Assignment Code: AED-01/TMA/2023-24

Course Code: AED-01

Assignment Name: Export Procedures & Documentation

Year: 2023-24

Verification Status: Verified by Professor

Q1) List out the details included in letter of credit and documents required under letter of credit. Briefly explain different types of letters of credit.

Ans) A Letter of Credit (LC) is a financial instrument widely used in international trade to ensure that payment will be made to a seller (exporter) by a buyer (importer) under specific conditions. It involves the issuance of a document (the LC) by a bank, which serves as a guarantee of payment to the seller, provided they meet the stipulated terms and conditions. Here are the key details included in a Letter of Credit and the documents required under it:

Details Included in a Letter of Credit

a)     Parties Involved:

1)      Applicant/Buyer: The party who requests the LC (importer).

2)     Beneficiary/Seller: The party who will receive payment under the LC (exporter).

3)     Issuing Bank: The bank that issues the LC on behalf of the buyer.

4)     Advising Bank: The bank that advises the LC to the beneficiary (usually a correspondent bank in the seller's country).

5)     Confirming Bank (optional): In some cases, a bank may confirm the LC to provide an additional payment guarantee to the beneficiary.

b)     LC Amount: The specified amount of money that the beneficiary is entitled to receive.

c)     Expiry Date: The date until which the LC is valid.

d)     Terms and Conditions: The specific requirements that the beneficiary must meet to receive payment. This can include details about shipment, documentation, and compliance with trade regulations.

Documents Required Under a Letter of Credit

a)     Invoice: A commercial invoice detailing the goods or services provided.

b)     Bill of Lading: A receipt issued by a carrier (usually a shipping company) that confirms the shipment of goods. It also serves as proof of ownership.

c)     Packing List: A document specifying the contents and packaging of the goods.

d)     Certificate of Origin: A document indicating the country where the goods were manufactured.

e)     Inspection Certificate: Sometimes required to confirm the quality, quantity, and condition of the goods.

f)      Insurance Certificate: Evidence of insurance coverage for the goods during transit.

g)     Transport Documents: These can include airway bills, sea waybills, or road/railway bills, depending on the mode of transportation.

h)     Export License: Required for certain restricted or controlled goods.

Types of Letters of Credit

a)     Revocable Letter of Credit: The issuing bank can amend or cancel the LC without notice to the beneficiary. It is rarely used in international trade due to its lack of security for the seller.

b)     Irrevocable Letter of Credit: The most common type, where the issuing bank cannot amend or cancel the LC without the consent of all parties involved. Provides a higher level of security for both the buyer and seller.

c)     Confirmed Letter of Credit: A second bank (confirming bank) adds its confirmation to the LC, guaranteeing payment to the beneficiary even if the issuing bank fails to do so. This provides an additional layer of security.

d)     Standby Letter of Credit (SBLC): Primarily used as a payment guarantee in non-trade-related transactions or as a backup to other payment methods.

e)     Transferable Letter of Credit: Allows the beneficiary to transfer all or part of the LC proceeds to one or more secondary beneficiaries.

f)      Back-to-Back Letter of Credit: Involves the use of two separate LCs, one for the original seller and one for the intermediary.

Q2) What do you mean by foreign exchange risk. Explain risk as an exporter and risk as an importer. What are the methods of dealing with foreign exchange risk?

Ans) Foreign exchange risk, also known as currency risk or forex risk, refers to the potential financial losses or uncertainties that can arise from fluctuations in exchange rates when conducting international transactions or holding assets denominated in foreign currencies. It is a risk faced by individuals, businesses, and governments engaged in cross-border trade, investment, or financial transactions. Foreign exchange risk arises due to the volatility and variability in currency exchange rates, which can affect the value of assets, liabilities, revenues, and expenses denominated in foreign currencies. There are several types of foreign exchange risk:

a)     Transaction Risk: This type of risk occurs when a business or individual is involved in a specific transaction with a payment or receipt in a foreign currency. Fluctuations in exchange rates between the transaction date and settlement date can lead to gains or losses.

b)     Translation Risk: Translation risk, also known as accounting risk, is associated with multinational corporations that have subsidiaries or assets in foreign countries. It arises when financial statements need to be converted from the local currency to the parent company's reporting currency. Exchange rate fluctuations can impact the reported value of assets, liabilities, and income.

c)     Economic Risk: Economic risk, also known as operating risk or competitive risk, pertains to the broader impact of exchange rate fluctuations on a company's overall financial health. It can affect a firm's competitive position, profitability, and long-term sustainability, especially if exchange rate movements make imported inputs more expensive or affect the demand for exports.

d)     Contingent Risk: Contingent risk arises when there are contractual obligations or contingent assets or liabilities that are denominated in foreign currencies. These obligations may become payable or receivable in the future, and exchange rate fluctuations can affect the actual financial outcome.

e)     Translation Exposure: This is a subset of translation risk and refers specifically to the potential impact on a company's financial statements when converting the financial results of foreign subsidiaries into the parent company's reporting currency.

