Export Import Management 9789387067592

Table of contents :
Title
Contents
1 Policy Framework for India’s Foreign Trade
2 Setting Up an International Trading Company
3 Legal Aspects of International Trade
4 Export Documentation
5 Export Procedure
6 Payments for Exports
7 Export Promotion Schemes
8 Foreign Trade Financing and Insurance Schemes
9 State Trading and International Trading Houses
10 Policy for Special Economic Zones and Export Processing Zones
11 Import Documentation and Procedure
12 Incoterms
13 Logistics Management and Modes of Transportation
14 Shipment in India
Appendix Foreign Exchange Management in India
Index

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EXPORT IMPORT MANAGEMENT

About the Author Parul Gupta is an Assistant Professor in the area of Public Policy and Governance at Management Development Institute (MDI), Gurgaon. She carries with her an experience of more than 14 years of teaching, training and consultancy. She holds PhD in Law, awarded by the Faculty of Law, Jamia Milia Islamia, New Delhi. Prior to joining MDI, she served at Army Institute of Management & Technology, an institute run for the wards of Indian Army, for about eleven years. She earned the prestigious ‘Chief of Army Staff Commendation Card’ for the excellent performance and contribution to her field of work. She has developed and conducted a customised management development programme for judicial officers and court managers of the State of Uttar Pradesh. She has been a consultant to Institute of Judicial Training & Research, Lucknow, and also to High Court, Allahabad, for developing training programme for the judicial officers and court managers. She has conducted a number of training sessions on Legal aspects of Business, Labour Laws, Contract Act, etc., for senior and middle level officers of BEL, GAIL, Indian Army and many other organisations. She is an author of two books and has several articles to her credit published in reputed journals, which include a case study published by Richard Ivey Business School.

EXPORT IMPORT MANAGEMENT

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McGraw Hill Education (India) Private Limited Published by McGraw Hill Education (India) Private Limited, 444/1, Sri Ekambara Naicker Industrial Estate, Alapakkam, Porur, Chennai - 600 116 export Import Management Copyright © 2018, McGraw Hill Education (India) Private Limited. No part of this publication may be reproduced or distributed in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise or stored in a database or retrieval system without the prior written permission of the publishers. The program listings (if any) may be entered, stored and executed in a computer system, but they may not be reproduced for publication. This edition can be exported from India only by the publishers, McGraw Hill Education (India) Private Limited 1 23456789

D101769

22 21 20 19 18

Printed and bound in India ISBN (13): 978-93-87067-59-2 ISBN (10): 93-87067-59-9 Managing Director: Kaushik Bellani Senior Portfolio Manager, B&E: Nikhil Wadhera Associate Portfolio Manager, B&E: Bhanoo Chakrabarti Senior Manager—Content Development: Shalini Jha Content Developer: Anuradha Kumar Production Head: Satinder S Baveja Copy Editor: Taranpreet Kaur Assistant Manager—Production: Atul Gupta General Manager—Production: Rajender P Ghansela Manager—Production: Reji Kumar Information contained in this work has been obtained by McGraw Hill Education (India), from sources believed to be reliable. However, neither McGraw Hill Education (India) nor its authors guarantee the accuracy or completeness of any information published herein, and neither McGraw Hill Education (India) nor its authors shall be responsible for any errors, omissions, or damages arising out of use of this information. This work is published with the understanding that McGraw Hill Education (India) and its authors are supplying information but are not attempting to render engineering or other professional services. If such services are required, the assistance of an appropriate professional should be sought. Typeset at Bharati Composers, D-6/159, Sector-VI, Rohini, Delhi 110 085, and text and cover printed at Cover Printer: Visit us at: www.mheducation.co.in

Preface

International trade between the countries and across continents is not a new phenomenon, rather it existed for centuries, including previous civilisations. However, world has come a long way since the earlier times and foreign trade today has taken on new dimensions. In present scenario, it is no longer optional for the countries to participate in foreign trade, as now, no country can afford to remain isolated from international trade; it has become a matter of their survival. In the current times, it is the advancement of technology that has dropped a significant impact on participation of countries in foreign trade. While opening the doors of its market for global competition, a country needs to be very careful and take all necessary steps to not to upset their domestic economy and to protect the domestic industries. This balancing act is often managed through individual country’s trade and tariff policy which forms an integral part of the foreign trade policy governing a country’s approach to international trade and commerce. Thus, it is important for a business firm involved in export import business to understand the key aspects of EXIM procedures and documentation and also foreign trade policy of the domestic country. India’s participation in foreign trade has undergone a number of phases and has witnessed plethora of reforms since the time of independence. Being one of the most active countries in the world in foreign trade, Indian business environment for international trade has been an attention catcher for Indian government as well as other countries. In past many years, there have been a number of significant changes introduced by the Indian Government in the EXIM procedures and documentation to facilitate ease of doing business in the country. This book covers all the key aspects of procedures and documentation required to be adhered by business firms involved in export import business in India. These key aspects include the policy framework for foreign trade, procedure of setting up an international trading company, documentation, procedures and promotion schemes and also legal aspects of international trade. The book opens with a detailed discussion on India’s foreign trade policy providing highlights of current policy and major economic reforms experienced by the country since Second World War till date. Chapter 2 of the book provides detailed procedure for setting up an international trade company in India followed by an in-depth discussion on legal aspects of international trade in Chapter 3. Export documentation, procedures and payment options for export are provided in Chapters 4, 5 and 6, respectively. Chapters 7 and 8 discuss about various export promotion and foreign trade financing and insurance schemes introduced in India. Role and objectives of state and international trade houses

vi Preface are provided in Chapter 9. Chapter 10 explains the important provisions of SEZ Act, 2005. Import procedures and documentation are provided in Chapter 11 with special emphasis on import duties and their purpose. Incoterms Rule 2010 and classification of Incoterms are discussed in Chapter 12. Chapter 13 deals with international logistics management and modes of transport available in the country. Chapter 14 provides an overview of shipping industry in India and procedures for custom clearance. The book closes with an Appendix on Foreign Exchange and Management Act (FEMA). The author has presented important facts and figures and recent policy developments in a simple, student and practitioner friendly manner, without getting bogged down in technicalities, excessive theorisation and mathematics, so that their implications for business can be easily inferred. The chapter-end section of each chapter provides case studies, exercises, links and sources for further reading, to provide deeper insights of the topics covered in the respective chapter. The contents of this book are well aligned with the syllabi of programmes in business administration and can serve as a handy reference for various courses on export import management that tend to feature in graduate and postgraduate programmes. The book is equally useful for practitioners seeking information on procedures and documentation of export import business. It is hoped that this book, with its wide canvas, will help and influence the future approach to such courses by providing a wider ranging and comprehensive perspective. Parul Gupta ([email protected])

Publisher’s Note McGraw-Hill Education (India) invites suggestions and comments, all of which can be sent to [email protected] (kindly mention the title and author name in the subject line). Piracy-related issues may also be reported.

Acknowledgements

I would like to express my gratitude to many people who helped me all through the making of this book, to all those who provided their support, offered comments and helped in completing this project. My first and foremost gratitude is due to my mentor, Prof. M.P. Jaiswal — Director, IIM Sambalpur, for the valuable direction, motivation and encouragement throughout my career. Above all, I want to thank my husband, Vishal Gupta, for standing beside me throughout my career and while writing this book. He has been my inspiration and motivation in continuing to improve my knowledge and move my career forward. I also thank my wonderful son, Raj Vishal Gupta, for always making me smile in spite of all the time that took me away from him. It was a long, patient and difficult journey for him. My sincere appreciation is due to my parents and parents-in-law for allowing me to chase my dreams and ambitions since long. I would like to thank the entire team at McGraw Hill Education (India) for helping me throughout the entire process of publishing this book. Because of their cooperation and continuous encouragement, my dream to get my book published has come true today. Parul Gupta

Contents

About the Author Preface Acknowledgements

1. Policy Framework for India’s Foreign Trade Introduction 1 Historical Background 1 Pre-Liberalisation Era 2 Changed Pattern of Exports 2 Restrictions on Imports 4 Devaluation of Rupee 4 Export Incentives 5 Development of a Complex Regime 5 Types of Goods and Import Restrictions under the Trade Regime 6 Relaxation in Import Controls under the Trade Regime 6 Emergence of Need for Economic Reforms 6 Post-Liberalisation Era 7 Growing Foreign Trade of India in Post-Liberalisation Era 7 Relaxed Import Licensing 8 Simplified Tariff Structure 8 Reforms in Foreign Direct Investments Policy 9 Foreign Trade Policy Reforms after 1991–92 9 Structural Changes in the Policy 10 Special Economic Zones 12 Approval Mechanism of SEZs 13 Administrative Set-up 14 Highlights of Export Import Policy 2009–14 16 Objectives 16

ii v vii

1

x Contents Key Terms 22 In Review 22 Multiple Choice Questions 23 Concept Questions 24 Further Reading 25 Case Study: Future of Foreign Trade in India

26

2. Setting Up an International Trading Company

30

Introduction 30 Structure, Role and Functions of Department of Commerce 30 Role of the Department 30 Organisational Set-up of the Department 33 Procedure for Setting Up an International Trading Company 39 Registering a Company in India 40 Registering with the Director General of Foreign Trade 41 Registering the Firm with Export Promotion Council (EPC) and Relevant Tax Authorities 42 Obtaining Export/Import Licence and Certificate of Origin 42 Importer Exporter Code (IEC) 45 Documents Required for Applying for the IEC Code 45 Procedure to Apply for IEC 46 Online Application for IEC Code 46 Eligibility and other Provisions for Applying for IEC 47 Key Terms 48 In Review 49 Multiple Choice Questions 50 Concept Questions 51 Further Reading 52 53

3. Legal Aspects of International Trade Introduction 60 International Commercial Contracts 60 The Principle of Contractual Freedom 61 Private International Law 61 Conflict of Laws Agreement 62

60

Contents

xi

International Sale Contracts 64 Passing of Property in Sale Contracts 64 Rules of Passing of Property 64 Passing of Property in International Sales 66 Reservation of Right of Disposal by Seller in International Sale 66 Passing of Property in FOB Contracts 66 Transferring of Property in CIF Contracts 67 Notice of Appropriation in International Sale 68 Rejection of Goods by Buyer in International Sale Contracts 68 Issue of Risk in International Sale Contracts 68 Delivery to Carrier 69 Goods in Transit 69 Passing of Risk in Case of Bulk Shipment 69 Passing of Risk in Bulk Shipment of CIF Contracts 69 Documentary Credit 70 Important Aspects of Passing of Risk in International Sales 70 Insurance in International Trade 70 Weighing up the Risks 71 Types of Insurance in International Trade 72 Types of Product Claims 73 Arbitration in International Commercial/Trade Disputes 75 International Trade Arbitration 75 Voluntary Arbitration in International Trade 76 Procedure 76 Powers of the Arbitrators 78 Key Terms 78 In Review 79 Multiple Choice Questions 80 Concept Questions 81 Further Reading 81 Case Study 82

4. Export Documentation Introduction 83 Export Documentation in India 83 Easing of Documentation 84 Mandatory Documents for Export and Import 84

83

xii Contents Types of Export Documents 85 Export Documents on the Basis of Nature of Documents 85 Export Documents on the Basis of Sequence of Activity Flow 87 Important Documents used in Export Trade 88 Documents Related to Goods 89 Documents Used for Shipment 95 Documents Related to Bank Processing 100 Documents Related to Payment 101 Official Documents 104 Key Terms 105 In Review 105 Multiple Choice Questions 106 Concept Questions 108 Further Reading 108 109

5. Export Procedure Introduction 110 Export Licence, Registration of Firms and Export of Samples 111 Obtaining Export Licence 111 Registration of Export Firms 113 Export of Samples 114 Packaging and Labeling of Goods 115 Packaging 115 Labeling 116 Inspection Certificates and Quality Control 116 ISI and Agmark Certification 117 In-Process Quality Control (IPQC) 117 Self-Certification Scheme 117 ISO 9000 118 Export Documents 118 Custom Procedure for Exports 119 Invisible Exports and its Importance in International Trade 124 Export Performance of the Indian Service Industry (Invisible Trade) 124 Exports from India to SAARC 126 Key Terms 138 In Review 139 Multiple Choice Questions 140

110

Contents

xiii

Concept Questions 141 Further Reading 141 142

6. Payments for Exports

143

Introduction 143 Methods and Terms of Payments for Exports 144 Clean Payments 144 Payment Collection of Bills in International Trade 144 Letter of Credit (L/C) 145 Cash-in-Advance 145 Letter of Credit 147 Parties to Letters of Credit 149 Risk Associated with Opening Import L/C 150 Types of Letter of Credit 150 Import Operations Under L/C 152 Fees and Reimbursements 152 Documentary Collections 153 Role of Various Parties 154 Types of Documentary Collections 155 Open Account 156 How to Offer Open Account Terms in Competitive Markets 157 Factoring 158 Forfaiting 158 Consignment 158 How to Export on Consignment 159 Key Terms 160 In Review 160 Multiple Choice Questions 161 Concept Questions 163 Further Reading 163 Case Study 164

7. Export Promotion Schemes Introduction 165 Duty Exemption Schemes (DES) 166 Advance Authorisation 168 Duty Free Import Authorisation (DFIA) 170

165

xiv Contents Duty Remission Schemes 172 Reward Schemes 176 Schemes for Import of Goods 178 Key Terms 181 In Review 182 Multiple Choice Questions 183 Concept Questions 184 Further Reading 185 Case Study 186

8. Foreign Trade Financing and Insurance Schemes

188

Introduction 188 Pre- and Post-Shipment Finance 189 Pre-shipment Export Finance 189 Post-shipment Export Finance 190 Export Credit Insurance and Export Credit Guarantee Corporation of India Limited (ECGC) 190 Export Credit Guarantee Corporation of India Limited 191 Export Credit Guarantee Corporation (ECGC) Schemes 194 Standard Policy or Shipment (Comprehensive Risk) Policy (SCR) 194 Specific Policies 197 Financial Guarantees 199 Special Schemes 203 Overview of EXIM Bank of India 206 EXIM Bank Initiatives 207 Forms of Financial Assistance provided by EXIM Bank to Indian Companies 208 Financial Assistance provided by EXIM Bank to Overseas Companies 208 Key Terms 209 In Review 209 Multiple Choice Questions 210 Concept Questions 212 Further Reading 212 213

9. State Trading and International Trading Houses Introduction 214 State Trading 214

214

Contents

xv

Objectives of State Trading 215 Rationale of State Trading 216 Types of State Trading 217 International Trading Houses 217 Services Provided to Manufacturing Firms 218 Selection of Trading House 221 Indian State Trading Organisations 222 State Trading Corporation of India Limited (STC) 222 Minerals and Metals Trading Corporation Limited (MMTC) 225 India Trade Promotion Organisation (ITPO) 226 Export Credit and Guarantee Corporation Limited 228 Projects and Equipment Corporation of India Ltd. (PEC) 228 Recognised Export and Trading Houses in India 229 Key Terms 232 In Review 233 Multiple Choice Questions 234 Concept Questions 235 Further Reading 236 237

10. Policy for Special Economic Zones and Export Processing Zones

238

Introduction 238 Special Economic Zones (SEZs) 239 SEZ Act, 2005 239 Export Oriented Undertakings (EOU) Schemes 241 Historical Background and Purpose of EOUs Scheme 241 Objectives 242 Scope of the Scheme 242 Implementation of the Scheme 243 Policy Changes in the EOUs Scheme 243 EOUs Permitted under the Scheme 244 General Conditions of Duty Free Import 244 DTA Sale 245 Incentives/Facilities to Special Economic Zone Units 245 Software Technology Park (STP)/Electronic Hardware Technology Park (EHTP) Scheme 249 Historical Background and Implementation of the STP/EHTP Scheme 249 Purpose and Scope of the Schemes 249

xvi Contents Procedure under the Scheme 250 Specific Provisions 250 Key Terms 251 In Review 251 Multiple Choice Questions 252 Concept Questions 253 Further Reading 254 Case Study 255

11. Import Documentation and Procedure

257

Introduction 257 Import Procedure and Documentation 257 The Indian Trade Classification 257 Import Procedure 258 Import Duties 265 Key Terms 266 In Review 266 Multiple Choice Questions 267 Concept Questions 268 Further Reading 268 269

12. Incoterms

270

Introduction 270 Incoterms 270 Purpose of Incoterms 271 The Incoterms 2010 Rules 271 Group 1: Applicable to any mode of Transport 273 Group 2: Incoterms Applicable to Sea and Inland Waterway Transport Only 274 Key Terms 277 In Review 277 Multiple Choice Questions 278 Concept Questions 279 Further Reading 279 280

Contents

13. Logistics Management and Modes of Transportation

xvii

281

Introduction 281 Distribution Channels 282 International Distribution Channels 282 International Distribution Channel Selection 283 International Marketing Logistics 284 Significance of Marketing Logistics 285 Objectives of Marketing Logistics 286 Logistics System Elements 289 Supply Chain Management (SCM) 290 International Supply Chain Management 291 Supply Chain Management and Logistics 292 International Transport 294 Transportation Utility 294 Modal Characteristics 295 Modal Competition and Model Preferences 297 Modal Preferences 299 Role of Transportation in Logistics Management 299 Future Prospects of Logistics 300 Key Terms 302 In Review 302 Multiple Choice Questions 303 Concept Questions 304 Further Reading 304 Case Study:

14. Shipment in India Introduction 306 Indian Shipping Industry: Economic Insights 306 Fleet Composition 308 Policy Initiatives to Promote Shipping Industry 311 Policy Initiatives 311 Obligations of Carriers and Custom Clearance 312 Obligations of Carriers 312 Customs Preventive Control 313 Customs Clearance of Cargo 313 World Shipping Terms 315

305

306

xviii Contents In Review 320 Multiple Choice Questions 321 Concept Questions 322 Further Reading 322 323

Appendix: Foreign Exchange Management in India

324

Index

331

Chapter

Policy Framework for India’s Foreign Trade

1

Learning Outcomes After reading this chapter, you will be able to: LO1 Know about the historical background of India’s involvement in global trade LO2 Discuss the structure of foreign trade during pre-liberalisation era LO3 Explain major policy and economic reforms introduced during post-liberalisation era LO4 Understand the highlights of Export Import Policy (EXIM)—2009–14

INTRODUCTION Indian economy and foreign trade are closely related. The main aim of initial economic and foreign trade policy initiatives was the liberalisation of the country’s trade policy. In the year 1991, a number of outward looking measures were introduced, and thus there began a new era of foreign trade in India. As a result of these trade policy initiatives, the country’s merchandise export recorded a remarkable growth and the total value of exports went up to US$ 251.1 billion in 2009–10, which was just US$ 1.3 billion in 1950–51. The new category of products made their place in the export basket of the country which included high value products and also differentiated products. Consequent to trade policy reforms, on one hand, India’s trade growth picked up; and on the other hand, the trade deficit got further widened. Thus, India’s potential in trade is great, but the challenges are also plenty.

LO1 Know about the historical background of India’s involvement in global trade

HISTORICAL BACKGROUND The domestic production of a country determines the exports and imports of that country. The production of a country largely depends on the availability of key factors leading to a comparative advantage for the economy. On one hand, India has been blessed with labour and land, but capital has always been a matter of worry. With this backdrop of facts, India remained in the race for the production of labour-intensive commodities. India’s foreign trade witnessed significant growth during the latter

2 Export Import Management half of the 19th century. The period 1900–1914 witnessed expansion in India’s foreign trade. The rise in output of crops such as oilseeds, cotton, jute and tea was largely due to a flourishing export trade. The First World War turned out to be a serious setback to India’s foreign trade. In the immediate post-war period, India’s exports recorded an increase due to rise in world demand for raw materials and lifting of war time restrictions. Simultaneously, the imports too increased, in order to satisfy the pent-up demand. India’s foreign trade was badly hit by the Great Depression of 1930s. Some of the important reasons behind the same includes sharp fall in commodity prices, decline in the consumer’s purchasing power and discriminatory trade policies practiced by the colonial government. During the Second World War, India gained huge export surplus resulting in the accumulation of large amount of sterling balances. At the end of the War, the import requirements went up and export surpluses remained low. The Partition of the country in the year 1947 further widened the deficit in food and raw materials in the country. There was a sharp decline in export surpluses of some commodities like raw cotton and raw jute. The volume of exports in 1946–47 went down to two-third of the pre-war level.1

LO2 Discuss the structure of foreign trade during pre-liberalisation era

PRE-LIBERALISATION ERA The structure of India’s foreign trade presented a continuous exploitation of the country’s resources by the foreign rulers. India’s foreign trade was dominated by the agricultural economy, which is typical of a colonial region. Exports largely comprised of raw materials and plantation crops, while imports composed of light consumer goods. In the process of systematic exploitation of the country’s resources by the foreign ruler, the raw materials were exported from India and finished products were imported from the UK. Thus the production of final products was largely discouraged by not allowing the raw materials to be used by local manufacturers. We can understand this with an example of Indian cotton textiles. In the British rule, export of cotton textiles accounted for the largest share in the country’s total export value. Due to continuous and systematic exploitation, the growth of Indian industries declined, and could not pick up for a long period of time, thus having an adverse impact on India’s foreign trade as well. After the introduction of policy reforms, India’s foreign trade has shown remarkable growth in terms of composition of commodities. The country’s exports now consist of a variety of traditional and non-traditional products and also services, while imports largely include capital goods, petroleum products, raw materials, intermediates and chemicals to fulfill the ever increasing industrial demands.

Changed Pattern of Exports The export trade of India during 1950–1960 witnessed the following two main trends: (1) No overall increase in the export of commodities which were directly or primarily based on agricultural production such as tea, cotton textiles, jute, hides and skins, spices and tobacco. (2) The exports of raw manufactures like iron ore gained a significant increase. However, this increase was not sufficient to offset the decline in traditional exports. In the early 1950s, basic primary products dominated the exports from India. 1

Mathur, Vibha, (2006), Foreign Trade of India, 1947–2007, Trends, Policies and Prospects, New Century Publications, New Delhi.

Policy Framework for India’s Foreign Trade

3

By and large, the same trend continued with little variations. It is worth noticing that during this period, the world demand for a majority of agriculture-based products did not increase or decrease due to a cyclical down turn in the global economy. In this decade, the economy also witnessed a balance of payments crunch. By mid-1950s, the sterling balance acquired by India during the Second World War also got exhausted. Though the export proceeds were increasing, this increase could not meet the growing import demand. A sharp decline in agriculture production and rapid growth of developmental activities added more pressure. The shortage of foreign exchange emerged as a crucial problem at that juncture. This strain on the balance of payments mandated the stiffening of import policy at a later stage. At the same time, India was going through the process of negotiating with the International Bank of Reconstruction and Development (IBRD) for loans to meet the foreign exchange requirements of several of its development projects. India was also exploring possibilities of deferred payments with respect to the import of capital goods from various countries.2 Table 1.1 provides the details of India’s trade during the pre-liberalisation period. Table 1.1

India’s Trade during the Pre-liberalisation Period

Year

Exports

% of change

Import

% of change

Total Trade

1971 1972

1535

—

1634

1608

4.76

1825

11.69

1973

1971

22.57

1867

1974

2523

28.01

1975

3329

31.95

1976

4036

1977 1978

% of change

—

3169

—

3433

8.33

2.30

3838

11.80

2955

58.28

5478

42.73

4519

52.93

7848

43.26

21.24

5265

16.51

9301

18.51

5142

27.40

5074

– 3.63

10216

9.84

5408

5.17

6020

18.64

11428

11.86

1979

5726

5.88

6811

13.14

12537

9.70

1980

6418

12.09

9143

34.24

15561

24.12

1981

6711

4.57

12549

37.25

19260

23.77

1982

7806

16.32

13608

8.44

21414

11.18

1983

8803

12.77

14293

5.03

23096

7.85

1984

9771

11.00

15831

10.76

25602

10.85

1985

11744

20.19

17134

8.23

28878

12.80

1986

10895

– 7.23

19658

14.73

30553

5.80

1987

12452

14.29

20096

2.23

32548

6.53

1988

15674

25.88

22244

10.69

37918

16.50

1989

20231

29.07

28235

26.93

48466

27.82

1990

27658

36.71

35328

25.12

62986

29.96

Source: Harikumar A., (2014). Changing Phases of the India’s International Trade before and after Liberalisation Period. International Journal of Application or Innovation in Engineering & Management. 3(3). 2

Bhat T.P., (2011), Structural Changes in India’s Foreign Trade, Institute for Studies in Industrial Development, New Delhi

4 Export Import Management It is clear from Table 1.1 that the trend of export and import growth remained constant without much variation in the pre-liberalisation era.

