization.

Main Differences Between Pre-Shipment and Post-Shipment Finance

1. The main difference between Pre-shipment and Post-shipment finance is the stage when the financial Pre-shipment happens before even the goods are manufactured while post-shipment is done immediately after the goods are exported.

2. Pre-shipment and Post-shipment finance are offered to the sellers to meet their financial demands during the trading process. The former helps to meet the goods manufacturing costs while the latter helps in after shipment expenses.

3. The documents required to avail pre-shipment finance is either an export order or a letter of credit while to avail the post-shipment the banks require the shipping evidence.

4. The rate of interest also differs between the two. 7.5% is the rate of interest in the case of pre-shipment finance while its counterpart is charged up to 8.65%.

5. The repayment of pre-shipment finance depends on the contract while the post-shipment repayment depends on the exports are realized by the buyer.

The various types of post-shipment finance are:

1. Negotiation of Export Documents under Letters of Credit

If the exports are covered by a letter of credit, the banks will negotiate the export bills as long as they are drafted correctly. When presenting documents to the bank for L/C negotiation, they should be carefully examined in light of the loan terms and circumstances. All documents should precisely follow the L/C terms. Notably, the L/C issuing bank will only honour its commitment if the beneficiary delivers the required documentation. Even minor deviations from the L/specifications C's can cause the issuing bank to refuse refund of the negotiating bank's payment.

2. Purchase / Discount of Foreign Bills

Exporters that meet the bank's Bill Purchase/Discounting restrictions are generally provided purchase or discount on export bills. Absent a letter of credit from the originating bank, the financing bank must rely on the overseas buyer's creditworthiness. Documents against Payment (DP) are only released upon payment. DIA bills are delivered to overseas importers following acceptance of the ability to pay. Exporter-friendly ECGC guidelines for banks are essential due to non-payment risk. Individual buyers have constraints and payment periods defined by the policy, and the financing bank must enforce them. Bank post-shipment finance is also guaranteed by the ECGC. Banks may check overseas buyers' credit before buying export bills.

3. Advance against Bills Sent on Collection

Post-shipment financing is available for the following situations:

1. when the accommodation available under the foreign bills purchase limit is exhausted

2. when some export bills drawn under L/C have discrepancies

3. where it is customary practice in the particular line of trade and in the case of exports to countries where there are problems of externalisation.

In the foregoing scenario, the bank may send the bill for collection and finance the exporter from the total bill amount. The advance will be paid back from the export proceeds of the export bill. Exporters can use the forward exchange facility to avoid exchange risk due to the new procedures for outstanding export invoices.

4. Advance against Goods Sent on Consignment

Consignment exports are sometimes made. Payment is due upon sale of items. Goods are sold "at the risk of the exporter." Banks may finance such transactions if the exporter meets certain criteria. The bank's overseas correspondent is to deliver the documents against Trust Receipt.

5. Advance against Export Incentives

Defeats to export pre-and post-shipment incentives are given. The majority of the advance is given post-shipment. The advance is given to an exporter in exchange for or as collateral for duty drawback incentives. Banks grant advances according to their own rules. The banks usually get a power of attorney from the exporter. It is transmitted to the relevant government department (foreign trade, customs, etc.). These loans are not given. It is only given if the same bank extends all other forms of export finance to the exporter.

6. Advance against Undrawn Balances

Some export businesses may not draught bills for the full invoice value of the products. Due to differences in weight quality, etc., a small portion of the bills remain unpaid. Undrawn balances are used to fund advances. It must be done within 90 days. If the undrawn balance is within normal range, advances are permitted up to 5% of the total export value. The exporters must promise to return the remaining revenues within 6 months of shipping.

7. Advance against Retention Money

Banks advance retention money, which is due one year after shipping. The advances are for 90 days. Advances of more than one year are classified as deferred payment advances, eligible for lower interest rates.

8. Post-shipment Export Credit Guarantee and Export Finance Guarantee

This guarantee applies to past-shipment loans provided by banks to exporters through the purchase, negotiation, or discount of export bills. The Export Finance Guarantee covers post-shipment credits given by banks to exporters against export incentives receivable in the form of duty drawback, etc.