Foreign exchange risk can affect both exporters and importers in different ways:

a)     Risk as an Exporter

1)      Transaction Risk: Exporters face transaction risk when they agree to sell goods or services to a foreign buyer at a specific price in their own currency. If the buyer's currency weakens against the exporter's currency, the exporter may receive fewer funds than anticipated when converting the payment.

2)     Translation Risk: If an exporter has foreign subsidiaries or holdings, they may face translation risk when consolidating financial statements. This risk arises because exchange rate fluctuations can affect the reported value of foreign assets and liabilities when converted into the parent company's reporting currency.

b)     Risk as an Importer

1)      Transaction Risk: Importers face transaction risk when they agree to purchase goods or services from a foreign supplier at a specific price in the supplier's currency. If the supplier's currency strengthens against the importer's currency, it may increase the cost of the imported goods.

2)     Economic Risk: Economic risk is related to the broader impact of exchange rate fluctuations on an importer's business. If the importer relies heavily on foreign suppliers and the local currency weakens, it can lead to higher costs and reduced profitability.

Methods of Dealing with Foreign Exchange Risk

a)     Forward Contracts: Both exporters and importers can use forward contracts to hedge against exchange rate risk. These contracts allow parties to lock in an exchange rate for a future date, ensuring that the transaction will be conducted at a predetermined rate.

b)     Currency Options: Currency options provide the right (but not the obligation) to exchange currencies at a specified rate on or before a future date. They offer flexibility, allowing businesses to choose whether to execute the contract or not.

c)     Money Market Hedge: Exporters and importers can use money market instruments to offset exchange rate risk. This involves borrowing or lending funds in a foreign currency to counterbalance the risk exposure.

d)     Natural Hedging: Companies can reduce forex risk by matching their foreign currency revenues with their foreign currency expenses. For example, an exporter might price their products in the currency of their major expenses to reduce exposure.

e)     Diversification: Diversifying operations across multiple countries can help spread forex risk. If a business operates in various markets with different currencies, adverse exchange rate movements in one market may be offset by favourable movements in another.

f)      Use of Derivatives: Sophisticated financial instruments like currency swaps and currency futures can be used to hedge foreign exchange risk. These instruments allow companies to manage their exposure more precisely.

g)     Monitoring and Analysis: Keeping a close eye on exchange rate movements and conducting regular risk assessments can help businesses make informed decisions and take timely actions to mitigate risk.

Q3) Differentiate between the following:

Q3a) Spot rate and forward rate.

Ans) Comparison between Spot rate and forward rate:

Q3) Differentiate between the following:

Q3a) Spot rate and forward rate.

Ans) Comparison between Spot rate and forward rate:

Q3b) Lines of credit and buyer’s credit.

Ans) Comparison between Lines of credit and buyer’s credit:

Q3c) War perils and strike perils.

Ans) Comparison between War perils and strike perils:

Q3d) Bill buying rate and bill selling rate.

Ans) Comparison between Bill buying rate and bill selling rate:

Q4a) What do you mean by pre-shipment finance. Describe the methods of preshipment finance.

Ans) Pre-shipment finance, also known as pre-export finance, is a type of short-term financing that is extended to exporters to meet their working capital needs before the actual shipment of goods. It is designed to help exporters cover various costs associated with preparing and producing goods for export, such as manufacturing, packaging, transportation, and other expenses incurred prior to the shipment of goods to the buyer. Pre-shipment finance ensures that exporters have the necessary funds to fulfil their export orders without disruptions due to cash flow constraints.