Restrictions on Imports The Second Five Year Plan carried a large foreign exchange component and specially emphasised on the development of industry, mining and transport. In 1957, a progressive tightening of the import policy took place. The Open General Licence (except for poultry, fish, vegetables, etc. from Pakistan) was dropped; instead limited quotas for essential commodities were granted to importers on the basis of their actual imports during 1952–56. Fresh licences to established importers were not granted in this period. Licences were issued keeping in view the austerity measures, import of consumer goods were cut to a great extent and that of raw materials and intermediate products were also reduced to the minimum level necessary for the maintenance of production. The conditions of issue of capital goods licences on deferred payment basis were made more stringent. Capital goods licensing continued to be confined to the highest priority programmes. All the above mentioned actions resulted in a drastic decrease in the imports. In the late 1950s, Indian imports witnessed a continuous growth, especially in the import of food items. The balance of payment position got better during the same period, which had been a matter of concern for the government in many previous years. The government issued a number of new licences to many firms for the import of raw materials, components and spare parts, on the basis of their export performance. In some specific cases, the facility was opened for the import of capital goods also. Export duties were relaxed and drawbacks of import duties were also granted on raw materials which were used for the manufacturing of export products. Although the quantitative restrictions on exports were not lifted, the quotas on some items were relaxed and such items included certain oilseeds and oils. In the early 1960s, both government and private imports recorded growth where food grains, raw cotton and metals contributed the most in the import basket of the country. This period marked the setting up of 12 Export Promotion Councils to promote exports in their respective areas. Special export schemes were also devised and operated to give a kick start to promote exports. In 1964–65, a rise in the debt service burden, repayment to the IMF, increase in imports of food and goods for development resulted in considerable pressure of balance of payments once more. The exports were not sufficient to meet the import requirements. However, there was an improvement in the utilisation of external assistance.

Devaluation of Rupee It was June 1966 when India resorted to the devaluation of Rupee in the face of financial crisis. During relation to the pound and dollar. However, it was estimated to be about 36.5 per cent in real terms. Domestic inflation in the country led Indian prices to become much higher than world prices at the pre-devaluation exchange rate. In 1966, as a result of withdrawal of foreign aid the devaluation of Rupee took place. It was followed by liberalisation of foreign trade which particularly moved the efforts in the direction of liberalisation in import control and tariff cuts. In spite of all these efforts India did not receive foreign aid and subsequently, the government had to back off its commitment to

Policy Framework for India’s Foreign Trade

5

liberalisation. Almost all liberalising initiatives had to be reversed and import controls were further tightened. Two other factors played an important role in the 1966 devaluation. The first one was India’s war with Pakistan in late 1965 and subsequent to this war, the US and other countries, friendly with Pakistan, withdrew foreign aid to India, which resulted in devaluation. In addition to that, the large amount of deficit spending needed by war effort accelerated inflation and it further widened the disparity between Indian and international prices. It is worth mentioning here that during that period defense spending was 24 per cent of the total expenditure. The second factor was the drought of 1965–66 which further resulted in sharp rise in prices of over 10 per cent. Thus the start of the Second Five Year Plan in 1956 coincided with a severe foreign exchange crisis, and the following period up to 1966 was featured by comprehensive and stringent administration of the import licensing system. The foreign trade policies were nothing but an extension of the more general economic policies. In these policies, state enterprises dominated the “commanding heights” of industrial economy, whereas the private sector was subjected to extensive controls, which was collectively termed as the “Licensing Raj”.3

Export Incentives After 1956, import licensing was further tightened in response to the steadily worsening foreign exchange situation, and tariffs recorded a continuous increase to reach very high levels by early 1966. It resulted in large and highly variable gaps between domestic and international prices of manufactured products. Subsidies were offered to manufacture exports to offset the anti-export bias resulting from an increasingly overvalued exchange rate. This was done by allowing the exporter to import duty free but otherwise restricted raw materials, components and machines that could be sold in the domestic market for premiums that reflected their scarcity values. For the first time, these subsidies and other export incentives for manufacturing encouraged the exports of a variety of manufactured products. The average implicit protection was quite high and had increased during the pre-devaluation period.

Development of a Complex Regime It is clear from the above discussion that till early 1980s, the trade regime was based on a complex system of licensing and India’s trade policy relied more on quotas than on tariffs. The country was regulating the imports through a licensing system without any policy prescriptions. However, import licences allocated reflected the following two major criteria: (1) The principle of essentiality (2) The principle of indigenous non-availability Thus the imports, in terms of both quantity and composition, were permitted only if the firm in question assured the government that inputs or equipment for production being imported were ‘essential’ in nature. At the same time the government was required to certify the imports from the viewpoint of indigenous availability. That means if it could be shown that there was a domestic production of the products being imported, then imports would not be permitted (regardless of quality or cost considerations).

3

Bhagwati, Jagdish N. and Padma Desai, (1970), India: Planning for Industrialization, Oxford University Press, London.

6 Export Import Management

Types of Goods and Import Restrictions under the Trade Regime Almost all imports were either subjected to discretionary import licensing or were ‘canalised’ by the government monopoly trading organisations. The only few exceptions were those commodities which were listed in the Open General Licence (OGL) category. (i) Capital Goods: Capital goods were divided into restricted category and the OGL category. The import licences were required for restricted capital goods but those in the OGL could be imported without a licence, subject to several conditions. (ii) Intermediate Goods: Intermediate goods were also classified as: (a) banned goods, (b) restricted goods, (c) limited permitted goods, and (d) OGL category. Whereas banned, restricted and limited permissible lists were in the order of import stringency, OGL import of intermediate goods was regulated by the actual user condition. (iii) Consumer Goods: The import of consumer goods was totally banned except those consumer goods which were considered essential, and such goods could only be imported by the designated government canalising agencies.

Relaxation in Import Controls under the Trade Regime In 1977–78, the Export-Import Policy directed a slow and sustained relaxation of import controls. Several capital goods that were previously not allowed to be imported without an import licence were slowly shifted to the OGL category, resulting in an increase in the number of capital goods on the OGL list from 79 in 1976 to 1170 in 1988. These changes were made with the purpose of allowing domestic industries to modernise. During the 1980s, the import licensing of capital goods in the restricted list was also relaxed and administered with less severity.4 As a result, the import penetration ratio in the capital goods sector also increased to a significant number. There was a steady shift of items in the case of intermediate goods as well.

Emergence of Need for Economic Reforms Mid-1980s recorded a significant acceleration in the export growth rate. However, exports were growing relatively slower than imports. As a result, the balance of payments crunch could not be addressed but remained with an altered magnitude. The modernisation of industrial technology became imperative. The import control stiffened the growth of the manufacturing sector. From this backdrop, there emerged the necessity for economic reforms. But the process of liberalisation that started in mid1980s was very slow and fragmented. During the initial phase of this process, many export incentives were introduced and imports were tied to exports. However, the growth of imports over exports was continuously exerting a pressure on balance of payments. Despite buoyancy in export growth and slowdown in imports the balance of payments crunch got aggravated with the passage of time. In fact, at that time the foreign reserves were hardly enough to meet one month’s import bill. Fast moving trade reforms shifted the focus from quantitative import controls to a protective system based on tariffs. This move was initiated by the Rajiv Gandhi government in November 1985. Restrictions on import of capital goods were further relaxed to fuel technological modernisation of industry. In mid-1980s, the number and value of incentives offered to exporters were increased and the 4

Pursell, G., (1996), Indian Trade Policies since 1991–92 Reforms, The World Bank, Washington D.C.

Policy Framework for India’s Foreign Trade

7

administrative procedures were streamlined. The allotment of REP (replenishment) licences awarded to exporters on a product specific basis was made more generous and easy. The duty exemption scheme for imported input was also extended to cover all imported inputs for both direct and indirect exporters.

LO3 Explain major policy and economic reforms introduced during post-liberalisation era

POST-LIBERALISATION ERA It was the year 1991 which witnessed a major series of economic reforms and liberalisation, with emphasis on the external sector. The new trade policy was instrumental in reversing the direction followed for decades. The tariff protection further reduced, relaxed and simplified the restrictive import licensing regime. These economic reforms helped the country eliminate the ‘export pessimism’ of 1950s and 1960s. It was accepted that there was no wisdom in production being ‘domestic’, if such production was inefficient.

Growing Foreign Trade of India in Post-Liberalisation Era In the post-liberalisation era, a number of significant steps taken in liberalising telecommunications and other services such as shipping, ports and airports marked the beginning of the process to open up the economy. However, foreign participation could not pick up at a fast pace and administrative barriers continued to exist. Moving ahead in the direction of liberalising the trade policy, India amended its copyright law in 1994 followed by introduction of a remarkable change in tariff rates with the peak rate reduced from 300 per cent to 105 per cent, and the peak duty on capital goods was cut to 80 per cent. Customs duty rates also fell from an average of 97 per cent in 1990–91 to 29 per cent in 1995–96. These steps would earn a significant increase in India’s export as well as import during this period. Table 1.2 presents the trend in India’s exports and imports and balance of trade. Table 1.2 Year

India’s Trade during the Post-Liberalisation Period Export

% of change

Import

% of change

Total Trade

% of change

1992

44042

35.27

47841

13.65

91883

23.08

1993

53688

21.90

63375

32.47

117063

27.40

1994

69749

29.92

73177

15.47

142926

22.09

1995

82673

18.53

89971

22.95

172644

20.79

1996

106352

28.64

122678

36.35

229030

32.66

1997

118817

11.72

138920

13.24

257737

12.53

1998

130101

9.50

154176

10.98

284277

10.30

1999

139752

7.42

178332

15.67

318084

11.89

2000

159095

13.84

215529

20.86

374624

17.78

2001

201356

26.56

228307

5.93

429663

14.69

2002

209018

3.81

245200

7.40

454218

5.71 Contd...

8 Export Import Management 2003

255137

22.06

297206

21.21

552343

21.60

2004

293367

14.98

359108

20.83

652475

18.13

2005

375340

27.94

501065

39.53

876405

34.32

2006

456418

21.60

660409

31.80

1116827

27.83

2007

571779

25.28

838048

26.90

1409827

26.24

2008

655864

14.71

1005159

19.94

1661023

17.82

2009

840755

28.19

1374436

36.74

2215191

33.36

2010

845534

0.57

1363736

– 0.78

2209270

– 0.27

2011

1142922

35.17

1683467

23.45

2826389

27.93

2012

1459281

27.68

2345973

39.35

3805254

34.63

Source: Harikumar A., (2014). Changing Phases of the India’s International Trade before and after Liberalisation Period. International Journal of Application or Innovation in Engineering & Management. 3(3).

Relaxed Import Licensing Under the new economic reforms, import licensing was completely done away with respect to the import of most machinery, equipment and manufactured intermediate products. Internal reforms were introduced including reduced control over locational restrictions and industrial licensing. In a couple of sectors controls were further reduced on administrative prices. The major focus of the policy this time was on liberalisation of capital goods and flow of inputs for industry, to place domestic and exportoriented growth on the cards. However, import of consumer goods remained under regulations. No change was brought in the structure of export incentives and subsidies. Significant steps were taken in liberalising telecommunications and other services such as shipping, roads, ports and airports were gradually opened up. However, foreign participation could not pick up as expected and administrative barriers remained unchanged. As of December 1995, more than 3,000 tariff lines covering raw materials, intermediaries and capital goods were taken out from import licensing requirements.

Simplified Tariff Structure In 1994, India amended its copyright law to comply with the international obligations under the Trade Related Intellectual Property Rights (TRIPs) agreement. As discussed before, a significant change in tariff rates was recorded where peak rates were reduced from 300 per cent to 150 per cent, and the peak duty on capital goods was brought down to 80 per cent. Customs duty rates were also reduced from an average of 97 per cent in 1990–91 to 29 per cent to in 1995–96. However, there was no significant change in the tariff rates with respect to consumer goods which remained on the negative list. Tariffs were reduced from an average of 71 per cent in 1993 to 35 per cent in 1997. It is to be noted that in paper and paper products, printing and publication, wood and wood products, food and beverages and tobacco, the tariff structure was still complex and escalation remained high in several other industries. Tariff rates were reduced across the board on intermediate, capital and consumer goods. In this way, from a very complex customs tariff structure in 1991 with an incredible array of general, specific and user-end exemptions, the structure was simplified.5 5

Bhat T.P., (2011), Structural Changes in India’s Foreign Trade, Institute for Studies in Industrial Development, New Delhi.

Policy Framework for India’s Foreign Trade

9

The reforms in tariff and non-tariff barriers did not get the support of similar reforms on export subsidies and incentive programmes. These included income tax exemptions, subsidised credit, and export insurance and guarantees. The overall scope of such incentives was enhanced and it resulted in more explicit export-oriented policies, which increased the possibilities of resource misallocation. The lifting of quantitative restrictions took place in 2000 and 2001, after India could not defend them on balance of payments grounds at the WTO.

Reforms in Foreign Direct Investments Policy On the path of liberalisation, India also simplified its foreign investment regime and opened up a number of sectors to foreign direct investment. Since 1993, some major changes in this direction included automatic permissions for foreign equity participation of up to 50 per cent in some mining activities. This was also extended to oil exploration which was offered incentives such as tax holidays. The FDI policy was liberalised, allowing investments in a greater number of sectors making them eligible for automatic investment procedures. However, FDI was still restricted in a few sensitive sectors.

Foreign Trade Policy Reforms after 1991–92 In early 1991, a major economic crisis surfaced. The roots of the problem were mainly macroeconomic imbalances and the precipitating factor appeared as a sharp drop in foreign exchange reserves. The problem got further aggravated by cut-off in private foreign lending and downgrading of India’s credit rating. Despite the disbursement of IMF loan in January 1991, the situation did not stabilise immediately. The new government was formed under the leadership of P.V. Narasimha Rao as Prime Minister. The new government was committed to structural reforms but first it had to find a solution to the macroeconomic imbalances. The IMF loan turned out to be a big relief to the reform package which included 19 per cent devaluation of the rupee and abolition of export subsidies. Tight control on imports resulted in no immediate increase in the dollar value of exports. Tight fiscal situation, with deficit dropping from 8.3 per cent of GDP in 1991–92 to 5.9 per cent of GDP in 1992–93, resulted in the slowdown in GDP growth rate and rupee devaluation. The aforementioned factors were responsible for bringing a significant drop in the imports and reducing the current account deficit from 3.2 per cent to 0.4 per cent of GDP in the subsequent years. A large number of policy initiatives were introduced in the early 1990s which affected the balance of payment crisis to a significant extent. Following are the factors which contributed in this regard: At the time of initiation of the policy measures, it was estimated that the available foreign reserves were not sufficient to meet the requirements of imports for two weeks. Thus the country was faced with a severe crisis of foreign reserve. It was evident from the facts available that the major factor behind the crisis was fiscal deficit and the same was required to be curtailed sharply. With the passage of time, a large number of people expressed their discontent with India’s slow growth. The disintegration of the Soviet Union further altered perceptions and undermined the support for state dominance of economic activity.

10 Export Import Management

Figure 1.1

Fluctuations in India’s Foreign Trade

Adapted from: Harikumar A., (2014). Changing Phases of the India’s International Trade before and after Liberalisation Period. International Journal of Application or Innovation in Engineering & Management. 3(3)

Structural Changes in the Policy The payment crisis provided enough room to change the policy regime. The reforms proceeded slowly and gradually and structural changes began to take the desired shape in 1992. The main areas chosen for reforms in the initial phase were tariffs, exchange rates, non-tariff barriers and capital flows. Many of the reforms affected in the capital flows had a major impact on the domestic monetary system which was significantly liberalised. Changes in Tariff Structure: Taking another step towards the liberalisation of trade policy, in 1991, all intermediate inputs and capital goods were freed from the requirement of obtaining import licence. However, consumer goods which met approximately 30 per cent of the tariff lines were retained in the category of items requiring import licence. However, India had to face the criticism of its trading partners in the Dispute Settlement Body (DSB) of the WTO for the tariff lines of consumer goods. It was demanded by the trading partners that consumer goods must be free from licensing requirements, and a decade later in April 2001, India had to honour this demand. During this phase of liberalisation, other than the 300 tariff lines of goods which continued to be subjected to the licensing requirements (on grounds of environmental, health and safety considerations), all other items were allowed to be imported without taking any licence or meeting any other requirements. Some more items were canalised (imported by the government only), which included fertilisers, cereals, edible oils, and petroleum products. In 1980s, to turn quota rates into revenue stream for the government, there was a substantial increase in the tariff rates. This step could bring an increase of 44 per cent in tariff revenue

Policy Framework for India’s Foreign Trade

11

share of imports which was just 20 per cent in the previous years. After lifting the licensing restrictions, the increased tariff rates started serving the purpose of restrictions on imports. Thus in the early 1990s, it was decided that the tariff rates be lowered by a systematic and gradual compression of top rates and rationalising the tariff structure by reducing the number of tariff bands. These efforts in the direction of liberalisation brought down the top rates to 25 per cent by the end of 2003–04, and further lower to 20 per cent by the end of financial year 2007–08. Lifting of Foreign Exchange Controls: Another major step towards the liberalisation of trade policy in the 1990s was the lifting of foreign exchange controls. This step was aimed at cutting an extra layer of restrictions on imports that has existed for a long time in the country. The Indian rupee was devalued by 22 per cent against the dollar and the value of rupee came to 25.8 rupee from 22.2 rupee per dollar. Another initiative in the same direction worth mentioning was the introduction of a dual exchange rate system. Under this system, the exporters were allowed to sell 60 per cent of their foreign exchange in the free market while the remaining 40 per cent was to be put for sale to the government at a lower official price. The dual exchange rate system permitted the importers to purchase foreign exchange from an open market at the higher price. This is how the exchange control was effectively removed. It took only one year after the establishment of this market exchange rate that the official exchange rate got unified with it. Subsequent to the above actions, the government allowed many current account transactions at the market exchange rate. These transactions included the expenses related to education, foreign travel and also medical expenses. All these steps were taken to implement the IMF Article VIII obligations in order to make the Indian rupee officially convertible on the current account. At the same time, the restrictions on FDI and portfolio investments were also relaxed. The positive effect of these policy reforms was a remarkable increase in private capital inflows which rapidly built up the foreign exchange reserves for the country. Deregulation in Infrastructure Sector: The introduction of policy reforms facilitated major changes in the infrastructure sector of India due to the positive changes made in the external sector that was telecom. The telecom industry underwent vast improvement processes in both internal and external communications. Some noteworthy steps taken to improve the telecom sector included the deregulation, permissions for private entry into the cell-phone market and separation of the regulator from the state provider. These steps helped significantly in improving the Indian business environment and making it more business friendly. Although the Indian telecom services improved significantly, the achievements were not enough to match the service standards of developed countries. A number of actions were initiated to enhance infrastructure capacity in other areas; however the rapidly increasing real GDP resulted in frequent congestion and delays in all transport modes, similar to those in the previous times. Adding to the main problems such as the cost, delays and uncertainties, the substantially high port congestion also adversely affected the growth of external trade. Import Liberalisation: In the 1990s, imports underwent a virtual complete dismantling of controls overproducer imports, but imports of consumer goods did not enjoy any such

12 Export Import Management relaxation. In 2002, import prohibitions were completely lifted on the basis of the WTO ruling passed in this regard. Tariffs also were gradually reduced and some non-tariff barriers were lifted. To offset the effect of these relaxations, para tariffs were introduced in some cases. To uplift the protection levels some systematic steps such as anti-dumping measures were taken. A special cell in the Ministry of Commerce came into existence to monitor 300 sensitive import products. The main function of this cell was to ensure that imports to the country do not cause any disruption to domestic production. It did not take much time to realise that the effect of free imports was not as significant as anticipated. Subsequently the monitoring of imports was reduced and the tariff rates were further brought down to the South East Asian levels, leaving the average protection for manufacturing products at only 15 per cent in the year 2007. Even after these reductions and relaxations, the tariff rates in India were higher than many other emerging markets in the world. As per the estimations of WTO in 2005, the simple average of India’s MFN tariff was 18.3 per cent with an average of 49.8 per cent. Antidumping Measures: As discussed before, antidumping measures were introduced to offset the effect of the removal of trade restrictions and reduction in tariff rates as it was equally important to keep a close supervision on the imported items in the country. From 1995 to 2005, India introduced a total of 425 antidumping measures and consequently became the largest user of antidumping measures in the world compared to the US which was using 366 cases, the EU 327 cases and Argentina 204 cases. However in the subsequent years, the antidumping actions diminished, leaving India with only 205 cases under investigation by the end of September 2010. Most of the actions were taken against Chinese items amounting to 52 per cent of the total actions taken. Actions under antidumping measures are initiated to align national standards with international norms. For around 73 per cent of national standards, the corresponding international standards do exist, with which national norms are aligned. At the level of the Central Government, the government procurement process also underwent reforms, although preference was extended to certain items from small-scale industry and state-owned enterprises. Other Policy Measures: Many other measures were taken to relax control over foreign trade. The most important one include, the paperless procedures to obtain export finance or permission to export. Systematic steps were taken to significantly reduce the paper work and control the economic activity in general. These steps brought a positive change in the attitude of people towards the private sector in the country. Among other initiatives, product standardisation and quality testing procedures were improved significantly and a positive business environment was created for private sector to enter the foreign markets. Institutional infrastructure assisting exporters is now more effective and efficient. The problems of the exporters are addressed quickly and the dissemination of information and data is quicker and more effective.

Special Economic Zones India was one of the first countries in Asia to recognise the effectiveness of the Export Processing Zone (EPZ) model in promoting exports, with Asia’s first EPZ set up in Kandla in 1965. Trade initiatives

Policy Framework for India’s Foreign Trade

13

have moved towards the Special Economic Zones (SEZ) in recent years. Their intention is to enable exporters to avoid both the bureaucratic red tape governing transactions and the restrictive labour laws. The legislations permitting SEZs was passed in 2005 and regulations for implementation was promulgated in early 2006. The prime objective of the legislation is to promote the development of large-scale manufacturing of unskilled labour-intensive goods. The act aims at drastic simplification of procedures and for single window clearance on matters relating to central as well as state governments. Following are the main objectives of the SEZ Act: (1) generation of additional economic activity (2) promotion of exports of goods and services (3) promotion of investment from domestic and foreign sources (4) creation of employment opportunities (5) development of infrastructure facilities However, in 2007, licences granting SEZ status were suspended for several months because of political objections raised on the grounds that farmers were losing their land and large enterprises were using the legislation to obtain land inappropriately. Subsequently, this problem was addressed and the SEZ scheme was made more attractive through offers of tax holidays to investors.

Approval Mechanism of SEZs The developer has to submit the proposal for establishment of SEZ to the concerned State Government. The State Government forwards the proposal with its recommendation within 45 days from the date of receipt of such proposal to the Board of Approval. The applicant also has the option to submit the proposal directly to the Board of Approval. The Central Government constituted the Board of Approval which has been in exercise of the powers conferred to it under the SEZ Act. All the decisions are taken in the Board of Approval by consensus. The Board of Approval has 19 members. Its constitution is shared in Table 1.3. Table 1.3

Constitution of Board of Approval

1.

Secretary, Department of Commerce

Chairman

2.

Member, CBEC

Member

3.

Member, IT, CBDT

Member

4.

Joint Secretary (Banking Division), Department of Economic Affairs, Ministry of Finance

5.

Joint Secretary (SEZ), Department of Commerce

Member

6.

Joint Secretary, DIPP

Member

7.

Joint Secretary, Ministry of Science and Technology

Member

8.

Joint Secretary, Ministry of Small Scale Industries and Agro and Rural Member Industries

9.

Joint Secretary, Ministry of Home Affairs

Member Contd...

14 Export Import Management 10.

Joint Secretary, Ministry of Defence

Member

11.

Joint Secretary, Ministry of Environment and Forests

Member

12.

Joint Secretary, Ministry of Law and Justice

Member

13.

Joint Secretary, Ministry of Overseas Indian Affairs

Member

14.

Joint Secretary, Ministry of Urban Development

Member

15.

A nominee of the State Government concerned

Member

16.

Director General of Foreign Trade or his nominee

Member

17.

Development Commissioner concerned

Member

18.

A professor in the Indian Institute of Management or the Indian Institute Member of Foreign Trade

19.

Director or Deputy Sectary, Ministry of Commerce and Industry, Department Member Secretary of Commerce

Source: Special Economic Zones in India, Ministry of Commerce and Industry, Department of Commerce; http:// www.sezindia.nic.in, accessed on 25 January 2017

Administrative Set-Up A three-tier administrative set-up governs the functioning of the SEZs. The Board of Approval is the apex body and is headed by the Secretary, Department of Commerce. The Approval Committee at the Zone level deals with approval of units in the SEZs and other related issues. A Development Commissioner heads each Zone, who is ex-officio chairperson of the Approval Committee. Units are allowed to be set up in the SEZ only when an SEZ has been approved by the Board of Approval and Central Government has notified the area of the SEZ. All the proposals for setting up of units in the SEZ are approved at the Zone level by the Approval Committee consisting of the Development Commissioner, Customs Authorities and representatives of State Government. All post approval clearances are given at the Zone level by the Development Commissioner and such clearances include grant of importer-exporter code number, change in the name of the company or implementing agency, broad banding diversification, etc. The performance of the SEZ units is periodically monitored by the Approval Committee. The units are liable for penal action under the provision of Foreign Trade (Development and Regulation) Act, in case of violation of the conditions of the approval. The SEZs are attracting capital-intensive industries. In SEZs, 100 per cent FDI is allowed through automatic route. The government role has been more of a facilitator by fast tracking approval rather than providing any monetary incentives. By end of March 2012, a total of 3,400 units were approved in SEZs. Out of the total employment of 8,44,916 persons in SEZs an incremental employment of approximately 79 per cent was generated as on 31st March 2012. Almost double this number obtained indirect employment outside the SEZs as the result of the operations of the SEZ units. Total exports generated by the units in SEZs in the financial year 2011–12 was US$ 364477.73 and total investment in the SEZs reached up to US$ 36.27 billion. The SEZs, set up under the SEZ Act of 2005, are primarily private investment driven. Exhibit 1.1 provides the insights of some important facts about SEZs in India. Table 1.4 discusses Export Performance of SEZs.