9. Post-shipment Credit in Foreign Currency

Exporters can obtain post-shipment export credit in rupees or foreign currencies. The credit is issued under the Export Bills Rediscounting Scheme (EBR) at LIBOR linked rates. The scheme covers export bills with a validity period of up to 180 days from the date of shipment. Exporters can get pre-shipment and post-shipment credit in rupees or in foreign currencies. If pre-shipment credit is in foreign currency, post-shipment credit must be in EBR. Because the pre-shipment credit must be liquidated in foreign currency.

 Q.2 Distinguish between: (10, 10)

Q2. (a) Telegraphic Transfer Rate and Bill Rate

Ans) Telegraphic Transfer rate may be either TT buying Rate or TT selling Rate. 

T.T. Buying Rate: This rate is applied for purchase of foreign currency by banks where cover is already obtained by banks in India. This rate is applied for all clean remittances outside India. All foreign inward remittances which are made payable in India are converted by applying this rate.

For example, suppose Nisha gets from Citi Bank in New York a demand draft for $10,000 drawn on Citi Bank, New Delhi. The New York bank will credit the New Delhi Citi Bank's account with itself immediately.

TT buying Rate is calculated as :

TT Buying Rate = Base rate - Exchange Margin.

T.T. Selling Rate: This rate is applied for all clean remittances outside India. It is applied for

selling foreign currency to its customer by the bank such as for issuance of bank drafts, mail/

telegraphic transfers, etc. The rate is computed as:

TT Selling Rate = Base Rate + Exchange Margin.

Here, the base rate is the interbank selling rate. FEDAI has prescribed exchange margin rate for TT Selling Rate as between 0.125% and 0.150%.

Bill Rate

Bill rate may also be either bill buying rate or bill selling rate.

i) Bill Buying Rate: This rate is applied when a foreign bill is purchased. As you must be knowing that exporters draw bills of exchange on their foreign customers. They can sell these bills to an authorised dealer for immediate payment. The authorised dealer buys the bill and collects payment from importer. When the bill is purchased, the proceeds will be realised by the authorised dealer after the bill is presented to the drawee at the overseas centre. In case of sight bill the payment is made on presentation of the bill. In the case of usance bill, the proceeds will be realised on the due date of the bill which includes the transit period and the usance period of the bill. The bank or the authorised dealer, therefore, makes an allowance for the loss of interest for the period of transit, the usance of the bill and the days of grace, if any. The authorised dealer loads the forward margin for an appropriate period. The period for which forward margin is to be loaded depends upon whether the foreign currency is at a forward premium or discount. The authorised dealers extract the rate which is most favourable for them. The rate IS computed as: Bill Buying Rate = The base rate - Forward discount for transit plus usance period rounded off to the higher month - Exchange Margin.

ii) Bill Selling Rate: This rate is applied for all foreign remittances outside India as proceeds of import bills payable in India. In this case the importer requests the bank to make payment to a foreign supplier against a bill drawn on the importer. The bank handles documents related to the transaction. For this purpose, the bank loads margin over the IT selling rate.

It is computed as:

Bill Selling Rate = TT Selling Rate + Exchange Margin

FEDAI has prescribed exchange margin rate as between 0.175% to 0.200%.

Q2. (b) Open Cover and Open Policy

Ans) Open Cover

Open Cover is an insurance arrangement designed specifically to the need of those firm which have substantial import/export turnover and frequent transactions. Such firms are spared the inconvenience of negotiating insurance contracts every time the transaction is to be made.

Main features of an Open Cover arrangement are as follows:

1. Unlike an insurance policy Open Cover is not an enforceable contract. Instead, it is an agreement under which the insurance company would honour and accept declarations of

2. shipment of cargoes and issue stamped specific certificates of insurance against each

3. Under an Open Cover arrangement, agreement between the insured and the insurer is reached about the subject matter (e.g., goods) insured, packing conditions, voyages, risks, covered, rates and other conditions of the cover. The insured can obtain insurance cover within these agreed conditions.

4. No premium is charged when an Open Cover is issued, but the insurance companies usually require the insured to furnish either a bank guarantee or cash deposit towards payment of premium against each declaration, as declarations are made.