There are several methods of pre-shipment finance that exporters can use:

a)     Packing Credit: Packing credit is a common form of pre-shipment finance. It provides exporters with funds to purchase raw materials, process goods, and pack them for export. The credit limit is determined based on the export order's value and the exporter's working capital needs. The loan is usually secured by the export order or the goods themselves.

b)     Export Packing Credit in Foreign Currency: This type of pre-shipment finance allows exporters to access funds in foreign currency. It is particularly useful when export contracts are denominated in a foreign currency, helping exporters avoid exchange rate risk.

c)     Supplier's Credit: Some exporters may negotiate credit terms with their suppliers, allowing them to delay payment until after the goods are shipped and payment is received from the buyer. This effectively provides the exporter with pre-shipment financing.

d)     Export Bill Purchase/Discounting: Exporters can discount or sell their export invoices (bills of exchange or promissory notes) to a bank at a discount. The bank provides immediate cash to the exporter, minus the discount, and assumes the responsibility of collecting payment from the buyer when it becomes due.

e)     Export Credit Insurance: Export credit insurance protects exporters against the risk of non-payment by foreign buyers. Exporters can obtain insurance coverage on their export receivables, ensuring they receive payment even if the buyer defaults.

f)      Advance Against Export Incentives: In some countries, the government offers export incentives and subsidies. Exporters can secure pre-shipment finance by obtaining advances against these incentives, which are typically provided by financial institutions.

g)     Letter of Credit (LC) Negotiation: Exporters can request their bank to negotiate the LC issued by the buyer's bank. This allows them to access the LC's value before the shipment is made. However, the exporter must comply with the LC's terms and conditions.

h)     Working Capital Loans: Exporters may obtain general working capital loans from banks to finance various business operations, including pre-shipment activities. These loans are often secured by the exporter's assets or the export order itself.

i)       Export Factoring: Export factoring involves selling accounts receivable to a factoring company at a discount. The factor advances a percentage of the invoice value to the exporter and assumes responsibility for collecting payment from the buyer.

Q4b) What is post shipment finance. Explain various methods of post shipment finance.

Ans) post-shipment finance, also known as post-export finance, is a type of financial assistance provided to exporters after the shipment of goods to the overseas buyer. This financing helps bridge the gap between the shipment of goods and the receipt of payment from the buyer, ensuring that exporters have the necessary working capital to manage their cash flow and business operations effectively.

Various methods of post-shipment finance are available to exporters:

a)     Export Bill Negotiation/Discounting: After shipping the goods, an exporter can present export documents, including bills of exchange or promissory notes, to their bank for negotiation or discounting. The bank advances a percentage of the invoice value to the exporter minus a discount. The bank then collects the full amount from the buyer when it becomes due.

b)     Export Bill Purchase: Similar to negotiation/discounting, an exporter can sell export bills to a bank at a predetermined rate. The bank assumes the responsibility of collecting payment from the buyer when the bill matures.

c)     Export Factoring: Export factoring involves selling accounts receivable to a factoring company at a discount. The factor provides an advance payment to the exporter, often covering a significant portion of the invoice value. The factor then manages the collection of payment from the foreign buyer.

d)     Export Credit Insurance: Export credit insurance can protect exporters from the risk of non-payment by the overseas buyer. Exporters purchase insurance coverage that guarantees payment in the event of a default by the buyer. This type of financing is not a loan but provides financial security.

e)     Foreign Bill Purchase: Exporters may present foreign bills, such as foreign currency drafts, to a bank for purchase. The bank pays the exporter in the local currency against the foreign bill, allowing the exporter to receive payment without waiting for the foreign currency to be converted.

f)      Overdraft Facility: Some banks offer overdraft facilities to exporters, allowing them to overdraw their current accounts up to a predetermined limit. This provides flexibility in managing working capital requirements.

g)     Letter of Credit (LC) Discounting: Exporters can discount or sell the LC issued by the buyer's bank to their own bank. This provides immediate access to funds, with the bank assuming the responsibility of collecting payment from the buyer.

h)     Foreign Currency Loans: Exporters may obtain loans in foreign currency from their banks or financial institutions. These loans can be used to cover post-shipment expenses or to hedge against currency risk.

i)       Export Bill Rediscounting: In some cases, exporters may choose to rediscount the export bills they have previously discounted or negotiated with their banks. This can provide additional liquidity when needed.

j)       Export Working Capital Loans: Exporters can secure working capital loans from banks to cover various expenses related to post-shipment activities, such as warehousing, marketing, and distribution.

Q5) Write a short note on the following:

Q5a) Duty drawback scheme

Ans) The Duty Drawback Scheme is a government program designed to promote exports by providing a refund of the customs and excise duties paid on imported raw materials and components used in the production of goods that are subsequently exported. This scheme aims to make the cost of production for export-oriented industries more competitive in international markets by reducing the tax burden on imported inputs.