Policy Framework for India’s Foreign Trade

15

Exhibit 1.1 Factsheet of SEZs – Approvals and Units Number of formal approvals

589

Number of notified SEZs (as on 389 (out of 589) + (7 Central Government + 12 State/Pvt. SEZs) 17 July 2012) Number of valid in-principle 48 approvals 153 (Break up: 17 are multi-product SEZs, remaining are IT/ITES, Operational SEZs (as on 31st engineering, electronic hardware, textiles, biotechnology, gem March 2012) and jewellery and other sector specific SEZs) Units approved in SEZs (as on 3,400 31st March 2012)

Land for SEZs

Notified SEZs

Formally Approved (FA) including notified SEZs

47,190 hectare

71,502 hectare

Land is a state subject. Land for SEZs is procured as per the policy and procedures of the respective state government. Investment (as on 31st March 2012) SEZs notified under the Act

Incremental Investment

Total Investment

US$ 32.79 billion

US$32.79 billion

State/Pvt. SEZs set up before US$ 1.06 billion 2006

US$ 1.37 billion

Central Government SEZs

US$ 1.65 billion

US$ 2.06 billion

Total

US$ 35.54 billion

US$ 36.27 billion

Employment (as on 31st March 2012) SEZs notified under the Act

Incremental Employment

Total Employment

5,52,048 persons

5,52,048 persons

State/Pvt. SEZs set up before 66,547 persons 2006

79,015 persons

Central Government SEZs

91,617 persons

2,13,853 persons

Total

7,10,212 persons

8,44,916 persons

Source:

Special Economic Zones in India, Ministry of Commerce and Industry, Department of Commerce; http://www.sezindia.nic.in, accessed on 25 January 2017

16 Export Import Management Table 1.4

Export Performance of SEZs Exports from SEZs 2010 –11

Per cent of total production

2011–12

Per cent of total production

DTA sale (counted for positive NFE)

29093.02

8.11

32472.70

8.00

DTA sale (not counted for positive NFE)

13881.20

3.87

29664.83

7.00

Total Exports Source:

315867.85

—

364477.73

—

Special Economic Zones in India, Ministry of Commerce and Industry, Department of Commerce; http://www.sezindia.nic.in, accessed on 25 January 2017

LO4 Understand the highlights of Export Import Policy (EXIM)—2009–14

HIGHLIGHTS OF EXPORT IMPORT POLICY 2009–14 The Union Commerce Ministry, Government of India announces the integrated Foreign Trade Policy (FTP) after every five years. This is also called the EXIM policy. This policy is updated every year and new schemes are added to the policy. New schemes come into effect on the first day of financial year, i.e., April 1, every year. The Foreign Trade Policy which was announced on Thursday, 28 August 2009, is an integrated policy for the period 2009–14.

Objectives The EXIM Policy 2009–14 aimed at enhancing the export potential, improving export performance, boosting foreign trade and earning valuable foreign exchange. The objectives of Foreign Trade Policy 2009–14 are to: Arrest and reverse the declining trend of exports (this aim will be reviewed after two years). Double India’s export of goods and services by 2014. Double India’s share in global merchandise trade by 2020 is a long-term aim of this policy. Set in motion the strategies and policy measures which catalyze the growth of exports. Encourage exports through a mix of measures including fiscal incentives, institutional changes, procedural rationalisation and efforts to enhance market access across the world and diversification of export markets. Figure 1.2 provides the details of India’s trade with ASEAN countries in recent years.

Relaxation in EPCG Scheme Obligations under EPCG scheme are much relaxed. EPCG scheme at Zero Duty has been introduced to aid technological upgradation of the export sector. Export obligation on import of spares, moulds, etc., under EPCG Scheme came down by 50 per cent.

Policy Framework for India’s Foreign Trade

Figure 1.2

17

India’s Trade with ASEAN

Source: Ministry of Commerce, Government of India, http://commerce.gov.in/InnerContent.aspx?Id=74, accessed on 25 January 2017

Re-fixation of Annual Average Export Obligation In a particular financial year, in which the exports declined from a specific country, the re-fixation of annual average export obligation was extended for a period of five years. This helped in managing the effect of decline in exports. At the same time necessary steps were taken to strengthen the support for green products and products from the North East.

Announcements for FPS, FMS, MLFPS Under this Scheme, 26 new markets were created. Incentives under FMS were moved from 2.5 per cent to 3 per cent and the incentives available under Focus Product Scheme (FPS) were revised from 1.25 per cent to 2 per cent. A new scheme to encourage and support export of ‘green products’ and some products from the North East was introduced, which was named as Focus Product Scheme. To avail the benefits under the various schemes, a common simplified application form was introduced. Some more products found their place under FPS and MLFPS. The list was extended by the addition of products like pharmaceuticals, textile fabrics, rubber products, glass products, auto components, motor cars, bicycle and its parts etc. However, the benefits of the schemes can be availed only if the exporting firm is able to export to a minimum of 13 identified markets.

Recognition of Towns of Export Excellence (TEE) Some cities were given the status of a town of export excellence. Following are such cities: Handicrafts : Jaipur, Srinagar and Anantnag Leather Products : Kanpur, Dewas and Ambur Horticultural Products : Malihabad

18 Export Import Management Scheme for Status Holders Under this Scheme, ‘Status Holders’ means star status holders. Here the Additional Duty Credit Script is given to Status Holders @ 1 per cent of the FOB value of past exports, in order to accelerate exports and encourage technological upgradation. This facility is open for the sectors of leather,6 textiles and jute, handicrafts, engineering,7 plastics and basic chemicals.8 The scheme remained in force up to 31 March 2011.

Extension of Income Tax Exemption to EOU (Export Oriented Unit) and STPI Income Tax exemption was granted to all such units which were 100 per cent EOUs and also to STPI units under Section 10B and 10A of Income Tax Act. The same exemption was extended for another financial year 2010–11 in the Budget of 2009–10.

Extension of ECGC At the end of 2008, an adjustment assistance scheme was initiated to provide enhanced ECGC cover at 95 per cent to those sectors which were adversely affected. The same scheme was extended till March 2010.

Announcements for Marine Sector Some of the important steps taken to support the marine sector included the exemption of fisheries from maintenance of average EO (Export Obligations) under EPCG Scheme (Export Promotion Capital Goods) along with seven other sectors. But fishing trawlers, boats, ships and other similar items were kept out of the scope of this exemption. Also, large amount of flexibility was ensured under the Target Plus Scheme (TPS)/Duty Free Certificate of Entitlement (DFCE) Scheme for the marine sector.

Announcements for Gems and Jewellery Sector Some steps were taken to make India an international trading hub of gems and jewellery. In the same direction, duty drawbacks were permitted on Gold Jewellery exports to neutralise duty incidence. To provide grading and certification, a new facility was put in place that allowed the import of cut and polished diamonds on a consignment basis. For participation in overseas exhibitions, the value limits of personal carriage were raised from US$ 2 million to US$ 5 million, while the personal carriage as samples, for export promotion tours, was also increased from US$ 0.1 million to US$ 1 million. A time limit of 60 days was set for re-import of exported gems and jewellery items. To further encourage the participation in overseas exhibitions, re-import of exported gems and jewellery was extended to 90 days in case the exports were made to the US.

Announcements for Agro Exports To facilitate export of perishable agricultural produce, a single window system of multi-functional nodal agencies was opened. It reduced the transaction and handling costs.

6

Excluding finished leather Excluding iron, steel and non-ferrous metals in primary and intermediate form, automobiles and two wheelers, nuclear reactors and parts, and ships, boats and floating structures 8 Excluding pharma products 7

Policy Framework for India’s Foreign Trade

19

Announcements for Leather Exports The exporters of leather were allowed to re-export the unsold imported raw hides and skins and also semi-finished leather. They could do so after the payment of 50 per cent of the applicable export duty.

Announcements for Tea Exports Minimum value addition under advance authorisation scheme for export of tea was reduced to 50 per cent, which was originally 100 per cent.

Announcements for Pharma Exports For the exports of pharmacy products, Export Obligation Period for advance authorisations was increased from existing 6 months to 36 months.

Announcements for Handloom Exports The requirement of a ‘Handloom mark’ for the export of handloom products was removed.

Scheme for Export Oriented Units (EOU) Without changing the criteria of ‘similar goods’, the EOUs got permission to sell their products in DTA (Domestic Tariff Area) up to a limit of 90 per cent instead of the existing 75 per cent, within the overall entitlement of 50 per cent for DTA sale.

Announcements for Value Added Manufacturing (VAM) It was made compulsory to do a 15 per cent value addition on imported inputs. This step was taken to encourage value added manufactured exports.

Announcements for Project Exports A large number of manufactured goods along with project exports got coverage under FPS (Focus Product Scheme) and MLFPS.

Easy Import of Samples It was made easy for exporters to import the sample pieces by increasing the number of duty free sample pieces from 15 to 50. The conversion of shipping bills from one export promotion scheme to another was made easier by providing a lot of flexibility. It was directed to Customs to allow this conversion to take place within three months, instead of the previously existing limited period of only one month.

Reduction in Transaction Costs Under the Advance Authorisation scheme for deemed supplies, the imported goods could be directly dispatched from the port.

Disposal of Manufacturing Wastes After the payment of the applicable excise duty, disposal of manufacturing wastes / scrap could be done. The same can now be done before meeting the export obligations under the Advance Authorisation and EPCG scheme.

20 Export Import Management Announcements for Sports Weapon To obtain licences for the import of sports weapon, the Regional Authorities were required to be approached. The licence was issued only if the applicant had received an NOC (No Objection Certificate) from the Ministry of Sports and Youth Affairs. Earlier, the DGFT (Director General of Foreign Trade) headquarters was required to be contacted for the same purpose.

Announcements for Medical Devices The procedure for issue of Free Sale Certificate was simplified and the validity of the certificate was also increased from 1 to 2 years.

Announcements for Automobile Industry For products which were not manufactured in India, the R&D establishments of automobile industry were allowed to freely import the reference fuels (petrol and diesel), up to a maximum of 5 kL per annum.

Import of Restricted Items The items listed under the restricted items category were permitted to be imported (as replenishment) against transferred DFIAs (Duty Free Import Authorisations) under the existing DFRC (Duty Free Replenishment Card) scheme. A provision was made for the state-run banks to provide dollar credits for such imports. Exhibit 1.2 provides important factual information about India’s export-import performance in the recent past. The data has been derived from the official website of the Ministry of Commerce and Industry, Government of India, sharing the growth of foreign trade in India. The link given at the end of the exhibit can be used to get deeper insights into the same.

Exhibit 1.2 India’s Export–Import Performamce: Current Scenario9 As per the rankings for the year 2014, India was the 19th largest exporter (with a share of 1.7 per cent) and 12th largest importer (with a share of 2.4 per cent) of merchandise trade in the world. In Commercial Services Export also India was found to be 8th largest exporter with a share of 3.2 per cent. India’s merchandise exports for the year 2014–15 stood at US$ 310.33 billion as against US$ 314.40 billion in 2013–14 registering a negative growth of 1.29 per cent. On the other hand imports in 2014–15 came down to US$ 448.03 billion from US$ 450.20 billion in 2013–14 registering a negative growth of 0.48 per cent. The Trade deficit in 2014–15 turned out at US$ 137.69 billion. Figures 1.3, 1.4 and 1.5 provide the insights of India’s export import performance in recent past.

9

Source: Department of Commerce, Ministry of Commerce and Industry, Government of India, Annual Report 2015-16 –“Accelerating Trade, Facilitating Business, Building India, http://commerce.gov.in/writereaddata/uploadedfile/MOC_635986646213330230_annual_ report_15_16_eng.pdf, accessed on 25 January 2017

Policy Framework for India’s Foreign Trade

Figure 1.3

Figure 1.4

21

India’s Share in World’s Export (figures in per cent)

India’s Merchandise Export in 2015–16 (figures in US$ billion)

Figure 1.5

India’s Service Trade in 2015–16 (figures in US$ billion)

Highlights of Foreign Trade Policy (FTP) 2015–20 To keep pace with the vision of “Make in India”, the Foreign Trade Policy 2015–20 has put special emphasis on providing suitable framework to encourage exports of goods as well as service. The policy highlights the requirements of generating new employment and adding value to it. The new policy provides a business friendly sustainable environment for foreign trade of goods and services and at the same time it also links rules, procedure and incentives for steps taken in the direction of the government’s new initiatives like “Make in India”, “Digital India” and “Skills India”.

22 Export Import Management

Key Terms International Bank of Reconstruction and Development (IBRD): IBRD is an international financial institution that offers loans to middle-income developing countries. The IBRD is the first of five member institutions that compose the World Bank Group. Open General Licence (OGL): An OGL is a type of export licence issued by a government to its domestic suppliers. In India, during the EXIM policies of the 70s and 80s, the freely imported/exported items were still monitored based on the licence issued under OGL. Trade Related Intellectual Property Rights (TRIPs) Agreement: TRIPS is an international agreement administered by the World Trade Organization (WTO) that provides minimum standards for many forms of intellectual property (IP) regulation as applied to the nationals of other WTO members. Import Tariff: A tariff is any tax or fee collected by the government. An import tariff is a tax imposed on goods to be imported. Though tariff is used in a non-trade context, it is commonly applied to a tax on imported goods. EXIM Policy: EXIM Policy is a set of guidelines and instructions established by the Directorate General of Foreign Trade (DGFT) in matters related to the import and export of goods in India.

In revIew The domestic production of a country reflects on the exports and imports of that country. Before Independence, India’s foreign trade was typical of a colonial and agricultural economy. Exports in the country composed mainly of raw materials and plantation crops, while imports consisted of light consumer goods and other manufactures. During 1950–60, the export proceeds increased, however they were not enough to meet the growing import demand. At the same time, India initiated negotiations with the International Bank of Reconstruction and Development (IBRD) in respect of loans to cover the foreign exchange needs of several of its development projects. The Second Five Year Plan carried a large foreign exchange component having special emphasis on the development of industry, mining and transport. A progressive tightening up of import policy took place in 1957. In the late 1950s, the government imports recorded a continuous upward trend, which included food imports. In June 1966, India resorted to the devaluation of Rupee in the face of financial crisis. After 1956, import licensing was tightened on a regular basis in response to the steadily worsening foreign exchange situation, and tariffs were increased to very high levels by early 1966. Till early 1980s, the trade regime of India was based on a complex system of licensing. India’s trade policy relied more on quotas than on tariffs. Imports were regulated and supervised through a licensing system without any policy prescriptions. Almost all imports were subject to discretionary import licensing or were ‘canalised’ by the government monopoly trading organisations. The Export-Import

Policy Framework for India’s Foreign Trade

23

Policy in the year 1977–78 directed a slow and sustained relaxation of import controls. The mid 1980s recorded a significant acceleration in the export growth rate. However, exports grew relatively slower than imports. A major programme comprising of a series of economic reforms and liberalisation was introduced in 1991 with emphasis on the external sector. Under the new economic reforms, import licensing was completely abolished with respect to import of most machinery, equipment and manufactured intermediate products. Internal reforms included reduced control over locational restrictions and industrial licensing. In some sectors controls were reduced on administrative prices. India amended its copyright law in 1994 to comply with its obligations under the Trade Related Intellectual Property Rights (TRIPs) agreement. The reforms in tariff and non-tariff barriers were not accompanied by similar reforms on export subsidies and incentive programmes. In the direction of liberalising, India also simplified its foreign investment regime and opened up a number of sectors to foreign direct investment. The 1990s Reforms were supported by the lifting of foreign exchange controls that had been serving as an extra layer of restrictions on imports for a long time. The policy reforms brought a major change in the infrastructure sector which had a positive effect on the external sector-telecom. For imports, the 1990s witnessed a virtual complete dismantling of controls over producer imports, but import of consumer goods remained prohibited. The removal of reductions in tariff rates and quantitative restrictions reduced the restrictiveness of the India’s trade regime. However, there has been a partial offset by the use of antidumping measures. Several other measures to relax control over foreign trade included a reduction in the amount of paper work required to obtain export finance or permission to export. The legislations permitting SEZs was passed in 2005 and regulations for implementation was promulgated in early 2006. The prime objective of the legislation is to promote the development of large-scale manufacturing of unskilled labour-intensive goods. In SEZs, 100 per cent FDI is allowed through automatic route. The Union Commerce Ministry, Government of India announces the integrated Foreign Trade Policy (FTP) after every five years. This is also called EXIM policy. The Foreign Trade Policy which was announced on 28 August 2009 is an integrated policy for the period 2009–14.

mulTIple ChoICe QuesTIons 1. India has been endowed with labour and land, but _______ was always a scarce factor of production. (a) capital (b) resources (c) legal protection (d) none of these 2. The structure of India’s foreign trade showed no exploitation of the country by the _______. (a) domestic industry (b) foreign rulers (c) global industry (d) all of these 3. The _______ had a large foreign exchange component and had special emphasis on the development of industry, mining and transport.

24 Export Import Management

4. 5.

6.

7.

8.

9.

10.

(a) First Five Year Plan (b) Second Five Year Plan (c) Third Five Year Plan (d) none of these India resorted to the devaluation of Rupee in the face of financial crisis in _______. (a) June 1966 (b) June 1976 (c) June 1986 (d) June 1990 Import licences allocated were based on the principle of _______. (a) essentiality (b) indigenous non-availability (c) both (a) and (b) (d) neither (a) nor (b) The import of _______ was not allowed except the goods which were considered essential and could only be imported by the designated government canalising agencies. (a) agricultural goods (b) consumer goods (c) capital goods (d) all of these India amended its copyright law in _______ to comply with its obligations under the Trade Related Intellectual Property Rights (TRIPs) agreement. (a) 1991 (b) 1989 (c) 1994 (d) 1999 Under _______, the government devalued the rupee by 22 per cent against the dollar from 22.2 rupee to 25.8 rupee per dollar. (a) 1991 reforms (b) 1980 reforms (c) both (a) and (b) (d) neither (a) nor (b) For imports, the 1990s saw a virtual complete dismantling of controls over producer imports, but imports of _______ remained prohibited. (a) agricultural goods (b) consumer goods (c) capital goods (d) all of these Till 1980s, the import licences were required for _______. (a) restricted capital goods (b) goods in the OGL (c) both (a) and (b) (d) neither (a) nor (b)

ConCepT QuesTIons 1. “India remained in race in the production of labour-intensive commodities.” Comment on the statement in the light of the historical backdrop of Indian economy. 2. Write a note on the trade regime of India till the 1980s. Discuss the complexities of the trade regime in details. 3. Highlight the major economic reforms of liberalised Indian Economy introduced in the year 1991. 4. Which major structural changes took place in the foreign trade policy of India from the year 1992 onwards? 5. Write a note on Special Economic Zone Act, 2005. Throw light on major achievements of the units in SEZs till 2012. 6. What were the key features of Export Import Policy (EXIM) – 2009–14? Discuss in detail.

Policy Framework for India’s Foreign Trade

25

FurTher readIng Department of Commerce, Ministry of Commerce and Industry, Government of India [1st April, 2015–31st March 2020], http://dgft.gov.in/exim/2000/ftp2015-20E.pdf; accessed on 15 February 2016. Directorate General of Foreign Trade (DGFT) (2009), Foreign Trade Policy Promotion, http:// dgft.gov.in/exim/2000/policy/FTP_Statement.pdf; accessed on 15 February 2016. The Institute of Chartered Accountants, (2008), Handbook on Foreign Trade Policy and Guide to Export & Import, Sahitya Bhawan Publications.

Answers to Multiple ChoiCe Questions 1. (a) 7. (a)

2. (b) 8. (a)

3. (b) 9. (b)

4. (a) 10. (a)

5. (c)

6. (b)

26 Export Import Management

Case Study Future of Foreign Trade in India Precision Perfection (the company) has a long and illustrious history of exporting to India. The company has earned a good reputation by delivering quality products and has been prized for the ultra-precision of its instruments. It started exporting to India 30 years ago and the country remains one of its top six worldwide markets. The dewpoint meters developed by the company are used to measure in parts per billion. Many years before, these meters were originally set up to record the moisture content of wool in the textile industry. For a long period of time, these meters were considered as specialists in measuring trace moisture in gases and compressed air. The company’s products are used in many industries and in India the company supplies its products to compressed air, electronics manufacture and power generation applications. In India, the company uses a long-standing representative to operate in the Indian market, although the managing director Mr Rob Anderson maintains a regular touch with both the representative and the end users. This helps the company in maintaining direct contact and developing important relationships with all the stakeholders of the business. Rob finds it important to keep those on the ground up to date with information and support as is required to maintain close ties with the end users. Mr Anderson shares his future expansion plans in India in the following words: “India is a growth market and the company foresees a bright future for business. The company has a strong market position there with a track record of impressive growth year after year. The company has earned a competitive advantage in India because of its pedigree. Having a shining history of being an established British manufacturing company, our company stands in good stead. The company has earned a reputation for quality products and excellent levels of service, which is supported by the long experience of operations in India that is more than 60 years. Other export firms having close relations with India have also discovered that doing business in India is very different from doing business in European countries.” Adding to the overwhelming experience of doing business in India, Mr Peterson cautions that one of the downsides of doing business in India is the high level of bureaucracy involved in trade procedures. His experience of dealing with many Indian organisations has forced him to conclude that organisations in India seemed to have adopted British bureaucracy and multiplied it further. His experience revealed that he had to issue more Letters of Credit for India than anywhere else in the world and it was the most popular and preferred option for many domestic industries. Additional paperwork often creates a lot of additional work with the order processing and payments procedures. Rob cautions his colleagues in following words: “The amount of paperwork required in India is three folds and much more complicated than in any other country in the world. It is further complicated by multistage procurement processes. But if you get it right, Indian companies are happy to deal with you again.”

Policy Framework for India’s Foreign Trade

27

Discussion Question 1. In the light of current changes taken place in the Foreign Trade Policy of India, and postliberalisation changes in policy framework and export import performance of the country, suggest an effective business strategy to this company.

References Foreign Trade Policy (2015–16) Government of India (2008 and 2009), The Economic Survey, New Delhi

28 Export Import Management

Annexure I: Trade Statistics of Foreign Trade ASEAN (Value in million US$) Provisional (as in June 2016) 2014–15 Country

Exports

Brunei Cambodia Indonesia Lao PDR

Imports

2015–16 (Apr–Feb) Trd. Bal

41.99

840.88

882.87

142.53

17.96

160.49

124.57

4043.32 15004.64 19047.96

– 17.97

67.31

Malaysia

Total Trade

85.28

– 798.89

Exports

Imports

Total Trade

Trd. Bal

25.72

554.02

579.74

128.09

51.32

179.41

76.77

2518.79 12082.37 14601.16

– 9563.58

152.59

– 35.94

36.15

5816.55 11117.74 16934.29

167.75

– 528.3

203.90

– 131.6

8408.38 11844.05

– 4972.71

– 5301.19

3435.67

773.24

1231.54

2004.78

– 458.3

942.25

894.24

1836.49

48.01

Philippines

1395.58

423.04

1818.62

972.54

1229.97

501.16

1731.13

728.81

Singapore

9809.36

7124.47 16933.83

2684.89

6978.51

6611.24 13589.75

Thailand

3464.83

5865.88

9330.71

– 2401.05

2730.02

5041.20

7771.22

– 2311.18

Viet Nam

6257.88

3003.35

9261.23

3254.53

4792.68

2355.25

7147.93

2437.43

Myanmar

367.27

Total of ASEAN 31812.58 44714.77 76527.35 – 12902.19 22817.84 36666.92 59484.76 – 13849.08 Per cent share in India’s total India’s total

10.2509

9.98

310338.4 448033.4 758371.8

9.6145

10.4548

237327.2 350718.2 588045.4

Source: Ministry of Commerce, Government of India, http://commerce.gov.in/InnerContent.aspx?Id=74, accessed on 25 January 2017

Annexure II: Trade Statistics of Foreign Trade-Europe-I (Value in million US$) Export / Import / Growth

(2014–15)

(2015–16)

Exports

49.36

44.60

Growth percentage over previous year

– 4.41

– 9.63

per cent share in total exports by India

15.94

17.02

Imports

49.21

43.53

Growth percentage over previous year

– 1.49

– 11.54

per cent share in total exports by India

10.98

11.44

Total Bilateral Trade

98.57

88.13

Growth percentage over previous year

– 2.97

– 10.59

Source: Ministry of Commerce, Government of India, http://commerce.gov.in/InnerContent.aspx?Id=74, accessed on 25 January 2017

Policy Framework for India’s Foreign Trade

29

Annexure III: Trade Statistics of Foreign Trade–North East Asian Countries (Value in million US$) Year

Exports

Imports

Total Trade

Trade Balance

2008–09

25,449.19

58,455.94

83,905.13

(–) 33,006.74

2009–10

28,904.56

53,491.57

82,396.13

(–) 24,587.01

2010–11

37,315.76

76,109.73

113,425.50

(–) 38,793.97

2011–12

45,349.59

94,883.00

140,232.59

(–) 49,533.41

2012–13

39,437.08

89,907.33

129,344.40

(–) 50,470.25

2013–14

40,816.49

84,372.93

125,189.41

(–) 43,556.44

Source: Ministry of Commerce, Government of India, http://commerce.gov.in/InnerContent.aspx?Id=74, accessed on 25 January 2017

Annexure IV: Trade Statistics of Foreign Trade–Sub-Saharan Africa (Value in billion US$)

Export Growth per cent over previous year

2013–14

2014–15

25.80

27.14

9.89%

5.20%

Import

31.53

34.75

Growth per cent over previous year

– 8.36%

10.25%

Total trade

57.32

61.89

Growth per cent over previous year

– 0.96%

0.07%

Source: Ministry of Commerce, Government of India, http://commerce.gov.in/InnerContent.aspx?Id=74, accessed on 25 January 2017

Chapter

Setting Up an International Trading Company

2

Learning Outcomes After reading this chapter, you will be able to: LO1 Know the details of structure, role and functions of Department of Commerce in India LO2 Discuss the insights of procedure to set up an international trading company LO3 Understand the meaning, eligibility and procedure to get IEC number for export-import business in India

INTRODUCTION In the last decade, India has emerged as a global trade dynamo blessed with vast natural resources and uninterrupted supply of skilled labour. Taking advantage of these two factors, Indian trade has grown exponentially over the past few years and export-led growth became a key driver of trade in India, which has played the role of a trailblazer in the recent enormous expansion of international trade. Recognising the importance of strong exports in the overall economic growth and poverty reduction, a number of structural reforms were initiated. The exports in India are rising at an appreciable rate which is well above the pace of growth of worldwide exports. In such a business environment, opportunities are plenty, as starting a trading business in India has never been easier.