5. The validity period of an Open Cover is twelve months.

6. It is customary to make an Open Cover agreement subject to two limitation clauses – Par Bottom and Per Place clauses. The effect of these clauses is to limit the liability of the

7. insurance company to an agreed amount. Thus, if the loss in an accident is more than this amount, the loss will be partly recoverable up to the agreed amount. For example, in an Open Cover, if the limitation clause was for Rs. 10 lakhs and the loss were Rs. 20 lakhs, the insurance company will pay only Rs. 10 lakhs. voyages other than from the USA, the notice period for cancellation of war and Strikes risks is seven days and for shipments from to USA it is 48 hours.

8. When the loss takes place, claim will be awarded with reference to insurable value calculated on the basis of c.i.f. plus ten percent.

9. The duty of the insured is to declare each, and every shipment as soon as known.

10. Unintentional failure to report shipment will be condoned by the insurance company.

11. However, if the insured does not wilfully report shipments, the insurance company may hold the Open Cover null and void for all subsequent shipments.

Open Policy

Also known as Floating Policy, it has much in a common with the Open Cover. This policy

benefits clients with substantial turnover and a large number of despatches. Thus, it covers a

series of consignments with all stipulations of the Open Cover, except that :

1. Open Policy is an enforceable contract of insurance and is hence, duly stamped; and

2. Open Policy is for an agreed amount, against which a series of consignments may be

3. despatched and declared as a result of which the sum insured will gradually diminish by

4. the amount of each declaration until it is finally exhausted.

5. Even though the Open Policy ceases on expiry of one year from the date of its issue, the

6. sum insured is of paramount importance. Therefore, the sum insured may exhaust prior

7. to the expiry of the policy.

8. Open Policy is subject to cancellation by either party after giving 15 days’ notice of

9. cancellation in writing.

Q.3 (a) Discuss the institutions providing technical and specialised services for promotion of export in India. (10)

Ans) Any country (including India) engaged in the task of export promotion, has to establish appropriate institutional infrastructure for strengthening export-marketing effort for the country as a whole. With this object in view, Government of India have established a number of specialised institutions for providing necessary services and assistance to individual corporate units from the export sector.

1. Indian Institute of Packaging

Packaging plays a crucial role in export marketing. The task has been rendered extremely complex and challenging because of the conflicting nature of expectations from the foreign buyers. Invariably, they insist on a very strong and sturdy package on the one hand to ensure the physical safety of the goods, and also at the same time insist on a package to be extremely easy to unpack. Good packing reduces the unpacking labour cost as well as saves time.

Hence, Government of India have established the Indian Institute of Packaging, for

rendering assistance, advice and guidance to help Indian exporters to effectively tackle the

challenges on the packaging front.

The Institute is primarily engaged in organising training programmes on packaging technology. It has been recognised as an agency for testing and evaluation of packages for hazardous cargo and authorisation for UN certification for exports. It is engaged in developing national standards of packaging and eco-friendly packages. It has been identified to act as the coordinating agency for introduction of Bar-Coding technology in the country with special emphasis on export of Indian goods.

2.  Export Inspection Council and Agencies

The export inspection agencies established by the Council, certify the quality and export worthy aspect of the manufactured and processed products exported from India. In this way, Government of India, indirectly, assure the foreign buyers, about the quality and export worthiness of the products, exported from India. This has been made a statutory requirement. Regular exporting units are also being declared as export-worthy units, subject to periodical inspection by the export-inspection agencies. In addition, these agencies also provide guidance and advice to individual export firms regarding technical standards and specifications required for servicing export markets world over.

Institutions established for strengthening marketing effort include Export Promotion Councils, Commodity Boards, Special Authorities and Industry Associations. These are the key institutions servicing export-effort at individual corporate level, product-wise. The primary function of these institutions is to provide the exporter with export-marketing guidance and advice. They provide complete information and details covering almost all the critical elements involved in export marketing effort at the individual corporate unit-level on a continuous basis.

In addition, separate institutions have also been established for providing technical and specialised services to the export-sector in India. These institutions provide necessary guidance, help and assistance to individual corporate units, especially in the field of packaging, quality-control, risk coverage, long-term credit, trade fairs and exhibitions, settlement of disputes, package-service, and market-information.