Key points about the Duty Drawback Scheme include:

a)     Eligibility: Exporters who meet certain criteria and export goods produced using imported raw materials or components are typically eligible for the Duty Drawback Scheme. The scheme is especially beneficial for industries with significant import content in their products.

b)     Types of Drawbacks: There are generally two types of drawbacks:

1)      All Industry Rate (AIR): Under this approach, the government sets predetermined drawback rates for various product categories or industries. Exporters receive a fixed percentage refund based on the assessed value of imported inputs used in their production.

2)     Brand Rate: Some exporters may opt for brand rate drawback. In this case, they must provide detailed information and evidence of the actual duties paid on specific imported inputs. Customs authorities then calculate the drawback amount based on this documentation.

c)     Application Process: Exporters need to apply to the relevant government authorities, typically the Customs Department or a designated agency. They must provide details of the imported inputs, their value, and the export products manufactured using those inputs.

d)     Verification: Government authorities may conduct audits and verifications to ensure that the claimed duty drawback is legitimate and accurate. This helps prevent misuse of the scheme.

e)     Time Frame: The refund process can take some time, and exporters often need to wait until the exported goods have been confirmed and assessed for their value and duty paid on inputs.

f)      Export Documentation: Exporters must maintain proper records and documentation of their export transactions and the use of imported inputs to support their claims under the Duty Drawback Scheme.

g)     Benefits: The scheme provides financial relief to exporters, reduces the overall cost of production, and enhances the competitiveness of domestically produced goods in international markets. It encourages foreign exchange earnings and supports economic growth.

h)     Drawbacks in Different Countries: Similar schemes exist in many countries, but they may vary in terms of eligibility criteria, rates, and administrative procedures. Exporters should familiarize themselves with the specific rules and regulations in their respective countries.

Q5b) Fiscal incentives

Ans) Fiscal incentives refer to a range of financial benefits and concessions provided by governments to individuals or businesses as a means of stimulating economic activity, achieving specific policy objectives, or attracting investment in a particular region or industry. These incentives typically take the form of tax reductions, exemptions, credits, deductions, subsidies, and other financial benefits. Fiscal incentives are used to promote economic growth, job creation, innovation, and various social or environmental goals.

Main points to understand about fiscal incentives:

a)     Types of Fiscal Incentives: Fiscal incentives can take various forms, including:

1)      Tax Reductions: Governments may reduce income taxes, corporate taxes, or value-added taxes (VAT) for eligible businesses or individuals.

2)     Tax Exemptions: Certain types of income, profits, or transactions may be exempted from taxation.

3)     Tax Credits: Tax credits provide a direct reduction in the amount of tax owed, often for specific activities such as research and development, renewable energy investments, or job creation.

4)     Deductions: Deductions allow businesses or individuals to subtract specific expenses from their taxable income.

5)     Subsidies: Governments may provide financial assistance or subsidies to support industries like agriculture, energy, or education.

6)     Customs and Tariff Benefits: Import/export duties and tariffs may be reduced or eliminated to promote international trade.

b)     Objectives of Fiscal Incentives: Fiscal incentives are employed for various reasons, including:

1)      Economic Growth: Governments use incentives to stimulate economic activity, attract investment, and create jobs.

2)     Industrial Development: Incentives can encourage the growth of specific industries or sectors.

3)     Innovation: Fiscal incentives may promote research and development, technological advancement, and innovation.

4)     Regional Development: Governments often use incentives to uplift economically disadvantaged regions or areas with high unemployment rates.

5)     Environmental Goals: Incentives can encourage environmentally friendly practices and investments in clean energy.

6)     Social Objectives: Some incentives support social goals, such as affordable housing or healthcare.

c)     Challenges and Criticisms: While fiscal incentives can have positive effects, they are not without challenges and criticisms. These include concerns about revenue loss, potential misuse, and the need for transparency and accountability in their administration. There may also be debates about whether incentives effectively achieve their intended goals.

d)     Global Competition: Many countries offer fiscal incentives to attract foreign investment and remain competitive in the global marketplace. This can lead to tax competition between nations.

e)     Compliance and Reporting: Businesses and individuals receiving fiscal incentives must typically comply with specific requirements and reporting obligations to qualify for and maintain these benefits.

f)      Duration and Review: Fiscal incentives may have time limits, and governments often review their effectiveness periodically to determine if they should be extended, modified, or terminated.