LO1 Know the details of structure, role and functions of Department of Commerce in India

STRUCTURE, ROLE AND FUNCTIONS OF DEPARTMENT OF COMMERCE Role of the Department The mandate of the Department of Commerce is regulation, development and promotion of India’s international trade and commerce by formulating appropriate policies and implementing the various provisions thereof.

Setting Up an International Trading Company

31

The roles of this department can be summarised as: Enabling the establishment of an attractive business environment and infrastructure for accelerated growth of international trade. formulating, implementing and monitoring the foreign Trade Policy (fTP) which provides the basic framework of policy and strategy to be followed for promoting exports and trade. Reviewing the trade policy periodically and incorporating changes necessary to take care of emerging economic scenarios in both domestic and international economy. Carrying out the other responsibilities relating to multilateral and bilateral commercial relations, Special Economic Zones (SEZs), state trading, export promotion and trade facilitation, and development and regulation of certain export-oriented industries and commodities. As it is clear from above discussion that main role of the Department of Commerce is to provide a business friendly environment in the country to win the trust of business firms and thus ensuring the growth of international trade. Exhibit 2.1 provides details on the work allocated to the Department of Commerce.

Exhibit 2.1

Work Allocated to Department of Commerce in accordance with the Allocation of Business Rules, 1961

I. International Trade

II. Foreign Trade (Goods and Services)

III. State Trading

Contd...

32 Export Import Management

IV. Management of Certain Services

V. Special Economic Zones

Note

VI. Export Products and Industries and Trade Facilitation

Setting Up an International Trading Company

33

VII. Attached and Subordinate Offices

VIII. Statutory Bodies

IX. Miscellaneous

Source: http://commerce.nic.in/publications/pdf/anualreport_chapter1-2012-13.pdf; accessed on 25 January 2017

The department is functionally organised into the following eight divisions: 1. Administration and General Division 2. finance Division 3. Economic Division 4. Trade Policy Division 5. foreign Trade Territorial Divisions 6. State Trading and Infrastructure Division 7. Supply Division 8. Plantation Division

Organisational Set-up of the Department The various offices/organisations under the administrative control of the department are: 1. Three attached offices

34 Export Import Management 2. Eleven subordinate offices 3. Ten autonomous bodies 4. five public sector undertakings 5. Advisory bodies 6. fourteen export promotion councils 7. Other organisations The broad organisational set-up and major roles and functions of these bodies are discussed ahead in this section.

(1) Attached Offices (i) Directorate General of Foreign Trade (DGFT): DGfT is an attached office of the Ministry of Commerce and Industry and is headed by Director General of foreign Trade. DGfT came into inception in the year 1991, when liberalisation in the economic policies of the Government took place. This organisation has been essentially involved in the regulation and promotion of foreign trade. After liberalisation, the shift was from prohibition and control of imports/ exports to promotion and facilitation of exports/imports, keeping in view the interests of the country. This wing of the department is responsible for implementing the foreign Trade Policy with the main objective of promoting India’s exports. The DGfT also issues licences to exporters and monitors their corresponding obligations through a network of 35 regional offices and extension counters at Indore and Srinagar. (ii) Directorate General of Supplies and Disposals (DGS&D): The DGS&D, with headquarters at New Delhi, is headed by a director general. It is an executive arm of the Supply Division of the Department of Commerce for conclusion of rate contracts for common user items, procurement of stores, consultancy, etc. The functions of DGS&D are carried out through its three functional wings and supporting service wings. The DGS&D has also developed a comprehensive e-procurement package encompassing every aspect of its procurement activity. This package is implemented through NIC by a customised web-based application software, the package is nationally operated involving DGS&D headquarters, its three regional offices and 27 field offices. (iii) Directorate General of Anti-Dumping and Allied Duties (DGAD): The DGAD was constituted in April 1998 and is headed by the designated authority of the level of Additional Secretary to the Government of India who is assisted by a Joint Secretary and an Adviser (Cost). The directorate functions as a major agency to carry out investigations and recommending, where required, under the Customs Tariff Act, the amount of antidumping duty/ countervailing duty on the identified articles, as would be adequate to remove injury to the domestic industry.

(2) Subordinate Offices (i) Directorate General of Commercial Intelligence and Statistics (DGCI&S): DGCI&S is the premier organisation of the Government of India. This directorate, with its office located at Kolkata, is headed by the director general. Its functions include the collection, compilation and dissemination of trade statistics and various other types of commercial information

Setting Up an International Trading Company

35

required by the policy makers, researchers, importers, exporters, traders as well as overseas buyers. DGCI&S collects the basic data from different customs formations in the form of DTR (Daily Trade Return) and then processes and compiles it using state-of-the-art technology. (ii) Office of the Development Commissioner of Special Economic Zones (SEZs): The main objectives of the SEZ scheme include, generation of additional economic activity, promotion of exports of goods and services, promotion of investment from domestic and foreign sources, creation of employment opportunities along with the development of infrastructure facilities. All laws of India are applicable in SEZs unless specifically exempted as per the SEZ Act/ Rules. All SEZs are administered by the SEZ Act 2005, and SEZ Rules 2006. Units may be set up in the SEZ for manufacturing, trading or for service activities. The units in the SEZ have to be net foreign exchange earners, but they are not subjected to any predetermined value addition or minimum export performance requirements. (iii) Pay and Accounts Office (Supply): The payment and accounting functions of the supply division, including those of DGS&D, are performed by the Chief Controller of Accounts (CCA) under the departmentalised accounting system. Payments to suppliers across the country are made by this organisation at its headquarters in New Delhi and regional offices situated in Kolkata, Mumbai and Chennai. (iv) Pay and Accounts Office (Commerce and Textiles): The Pay and Accounts Office, common to both the Department of Commerce and the Ministry of Textiles, is entrusted with the responsibility to make payment of claims, accounting of transactions and other related matters through the four departmental pay and accounts offices in Delhi, two in Mumbai, two in Kolkata and two in Chennai. These offices are controlled by the Principal Accounts Office at Delhi with the Chief Controller of Accounts (CCA) as the Head of the Department of the accounts wing.

(3) Autonomous Bodies (i) Coffee Board: The Coffee Board is a statutory organisation constituted under Section (4) of the Coffee Act, 1942. It functions under the administrative control of the Ministry of Commerce and Industry, Government of India. The board has 33 members including the chairperson, who is the chief executive and functions from Bengaluru. The remaining 32 members representing the various interests are appointed as per provisions under Section 4(2) of the Coffee Act together with Rule 3 of the Coffee Rules, 1955. The board mainly focuses its activities in the areas of research, extension, development, quality upgradation, economic and market intelligence, external and internal promotion and labour welfare. (ii) Rubber Board: The Rubber Board was set up under Section (4) of the Rubber Act, 1947. Having its headquarters located at Kottayam in Kerala, the chairperson of the board is the chief executive officer of the board. The board ensures the development of the rubber industry in the country by way of assisting and encouraging scientific, technical and economic research; providing training to growers in improved methods of planting, cultivation, manuring, spraying, harvesting; improving processing and marketing of rubber; and collecting statistics from the owners of estates, dealers, processors and rubber product manufacturers. One of the main functions of the board is to secure better working conditions and provide/improve amenities and incentives to rubber plantation workers.

36 Export Import Management (iii) Tea Board: The Tea Board is an autonomous body under the Ministry of Commerce & Industry, Government of India. It was set up as a statutory body on 1 April 1954 as per provisions under Section (4) of the Tea Act, 1953. It is an apex body, which looks after the overall interests of the tea industry. The Board is headed by a Chairperson and there are other 30 members representing various interests pertaining to the tea industry. The Board’s functions and responsibilities include measures for development of the tea industry, extending financial and technical assistance to the tea growers, manufacturers and producers, export promotion and domestic generic promotion, regulating and controlling different marketing activities including that of tea auctions, facilitating R&D activities, market liaison, assistance to labour welfare activities, maintenance of statistical data, etc. (iv) Tobacco Board: The Tobacco Board was constituted as a statutory body on 1 January 1976 under Section (4) of the Tobacco Act, 1975. The board is headed by a chairman with its headquarters at Guntur, Andhra Pradesh and is entrusted with the responsibility to develop the tobacco industry. At present, the activities of board are restricted to production and marketing of Virginia tobacco only. However, the board performs the function of export promotion in all varieties of tobacco. (v) Spices Board: The Spices Board was constituted as a statutory body on 26 february 1987 under Section (3) of the Spices Board Act, 1986. the board is headed by a chairperson with its head office at Kochi. This board is responsible for the development of the cardamom industry and promoting the export of all the 52 spices listed in the schedule of the Spices Board Act, 1986. The primary functions of the board are to produce and develop small and large cardamom and the development, promotion and regulation of export of spices. (vi) The Marine Products Export Development Authority (MPEDA): The Marine Products Export Development Authority was set up as a statutory body in 1972 under an Act of Parliament (No. 13 of 1972). The authority, with its headquarters at Kochi and field offices in all the maritime states of India, is headed by a chairperson. It is responsible for development of the marine industry with special focus on marine exports. APEDA has been serving the agri-export community for 25 years and strives to reach out to exporters in different parts of the country. (vii) Export Inspection Council (EIC): The Export Inspection Council was set up as a statutory body on 1 January 1964 under Section 3 of the Export (Quality Control and Inspection) Act, 1963. The council ensures sound development of export trade of India through quality control and inspection and for matters connected therewith. It is an advisory body to the Central Government, with its office located at New Delhi and headed by a Chairperson. The executive head of the EIC is the Director of Inspection and Quality Control who is responsible for the enforcement of quality control and compulsory pre-shipment inspection of various commodities meant for export and notified by the Government under the Export (Quality Control and Inspection) Act, 1963. (viii) Indian Institute of Foreign Trade (IIFT): The Indian Institute of foreign Trade was registered in May 1963 under the Societies Registration Act, 1860. The institute with its head office at New Delhi and one regional branch at Kolkata is headed by a director. The institute was conferred ‘Deemed University’ status in 2002 and is engaged in the following activities:

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Conducting academic courses leading to award of PhD degree and degrees/diploma/certificate in international business, industrial marketing, capital and financial market and export management. Training of personnel in international trade. Organising research on issues in foreign trade, marketing research, area surveys, commodity surveys, market surveys. Dissemination of information arising from its activities relating to research and market studies. (ix) Indian Institute of Packaging (IIP): The Indian Institute of Packaging (IIP) is an apex body in the field of packaging and is a registered society under the Society Registration Act, 1860. It came into existence in the year 1966 by the packaging fraternity with the financial support of the Ministry of Commerce and Industry, Government of India. The primary function of the institute is to stimulate consciousness of good packaging; undertake and promote research and development in packaging and package design for export promotion. The functions include providing short-term and long-term educational and training programmes in packaging as well as organising seminars and conferences in collaboration with other ministries, government departments and industry associations.

(4) Public Sector Undertakings (PSUs) (i) State Trading Corporation of India Limited (STC): State Trading Corporation of India Limited was set up on 18 May 1956, primarily with a view to undertake trade with the East European countries and to supplement the efforts of private trade and industry in developing exports from the country. STC has played an important role in the country’s economy by arranging import of essential items of mass consumption (such as wheat, pulses, sugar, edible oils) into India and enabling the export of a large number of items from India. STC has achieved record breaking performances in the recent years. STC is today able to structure and execute trade deals of any magnitude, as per the specific requirement of its customers. (ii) MMTC Limited: The MMTC Limited (Minerals and Metals Trading Corporation) was incorporated in 1963 as an individual entity, on separation from State Trading Corporation of India Ltd. Its primary function is to deal in export of minerals and ores and import of non-ferrous metals. In 1970, MMTC took over import of fertiliser raw materials and finished fertilisers. Over the years import and export of various other items like steel, diamonds, bullion, etc., were progressively added to the portfolio of the company. (iii) Project and Equipment Corporation of India (PEC Limited): The PEC Limited was detached from the STC in 1971–72 to take over the canalised business of STC’s railway equipment division, to diversify into turn-key projects especially outside India and to aid and assist in promotion of exports of Indian engineering equipment. The main functions of PEC Ltd. are export of projects, engineering equipment and manufactured goods, defence equipment and stores; import of industrial raw materials, bullion and agro commodities; consolidation of existing lines of business and simultaneously developing new products and new markets; diversification in export of non-engineering items, e.g., coal and coke, iron ore, edible oils, and structuring counter trade/ special trading arrangements for further exports.

38 Export Import Management (iv) Export Credit Guarantee Corporation of India Limited (ECGC): The Corporation came into existence in 1957 as the Export Risk Insurance Corporation of India Ltd. Keeping in view the wider role played by the Corporation, the name was changed to Export Credit Guarantee Corporation of India Ltd. (ECGC). The company is the premier organisation in the country which offers credit risk insurance cover to exporters, banks, etc. The primary objective of the corporation is to promote the country’s exports by covering the risk of export on credit. (v) India Trade Promotion Organisation (ITPO): Two authorities, namely—Trade fair Authority of India (TfAI) and Trade Development Authority (TDA), were merged together in 1992 and the new organisation brought into inception was renamed as India Trade Promotion Organisation (ITPO). It is the premier trade promotion agency of India and provides a broad spectrum of services to trade and industry so as to promote India’s exports.

(5) Export Promotion Councils (EPCs) There are fourteen export promotion councils under the administrative control of the Department of Commerce. These councils are registered as non-profit organisations under the Companies Act/ Societies Registration Act. These councils perform both advisory and executive functions. The role and functions of these councils are guided by the foreign Trade Policy 2009–14. These councils are also the registering authorities for exporters under the foreign Trade Policy 2009–14.

(6) Advisory Bodies (i) Board of Trade (BOT): The Board of Trade (BOT) was reconstituted on 16 July 2009 under the Chairmanship of the Commerce & Industry Minister vide order No.01/94/180/438/AM05/ BOT/PC-V dated 16 July 2009. The Board of Trade, inter alia, advises the Government on policy measures connected with the foreign Trade Policy in order to achieve the objective of boosting India’s trade. (ii) Inter-State Trade Council: The Inter State Trade Council has been set up to serve as a mechanism for institutionalised dialogue between the union and the states in matters relating to trade facilitation and to create a framework for making the states partners in India’s export effort.

(7) Other Organisations (i) Federation of Indian Export Organisations (FIEO): The federation of Indian Export Organisations was set up in 1965. It is an apex body of various export promotion organisations and institutions with its major regional offices at Delhi, Mumbai, Chennai, and Kolkata. The primary function of fIEO is to render an integrated package of services to various organisations connected with export promotion. It provides the content, direction and thrust to India’s global export effort. (ii) Indian Council of Arbitration (ICA): ICA is India’s premier arbitral institution. It is a society registered under the Societies Registration Act, 1860, operating on a no-profit basis, with its head office in New Delhi and eight branches with a pan-India network. The organisation originally established in 1965 promotes and administers the use of alternative dispute resolution mechanisms in commercial disputes. The council functions to promote the knowledge and use of arbitration and provide arbitration facilities for amicable and quick settlement

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(iii)

(iv)

(v)

(vi)

39

of commercial disputes with a view to maintaining the smooth flow of trade, particularly export trade, on a sustained and enduring basis. Indian Diamond Institute (IDI): With the primary objective of enhancing the quality, design and global competitiveness of Indian jewellery, the Indian Diamond Institute was established as a society in 1978 with its office located at Surat. The Institute is sponsored by the Department of Commerce and patronised by the Gems and Jewellery Export Promotion Council (GJEPC). Footwear Design and Development Institute (FDDI): footwear Design and Development Institute was established in the year 1986 as a society under the Societies Registration Act, 1860. The main objective of the Institute is to train professional manpower for the footwear industry. It conducts a wide range of long-term and short-term programmes in the areas of retail management, fashion, footwear merchandising, marketing, creative design, and leather goods and accessories design, etc. The institute provides a one stop solution to the footwear industry and is internationally acclaimed as one of the premier institutes in the area of footwear design, technology and management. National Centre for Trade Information (NCTI): The National Centre for Trade Information (NCTI) was incorporated on 31 March 1995 as a company under Section 25 of Companies Act, 1956. It has a Board of Directors for administration of its affairs, which includes representatives from various premier organisations and Institutes such as the Ministry of Commerce & Industry, National Informatics Centre (NIC), Indian Institute of foreign Trade (IIfT), and Directorate General of Commercial Intelligence & Statistics (DGCI&S), India Trade Promotion Organisation (ITPO), Council for Leather Exports (CLE), the Marine Products Export Development Authority (MPEDA), PEC Ltd., Coir Board and ASSOCHAM. Price Stabilisation Fund Trust (PSF): Against the backdrop of decline in international and domestic prices of tea, coffee, rubber, and tobacco causing distress to primary growers, the PSf scheme was launched by the Government of India in April 2003. The growers of these commodities were particularly affected due to substantial reduction in unit value realisation for the above mentioned crops. At times, the unit value realisation fell below their cost of production. The objective of the scheme is to safeguard the interests of the growers of these commodities and provide financial relief when prices fall below a specified level.

LO2 Discuss the insights of procedure to set up an international trading company

PROCEDURE FOR SETTING UP AN INTERNATIONAL TRADING COMPANY Right strategies are the key for starting a profitable export-import business. However, their long-term success and profitability largely depends on the firm’s knowledge and understanding of international procedures, in addition to keen analysis of a foreign and procedure-centric market like India. So, to start a hassle free export-import business, the business firm must follow a time-tested formula for setting up an international trading company. It is also essential for prospective investors looking to start an export-import business in India to obtain all the necessary information with regard to matters associated with foreign trade agreements, which require a lot of preparation time.

40 Export Import Management The procedure to set up an international trading company in India can be divided into four steps, as depicted in figure 2.1.

Figure 2.1 Procedure to set up an International Trading Company in India

1. Registering a Company in India To start an export import business in India, the first step is to find a company which is already registered as an Indian company and fulfills all the requirements laid down by the Companies Act, 2013. To register a company in India, the proposed director(s) of the company first have to apply for a Director Identification Number (DIN), and the same can be obtained by submitting an application to India’s Ministry of Corporate Affairs. The application must include the individual applicant’s proof of residence, proof of identity and a recent colour photograph. After obtaining the number, the director may then begin the process of incorporating the company. Before legally registering and incorporating a company, an application has to be filed with the Registrar of Companies (ROC) of the state in which the company is proposed to be incorporated. Subsequently, a registration application having the names of the company’s directors, Memorandum of Association, Articles of Association and the following relevant documents, is submitted to the ROC. The documents required for the incorporation of the company include: Memorandum of Association Articles of Association Company agreement, if any, which includes all individual appointments (i.e., director, manager, etc.) A copy of the letter of the Registrar of Companies certifying payment of prescribed registration and filing fees All documents evidencing directorship and company structure

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Registered office forms and declaration of compliance with the requirements of the Companies Act After being satisfied that the above requirements have been fulfilled, the Registrar of Companies registers the company and issues a formal certificate of incorporation. Once the company has been registered and incorporated under Companies Act, it can then start the activities for export and importrelated matters.

2. Registering with the Director General of Foreign Trade The Ministry of Commerce and Industry in India is the largest and most important agency concerned with the promotion and regulation of foreign trade in India. It has an elaborate organisational structure aimed at facilitating the various aspects of domestic and international trade in the country. There are two departments under the Ministry of Commerce and Industry. The Department of Commerce (DoC) The Department of Industrial Policy and Promotion (DIPP)

Director General of Foreign Trade (DGFT) In India, exports and imports are regulated by the foreign Trade (Development and Regulation) Act 1992, which empowers the Indian Government to control the export-import policy and procedures. One of the most critical and active bodies concerned with the import and export of goods in India is the Director General of foreign Trade (DGfT) which undertakes the responsibility of interaction with investors. DGfT is an arm of the Ministry of Commerce and Industry’s Department of Commerce set up to deal with all matters related to India’s export/import policies. Some of its major resources are devoted to the execution of all foreign trade laws passed by the Central Government and the maintenance of an up-to-date database of all of India’s exporters and importers. Indian law requires all first-time exporters or importers to register themselves with the DGfT to collect a unique Importer Exporter Code (IEC) number for their business from the DGfT. The IEC number is a 10-digit code required for both exports and imports, and it is checked by Indian Customs during every single import-export transaction. To apply for an IEC number, the business firm has to submit the required document called the “Aayaat Niryaat form” (ANf2A) to the nearest regional authority of the DGfT. This form can be submitted online, via post or also in person. further, in order to obtain the code, the entity seeking to export or import goods, has to submit the following items as well: Two passport-size photographs of the legally responsible person Permanent Account Number (PAN) Current bank account number Banker’s certificate The procedure to obtain the IEC number will be discussed in details in the next section of this chapter. The PAN is another 10-digit code that is necessary for many financial transactions in India. PAN can be obtained by submitting an application accompanied by the applicant’s proof of residence and identity. for almost all export-import businesses, an IEC number is absolutely necessary; however,

42 Export Import Management certain exceptions do exist. If any business firm imports from Nepal, Myanmar (through the border), China or a small number of selected ports and locations around India, then an IEC number is not

3. Registering the Firm with Export Promotion Council (EPC) and Relevant Tax Authorities Registering with the Export Promotion Council After completing the initial registration process of a company, the next step to be taken is to register the company with the Export Promotion Council (EPC). The EPC is a non-profit organisation established to promote export of various goods from India in international markets. Having its branches all over the country, the EPC offers procedures based on provincial laws. The EPC also works closely with the Ministry of Industry and Commerce providing a platform for interaction between the exporting community and the Government of India. Given its function, exporters are required to obtain a registration and membership certificate from the EPC. In order to apply for registration from EPC, a certified copy of the IEC number has to be submitted along with the application form. The aspirants looking for registration with EPC are also required to submit membership fees which vary from one location to another.

Registration with Tax Authorities There are some benefits extended to the export firms to encourage exports from the country. for instance, after getting proper registration done with the tax authorities, an export firm may enjoy exemptions from value added taxes and sales taxes. To enjoy the maximum level of benefits, the company must be registered with all of the relevant authorities, such as the regional Sales Tax Department and the Export Import Credit Guarantee Corporation. However, both these organisations have different procedures varying from state to state. Therefore, it is advised to the export import firms to identify and register the export firm with all of the relevant local tax authorities, if the firm wishes to receive all of the possible benefits associated with exports and imports.

4. Obtaining Export/Import Licence and Certificate of Origin India’s export-import laws are no longer considered highly restrictive by any standard, and a majority of goods are able to make their way in and out of India without undergoing any licensing requirements, thus making export goods easy to administer, and also profitable. However this facility is not available to all type of goods, there is a certain specific category of items which still require a licence to export or import from relevant authorities.