In order to oversee the national effort in export promotion, Government have also established Indian Institute of Foreign Trade (IIFT) at the apex level. The IIFT, besides providing export-marketing intelligence at the national level, also provides foreign-trade management education to business-executives, policymakers, and service institutions.

Q3. (b) Describe the institutional set-up for Government policy making and consultation for export promotion in India. (10)

Ans) Appropriate government policies are critical for export success. Given the growing importance of overseas commerce in economic development, a separate Ministry of Commerce has been established to promote India's interests globally. The Ministry of Commerce is responsible for all aspects relating to India's external commerce. The Ministry's principal tasks are to formulate foreign commercial strategy, negotiate trade agreements, and administer export-import policies. It has established a network of business sections in Indian embassies and high commissions around the world. For exporters' problems, it has established up an "Exporters Grievances Redressal Cell."

Board of Trade: The Government of India has set up a Board of Trade comprising representatives from Commerce and other major Ministries, Trade and Industry Associations, and Export Service Organizations. It is a nationwide platform for regular discussion between government and business. The Board of Trade's deliberations lead the Government's policy actions for corrective action.

Cabinet Committee on Exports: "With a view to ensure regular and effective monitoring of India's foreign trade performance and related policies, Cabinet Committee on Export has also been set up.

Empowered Committee of Secretaries: For speedier and quicker decision-making, an Empowered Committee of Secretaries has also been established to assist the Cabinet Committee on Exports.

Grievances Cell: A Grievance Cell has been established to handle and monitor grievances and suggestions. It is a cell for expediting legitimate issues. In each licencing office, a grievance committee led by the Director General of Foreign Trade and the Regional Licensing Authority head has been formed. Members of the Committee include FIEO, the Export Promotion Council Commodity Board, and other agencies and organisations. The grievances may be sent to the applicable Licensing Authority's Grievance Cell in the prescribed Export Promotion in India proforma.

Director General of Foreign Trade (DGFT): The DGFT is an essential Ministry of Commerce office that helps formulate India's Export-Import Policy. It has regional offices in practically every Indian state and union territory. Regional Licensing Authorities are these offices. The DGFT office has an Export Commissioner who coordinates all export promotion programmes. Also, Regional Licensing Offices operate as Export Facilitation Centers (E DGCI&S is tasked with compiling and publishing data on India's foreign trade.

Ministry of Textiles: The Ministry of Textiles is responsible for textile policy formation, development, regulation, and export promotion. In addition, it has distinct Export Promotion Councils and Commodity Boards. The advisory bodies were set up to help the government formulate overall growth plans in the sector. It also plans to grow markets in India and overseas.

States Cell: The cell is run by the Ministry of Commerce. Its tasks include liaising with state and union territory governments on topics of export and import. It guides state-level export organisations. It helps them build export plans for each scenario.

Q.4 Comment on the following: (4X5)

Q4. (a) Litigation is better than arbitration.

Ans) Arbitration is favoured over litigation because it is usually less expensive. It facilitates conflict resolution through flexible timetables and easier procedures. Arbitration has distinct advantages over litigation. As a result, the process can be done without the involvement of lawyers or other agents, resulting in significant time and cost savings. Many quality disagreements in commodities exchanges, many commercial properties rent conflicts, and many small consumer disputes are addressed this manner.

Arbitration is necessary today due to litigation delays, acquittal rates, costs, and procedural formalities.

Q4. (b) Credit is not a major weapon of international competition.

Ans) All credit transactions carry risk, but export deals carry more. The exporter is exposed to credit risk if the customer cannot pay owing to insolvency or other reasons. Even when a buyer's credit history has been thoroughly reviewed, credit risk exists. A conservative approach to analysing buyers may cost you commercial prospects. With exports in particular, credit risk is inevitable.

Export transactions carry a higher credit risk since reliable information on foreign customers is harder to get. Credit risk has grown in importance today, not just due to increased export transactions, but also due to global political and economic upheavals. A civil war, coup, or rebellion may halt or delay export payments. Transfers may be delayed due to payment issues. And this is true even when the buyer is completely able to pay. Also, to be considered are the purchasers' insolvency or protected default. Even in industrialised countries, insolvencies and business failures have increased significantly in recent years. In such a high-risk circumstance, export credit insurance can be extremely beneficial to both exporters and banks.