Q5c) EXIM Bank

Ans) The Export-Import Bank, commonly referred to as Exim Bank or EXIM, is a financial institution that plays a crucial role in promoting international trade and economic development. Exim Banks are typically government-owned, or government-backed entities established with the primary objective of facilitating and supporting a country's exports and imports. Here are some key points to understand about Exim Banks:

a)     Export and Import Promotion: Exim Banks are established to promote a nation's exports and facilitate imports. They provide financial and credit-related services to businesses engaged in international trade, both exporters and importers.

b)     Financial Services: Exim Banks offer a range of financial products and services, including export credit insurance, export financing, working capital loans, project financing, and trade-related advisory services. These services are designed to mitigate risks associated with international trade and help businesses access the funds they need to engage in global commerce.

c)     Export Credit Insurance: One of the essential functions of an Exim Bank is to provide export credit insurance. This insurance protects exporters against the risk of non-payment by foreign buyers, ensuring that they receive payment even if the buyer defaults.

d)     Export Financing: Exim Banks offer various financing options to exporters, such as pre-shipment and post-shipment financing, export factoring, and export refinance facilities. These services help exporters manage cash flow, cover production costs, and expand their international markets.

e)     Working Capital Support: Exim Banks may extend working capital loans or lines of credit to exporters, enabling them to fulfil large orders, maintain inventory, and meet other operational expenses related to international trade.

f)      Project and Infrastructure Financing: In addition to supporting traditional exports, Exim Banks often play a role in financing large-scale projects and infrastructure development in foreign countries. They may provide loans and credit guarantees to businesses involved in such projects.

g)     Trade Promotion and Advisory Services: Exim Banks offer guidance and advisory services to businesses looking to expand into international markets. They provide market research, trade information, and assistance with trade documentation.

h)     Government Backing: Exim Banks typically enjoy government backing and financial support, making them more effective in addressing the challenges and risks associated with international trade. This support may include capital injections, loan guarantees, or access to government funds.

i)       Economic Development: Exim Banks contribute to a country's economic development by boosting exports, creating jobs, attracting foreign investment, and supporting infrastructure projects that can enhance trade and economic growth.

j)       International Cooperation: Exim Banks often collaborate with other international financial institutions, such as the World Bank and regional development banks, to foster international trade and development.

Q5d) India trade promotion organisation

Ans) The India Trade Promotion Organisation (ITPO) is a government agency under the Ministry of Commerce and Industry in India. It plays a pivotal role in promoting and facilitating India's international trade by organizing trade fairs, exhibitions, and other events. Established in 1977, ITPO's mission is to boost India's export potential, showcase its capabilities, and attract foreign investment and partnerships.

Some key points to understand about the India Trade Promotion Organisation:

a)     Promoting Exports: ITPO primarily focuses on promoting Indian exports and helping Indian businesses connect with international markets. It organizes and participates in trade fairs and exhibitions both within India and abroad to showcase Indian products and services to a global audience.

b)     Hosting International Trade Fairs: ITPO is responsible for organizing major international trade fairs and exhibitions in India, such as the India International Trade Fair (IITF) held annually in New Delhi. These events serve as platforms for Indian and foreign companies to interact, negotiate deals, and explore business opportunities.

c)     Facilitating Trade and Investment: ITPO facilitates trade negotiations, collaborations, and investment opportunities for Indian businesses by bringing together domestic and international stakeholders. It acts as a bridge between Indian exporters and potential foreign buyers, investors, and partners.

d)     Promoting 'Make in India': ITPO actively supports the Indian government's "Make in India" initiative by showcasing the capabilities of Indian manufacturers and entrepreneurs. It encourages both domestic and foreign investors to invest in India's manufacturing sector.

e)     International Outreach: ITPO maintains a global presence by participating in international trade fairs, exhibitions, and events. It promotes Indian products and services, builds networks with foreign trade organizations, and encourages foreign businesses to explore India as an investment destination.

f)      Supporting Small and Medium Enterprises (SMEs): ITPO aids small and medium-sized enterprises (SMEs) in India, helping them participate in international trade fairs and exhibitions. This support aims to boost the competitiveness of SMEs in the global market.

g)     Market Research and Information: ITPO conducts market research, gathers trade-related data, and disseminates information to help Indian businesses make informed decisions about entering foreign markets. It offers trade-related publications and resources to the business community.

h)     Trade Promotion Infrastructure: ITPO manages and operates various trade promotion venues and facilities, including exhibition complexes and convention centers, where trade fairs and exhibitions are held.

i)       Partnerships and Collaborations: ITPO collaborates with other government agencies, industry associations, and international organizations to advance India's trade and investment goals.