Obtaining an Export Licence As discussed above, not all the products need export licence for their movement from the country. To determine whether a licence is required to export a particular commercial product or service, an exporter must first classify the item by identifying its ITC (HS) classification. ITC (HS), also known as Indian Trading Clarification, is based on a Harmonized System of Coding. ITC (HS) is India’s main method of classifying items for trade and export-import operations. The ITC-HS code, an 8-digit alphanumeric code representing a certain class/category of goods, is issued by the DGfT. It allows

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the exporter/importer to follow regulations concerned with those goods. ITC-HS codes are divided into following two different sections, or “schedules”. (i) ITC (HS) Import Schedule I: Schedule I deals with the rules and guidelines related to import policies, and is comprised of 21 sections in total. These 21 sections are further divided into 98 chapters providing detailed guidelines for classification of imported goods and regulations regarding specific items. (ii) Export Policy Schedule II: The Schedule II provides regulations surrounding an export policy and other issues surrounding certain exports. This schedule has 97 chapters, all of which provide thorough information about export procedures and policies. These chapters also provide regulatory information on different classes of export items. The DGfT maintains an up-to-date database having codes for all items to help the exporting firms looking for regulatory or trade-related information about any item in Schedules I and II. If the exporting firm discovers that a licence is indeed necessary for the product in question, then the firm has to file an application to the DGfT for obtaining the relevant licence. The Export Licensing Committee under the chairmanship of export considers all such applications. The DGfT sometimes make public announcements, timed to coincide with the implementation of new laws, noting that some specified goods that are not included in the ITC (HS) classifications of export and import items may be exported or imported without a licence. These announcements also lay down conditions for the export of certain specified items, which may include a minimum export price registration with the relevant authorities, quantitative ceilings and compliance with other relevant laws, rules or regulations.

Obtaining an Import Licence Indian custom laws do not prohibit the import of certain items. However, this does not mean that any item can be imported without obtaining any licence or permission from the relevant authorities. To restrict the import of certain items the Indian customs laws imposes import conditions on such items. To implement the regulations laid out in some of these laws, the importer is required to apply for an import licence, which is issued by the relevant governmental import authorities. Two copies of each import licence are issued, one is considered as the foreign exchange control copy, certifying the compensation for the foreign seller of the goods. The second copy is to be presented to the relevant customs authority for import clearance purposes. Without the necessary documents, import of any item run the risk of being declared unauthorised, which may subject it to confiscation or refusal of entry into the country. It must be noted that the renewable import licences remain valid for 24 months for capital goods and 18 months for raw materials components, consumables and spares.

Obtaining Certificates of Origin from Indian Chamber of Commerce Article II of the International Convention, relating to simplification of Customs formalities 1923, mandates each export to obtain a certificate of origin from the relevant authorities. This is done to confirm the country of origin of the goods to be exported. In India, if a business firm intends to export goods, it is required to register itself with the relevant authority which is the regional branch of Indian Chamber of Commerce (ICC) in this case. Performing its main functions, the ICC issues a NonPreferential Certificate of Origin to Indian exporters, in accordance with Article II of the International Convention Relating to Simplification of Customs formalities, 1923. The purpose of this certificate is to certify that the exported goods are of Indian origin.

44 Export Import Management The role of ICC is not limited to issuance of Certificate of Origin to the exported goods, rather ICC organises some very informative and useful programmes for the exporting and importing firms to increase their level of awareness about the foreign market conditions. When a company initiates the process of exporting goods, it may face some difficulty in meeting the requirements of foreign market; for example requirements related to air and maritime insurance for the exported products, adequate warehousing, and quality control resources etc. In such a situation, the limited knowledge of the exporting firm may appear as a barrier in the smooth export of goods. The programmes conducted by ICC, in association with other bodies, are found to be very useful and informative. Other platforms offering the assistance to new exporters are offered by the entities set up for this purpose only. Registering with these entities also provides the business firm with valuable inputs and contacts that may prove invaluable in getting to know the outside market. Exhibit 2.2 provides a glimpse of some significant prevailing business environment for foreign trade in India.

Exhibit 2.2 Changing Business Environment for Foreign Trade in India

Sources: http://www.india-briefing.com/news/establishing-trading-company-india-6946.html/, accessed on 25 January 2017 http://www.asiabriefing.com/store/book/trading-with-india-418, accessed on 25 January 2017

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LO3 Understand the meaning, eligibility and procedure to get IEC number for export-import business in India

IMPORTER EXPORTER CODE (IEC) As discussed before, the prerequisite to start an import-export business in India is to obtain an IEC. An IEC is necessary for import-export of goods. But in case the import-export is of services or technology, IEC is required for the import-export of ‘specified services’ or ‘specified technologies’, i.e., services or technologies in which international trade is restricted by the Government of India for national security reasons. IEC is not required under the following circumstances: 1. Import-export of goods for personal use, which is not connected with trade, manufacture or agriculture. 2. Import-export by government ministries and departments, and certain notified charitable organisations. There are some category of exporters and importers who are not required to obtain IEC. Exhibit 2.3 may be referred to get details of such exporter/importer before starting their business.

Exhibit 2.3 Importers-Exporters Exempted from Obtaining IEC

Source:

http://www.dgft.org/iec_code.html, accessed on 25 January 2017

Documents Required for Applying for the IEC Code following documents are required to obtain an IEC number: 1. Covering Letter: Covering Letter on firm/Company’s letter head for issue of new IEC code number.

46 Export Import Management 2. Application: Two copies of the application in prescribed format (Aayaat Niryaat form ANf 2A) to be submitted to the Regional Jt. DGfT office. Each individual page of the application has to be signed by the applicant. The application has to be submitted in duplicate. 3. Declaration: The declaration/ undertaking to be filled in and signed by the applicant. The same has to be submitted along with the application. 4. Bank Receipt: application fee in terms of Appendix 21B. 5. Banker’s Certificate: Certificate from the banker of the applicant firm in the format given in Appendix 18A. 6. PAN (Permanent Account Number) Card: The applicant is required to submit Self-certified copy of PAN issuing letter or PAN (Permanent Account Number) card issued by the Income Tax Authority. If the applicant does not hold the PAN then a copy of PAN allotment letter from IT Department is also accepted. It is to be noted that only one IEC is issued against a single PAN number. Any proprietor can have only one IEC number and in case there is more than one IEC allotted to a proprietor, the same has to be surrendered by the proprietor to the regional office for cancellation. Thus two IEC cannot be issued against one PAN. 7. Photographs of the Applicant: Two copies of passport size photographs of the applicant. The photograph pasted on the banker’s certificate must be attested by the banker with the seal and signature of the applicant. 8. Self-addressed Envelope: The applicant is required to furnish a self-addressed envelope of size 40 × 15 cm, with postal stamp affixed on the envelope for all documents required to be sent by speed post. These documents may be kept secured in a file cover.

Procedure to Apply for IEC Application can be submitted by an authorised employee of the firm/ company at the counter in person at the office, or it can also be sent through post/courier. An acknowledgement in the form of a receipt bearing file number is generated on receipt of the application. This file number can be used for any correspondence/query regarding the IEC application submitted to the office. Afterwards the application is sent to IEC section where it is processed. If the application is found complete in all aspects (as per requirements prescribed) an IEC is generated, or else a deficiency letter stating the nature of deficiency is prepared and sent to the applicant. The reply from the applicant is awaited in cases where deficiency letter is issued and after due compliance by the applicant the IEC is allotted. IEC allotment letter is sent through post at the registered office mentioned by the applicant in the application. Similarly, deficiency letters are sent to the applicant by post.

Online Application for IEC Code Till 2010, the applications for the allotment of IEC number were submitted physically with the Regional Jt. Director General of foreign Trade office. But vide Policy Circular No. 10 (RE-2010)/ 2009–14 dated 31 December 2010, the facility for Online Application for IEC Code has been given to the applicants, w.e.f. 01.01.2011 on the DGfT website (http:/ /dgft.gov.in). This initiative has reduced the transaction cost and time for the applicant and ensured easy, flexible filing of applications, thereby reducing human interface and paper work in the process. But under this policy circular, the option of

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online application is not mandatory; rather the option to file the application physically is also given. The documents required under online application are the same as those used for physical submission of documents, and which have been discussed above.

Eligibility and Other Provisions for Applying for IEC Eligibility conditions and legal provisions for obtaining IEC number are laid down in foreign Trade (Regulation) Rules, 1993 Ministry of Commerce, Notification No. GSR 791 (E), dated 30 December 1993. However, Directorate General of foreign Trade (DGfT) issued a Policy Circular No.15 (RE2006)/2004-2009 dated 27 July 2006) for the new system for issuance of importer-exporter code number. Important provisions in this regard are discussed as follows: No export or import is allowed to be made by any person without an IEC number unless specifically exempted. An IEC number is to be granted on application to the competent authority. Every application for IEC number has to be made by the registered/head office of the applicant, unless otherwise specified. The application is to be submitted to the Regional Authority of Directorate General foreign Trade, as per the territorial jurisdiction of the regional authorities and the application has to be accompanied by documents prescribed therein. In case of STPI/ EHTP/ BTP units, the regional offices of the DGfT exercising jurisdiction over the district in which the registered/head office of the unit is located has to issue or amend the IECs. The concerned licensing authority issues an IEC number in the format as given in Appendix 2B and dispatches it to the applicant’s address. IEC is dispatched through speed post to verify the address of the firm/ entity which intends to carry on the import-export business. Thus the IEC number will not be handed to the applicant over the counter and it is mandatory for the entity to affix the board indicating name and address of the firm at the place of business. An IEC number allotted to an applicant remains valid for all its branches/divisions/units/ factories as indicated on the IEC number. If an IEC number is lost or misplaced, the business firm has to apply for the issue of a duplicate copy of the IEC number. The issuing authority may consider requests, if the application is accompanied by following documents: Request letter on letter head for issue of duplicate IEC Application form as per Appendix 2 and 3 in duplicate Copy of IEC or IEC number Copy of fIR fT If an IEC holder does not wish to operate the allotted IEC number, he can surrender the same by informing the issuing authority. On receipt of such intimation, the issuing authority immediately cancels the same and electronically transmits it to DGfT for onward transmission to the customs and regional authorities, to intimate that the said IEC number has become inoperative.

48 Export Import Management In case of a change in the name/address or constitution of the IEC holder/licence, the actual user eligible for import without a licence/recognised status as the case may be, ceases to be eligible to import or export against the licence/IEC number or any other facility permitted under the Policy and Handbook, after the expiry of 60 days from the date of such change in his name or constitution as applicable.

Key Terms Directorate General of Supplies and Disposals (DGS&D): The DGS&D is an executive arm of the supply division of the Department of Commerce for conclusion of rate contracts for common user items, procurement of stores, consultancy, etc. Directorate General of Anti-Dumping and Allied Duties (DGAD): DGAD functions as a major agency to carry out investigations and recommending, where required. Directorate General of Commercial Intelligence and Statistics (DGCI&S): DGCI&S is the premier organisation of Government of India, responsible for collection, compilation and dissemination of India’s trade statistics and commercial information. Marine Products Export Development Authority (MPEDA): The Marine Products Export Development Authority is responsible for development of the marine industry with special focus on marine exports. Export Inspection Council (EIC): The Export Inspection Council ensures sound development of export trade of India through quality control and inspection and for matters connected therewith. Indian Institute of Packaging (IIP): The Indian Institute of Packaging (IIP) is an apex body in the field of packaging and the primary function of the institute is to stimulate consciousness of good packaging, undertake and promote research and development in packaging and package design for export promotion. State Trading Corporation of India Limited (STC): State Trading Corporation of India Limited undertakes trade with the East European countries and supplements the efforts of private trade and industry in developing exports from the country. MMTC Limited (Minerals and Metals Trading Corporation): The MMTC Limited (Minerals and Metals Trading Corporation) deals in export of minerals and ores, and import of non-ferrous metals. In 1970, MMTC took over import of fertiliser raw materials and finished fertilisers. Export Credit Guarantee Corporation of India Limited (ECGC): The Export Risk Insurance Corporation of India Ltd. is the premier organisation in the country which offers credit risk insurance cover to exporters, banks, etc. The primary objective of the Corporation is to promote the country’s exports by covering the risk of export on credit. Federation of Indian Export Organisations (FIEO): The federation of Indian Export Organisations renders an integrated package of services to various organisations connected with export promotion.

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Importer Exporter Code (IEC): An IEC is necessary for import-export of goods. But in case the import-export is of services or technology, IEC is required for the import-export of specified services or specified technologies.

In revIew The mandate of the Department of Commerce is regulation, development and promotion of India’s international trade and commerce by formulating appropriate international trade and commercial policies and implementing the various provisions thereof. The department is functionally organised into eight divisions. Director General of foreign Trade (DGfT) is responsible for implementing the foreign Trade Policy with the main objective of promoting India’s exports. DGC&S is an executive arm of the supply division of the Department of Commerce for conclusion of rate contracts for common user items, procurement of stores, consultancy, etc. DGAD functions as a major agency to carry out investigations and recommending, where required, under the Customs Tariff Act. DGCI&S collects, compiles and disseminates trade statistics and various types of commercial information required by the policy makers, researchers, importers, exporters, traders as well as overseas buyers. The Coffee Board mainly focuses its activities in the areas of research, extension, development, quality upgradation, economic and market intelligence, external and internal promotion and labour welfare. The Rubber Board ensures the development of the rubber industry by way of assisting and encouraging scientific, technical and economic research. The Marine Board is responsible for development of the marine industry with special focus on marine exports. IEC ensures sound development of the export trade of India, through quality control and inspection and for matters connected therewith. ICA functions to promote the knowledge and use of arbitration and provide arbitration facilities for amicable and quick settlement of commercial disputes with a view to maintaining the smooth flow of trade, particularly export trade on a sustained and enduring basis. To start an export-import business in India, the first step is to bring a company into inception which is already registered as an Indian company and meets all the requirements laid down by the Companies Act, 2013. In India, exports and imports are regulated by the foreign Trade (Development and Regulation) Act 1992, which empowers the Indian Government to control the export-import policies and procedures. Indian law requires all first-time exporters or importers to register themselves with the DGfT to collect a unique Importer Exporter Code (IEC) number from DGfT for starting their business. The IEC number is a ten-digit code required for both exports and imports, and it is checked by Indian customs during every single import-export transaction. Once the initial registration is complete, the next step is to register the company with the Export Promotion Council (EPC). In order to enjoy the maximum level of benefits, the company must be registered with all of the relevant authorities, such as the regional Sales Tax Department and the Export Import Credit Guarantee Corporation—both of which have different procedures that vary from state to state. Not all the products need export licence for their movement from the country. ITC (HS), also known as Indian Trading Clarification based on a Harmonized System of Coding, is

50 Export Import Management India’s main method of classifying items for trade and export-import operations. The ITC-HS code is issued by the DGfT. Indian customs laws do prohibit the import of certain items. In order to restrict the import of certain items, the Indian customs laws impose import conditions on such items. To deal with such regulations laid out in some of these laws, the importer has to apply for an import licence, which is issued by the relevant governmental import authorities. Article II of the International Convention Relating to Simplification of Customs formalities 1923, provides that each export has to obtain a certificate of origin from the relevant authorities, to confirm the country of origin of the goods to be exported. No export or import is allowed to be made by any person without an IEC number unless specifically exempted. IEC is dispatched through speed post to verify the address of the firm/ Entity which intends to carry on the import-export business. An IEC number allotted to an applicant remains valid for all its branches/divisions/units/factories as indicated on the IEC number.

mulTIple ChoICe QuesTIons 1. The mandate of the Department of Commerce is _______ of India’s international trade. (a) regulation (b) development (c) promotion (d) all of these 2. _______ is an attached office of the Ministry of Commerce and Industry and is headed by Director General of foreign Trade. (a) Directorate General of foreign Trade (DGfT) (b) Directorate General of Supplies and Disposals (DGS&D) (c) Directorate General of Anti-Dumping & Allied Duties (DGAD) (d) Directorate General of Commercial Intelligence and Statistics (DGCI&S) 3. _______ collects, compiles and disseminates trade statistics and various types of commercial information required by the policy makers, researchers, importers, exporters, traders, as well as overseas buyers. (a) Directorate General of foreign Trade (DGfT) (b) Directorate General of Supplies and Disposals (DGS&D) (c) Directorate General of Anti-Dumping & Allied Duties (DGAD) (d) Directorate General of Commercial Intelligence and Statistics (DGCI&S) 4. _______ was conferred ‘Deemed University’ status in 2002. (a) Export Inspection Council (EIC) (b) Indian Institute of Packaging (IIP) (c) Indian Institute of foreign Trade (IIfT) (d) None of these

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5. The Trade fair Authority of India (TfAI) and the Trade Development Authority (TDA) were merged together in 1992 and the new organisation brought into inception was renamed as _______. (a) State Trading Corporation of India Limited (STC) (b) India Trade Promotion Organisation (ITPO) (c) Indian Council of Arbitration (ICA) (d) National Centre for Trade Information (NCTI) 6. To start the export import business in India, the first step is to _______. (a) register with Director General of foreign Trade (b) obtain an Importer-Exporter Code (IEC) number (c) register a company in India (d) any of these 7. In India, exports and imports are regulated by the _______. (a) foreign Exchange Management Act (b) Competition Act (c) Companies Act (d) foreign Trade (Development and Regulation) Act 8. Once the initial registration is complete, the next step is to register the company with _______ (a) Relevant Tax Authorities (b) The Export Promotion Council (EPC) (c) Registrar of Companies (d) None of these 9. _______ deals with the regulations surrounding export policy and other issues surrounding certain exports. (a) Export Policy Schedule II (b) ITC (HS) Import Schedule I (c) Both (a) and (b) (d) Neither (a) nor (b) 10. IEC allotment letter is sent _______ at the registered office mentioned by the applicant in the application. (a) by post only (b) by person only (c) either by post or person (d) none of these

ConCepT QuesTIons 1. Discuss the structure, role and functions of the Department of Commerce in the promotion of international trade in India. 2. Write short notes on the following: (a) Office of Development Commissioner of Special Economic Zones (SEZs) (b) The Marine Products Export Development Authority (MPEDA) (c) Indian Institute of foreign Trade (IIfT)

52 Export Import Management (d) Indian Institute of Packaging (IIP) (e) federation of Indian Export Organisations (fIEO) 3. Discuss in detail all the steps of setting up an international trading company in India. 4. What do you understand by IEC number? Explain the procedure to obtain the IEC number to start export-import business in India.

FurTher readIng https://industries.cg.gov.in/; accessed on 25 January 2017. Gupta, Agham (2016), Entrepreneurs: Here’s how to start your import export business, https:// yourstory.com/2016/07/start-your-import-export-business/; accessed on 25 January 2017. Department of Industrial Policy and Promotion, Ministry of Commerce and Industry, Government of India, Consolidated FDI Policy (Effective from April 17, 2014), http://dipp.nic.in/ English/Policies/fDI_Circular_2014.pdf; accessed on 25 January 2017.

Answers to Multiple ChoiCe Questions 1. (d) 7. (d)

2. (a) 8. (b)

3. (d) 9. (a)

4. (c) 10. (a)

5. (b)

6. (c)

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Exercise In recent times, India has witnessed a major growth in the export and import of goods and services. Encouraged by this positive change, more and more entrepreneurs or startups are venturing into this area. Leather industry in India is one such industry which has been explored by many start-ups in the recent past. A large number of small and medium-sized companies are already doing this business successfully. India has held a strong position for years in exporting leather products like wallets, belts, toys, and handbags. Radhey, an engineer by profession, has been supplying leather products to corporate clients in the domestic market. He is keen to expand his business outside geographic boundaries through exports. However jumping into the export of leather products without having complete understanding of the export import business in India may turn out to be a nightmare experience.

Question 1. Advise Radhey the procedures to start the export business of leather products and other compliances to be followed. Prepare a pre-checklist for this purpose and explain the purpose of each item in the list.

References http://commerce.gov.in/InnerContent.aspx?Id=9; accessed on 25 January 2017. http://commerce.nic.in/publications/anualreport_chapter1-2009-10.asp; accessed on 25 January 2017.

54 Export Import Management

Annexure I: Application Form for Issue/Modification in Importer Exporter Code Number (ANF 2A)#

Part A To be filled by the Issuing Authority IEC Details 1. IEC Number 2. Date of Issue 3. Issuing Authority

To be filled by the applicants Unattested photograph of the applicant. Identical photograph should be used on the bank certificate. Note: Please state ‘Not Applicable’ wherever the information/data is not applicable to you. Fields marked * are optional. All others are mandatory. 1. Applicant Firm Details i. Name ii. Address (Registered Office in case of Companies and Head Office in case of Others) iii. Address of all Branches/Divisions/Units/Factories located in India and abroad (attach extra sheet if required) iv. Telephone* v. Email address (for correspondence with DGFT)* vi. Name and Designation of the person whose photograph has been affixed on the Bank Certificate.

#

Source: http://www.dgft.org/iec_code.html

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2. Details of Proprietor/Partners/Directors/Karta/Trustee of the applicant firm (attach extra sheet if required) Total Number of Partners/Directors/Karta/Trustee in the applicant firm Following information may be provided for each Proprietor/Partners/Directors/Karta/Trustee of the applicant firm i. Name ii. Father’s Name iii. Residential Address iv. Telephone

3. Nature of Concern (please tick) ( ) i. Government Undertaking ii. Public Limited Company iii. Private Limited Company iv. Proprietorship v. Partnership vi. Others

4. Type of Exporter (please tick) ( ) i. Merchant Exporter ii. Manufacturer Exporter iii. Service Provider iv. Others (please specify) v. Merchant cum Manufacturer

5. Bank Account Details i. Name of the Bank ii. Address of the Bank iii. Type of Bank Account iv. Bank Account Number v. Year of opening Bank Account

6. PAN Details i. PAN Number ii. Issuing Authority

56 Export Import Management 8. Application Fee Details Amount (Rs)—Rupees Demand Draft Date of Issue Name of the Bank and its Branch on which drawn

Signature of the Applicant:

Place:

Name:

Date:

Designation: Official Address: Telephone: Residential Address: Email Address:

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Part B Format of Bank Certificate for Issue of IEC (To be issued on the official letterhead of the Bank) Ref. No. ........................... To .......................................... .......................................... .......................................... (Name and address of the licensing authority) Sir/ Madam, We certify that M/s ...................................................................... (Name and Address of the applicant) are maintaining a Savings Bank Account/Current Account (tick whichever is applicable) number ......................... with us since .................. ................ Affix Passport Size Photograph of the applicant Note: The Banker must identify and attest the photograph. Date: ................... Place: ..................

(Signature of the Banker) Name ......................... Designation .........................

Bank Stamp

58 Export Import Management Part C For Modification of Import-Export Code Number IEC Number 1. Details of Modification S. No.

Details of Modification required Existing details

Modification required

Modification-1 Modification-2 Modification-3

2. Documents to be submitted in support of the claim a. In case of Proprietorship firms, please furnish documentary evidence regarding i. Date of Birth of individual ii. Number of IEC’s held along with their details b. In case of Companies, please furnish documentary evidence regarding i. Date of incorporation ii. In case of others iii. Date of formation

Signature of the Applicant: Name: Date: Designation: Official Address: Telephone: Residential Address: Email Address:

Place:

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Part D Declaration / Undertaking 1. I/We hereby declare that the particulars and the statements made in this application are true and correct to the best of my/our knowledge and belief and nothing has been concealed or held there from. 2. I/We fully understand that any information furnished in the application if found incorrect or false will render me/us liable for any penal action or other consequences as may be prescribed in law or otherwise warranted. 3. I/We undertake to abide by the provisions of the foreign Trade (Development and Regulation) Act, 1992, the Rules and Orders framed thereunder, the foreign Trade Policy, the Handbook of Procedures and the ITC (HS) Classification of Export and Import Items. 4. (a) I/We hereby certify that the firm/company for whom the application has been made has not been penalised under the Customs Act, Excise Act, foreign Trade (Development & Regulation) Act, 1992 and fERA/fEMA. (b) I/We hereby certify that none of the Proprietor/Partner(s)/Director(s)/Karta/Trustee of the firm/company, as the case may be, is/are a Proprietor/Partner(s)/Director(s)/Karta/Trustee in any other firm/Company which (i) has come to the adverse notice of DGfT, (ii) is in the caution list of RBI. (c) I/We hereby certify that neither the Registered Office/Head Office of the firm/company nor any of its Branch Office(s)/Unit(s)/Division(s) has been declared a defaulter and has otherwise been made ineligible for undertaking import-export under any of the provisions of the Policy. 5. NRI interest in the firm – Kindly tick one of the following: (i) There is no non-resident interest in the firm/company and no non-resident investment with or without repatriation benefits has been made in the firm/company; or (ii) There is non-resident interest in the firm/company and non-resident investment without repatriation benefits in the firm/company is held with the general/specific permission of RBI; or (iii) There is non-resident interest in the firm/company and non-resident investment with repatriation benefits in the firm/company is held with the specific permission of RBI. In case of NRI interest/holding with repatriation benefits in the firm/company, please furnish (i) RBI Approval Number (ii) RBI Approval Date 6. I/We hereby declare that I/We have not obtained nor applied for issuance of an Importer Exporter Code number in the name of our Registered/Head Office or any of our Branch(s)/ Unit(s)/Division(s) to any other Licensing Authority. 7. I hereby certify that I am authorised to verify and sign this declaration as per Paragraph 9.9 of the Policy. Signature of the Applicant: Place: Name: Date: Designation: Official Address: Telephone: Residential Address: Email Address:

Chapter

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Learning Outcomes After reading this chapter, you will be able to: LO1 Understand the meaning and legal implications of international commercial contracts LO2 Know the insights of legal aspects of international sales contracts LO3 Discuss the risks involved in international sales contracts LO4 Review the details of insurance in international trade LO5 Illustrate the process of arbitration in international trade disputes

INTRODUCTION While transporting the goods from one country to another, if any of the parties to the contract either breach the contract or the goods are damaged or lost during transit, the aggrieved party has to undergo a complex, expensive and time consuming process to enforce its rights against the other party because of the cost and time required for legal proceedings. The business firms engaged in export-import business must be prepared to manage complex legal terrain of international transportation to avoid any trouble in future. The firms must give special attention to contract negotiations and insurance coverage to avoid transportation risks associated with cargo delays, damages, non-acceptance, and non-delivery. It must not be forgotten that the export-import firms have also need to fulfill the legal documentation requirements and regulatory compliances framed by different countries.