Q4. (c) Advance payments are not free from any kind of risks from an exporter’s point of view.

Ans) Payment is made either at the time of order acceptance or before shipment. Optimal and safe for the exporter. In most circumstances, though, the customer will not prefer this option. The buyer may choose this option if he is an international affiliate of the exporter or needs the items urgently and the exporter can dictate terms. The buyer can remit funds by either acquiring a bank draught payable to an Indian bank and mailing it to the exporter or instructing an Indian bank to pay the exporter via mail or cable. The draught, mail, or telegraphic transfer shall be in the sale currency.

From the exporter's perspective, it is the easiest and most risk-free way. Payment is collected prior to dispatch; therefore, no post-shipment financing is required. It is also the cheapest approach because Indian banks do not charge interest or commission on clean remittances. If the exporter quotes in a foreign currency, there is an exchange risk from the date of contract until the buyer's payment.

Q4. d) Export Incentives are not a universal practice.

Ans) Export incentives in the form of tax-concessions or fiscal incentives, as well as financial incentives, play a major role in rendering Indian exports, competitive in the international market. However, in view of the highly competitive nature of international market, every country in the world makes an all-out effort to increase her exports, for which various types of different fiscal and financial incentives are provided. Thus, the practice of incentives has almost become universal, covering both developed as well as developing countries.

Q.5 Write short notes on the following. (4X5)

Q5. (a) Gains from International trade.

Ans) Gains from trade refers to various benefits which country derived out of international trade. Such gains are due to international division of labour and specialisation .The important gains that countries enjoy by participating in international trade .  Gains from trade are the net benefits to economic agents for being allowed and increase involuntary trading with each other.  In technical terms, they are the increase of consumer surplus Plus producer surplus from lower tariffs or otherwise liberalizing trade.

Gains from trade are broadly divided into two types – Static gains and dynamic gains.

Q5. (b) Roles of Clearing and Forwarding Agents in export trade.

Ans) Their main job is to help exporters ship their goods smoothly and on time. Clearing and Forwarding Agents influence the mode and route of shipment. They are the experts in choosing a shipping line/airline. To ensure that the items reach the final buyer in a timely and cost-effective manner, every exporter is worried about distribution logistics. The choice of transport mode is the essence of distribution logistics.

Clearing agency advises exporter on alternative modes of transport and supports exporter in final choice of transport to achieve optimal cost and delivery schedule. In addition to these duties, he handles the exporter's duty-drawback claims and advises on trade legislation. An efficient clearance and forwarding agent make the exporter's life easier, more comfortable, and possibly cheaper.

Q5. (c) Procedure of pre-shipment credit in Foreign Currency.

Ans) This credit is available to cover both the domestic and imported inputs of the goods exported from India. The facility is available in any of the convertible currencies. The credit will be self-liquidating in nature and accordingly after the shipment of goods the bills will be eligible for discounting/rediscounting or for post-shipment credit in foreign currency. me exporters can avail this finance under the following two options.

1. the exporters may avail pre-shipment credit in rupees and then, the post-shipment credit

2. either in rupees or in foreign currency denominated credit or discounting/rediscounting of export bills.

3. the exporters may avail pre-shipment credit in foreign currency and discounting /  rediscounting of the export bills in foreign currency.

PCFC credit will also be available both to the supplier units of EPUEOU and the receiver units of EPZIEOU. The credit in foreign currency shall also be available on exports to Asian Clearing Union (ACU) Countries.

Q5. (d) Forward Contracts.

Ans) A forward contract is a customized contract between two parties to buy or sell an asset at a specified price on a future date. A forward contract can be used for hedging or speculation, although its non-standardized nature makes it particularly apt for hedging.

Main points

1. A forward contract is a customizable derivative contract between two parties to buy or sell an asset at a specified price on a future date.

2. Forward contracts can be tailored to a specific commodity, amount, and delivery date.

3. Forward contracts do not trade on a centralized exchange and are considered over the counter (OTC) instruments.

4. Financial institutions that initiate forward contracts are exposed to a greater degree of settlement and default risk compared to contracts that are marked-to-market regularly.