LO1 Understand the meaning and legal implications of International Commercial Contracts

INTERNATIONAL COMMERCIAL CONTRACTS A commercial contract is formed for a commercial transaction made by a trader for the purposes of his trade. It signifies the inclusion of foreign elements in a commercial contractual relationship.

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Example A contract between a Spanish commercial agent and an Indian entrepreneur constitutes an international commercial contract. It may also be a contract between an Italian company and a provider of electronics in India.

The Principle of Contractual Freedom The general principle of Law of Contract is contractual freedom. In simple words, the parties to a contract have to give free consent to bring a legal contract into force. The parties to the contract are free to choose the law applicable to the relationship created by the contract. They may also have a clause of arbitration to be invoked in case of disagreement or dispute between the parties. In case of application of arbitration, the parties may appoint the judge (by a jurisdictional clause) or the appropriate arbitrator as provided under the contract. The principle of contractual freedom, applicable in international commercial transactions, maintains that the provisions under the contract are treated as law of parties. However, the contractual freedom can be exercised subject to some limitation and mandatory rules. These mandatory rules are internal legislative and bind on both the parties to the contract at international level too. It must be remembered that if any party to the contract violates the mandatory rules then the obligatory laws will prevail over the provisions of the contract and laws made by the parties for themselves.

Private International Law It may happen sometimes that the contracting parties fail to specify the governing law in their contract and discourse. In this case, the international commercial contracts are subject to the rules of Private International Law (PIL). This helps in determining which law will apply to the international commercial contract and which will be the appropriate court to hear the parties in case of a dispute. In private international law, the regulations are roughly categorised into the following types: (1) International Substantive Rules: These rules provide a direct solution to the question without resolving the conflict of laws specific to the public international law. For example, in international trade law, it is important to mention the Vienna Convention of 1980 on the international sale of goods. (2) The Rule on Conflicting Laws: These are international (conventions) and national (internal rules for each country/state) rules. In a situation where international substantive rules exist, it follows that laws are applicable to international commercial contracts first through an international carrier of conflict of laws. If such agreement fails then the disputes are resolved following the conflict rules of domestic laws of the countries or states. Some of the international conventions bearing conflicting laws include the following: The Hague Convention of 15 June 1955, dealing with the law applicable to international sale of goods. The Hague Convention of 14 March 1978 regarding the law applicable to agency and representation. The Rome Convention of 1980 dealing with the law applicable to contractual obligations.

62 Export Import Management Usually parties to the contract develop their own rules to decide about the governing law in their commercial contracts. As there are close interactions between the principles of contractual freedom, respect of mandatory rules, and the principles of private international law, all parties to an international commercial contract must be aware of the legal aspects of such contracts to avoid any unexpected consequences while dealing with each other. Since it is not easy to understand the technicality of this subject, the business firms engaged in cross border trade may have to take the advice of a multi-skilled lawyer specialising in business and international law. It should also be noted that international trade and contract law are often subjected to different national rules that vary from one country to another. Therefore, to deal with these variations, the International Chamber of Commerce (ICC) promotes international practices and customs, including international arbitration as an alternative to the diversity of global legal systems.

Exhibit 3.1 Mandatory Rules and International Arbitration Although the parties to an international sales contract are free to decide the substantive law applicable on them; yet they cannot, in all the conditions, keep aside the rules applicable at the seat of arbitration. Here, we are talking about the mandatory rules which can be derogated by the terms of a contract. These rules affect the merits of a case to a significant extent. The rules governing the competition and regulating corruption may influence the procedural rules for enforcement in a country. It happened in one case in United Arab Emirates where the enforcement of an arbitration award was denied because a particular wording of an oath, required by witnesses, was not used. However, this happened much before United Arab Emirates signed up to the New York Convention on enforcement of arbitration awards. The treaty ensures that a similar case may now be decided differently. This case also highlights the importance of considering where a party might be attempting to enforce an award if it records victory in the arbitration. Thus, it is very important that the parties consider the implications of enforcing in a particular jurisdiction very carefully, as the ability to enforce an award may not be solely dependent on compliance with all applicable local procedural laws but also on the support of local courts. It is worth noticing here that any applicable institutional rule governing the dispute can only affect the non-mandatory provisions of the procedural law at the seat of the arbitration. Source:

International arbitration: substantive, procedural and mandatory rules, http://www.out-law.com/en/ topics/projects--construction/international-arbitration/international-arbitration-substantive-proceduraland-mandatory-rules/, accessed on 30 January 2017

Conflict of Laws Agreement One of the most critical considerations in the drafting of any international contract is the choice of its governing law. Significant differences may exist among both the substantive contract law and the conflict of law rules of the potential forums. In an international commercial contract, a contractual term which is enforceable in one legal system may be unenforceable in another. To alleviate the potential conflict of laws problem, generally parties contractually agree that the laws of a certain country are to

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govern in the event of a dispute. Even such an express choice of law, however, gains force and effect through the conflict of law rules of the forum country. While determining the wording of their contractual choice of law clause, the parties must initially consider the distinction found in English conflict of law rules between a party reference and an incorporation. Party Reference: Under a party reference, the parties submit their contract to the chosen law. In simple words, they agree that all disputes arising out of their contract will be governed by the law of a particular legal system. Incorporation: In contrast to party reference, under incorporation, the parties merely incorporate selected provisions of a foreign law as terms of the contract. This is a shorthand alternative to setting out the actual provisions of the foreign law in the contract. The effect of this option, however, is limited to having the foreign law operate as a contractual term or terms and it does not govern all contractual issues during disputes. Thus an incorporation pre-supposes a different proper law and derives its validity from the provisions of the proper law.

Exhibit 3.2 Issues of Jurisdictions of Courts12 A general rule of private international law is that courts do not assume jurisdiction over foreign immoveable properties. An important judgment deserves a discussion here in which this principle was followed. This dispute was between Ct A. Ct. Nachiappa Chettiar and Ct A. Ct. Subramama Chettiar concerning the division of certain immoveable properties situated in Burma (now known as Myanmar). It was held in that case that courts in India had no jurisdiction to determine questions of title in respect of immoveable properties in foreign countries or to direct division thereof. Further, the court observed that where it had no jurisdiction to determine any matter in controversy, such as the question of tide in respect of the foreign immoveable property, it had no jurisdiction to refer it for the determination of the arbitrators. In another case (World Tanker Carrier Corporation v. SNP Shipping Services1) the court’s jurisdiction in an action for limitation of liability of owners of sea-going vessels was disputed. A limitation action, as in that case, fell under the high court’s admiralty jurisdiction. The court of domicile of the owner and the ship was a court where a liability claim was filed. The Supreme Court, therefore, clearly pointed out that a limitation action in admiralty jurisdiction could not be filed in a court when all the claimants (who were defendants to the action) were foreigners residing outside India, and who did not carry on any business in India. It was held that since no part of the cause of action had arisen within the jurisdiction of the Bombay High Court, it had no jurisdiction to entertain the admiralty suits. The court also ruled that the presence of a foreign defendant who appeared under protest to contest jurisdiction could not be considered as conferring jurisdiction on the court to take action.2 Source: Jambholkar Lakshmi, Conflict of Laws, http://14.139.60.114:8080/jspui/bitstream/123456789/713/24/ Conflict%20of%20Laws.pdf, accessed on 30 January 2017

1 2

6 (1998) 5 SCC 310 7 Ibid. at 325-6

64 Export Import Management LO2 Know the insights of legal aspects of International Sales Contracts

INTERNATIONAL SALE CONTRACTS Passing of Property in Sale Contracts Passing of property is of vital importance in a contract of sale of goods. This is because it has important consequences in terms of risk, the right to sue, the ability to pass a good title and the security of payment of a party as against another insolvent party. Further, in cases of international sale of goods, the most frequent problems are regarding the passing of property, in order to determine whether the goods can be treated as security for payment of the price. In these cases the law starts with the assumption that a seller of goods in transit will not normally wish to part with the property in the goods so long as he needs it as a security for payment of the price. Therefore, a discussion on the rules relating to passing of property and their application to international contracts of sale is needed, particularly FOB and CIF contracts. The following discussion will provide the insights of how and when risk passes in such contracts.

Rules of Passing of Property In India, the general rules relating to the passing of property from the seller to the buyer are contained in Sections 18, 19 and 20 of the Sale of Goods Act, 1930 (the Act).

Rule one [Section 18] Section 18 states the general rule that property in goods cannot pass unless and until the goods are ascertained. Goods initially unascertained become ascertained only when they are earmarked or identified to the contract in such a way that the seller demonstrates an intention that these particular goods will be used for the fulfillment of the contract. This rule was established in the case of ‘Wait, Re’ which has been a long-standing authority in this respect (Exhibit 3.3).

Exhibit 3.3 Wait, Re3 In this case, the buyer had paid in advance for 500 tons of wheat out of a consignment of 1000 tons, on board a particular ship. But before he could take delivery, the seller went bankrupt. It was to be decided by the court whether the buyer could claim his 500 tons. It was held that since the 500 tons still formed the part of the bulk at the time of the seller’s bankruptcy, the property in them had not passed to the buyer despite him paying in advance. Therefore, all he could do was prove to be an unsecured creditor in the seller’s bankruptcy.

In India, this is still the law, but in England, this position has changed with the introduction of Section 20A in the (English) Sale of Goods Act 1979, which provides that the property in unascertained goods may pass where the price has been paid. In such a case the buyer obtains an undivided share in the bulk so as to become an ‘owner-in-common’ of that bulk. But it is to be noted that the buyer’s 3

1926 All ER Rep

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interest in the bulk is a proportional one, relative to that of other interested parties; and the buyer is deemed to consent to deliveries out of the bulk to the other ‘owners-in-common’.

Rule two [Section 19(1)] This section provides that property in the goods passes when the parties intend it to pass. Subject to the goods being ascertained, it is for the parties to decide when the property is to pass. Clause (2) of this section further mentions that for the purpose of ascertaining the intention of the parties, regard is to be given to the terms of the contract, the conduct of the parties and the circumstances of the case. Exhibit 3.4 provides input for the discussion in this regard.

Exhibit 3.4 Aluminium Industrie Vaassen BV v. Romalpa Aluminium Ltd. In this case, the plaintiff was a Dutch company which sold aluminium foils to the defendant, an English company. The plaintiff had elaborated standard conditions of sale which provided, inter alia, that the property would not pass to the buyer until they had paid all that was owing to the seller. Till then the buyer would keep the manufactured articles with the foil as “fiduciary owner” of the seller. It was decided that the buyer would store the articles in such a way that it could be clearly recognised as the property of the seller till the time of payment. The buyer eventually became insolvent owing the seller over GB £1,20,000. It was held that the property had not passed to the buyer and he resold the goods as the agent of the original seller. Therefore, the seller was entitled to the retail price in preference to other creditors of the insolvent buyer.

Following this case, many business firms, especially the firms engaged in international sales saw the advantage they could obtain by retaining ownership in goods even though they had transferred possession of them to a buyer. These firms started adopting similar provisions in their contracts. Thus, in international sales, this has become the standard practice.

Rule three [Section 20] Section 20 provides the third rule which is the most important rule for passing of property in goods where the parties have not expressed an intention as to when the property should pass. This rule specifies that where there is an unconditional contract for the sale of specific goods in a deliverable state, the property in the goods passes to the buyer at the time the contract is made. Here it is immaterial whether the time of payment of the price or the time of delivery of the goods are both postponed. Following are the conditions to be met to attract applicability of this section First, the contract has to be an unconditional one, that is a contract to which there are no conditions upon which the passing of property depends. Second, the sale has to be of specific goods. Specific goods are goods that are identified and agreed upon at the time the contract of sale is made. Third, the goods must be in a deliverable state i.e., the state in which they are to be delivered by the terms of the contract. It can be said that the goods are in such a state that the buyer would, under the contract, be bound to take delivery of them.

66 Export Import Management

Passing of Property in International Sales In international sales, where the seller and the buyer stay in different countries, there is a fairly strong presumption that the seller does not intend to part with the property until he has been paid or given adequate assurance for the same. According to Section 23(2) of the Act, a seller who delivers the goods to a carrier for transmission to the buyer is taken to have unconditionally appropriated them to the contract if he does not ‘reserve a right of disposal’. Whether the seller has reserved a right of disposal is a question that depends, in the first place, on any relevant provisions in the contract itself. In case of international sale, the right of disposal can also be reserved by the way in which shipping documents have been made. However, difficulty may arise when the contract itself contains contradictory provisions. Exhibit 3.5 throws light on this aspect.

Exhibit 3.5 In Nippon Yusen Kaisha v. Ramjiban Serowgee In this case, the contract is provided for payment by cash against the mate’s receipts. Had this provision stood alone, it would have postponed the passing of property until such payment was made. The contract, however, further provided that so long as the mate’s receipts were in the possession of the seller, his lien was to subsist until payment in full. This clause led to the conclusion that the property had passed before payment, for the seller could not have a lien over goods which were his own property.

Reservation of Right of Disposal by Seller in International Sale As provided by Section 25(2) of the Act, a seller is prima facie taken to have reserved the right of disposal if the bill of lading is made in the name of the seller or his agent. In such cases, the property in goods which belongs to the seller will not pass to the buyer by virtue of shipment. This is because, here the shipment does not constitute an unconditional appropriation of the goods by the seller which is a precondition for the transfer of property in goods. However, the effect of bill of lading made to the order of buyer will have a different effect. Thus, if the bill of lading is endorsed in blank, or to the buyer’s order, and sent directly to the buyer, the buyer becomes the owner of the goods by receiving the property in goods, unless a contrary intention appears from the provisions and terms of the contract or from the circumstances in which the bill was sent. One such case can be seen where the bill of lading is sent by the buyer through his agent with clear instructions to present the same in exchange for payment of price of the goods. Here, the property will not pass unless payment is made by the buyer. Another way to reserve the right of disposal of goods with the seller is to issue a bill of exchange together with a bill of lading according to the terms of contract. Here, the buyer would be under a contractual obligation to honour the bill of exchange. In such cases, the buyer of the goods cannot retain the bill of lading without honouring the bill of exchange; if he does so, the property in goods will still remain with the seller of the goods only.

Passing of Property in FOB Contracts The term FOB stands for Free On Board, i.e., the seller fulfils his obligation to deliver when the goods have passed over the ship’s rail at the named port of shipment.

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The cardinal rule for the transfer of property in cases of FOB contracts states that the property in goods and risk associated with the goods shall pass from seller to buyer immediately on the shipment of goods. Therefore, when goods are passed over the ship’s rail, the risk of damage or loss of each parcel of cargo is passed to the buyer when the parcel crosses the rail. This is the reason that under FOB contracts, the seller has no further obligations in relation to goods when the goods are delivered for shipment to a carrier named by the buyer at a named port of shipment. However, it must be remembered that above stated principle is applicable only when the seller did not reserve the right of disposal of goods; otherwise, the property in goods will stay with the seller only and the associated risk and property will not transfer to the buyer on shipment. This rule will hold true even if before the shipment, the buyer has paid the whole price of the goods in question. In case of FOB contracts, another exception to the principle of transfer of property in goods to buyer on shipment is the case where the goods in question are specific goods in a deliverable state; in such cases, the property will pass to the buyer immediately at the time of formation of contract between seller and buyer since shipment of the earmarked goods is an essential condition to be fulfilled by the seller in such cases. Support for this can be drawn from the case discussed in Exhibit 3.6.

Exhibit 3.6 Carlos Federspiel and Co. SA v. Charles Twigg and Co. Ltd. In this case, children’s bicycles were sold through an FOB contract. The freight and insurance charges were to be arranged by the seller, on the buyer’s account. The goods were paid for and packed in cases marked with the buyer’s name. The shipping instructions were given by the seller but the goods were never shipped, nor even dispatched from the works of the seller. Subsequently the seller was declared insolvent and the question arose whether the property in goods had passed to the buyer. It was held that the property had not passed to the buyer since in international sale contracts, it is a specific obligation of the seller to ship the goods and till this is done, both the risk and property stay with the seller.

It is also to be noted that an FOB seller is not bound to find shipping space for the goods or to insure them, in the absence of a specific clause in the contract. The cost of carriage or insurance, even if these terms are procured by the seller, is generally borne by the buyer.

Transferring of Property in CIF Contracts Under a CIF contract, the seller agrees to sell the goods to the buyer at a price that includes the cost of goods, insurance and freight. Transfer of property under CIF contract deserves a special attention as there are severe consequences for the involved parties in case of insolvency of any party or loss or damage of goods in question where no insurance cover was available for the goods. Under these contracts of sale of goods, the seller offers to the buyer all shipping documents including the contract of affreightment, insurance policy and the bill of lading after having shipped or sold afloat goods in accordance with the contract. Under CIF contracts, the property in goods is passed from seller to buyer on the transfer of bill of lading and insurance policy by the seller to buyer. By transferring these documents, the seller transfers the right to initiate any action against the carrier or insurance company if some loss or damage is

68 Export Import Management caused to the goods. Thereafter, the seller is not guilty of breach of contract even if the goods are lost. Here, on tendering the documents by the seller, the buyer is obliged to pay the price of goods to the seller. The buyer can only take an action against the carrier or the insurer for the loss of goods but no action lies against the seller. In CIF contracts, property would not pass on shipment in cases where the seller reserves a right of disposal, which is to be inferred from retention of the shipping documents by the seller or his agent for presentation to obtain payment. Similar to an FOB contract, under a CIF contract for specific or ascertained goods, the property in goods will transfer to the buyer on shipment. This is so because when the goods are ascertained or agreed upon, not only shipment is an essential condition to be performed by the seller, but the necessary documents (bill of lading and the insurance policy) cannot, in the ordinary course, be properly filled out and issued until the shipment agreements have been completed.

Notice of Appropriation in International Sale Under CIF contracts, the goods in questions are appropriated when they sail in high seas. Therefore, it is expected from the seller that he sends a notice to the buyer stating the appropriation of goods mentioning accurate quantity, name of the ship, date of bill of lading and other important information. If the contract has an express condition requiring the notice of appropriation to be sent by the seller then the same is treated as mandatory act of the seller. If he fails in meeting the aforesaid requirements then the buyer gets a right to rescind the contract and reject the documents.

Rejection of goods by Buyer in International Sale Contracts The buyer could reject the goods if they do not conform to the contract, even after he has paid for and accepted documents which appear to be conforming prima facie. If the buyer rejects the goods and communicates his rejection to the seller, the property in goods returns to the seller. However this remedy is available only in the case where the seller has shipped non-conforming goods in the first place. If the general character of goods has changed during the voyage, the seller cannot be held liable for it. The claim in such a case, must lie against either the insurer or the carrier, as it would be unjust to hold the seller responsible for the deterioration of goods that have long ceased to be under his control and supervision.

LO3 Discuss the risks involved in International Sales Contracts

ISSUE OF RISK IN INTERNATIONAL SALE CONTRACTS The general rule speaks that risk passes with property. Therefore the goods agreed to be sold remain at the seller’s risk until the property in the goods passes to the buyer. However, this presumptive rule can be modified and passing of property and passing of risk may be separated by an agreement between the parties. This may be done either by including an explicit provision on risk in the contract, or in the absence of such a provision by referring to ‘Incoterms’ and its definition of a specified trade term. Moreover, if delivery has been delayed by the fault of the seller or the buyer, then the goods are at the risk of the party in default, regarding any loss which may not have arisen but for such default. Some important provisions in this regard are discussed in this section.

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Delivery to Carrier The passing of risk is also a matter of intention. Like in the case of passing of property, the risk cannot pass until the goods have been delivered to the carrier for shipment. Once this is done, the parties intend that the seller’s responsibility comes to an end although he may still be obliged to tender the correct documents to the buyer. Article 67(1) of Convention on International Sale of Goods (CISG), 1980 provides that the risk of loss passes to the buyer when the goods are handed to the first carrier for shipment to the buyer, unless the contract is specific about where the goods are to be handed over to a carrier, in which case, the risk of loss passes when the goods are delivered to the carrier at that specific place.

goods in Transit If the goods are already in transit, Article 68 of CISG states that the risk of loss passes to the buyer at the time of conclusion of the agreement, or if the circumstances indicate the risk is assumed by the buyer from the time the goods were handed over to the carrier. The latter part of the above stated article means that the risk passes retrospectively to the buyer from the time of shipment since it is not possible to decipher the exact point at which the risk would pass when a sale occurs at a time when the goods are in transit. However, the point to be noted here is that in both FOB and CIF contracts the seller’s undertakings as to quality refer to the time of shipment and only subsequent deterioration of the shipped goods is governed by the rules of risk. Hence the question of risk does not arise in relation to non-conformity of goods at the time of shipment; the risk in this case must lie wholly with the seller. Also, in the cases where the seller ships the goods but asks for a higher price than agreed upon under the contract, the risk lies on the seller even after the goods have reached the buyer.

Passing of Risk in Case of Bulk Shipment Article 69 of CISG provides another rule to decide the question that who will bear the risk of loss, whether the buyer or the seller. The article provides that if the buyer fails to take delivery of the goods, risk of loss is still deemed to have passed on to him when the goods are placed at his disposal. Article 67(2) provides that risk will not pass to the buyer until the goods are identified to the contract. Now, if identification means ascertainment as understood under the Act, it creates a problem in the cases of bulk shipment for the goods. In such cases goods would not be identified until separation at a discharge port. If it means when the notice of appropriation is received or transmitted, this risk in many CIF cases would be transferred at some point, perhaps unknowable on the high seas, which is itself a point of uncertainty.

Passing of Risk in Bulk Shipment of CIF Contracts As discussed before, under CIF contract, it is not easy to fix the exact time of passing of risk of loss of goods from the seller to buyer. Section 20-A of Sale of Goods Act, 1979, of England, may be referred to find an explanation in this regard. The section provides, in cases of bulk shipments the buyer obtains an undivided share in the bulk to become an owner-in-common. This section has received a place in the form of a standard clause in almost all international sales contract formed in the current time. As the aforementioned section provides for the transfer of goods in bulk shipment and the risk travels with the ownership of goods, it may be inferred from such contract, having this standard clause,

70 Export Import Management that risk of loss associated with the goods will pass from the seller to buyer at the time when the bill of lading is handed to the buyer. Thereafter, buyer is the legal owner of the goods, and the ownership of the seller ends and hence, the control of the seller over the goods. Moreover, one of the implied terms in CIF contract is that the risk will be borne by the buyer after the shipment, since he, at all times, is covered by insurance, which would safely transfer the risk on him to the insurer. In case of absence of insurance cover for the buyer, the seller might continue to feel apprehensive about the loss or destruction of goods even when the goods are no longer his property.

Documentary Credit Risk of non-payment is one of the most pressing worries of the seller in international sales transactions and therefore, the seller, to protect his interest in payment, puts various clauses in the contract that restricts the passing of property till he has been paid. The other option exercised by the seller for the same purpose is to issue necessary instructions to the buyer beforehand that the financing will take place through documentary credit. Under the documentary credit, the banker of the buyer releases the payment of the price of goods to the seller’s banker after thoroughly checking the documents produced by the seller and being satisfied that all the documents are in conformity with the terms of contracts. Thus, the seller can receive the payment for goods after producing all the documents to the banker of the buyer. This option protects the interest of the seller and minimises the risk of non-payment. It provides the seller with maximum security against non-payment as the transaction of money takes place between two established commercial banks trading in normal course and not between two unknown entities situated in two different countries. This option suits to the needs of the buyer also the buyer has no risk of loss or destruction of goods by either contracting on a trade term which covers the goods with insurance from the time of shipment. In the absence of such a term, the buyer may instruct the seller to do so on the buyer’s account.

Important Aspects of Passing of Risk in International Sales From the above discussion, it is clear that the point at which property or risk is to pass is a question that depends on the intention of the contracting parties. If a contract provides for a specific method, place or time of passing of property or risk or both, such provisions in the contract will prevail even if it differs from the provisions of the Sale of Goods Act or the standard commercial practice. However, the case would be different where the contract is struck by illegality under the general principles of contract law and is void prima facie, or causes unnecessary prejudice to either of the contracting parties, or is against public policy. For the seller, the risk is of not getting his payment in return for the goods, while for the buyer, this risk takes the form of the goods getting lost or damaged even before the buyer actually takes delivery of them, in cases where the risk of loss was to be borne by the buyer. Both these risks significantly increase in an international sale transaction where the parties are situated in different countries.

LO4 Review the details of insurance in international trade

INSURANCE IN INTERNATIONAL TRADE Whether a firm purchases or sells goods from or to the international market, there is always a risk that the goods may be delayed, damaged or lost in transit. In the supply chain, the people who facilitate

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the movement of goods operate under conditions that limit their liability in cases of loss, damage or delay. To minimise the risk of delay, non-payment, political risk, loss or damage of goods in transit, the firm must therefore insure their goods.

Weighing up the Risks For Exporter As an exporter of goods or services, you need to insure against the risks of following types: Risk of loss or damage of goods in transit Risk of a fault that causes an end-customer to sue Risk of non-payment for your goods or services

For Importer If you are an importer, you may need to take into account the following types of risks: Risk of possible loss or damage of goods in transit Risk of supplier problems, including failure to supply Risk of transport delays and potential hold-ups at ports Risk of performance or health and safety problems Risk of import duties Risk of storage of goods in bonded warehouses Risk of currency fluctuations Loss or Damage of Goods: The goods exported or imported must have cover from the beginning of their journey until their arrival, with either the exporter or the importer. In some cases, the exporter will pay for this cover, otherwise it will be built into the cost of the goods. Product Faults: In exceptional circumstances, a fault with the product supplied may result in an end user taking legal action against the exporter. Depending on the nature of the product or service, the exporter may need to take out insurance to cover this risk. Non-payment: The exporter may not be paid in full for the goods or services that he exports. Some of the reasons for the non-payment or partial payment include the inability of the buyer to pay, declaration of war or a natural disaster that prevented the goods from reaching the buyer, or political reasons preventing either of the parties from completing their contract. The reasons include an export licence ban in the exporter’s own country, import restrictions or a change in the law in the buyer's country, or currency problems that prevent the buyer from getting the cash they need to pay to the exporter, etc. Generally, the responsibility for organising insurance is shared between the importer and exporter. But sometimes it may be taken on by just one of them. Usually the contract between the exporter and importer confirms which option has been chosen. If the contract does not make this explicit, the common international trade terms, Incoterms 2000, clarify to what extent a party must take responsibility for particular risks.

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Types of Insurance in International Trade Let us discuss in detail some important types of risks involved in international trade and the types of insurance available to minimise respective risks.

Insuring goods in transit Goods in transit refer to merchandise and other inventory items that have been shipped by the exporter (seller), but have not yet been received by the importer (purchaser). ‘Goods-in-transit’ insurance provides financial protection against the loss of, or damage to, goods that are transported as part of the stated business activity. Cargo Insurance: Cargo insurance provides ‘goods-in-transit’ insurance and covers loss of or damage to goods while in transit by land, sea or air. A typical cargo insurance policy covers goods in transit via road, rail, sea or air. In its simplest form, cargo insurance provides cover against accidental damage and other risks. The other extreme is a comprehensive all-risk policy which provides cover to a range of specified accidents, including damage during loading, theft and negligence. The cost of insurance and the circumstances in which the firm will receive compensation depends on following factors: Value of the goods in transit Whether the journey is domestic or international Limited liability Without insurance, the goods get only the minimum protection because freight forwarders and carriers typically have limited liability in the event of loss, damage or delay. Following types of cover are available under cargo insurance: Open cover—available for all journeys Specific (voyage) policy—covering one-off shipments Seller’s interest contingency—back-up for physical loss or damage Where the parties have not arranged cargo insurance Where to get cargo insurance Most of the time, exporters arrange insurance and freight and pass on the cost to the buyer. The importer or the foreign buyers may insist on this service, if the rate in the other country is relatively cheap. Some banks offer cargo insurance as part of a finance package. The freight forwarder can be asked for a quote, but the costs and service offered by specialist brokers are more reliable and cost effective. It is to be noted that carriers, freight forwarders or third-party service suppliers do not automatically insure goods that are under their care or control. They can only do so if instructed in writing.

Product liability Insurance While supplying goods for export, the exporter needs to consider whether his product could, in rare cases, cause damage to a third party, which could be either a person or property. Product liability insurance protects the exporting firm from claims related to the manufacture or sale of products, food, medicines or other goods to the public. It covers the manufacturer's or seller's liability for losses or injuries to a buyer, user or bystander, caused by a defect or malfunction of the product and, in some instances, a defective design or a failure to warn. The exporter needs product liability insurance to protect him from:

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Safety claims Manufacturing defects Spoilage costs Legal or defence costs Medical costs

Types of Product Claims There are generally three types of products claims a company may face. These are as follows: 1. Manufacturing or Production Flaws: This covers a claim by the buyer that some part of the production process created an unreasonably unsafe defect in the resulting product. Recent claims against Chinese manufacturers regarding the presence of dangerous chemicals in their products are an example of this type of claim. 2. Design Defect: Design defect claims state that the design of the product is inherently unsafe. The most memorable example of this type of claim is the series of Pinto car cases against Ford in the 1970s. 3. Defective Warnings or Instructions: This claim states that the product was not properly labeled or had insufficient warnings for the consumer to understand the risk. The McDonald's “coffee case” is an example of this type of claim. The damages awarded in the above mentioned claims include medical costs, compensatory damages, economic damages and in some instances, attorneys' fees, costs and punitive damages. The premiums on such policies are based upon the type of product, volume of sales, and the role of the insured in the process.

Insuring against non-payment There may be many reasons for non-payment to the exporter which include buyer, country or political reasons. The exporter has an option to get an export insurance policy to protect against non-payment. Such types of insurance are an important tool in credit management. It simply means that the exporter can sell more goods or services on credit terms and increase his borrowing power. An export insurance policy will cover up to 95 per cent of loss against non-payment for the supply of goods or services and can be tailored to one’s needs.

Export Credit Insurance (ECI) ECI protects an exporter of products and services against the risk of non-payment by a foreign buyer. ECI significantly reduces the payment risks associated with international trade by giving the exporter conditional assurance that payment will be made if the foreign buyer is unable to pay. In simple words, exporters can protect their foreign receivables against a variety of risks that could result in non-payment by foreign buyers. ECI generally covers the following risks: Commercial risks such as insolvency of the buyer, bankruptcy, or protracted defaults/slow payment Certain political risks (such as war, terrorism, riots, and revolution) that could result in non-payment Currency inconvertibility

74 Export Import Management Expropriation Changes in import or export regulations ECI may be offered to either a single buyer or a portfolio multi-buyer for short term (up to one year) and medium term (one to five years) repayment period. Thus export credit insurance can be divided into the following two types 1. Short-term ECI: Such type of ECI covers short term non-payment risks. Consumer goods, raw materials and other similar items are normally sold on cash or short payment terms of less than two years. For such goods, exporter should go for short term ECI. 2. Medium/long-term ECI: Medium and long term export credit insurance is a policy insurance that helps the insured exporter’s payment risk through shouldering commercial and political risks as stated in the insurance policies. This type of policy is generally opted for payment terms exceeding two years.

Export Finance and Insurance When an exporter gets an order to supply goods or services to a buyer situated in another part of the world, he can ask to be paid up front, that is at the time the buyer places the order, or before the goods and services are delivered if the exporter needs time to make the goods. This is quite a safe way of exporting because the exporter knows he will get his money before the goods or services are delivered. However, with this approach, the exporter will not enter into as many export contracts as he could because his buyers may require time to pay, i.e., credit terms. Most buyers these days need credit from their suppliers. Therefore international traders need to offer credit to win customers, but they also need cash to finance growth. Thus, a key problem all exporters face is cash-flow and to overcome this problem exporters opt for export finance insurance options. Some important options are discussed as follows: 1. Documentary Credit (DC): DC is a fixed assurance from the overseas buyer's bank in the buyer’s country. It is issued on behalf of the buyer to give an assurance to the exporting firm that payment will be made for the goods or services supplied, provided that the exporter complies with all terms and conditions established by the credit. Following are the options available under DC: (i) Cash Contract: If the parties have a cash contract, the DC terms will provide for payment immediately upon presentation of the conforming documents. (ii) Credit Contract: If the exporting firm has offered credit, the DC terms provides that when payment is due, it will also reflect any extended payment terms that exporter has granted. 2. Factoring: A factor enables the exporting firm to receive cash within a few days of invoicing, by taking on the ongoing responsibility for collecting its short term debt. In some cases the factor will also take on a percentage of the non-payment risk. Such a factor is called nonrecourse factoring which means the factoring company will not bother the exporting firm if the payer defaults. 3. Forfeiting: Forfeiting is opted by the parties for larger projects. Under forfeiting, a bank buys 100 per cent of the invoice value of an export transaction at a discount. After taking this option, the exporting firms are free from financial risk in the transaction and remain liable only for the quality and reliability of the goods or services provided.

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4. Credit Insurance Facilities: An exporter can also raise finance by assigning his credit-insured invoices to banks and in return the bank offers up to 100 per cent of the insured debt as loan. This facility is termed as ‘credit insurance facility’.

trade Facilitation Programme When an exporting firm trades with Russia, Eastern Europe or the Commonwealth of Independent States, it can benefit from special guarantees offered through the Trade Facilitation Programme (TFP). The European Bank for Reconstruction and Development (EBRD) offers some special programmes to promote trade with the above mentioned regions by offering ‘confirming banks’ (which finance exports) security against the commercial and political risks of non-payment by local ‘issuing banks’ (which finance imports).

LO5 Illustrate the process of arbitration in international trade disputes

ARBITRATION IN INTERNATIONAL COMMERCIAL/TRADE DISPUTES International Trade Arbitration Generally, when barriers to international trade are discussed, we generally talk about high tariffs, customs red tape, foreign exchange controls, trade discriminations, restrictive cartel practices etc. Another thing that adds to the normal difficulties of trade among nations is the increasing number of international commercial disputes. Although commercial disputes between trading firms are rarely thought of as a barrier to international trade expansion, many medium-sized and small companies find themselves in trouble when they have disagreements with their customers or their suppliers in other countries of the world. Small and medium sized companies involved in international trade must think in terms of lawsuits or losses or both. It is a well-known fact that commercial disputes that end in courts of law are always costly and usually time consuming. Cases frequently are dragged through the courts for many years. There is no international commercial law body which dedicatedly functions towards resolving international commercial disputes, rather the courts of different countries interpret the rights and liabilities of buyers and sellers differently. Public attention resulting from cases being aired in courts adds more to the friction between the disputants, and thereby creates enough animosity to end business relationships between the parties. International trade arbitration is an alternative method of settling international commercial disputes. It is not a new method, rather has been in practice for quite a long time, enabling the business firms to adjudicate their differences quickly, cheaply, privately and fairly. International commercial arbitration is not a perfect method, however.

Exhibit 3.7

Opinion of Multinational Businesses about International Arbitration as an Effective Mechanism for International Dispute Settlement

The corporate counsel conducted a survey in association with PwC (Pricewaterhouse Coopers) on multinational businesses’ experience of and views on international arbitration. As we know that multinational businesses are an important segment of the users of international arbitration. Their perspective of what works well and of things that need improving is quite valuable. The key findings from the study revealed some interesting findings; some important ones are as follows: Contd...

76 Export Import Management 1. Choice of dispute resolution mechanisms: Overall, businesses expressed their preference for using arbitration over litigation for transnational disputes, although concerns remained about the costs of arbitration. 2. Internal decision-making on arbitration matters: On an average, respondents admitted that they managed to settle 57 per cent of their disputes through direct negotiation or mediation. Interestingly, of those disputes that did not settle, only a minority (32 per cent) were referred to litigation or arbitration 3. Cost, delay and the fear of “judicialisation” of arbitration: While international arbitration was preferred to other dispute resolution mechanisms across industry sectors, many corporations showed concerns over costs and delays in arbitration proceedings. For respondents who did not consider arbitration to be the choice of their industry, costs and delay were cited as the main reasons more than any other factor. Source:

PwC (2014), Corporate choices in International Arbitration Industry perspectives, 2013 International Arbitration Survey, https://www.pwc.com/gx/en/arbitration-dispute-resolution/assets/pwc-international-arbitration-study.pdf, accessed on 30 January 2017

Voluntary Arbitration in International Trade Through the process of voluntary arbitration, parties to the contract decide to submit their dispute to one or more impartial parties for a decision and the parties to the dispute agree in advance that the decision given by impartial parties will be binding on them. The process of voluntary arbitration provides an alternative dispute redressal option to the parties which saves time, efforts and costs of the parties involved. Usually the parties forming an international sales contract expressly provide a clause of arbitration in their sales contract which can be invoked in case of any future dispute related to the contract of sales between the parties. The clause of arbitration will be useless if any of the party, or both the parties, is given an option under the contract to refuse to arbitration and thus be able to avoid an obligation which the parties have undertaken under the contract of sale of goods. The laws pertaining to arbitration in the different countries of the world have some fundamental variations. More importantly, different countries have different laws dealing with the validity and enforcement of the arbitration clause. However there are some international agreements whereby some groups of countries recognise the validity of arbitration clauses in commercial contracts between their nationals. The trading firms must be aware of this aspect of business, so that when the firm enters into a contract of purchase or sale having an arbitration clause, it has basic understanding of the following: Proper wording of the clauses of international contract of sale of goods to ensure the compliance with the law of land of the contracting parties. Assurance of the fact that law of land of both the contracting parties validates the clause of arbitration in the sales contract between them, if any of the party tries to avoid the enforcement of this clause and dispute arises.

Procedure When a dispute arises at the international level it is important for the parties to arrange for arbitration and then decide the process of conducting the arbitration. The procedure of arbitration in international trade disputes can be divided into the following steps:

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1. Selection of Tribunal and Place of Arbitration: So far as the selection of a tribunal and place of arbitration is concerned there are usually the following two types of clauses: Arbitration Association Identified: There may be a clause in the contract specifying that the arbitration shall be held under the rules and regulations of a specific association. The clause will frequently mention the place in which the arbitration is to be held, unless an association is mentioned that conducts arbitrations in only one place. This may be one of the generic types of commercial or arbitration associations such as the International Chamber of Commerce, the American Arbitration Association or the London Court of Arbitration. The clause may also provide for arbitration before a specific commodity or trade association such as the London Corn Association or the Rubber Trade Association of New York or any other similar groups. Arbitration Association Unidentified: In another type of arbitration clause, the arbitration association is not identified but the clause states that each of the parties has the freedom to choose an arbitrator and that the arbitrators so chosen can choose an umpire who will decide in the event of a disagreement. Such clauses may or may not specify the place in which the arbitration is to be held. The biggest disadvantage of this type of clause is that the procedure of arbitration is left to the arbitrators and umpire, who may act under the statutory laws, and the parties may not be able to choose arbitrators having sufficient knowledge of the law and procedure of arbitration, to enable the winner to secure a valid and enforceable award. Therefore the first type of clause which always specifies an association to act as the arbitration tribunal is the more satisfactory of the two. Arbitration Agencies: There are many general and specific associations conducting arbitration proceedings for resolving international disputes. These associations generally issue their own rules. These rules are usually prepared keeping in view the laws of the countries in which the arbitrations are to be held by the issuing tribunal. Most of the time, the rules of these associations are different from each other. For example, the International Chamber of Commerce has a provision for conciliation before arbitration while the American Arbitration Association has no such provision. On the other hand, the Inter-American Commercial Arbitration Commission which was set up under the auspices of the American Arbitration Association also attempts conciliation before arbitration. Those tribunals that have rules for conciliation set forth the procedures by which committees of the organisation try to bring the two parties together without initiating the judicial proceeding of arbitration. A party to the contract may request the tribunal to use its good offices to examine the facts of the case and suggest friendly solutions to both parties, to explore the possibility of compromise. 2. Invitation to Another Party: Upon receipt of a written request and the necessary papers, documents and the deposit from one party to the contract, the proper official of the arbitration association informs the other party to the dispute and invites them to accept the intervention of the identified arbitration association. Following the acceptance by both the parties, the case from each party is submitted to the arbitration association. 3. Constitution of Conciliation Commission: If both parties agree to accept the assistance of the arbitration association, two or more members of the administration commission of the

78 Export Import Management arbitration association along with its Chairman constitute a conciliation commission. The conciliation commission examines all the details pertinent to the dispute. 4. Dispute Settlement: The parties can appear in person, can employ counsel, or submit their statements in writing. After examination of written submission or oral hearings as the case may be, the conciliation commission submits its suggestions for settlement. The parties to the contract are given the liberty to accept or reject the settlement proposed by the conciliation commission. If both parties accept the settlement, a record of the settlement is prepared by the commission and the case is considered closed. If the parties fail to reach an agreement, they may choose to submit their dispute to arbitration, or if they are not bound by an arbitration clause, they may decide to appeal to the courts. Hence, nothing affects the legal rights of the parties to take further arbitration or court action.

Powers of the Arbitrators The power accorded to the arbitrators by law is not the same in all countries. Generally speaking, there always remains a doubt whether or not the decisions of the arbitrators are final and binding as to the merits of the case and will be enforced by the courts or whether the courts will re-hear the cases to examine the merits and pronounce decisions of their own, superseding and sometimes overruling the decisions of the arbitrators. The other related topic of discussion is whether or not an arbitrator has to base his decisions strictly on the legal considerations involved in the case or an arbitrator may choose to decide a case according to his view of the intent of the parties and what would be fair to both, regardless of legal requirements or established principles of law. It is advisable for arbitrators not to ignore the commercial law, both statutory and decisional, of the countries in which they conduct arbitrations. However the laws give arbitrators greater discretion in some countries than in others. Both of the parties may by agreement, either in the arbitration clause or at the time of signing the submission to arbitration, give the arbitrators a wide range of powers and freedom to decide a case solely on its merits, as they see the merits, without giving due regard to the law and perhaps even contrary to a strict interpretation of the law.

Key Terms International Commercial Contract: An international commercial contract signifies the addition of foreign elements in a commercial contractual relationship. International Substantive Rules: These rules provide a direct solution to the question without going through the resolution of conflict of laws specific to the public international law. FOB: It stands for Free On Board, i.e., the seller fulfils his obligation to deliver when the goods have passed over the ship’s rail at the named port of shipment. CIF: A CIF contract is an agreement to sell goods at an inclusive price that covers the cost of goods, insurance and freight. Goods in Transit: Goods in transit refers to merchandise and other inventory items that have been shipped by the exporter (seller), but have not yet been received by the importer (purchaser).

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Documentary Credit (DC): DC is a fixed assurance from the overseas buyer's bank in the buyer’s country.

In revIew An international contract contains a foreign element, i.e., it is in contact with one or more foreign legal systems. The general principle of Law of Contract is contractual freedom, i.e., the parties to a contract have to give free consent to bring a legal contract into force. Occasionally, the parties fail to specify the governing law in their contract and discourse. In this case, the international commercial contracts are subject to the rules of Private International Law (PIL). There are intricate interactions between the principles of contractual freedom, respect of mandatory rules, and the principles of private international law. All parties of an international commercial contract must be aware of the legal aspects of such contracts. One of the most critical considerations in the drafting of any international contract is the choice of its governing law. The cardinal rule in cases of FOB contracts is that the property and risk pass on shipment, i.e., when the goods have passed over the ship’s rail and the risk in each parcel of the cargo will pass when it crosses the same. Property in CIF contracts passes to the buyer when the seller transfers the bill of lading and the insurance policy to him, giving him the right of action if there is loss or damage to the goods. The passing of risk is also a matter of intention. Like in the case of passing of property, the risk cannot pass until the goods have been delivered to the carrier for shipment. Even if the buyer fails to take delivery of the goods, risk of loss is still deemed to have passed on to him when the goods are placed at his disposal. For the seller, the risk is of not getting his payment in return for the goods. Whether a firm purchases from or sells goods to the international market, there is always a risk that the goods may be delayed, damaged or lost in transit. Goods-in-transit insurance provides financial protection against the loss of, or damage to goods that are transported as part of the stated business activity. Product liability insurance protects the exporting firm from claims related to the manufacture or sale of products, food, medicines or other goods to the public. An export insurance policy protects against non-payment. If an exporting business firm trades with Russia, Eastern Europe or the Commonwealth of Independent States, it can benefit from special guarantees offered through the Trade Facilitation Programme (TFP). International Trade Arbitration is an alternative method of settling international commercial disputes. Voluntary arbitration is the process in which two parties to a dispute voluntarily decide to submit their differences to one or more impartial persons for a decision which both parties agree to accept as binding upon them. There are many associations that conduct arbitration proceedings and issue their own rules which are usually prepared keeping in view the laws of the countries in which the arbitrations are held by the issuing tribunal.

80 Export Import Management Upon receipt of a written request and the necessary papers, documents and the deposit from the party to contract, the proper officials of the arbitration association inform the other party of the dispute and invite them to accept the intervention of the identified arbitration association. After examination of the written submission or oral hearings, the conciliation commission submits its suggestions for settlement. The power accorded to arbitrators by law is not the same in all countries.

mulTIple ChoICe QuesTIons 1. An international commercial contract signifies the addition of _______ in a commercial contractual relationship. (a) free consent (b) foreign elements (c) two parties (d) undue influence 2. _______ provide a direct solution to the question without going through the resolution of conflict of laws specific to the public international law. (a) International substantive rules (b) The rule on conflicting laws (c) None of the above (d) Both (a) and (b) 3. Property in goods cannot pass unless and until the goods are _______. (a) physically examined by the buyer (b) put to quality check (c) ascertained (d) in the possession of the buyer 4. Where there is an unconditional contract for the sale of specific goods in a deliverable state, the property in the goods passes to the buyer _______. (a) at the time the contract is made (b) when goods are appropriated (c) if buyer pays for the goods (d) if seller intends to pass 5. A seller who delivers the goods to a carrier for transmission to the buyer is taken to have unconditionally appropriated them to the contract if _______. (a) appropriation of goods has taken place (b) he reserves the right of disposal (c) he does not reserve a right of disposal (d) all of these 6. In case of _______ contracts is that the property and risk pass on shipment i.e., when the goods have passed over the ship’s rail and the risk in each parcel of the cargo will pass when it crosses the same. (a) CIF (b) FOB (c) both (a) and (b) (d) none of these 7. Property in _______ contracts passes to the buyer when the seller transfers the bill of lading and the insurance policy to him thereby giving him the right of action in respect of loss or damage to the goods. (a) CIF (b) FOB (c) both (a) and (b) (d) none of these 8. If the buyer rejects the goods and signifies his rejection to the seller, the property in goods _______. (a) stays with the buyer (b) returns to the seller (c) does not pass to anyone (d) may stay with either buyer or seller

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9. If the buyer fails to take delivery of the goods, risk of loss is deemed to have passed to _______ when the goods are placed at his disposal. (a) the buyer (b) the seller (c) the carrier (d) the insurer 10. _______ covers the manufacturer's or seller's liability for losses or injuries to a buyer, user or bystander caused by a defect or malfunction of the product, and in some instances, a defective design or a failure to warn. (a) Product liability insurance (b) Export credit insurance (ECI) (c) Cargo insurance (d) Documentary Credit (DC)

ConCepT QuesTIons 1. How are international commercial agreements dealt by international traders when a conflict of law arises between the parties? 2. Discuss in details the rules for passing the property in goods in international sale contracts. 3. Write short notes on following: (a) Passing of property in FOB contracts (b) Passing of property in CIF contracts 4. What are general legal rules for passing of risk in international sales contracts? 5. What types of insurance facilities are available to international traders to mitigate various types of risks involved in international trading? Discuss in details. 6. Throw light on the process of international arbitration in case of international trade disputes.

FurTher readIng PwC (2014). Corporate choices in International Arbitration Industry perspectives. 2013 International Arbitration Survey. https://www.pwc.com/gx/en/arbitration-dispute-resolution/assets/ pwc-international-arbitration-study.pdf, accessed on 30 January 2017. Desai N. (2008). International Trade Law: The Indian Perspective. International Journal of Legal Information. 36(2). Ly F. D. (1991). The Place of Arbitration in the Conflict of Laws of International Commercial Arbitration: An Exercise in Arbitration Planning. Northwestern Journal of International Law & Business. 12(1).

Answers to Multiple ChoiCe Questions 1. (b) 7. (a)

2. (a) 8. (b)

3. (c) 9. (a)

4. (a) 10. (a)

5. (c)

6. (b)

82 Export Import Management

Case Study Mr X, the appellant entered into a contract with Mr Y, the respondent which contained an arbitration clause stating that arbitration was to be as per the rules of the International Chamber of Commerce (ICC for short). Subsequently the respondent filed a request for arbitration with ICC. Parties agreed that the arbitration be held in Paris, France and ICC appointed a sole arbitrator. Mr Y filed an application under Section 9 of the Arbitration and Conciliation Act, 1996 (the Act) against Mr X seeking an interim relief of injunction restraining Mr X from alienating, transferring and/or creating third party right, disposing of, dealing with, and/or selling their business assets and properties. Mr X raised the plea of maintainability of such an application and contended that part I of the said Act would not apply to arbitrations when the place of arbitration was not in India. He further submitted that if the place of arbitration was not in India then part II of the said Act would apply. He relied on sub-section (2) of Section 2 of the said Act which provides that part I shall apply when the place of arbitration is in India. In light of the aforementioned sub-section, Mr X submitted that it was clear that the provisions of part I did not apply where the place of arbitration was not in India. It was further submitted that according to Section 2(f) of the Act, an international commercial arbitration could take place either in India or outside India. If the international commercial arbitration took place out of India then part I of the said Act would not apply, since only part II of the Act applied to foreign awards. On the other hand Mr Y, the respondent, submitted that a conjoint reading of the provisions showed that part I was to apply to all arbitrations. He contended that unless the parties by their agreement excluded its provisions part I would also apply to all international commercial arbitrations including those that take place out of India.

Discussion Question 1. Was part I of the Act to apply also to international commercial arbitrations which take place out of India, unless the parties by agreement, express or implied, exclude it or any of its provisions?

Reference https://indiankanoon.org/doc/110552/, accessed on 30 January 2017, Bhatia International v. Bulk Trading S. A. and Anr, on 13 March 2002.

Chapter

4 Export Documentation

Learning Outcomes After reading this chapter, you will be able to: LO1 Know the changes in export documentation in India in last decades LO2 Understand the classification of export documents on different basis LO3 Discuss the important export documents used in India under the categories: Documents related to goods, Documents used for shipment, Documents related to bank processing, Documents related to payment, and Official documents

INTRODUCTION Export documentation is one of the most important aspects of international business as it facilitates the smooth flow of goods and payments thereof, across national frontiers. Export firms have to follow particular procedures and use a number of documents to complete the export documentation requirement. Each such document serves a specific purpose and hence carries its own significance. Therefore it is essential for an export firm to have a clear understanding of all documents, their purpose and procedure to prepare, and file these documents with respective authorities.

LO1 Know the changes in export documentation in India in last decades

EXPORT DOCUMENTATION IN INDIA Export documentation is a complex process as a number of documents are required to be filled in, and so also the number of concerned authorities to be contacted to whom the relevant documents are to be submitted. Export documentation in India has evolved a great deal of interest since 1990. Earlier, export documentation was manual and lacked proper co-ordination. The manual processes used to result into lot of delays and mistakes, rendering the task very clumsy, tiresome, repetitive, and quite frustrating

84 Export Import Management for the business firms. India adopted an internationally accepted documentation system called ADS (Aligned Documentation System) in 1991. India ranked 126 in ‘Trading across Borders’ component of ‘Ease of Doing Business’, out of 189 countries, in the World Bank’s 2015 report. The ranking methodology adopted by the World Bank takes into account the number of mandatory documents required for export and import and the time and cost of exporting/importing a container out of/into the country. World Bank’s 2015 report listed 7 and 10 mandatory documents, respectively, for export and import from/to India (refer Table 4.1). Table 4.1

Mandatory Documents Listed by the World Bank in Doing Business Report 2015

S. No.

Exports

Imports

1

Shipping bill

Bill of entry

2

Commercial invoice

Commercial invoice

3

Packing list

Packing list

4

Bill of lading

Bill of lading

5

Foreign Exchange Control Form (SDF)

Foreign Exchange Control Form (Form A-1)

6

Terminal handling receipt

Terminal handling receipt

7

Technical standard certificate

Certified engineer’s report

8

–

Cargo release order

9

–

Product manual

10

–

Inspection report

Easing of Documentation To study and recommend ways to reduce the number of mandatory documents required for export and import, the Department of Commerce had set up an Inter-Ministerial Committee, under the Chairmanship of DGFT, in July 2014. The Committee held detailed discussions with all stakeholders and the concerned departments/ministries/agencies and also visited JNPT to study the ground situation and find ways to minimise the number of documents and reduce transaction costs and time for exports and imports. The committee submitted its ‘Trading across Borders’ report to Prime Minister’s Office in December 2014. The committee recommended in its report to keep the mandatory documents required for import and export of goods to three documents each. The Directorate General of Foreign Trade (DGFT) of India issued a notification in this regard and implemented the recommendations of the committee in March 2015. By doing this, India took a leap forward in improving ‘Ease of Doing Business in India’.

Mandatory Documents for Export and Import Based on the recommendations of the World Bank 2015 report, following important decisions have been taken: The rBI has agreed to do away with the Foreign Exchange Control Form (SDF) by incorporating the declaration in the shipping bill for exports and dispensing with the Foreign Exchange Control Form (Form A-1) for imports.

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85

Customs have also agreed to merge the commercial invoice with the packing list and have issued a circular for accepting ‘commercial invoice cum packing list’ that incorporates the required details of both the documents. The exporters and importers, however, have the option of filing separate commercial invoice and packing list also, if they so desire. Shipping Ministry has also agreed to do away with the requirement of Terminal Handling receipt and make the process online. As a consequence, after issue of the DGFT’s notification dated 12 March 2015, only three documents each will be mandatory for export and import. These documents are shown in Table 4.2. Table 4.2 S. No.

Mandatory Documents for Export and Import Exports

Imports

1

Bill of lading/Airway bill

Bill of lading/Airway bill

2

Commercial invoice cum packing list

Commercial invoice cum packing list

3

Shipping bill/Bill of export

Bill of entry

After issue of DGFT’s notification, two documents (packing list and commercial invoice) required by the customs have now been merged into one document; whereas, one document required by rBI (Foreign Exchange Control Forms — SDF for exports and Form A-1 for imports) and one document required by the Ministry of Shipping (Terminal Handling receipt) earlier, have now been dispensed with. Cargo release order is not a mandatory document required by any regulatory agency, but is a commercial document issued by the shipping line to the concerned importer. So far as technical standard certificate/certified engineer's report, product manual and inspection report are concerned, these documents are required in specific cases/products/tariff lines only and are not mandatory for all products. The reduction in the number of mandatory documents leads to a corresponding reduction in transaction cost and time of exports and imports. This step would not only facilitate the ‘Ease of Doing Business’ in respect of ‘Trading across Borders’, but will also improve India’s ranking in this parameter.

LO2 Understand the classification of export documents on different basis

TYPES OF EXPORT DOCUMENTS Export documents are classified in various categories on different basis. These categories will be discussed in this section.

Export Documents on the Basis of Nature of Documents Export documents are classified into following four categories: (i) Commercial documents, (ii) regulatory documents, (iii) Export assistance documents, and (iv) Documents required by importing countries.

86 Export Import Management 1. Commercial Documents: These documents are used by exporters/importers to meet their respective legal and other incidental responsibilities arising out of a sales contract. Commercial documents can be further sub-divided into: Principal commercial documents Auxiliary commercial documents (i) Principal Commercial Documents: These documents are prepared to serve the following purposes: To affect physical transfer of goods and title of the goods from exporter to the buyer To realise export sales proceeds Following documents are part of principal commercial documents: Commercial invoice (and the invoice prescribed by the importer) Packing list Certificate of inspection Certificate of insurance/insurance policy Bill of lading Airway bill Combined transport documents Certificate of origin Bill of exchange Shipment advice (ii) Auxiliary Commercial Documents: These documents are required to prepare and procure principal export documents. The auxiliary commercial documents include: Proforma invoice Shipping instructions Insurance declaration Intimation for inspection Shipping order Mates receipt Application for certificate of origin Letter to bank for negotiation/collection of documents 2. Regulatory Documents: The documents prescribed by different government departments/bodies for compliance of formalities under relevant laws, rules and regulations governing export trade are termed as regulatory documents. Thus, regulatory documents are required to meet the obligations laid down by FErA, Import and Export (control) Act, Central Excise rules, Export (Quality Control and Inspection) Act, Customs Act, Major Port Trusts Act and other such authorities. Various government departments/bodies prescribe the regulatory documents to meet the requirements provided under relevant laws governing export transactions. These documents include: Exchange control declaration Form-Gr

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87

Freight payment certificate Insurance premium payment certificate ArE I/ArE II forms Shipping bill/bill of export Port trust copy of shipping bill/export application/dock challan receipt of payment of port charges Vehicle ticket 3. Export Assistance Documents: These documents are prepared to claim assistance under various export assistance measures as may be in operation from time to time. Currently, these documents refer to shortcomings of central excise and custom duties, packing credit facilities, etc. 4. Documentation Required by Importing Countries: These documents are required by the importer in order to satisfy the requirements of his government. These documents include certificate of origin, consular invoice, quality control certificate, etc.

Export Documents on the Basis of Sequence of Activity Flow The total working of export can be broadly classified into three stages, and these stages demand for three different sets of documents to be filled and submitted to respective authorities. On this basis, the export documentation can be classified as: (i) Pre-shipment documentation, (ii) Shipment documentation, and (iii) Post-shipment documentation. 1. Pre-Shipment Documentation: Pre-shipment procedure starts from receiving the order and ends with handling over the goods to the transporters. In the case of advance payment, the following documents are required for pre-shipment documentation: (i) Sales Contract: After receiving the export order, sales contract is sent to the buyer and he/ she then sends it back after putting the seal along with 30 per cent of the total invoice value (in case of advance payment). (ii) Packing Slip: After packing of goods, packing slip is sent from the packing department. With that slip, packing list is prepared in commercial section. (iii) Invoice: After thoroughly checking the packing list, invoice is prepared and then both packing list as well as the invoice are sent to the buyer to get the remaining 70 per cent of the payment. When they make the total payment, goods are sent to them. In this procedure, first of all, goods are handled over to the transporter and then the transporter gives the goods to the clearing agent (details will be discussed in the subsequent sections of the chapter). 2. Shipment Documentation: Shipment procedure starts with the handing over of goods to the clearing agent. Following are some important shipping documents: (i) Shipping Instructions: If the consignment is exported through sea, three copies of shipping instruction are sent to the clearing agent which contains the information about the consignment. For example, dimension of cartons (number and size of cases), detail of items, name of transporter, etc. (ii) Challan: When goods are loaded onto the ship/aeroplane, challan is provided by its owner. Challan, bill of clearing agent (in case of FOB), invoice and ArE (Application for removal of Excisable goods) are sent to the buyer.

88 Export Import Management (iii) Terms of Delivery: It means the cost included while delivering the goods to the buyer; whether it will include only the cost of production or the transportation costs as well. Mainly there are three terms of delivery: FOB (Free on Board): It is also called freight on to-pay basis, that means freight charges will be paid by the buyer. CIF (Cost including Insurance and Freight): It is also called freight on prepaid basis, that means freight charges will be paid by the exporter and goods will be insured. C&F (Cost including Freight): It means only freight charges will be paid by the exporter and insurance charges will be borne by the buyer himself. 3. Post-Shipment Documentation: Post-shipment documentation starts when goods reach at their destination. To clear the goods from the customs in the importer country, some documents are needed and they form the post-shipment documentation category of export documents. Following documents belong to this category: (i) Shipping Advice: It is sent as a covering letter which contains the details of the consignment and clearing agent (details will be discussed in the subsequent sections of the chapter). It includes: Invoice (two copies) Packing list (three copies) Bill of lading (one original and one photocopy) (ii) Shipping Bill (Original): Shipping bill is provided by the Customs of India to the clearing agent after checking of goods. Without clearance of customs, no export from India can take place. It has all the details of export order like details of items, invoice value of total consignment, foreign currency involved, exchange rate, drawback details, date of export, etc. The shipping bill is needed at the customs of the importer country as well as the bank of the exporters to get the payment. The shipping bill is divided into two sections: Exchange control copy: In includes first two pages of the shipping bill in which exchange rates, freight charges, and insurance charges (if applicable) are indicated. Export promotion copy: Government gives export incentives on certain items, so in the shipping bill, all details are given regard in drawbacks like their rates and amounts.

LO3 Discuss the important export documents used in India under the categories: Documents related to goods, Documents used for shipment, Documents related to bank processing, Documents related to payment, and Official documents

IMPORTANT DOCUMENTS USED IN EXPORT TRADE Documentation is important from the viewpoint of both the exporter and the overseas buyer. If the documents are not produced before the appropriate authorities, the importer may find it difficult to clear goods or he/she may have to pay heavy import duties at a higher rate. In such a case, the payment of demurrage or penalty is unavoidable. In certain cases, the goods may not be permitted to

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89

even land or may be detained. On non-presentation of certain documents, the exchange control and custom authorities may take an action and may require payment of heavy penalty. Hence, an exporter must have the complete knowledge of handling export documents. Important documents used in export trade are discussed in subsequent sections. Documents related to goods Documents used for shipment Documents related to bank processing Documents related to payment Official documents

Documents Related to Goods 1. Sales Contract: It is a legal contract to facilitate the exchange of goods, services or property from seller to buyer (in case of export: from exporter to importer) for a pre-decided value in money or money equivalent. Sales contract contains all the details regarding trade taking place between any two parties belonging to two different countries. It contains the following information: Contract number Invoice of Delivery period Date Port of loading Port of destination Mode of payment Exchange rate Invoice Packing description Freight charges Insurance charges Name of seller’s bank Description of goods 2. Commercial Invoice: A commercial invoice is the seller’s bill of merchandise. It is a basic and one of the most important documents in an export transaction. Extreme care must be taken by the export firm to prepare the commercial document as it contains complete details of the export order. The normal trade practice in the cross border transactions is to raise and send a pro forma invoice to the buying firm for his approval, once the order has been finalised. On receipt of the approved pro forma invoice, the exporting firm can use it as a part of the export contract. The commercial invoice (Figure 4.1) can thereafter be easily prepared on the basis of the approved pro forma invoice. There is no standard format for commercial invoice, but usually it contains the following: Exporter’s name and address Invoice number

90 Export Import Management Date Buyer order number Consignee name Buyer’s name and address Country of origin of goods Country of final destination Terms of delivery and payment Pre-carriage by Vessel/flight number Port of loading Port of discharge Final destination of goods Marks and number Number of packages Description of goods Container number Quantity rate Amount Declaration Signature of authority 3. Pro forma Invoice: A pro forma invoice is not an invoice at all but a quote and is very commonly used in international trade. As we know, an international transaction includes many variables that it is sometimes difficult for the importer to determine the final cost of the goods. For example, the cost of goods is increased by the cost of shipping, insurance, and so forth. In order to determine these costs, the importer may request from the exporter for a pro forma invoice which provides the importer an accurate and precise preview of the actual invoice which is usually prepared when a transaction is going to take place. When exporter requests for the payment on a letter of credit basis, the information contained in pro forma invoice is used by the issuing bank to open the letter of credit. It contains the following information: Seller’s name and address Buyer’s name and address Date Delivery time Terms and conditions Port of loading Port of discharge

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91

Ref. of Exporter

INVOICE Exporter

Exporter’s Ref.

Invoice No. & Date Buyer’s Order No. & date Other Reference(s)

Consignee

TO THE ORDER OF BLANK ENDORSED

Buyer (if other than consignee)

Country of Origin of goods Pre-Carriage by

Place of Receipt by Pre-Carrier

Terms of Delivery & Payment

Vessel No.

Port of Loading

DA/DP/LC

Port of Discharge

Final Destination

Marks & Nos.

No. & kind of

Container No.

Pkgs.

Quantity

Description of Goods

Amount Chargeable

CIF/FO

Total

Country of Final Destination

INDIA

Unit Rate

Amount

(in $US)

(in $US)

Total Other Payment terms

(in words) We declare that this invoice shows the actual price of the goods described and that all particulars are true and correct

Figure 4.1

SIGNATURE & DATE

Specimen Copy of Commercial Invoice

92 Export Import Management Terms of trade Freight to be covered by Insurance to be covered by Banker’s name Mode of transport Currency used Description of goods Signature In some exporting countries, the term ‘sales confirmation’ is used in place of the term ‘pro forma invoice’. 4. Packing List: The packaging list (Figure 4.2) serves a useful purpose of the exporting firm while dispatching the consignment of goods as a cross-check of the goods sent. It is a useful document for the port personnel while planning the loading and offloading of cargo. This document is essentially demanded by the customs authorities as they can carry out the physical examination of the cargo and conduct checks on the net weight and measurements of the goods smoothly against the declarations made by the exporting firm in the packing list. Net weight refers to the actual weight of the items and the gross weight means the weight of the items plus the weight of the packing material. The packaging slip provides the following information: Number of packages, Quantity packed in each package, Weight and measurement of each package, and Net and gross weight of the total consignment. 5. Packing Slip: As the name suggests, this document is the detailed description of the product. It is prepared by the packing department. Contents of packing slip are as follows: Item code Quantity rate Actual unit Net weight Gross weight Packing slip number Order number Date Signature of the checking authority 6. Certificate of Origin: Certificate of origin (Figure 4.3) is considered as a proof of the country of origin of goods for the importing firm in its country. The countries importing any item usually demand this to be produced at the time of custom clearance of the imported cargo. It also plays an important part in computing the liability and the rate of import duty in the country of import. This certificate

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93

PACKING LIST EXPORTER

INVOICE No. & Date Buyer’s Order No. & Date

CONSIGNEE

Buyer (if other than consignee)

TO THE ORDER OF SHIPPER BLANK ENDORSED NOTIFY

Pre-Carriage by

Place of Recepit

Country of Origin of Goods

Final Destination

by Pre carrier Vessel No.

Port of Loading

Port of Discharge

Place of Delivery

Marks & Container No.

No. & Kind of Pkgs

Description of Goods

Quantity

Remarks WT (Kgs.)

NET WT. GROSS WT. SIGNATURE

Figure 4.2

Specimen Copy of Packaging List

94 Export Import Management carries a declaration about the details of goods to be shipped and the country where these goods are grown, manufactured or produced. Such goods must have substantial value addition so as to become eligible for certification of this nature. NO.

CERTIFICATE OF ORIGIN SPECIMEN Marks

No.

Package

Quality or Weight

Description of goods

Value (in

I/we hereby declare that the above goods were produced in India _____________________ states and are sent to _______________________ from _____________________ ________________________________________ ON OR ABOUT the ___________________________________ ______________________________________ Address of shipper: ____________________________________ __________________________________ __________________________________ Shipper __________________ (Signature) I, the undersigned, Secretary of the Pondicherry Chamber of Commerce, hereby certify that the above declaration was made by ______________________________________________ of ______________________ ______________________________________________________________________________________________ the ______________________ 2001. Secretary Chamber of Commerce Figure 4.3

Specimen Copy of Certificate of Origin

7. Certificate of Inspection: For ensuring the quality, government has made it compulsory for certain products that should be inspected by some authorised agency. Export Inspection Council of India (EICI) is one such agency which carries out such inspections and issues the certificate that the consignment has been inspected as required under the Export Quality Control and Inspection Act,

Export Documentation

95

1963, to ensure that goods being exported satisfy the conditions relating to the quality control and inspections as applicable to it and is export worthy. This certificate is issued by the Export Inspection Agency after the pre-shipment inspection of goods. It is required by only those goods which fall under the notified category of goods requiring compulsory shipment of inspection. However, some countries have made it mandatory for the goods being imported to their countries. It contains: Beneficiary’s name and address Applicant Description of the goods Bill of lading quantity For transportation to remarks Item-wise/size-wise break up of quantity 8. Certificate of Measurement: It is a certificate issued by an independent company. It attests the goods confirming the measurements described and purity levels contained in the invoice provided by the exporter. Contents of the certificate of inspection are as follows: Name of the authority giving measurement certificate Date Shipper’s name Clearing house agent name Clearing house number Shipping bill number Steamer agent name Measurer signature Port of destination Number of packages Service charges Marks and number Measurement of quantity

Documents Used for Shipment 1. Mate’s Receipt: This document is issued by the chief of vessel after the cargo is being loaded and it is duly signed and stamped by the chief officer or master of vessel. The shipping company will not issue the bill of lading unless it receives the mate’s receipt. It contains the following information: Mate receipt number Shipping bill number Date Voyage Exporter’s name

96 Export Import Management CHA name Marks Quantity of goods Description of goods Cargo weight Consignee name Terminal or chief officer signature 2. Shipping Bill: Any goods moving out of the country need to be approved by the customs by mandatory filing of a legal document is known as shipping bill. Shipping bill contains all the required details about the goods planned to export. For example, order or LC number and date, shipper’s invoice number and date, name of the shipper, consignee, etc. After preparing a commercial invoice, packing list and other documents for export documentation for custom clearance procedures, the shipper either has to file documents directly with customs department or appoint a customs broker to file export documents on behalf of the shipper. Types of Shipping Bill

There are five types of shipping bills as described below: (i) Shipping bill for export of duty free goods: This is a white coloured shipping bill. (ii) Shipping bill for export of goods under claim for duty drawback: This shipping bill is green coloured. (iii) Shipping bill for export of duty free goods ex-bond, i.e., from bonded warehouse: This is a pink coloured shipping bill. (iv) Shipping bill for export of dutiable goods: This shipping bill is yellow coloured. (v) Shipping bill for export under DEPB scheme: This shipping bill is blue in colour. Processing of Shipping Bill

In case of export via sea or air, the exporter is required to submit the shipping bill, and in case of export via road, the exporter has to submit the bill of export in an agreed form containing the prescribed details such as the name of exporter, consignee, invoice number, details of packing, description of goods, quantity, FOB value, etc. Along with the shipping bill, other documents such as copy of packing list, invoices, export contract, letter of credit, etc., are also to be submitted. The export firm has to file quadruplicate with extra copies (under certain schemes in quintuplicate) of shipping bills to the customs authorities. Thereafter, the custom authorities admit shipping bill, and necessary assessment and examination procedures are carried out. After completion of all the export procedures and formalities, a ‘let export order’ is issued on the shipping bill duly signed and sealed by the custom officials. Under EDI system of filing export customs clearance procedures, an online examination process is available, and after completing the online examination process or physical verification, if required, the copies of ‘let export order’ is released. Hard copies of ‘let export order’ are released after signing and sealing by an officer of customs. The shipping bill contains the following information: CHA name Date

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97

State of origin Exporter’s details Consignee Port of loading Port of discharge Gross weight Total packages Net weight Country of destination Nature of cargo Marks and numbers Foreign exchange bank A/c number rBI waiver number Invoice details Exchange rate Insurance charges Freight charges Discount Commission Packing charges Drawback description Nature of payment Buyer name and address 3. Bill of Lading: A bill of lading (B/L) (Figure 4.4) is a document of title of goods which is issued by the shipping company upon the shipment of goods. It is simply a contract between the exporter and the shipping company. This document serves as a receipt for goods, an evidence of the contract of carriage, and also a document of title of goods. The carrier issues the B/L according to the information in the mate’s receipt. The B/L indicates that the goods have been loaded on board or shipped on a named vessel, and it is signed or authenticated by the master of the ship. Types of Bill of Lading

The B/L is usually prepared in three sets of originals, anyone of which can give the title of goods. Whoever presents one of those original copies, negotiable B/L can take the possession of goods. B/L can be either negotiable or non-negotiable. The non-negotiable copies cannot transfer the title of goods to the transferee but are issued for record purpose. (i) Non-negotiable (or straight) B/L: It indicates that the shipper will deliver the goods to the buyer and that title of the goods has not been transferred to the shipper. In simple words, when the non-negotiable B/L is issued, the buyer or seller owns the goods while they are being shipped. This type of B/L is often used when payment for the goods has already been made in advance.

98 Export Import Management (ii) Negotiable (or shipper’s order) B/L: It serves as a title document of the goods issued ‘to the order of’ a party, usually the shipper, whose endorsement is required to effect its negotiation. The negotiable B/L can also be issued ‘to the order of’ the buyer’s bank as part of a documentary credit/letter of credit stipulation so that when the buyer’s bank receives the original B/L, they can endorse it over to the buyer at the time of payment to clear the goods at customs. Sometimes the negotiable B/L may be consigned ‘to order’ without reference to a company. It is to be noted here that a negotiable B/L can be bought or traded while the goods are in transit, whereas a straight B/L is non-negotiable and is consigned to the buyer. (iii) Inland Bill of Lading: When the exported goods are transported via road, the inland bill of lading is used to serve the purpose of a document of title of goods. It is issued by the trucking company and/or the railroad line for taking the goods from the exporter’s facility to the port of embarkation or consolidation facility. (iv) Ocean Bill of Lading (OBL): The ocean B/L is an invoice, and may be issued as a ‘clean bill of lading’. This OBL certifies that the goods have been received without visible damage. An ‘on-board B/L’ may be issued when the goods are received into the carrier’s port facility, basically confirming the cargo will be sailing. (v) Air Way Bill (AWB): The air way bill is used for the air transport of goods. AWBs are non-negotiable, for the reason that goods remain in transit for a short period of time. The original AWB is rarely needed by the importer at the other end of the shipment to prove the ownership of goods. A freight forwarder issues a ‘house airway bill’ on behalf of the actual carrier, which is the case when a freight forwarder has a contract rate with an air cargo service to expedite the documentation. Following are the contents of bill of lading: Shipper’s name Consignee Notifying party Pre-carriage by Place of receipt by pre-carrier Ocean vessel Port of loading Port of discharge Marks and numbers Number of packages or units Kind of packages, description of goods Weight of goods Voyage number Whether freight paid or payable Other relevant details

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99

Bill of Lading (B/L) Instructions Format Consignor

Consignee

NOTIFY PARTY

Place of Receipt

Place of Delivery Vessel and Voyage No.

Poart of Loading

Port of Discharge

Marks & Numbers

Number and Kind of Packages

GROSS WT

Description of Goods

Total No. of

Number of

(Kgs)

Movement

Freight

FCL/LCL

prepaid

Remarks

Originals

Figure 4.4

Specimen Copy of Bill of Lading

Mesurement

100 Export Import Management 4. Marine Insurance Policy Certificate: The marine insurance policy certificate provides cover against perils of sea and other connected risks to which goods are exposed to while being transported by sea. It is same as any other insurance and usually done to minimise the risk related to shipment of goods. The contents of this document are as follows: Certificate number Open cover number Open cover date Assured name Address of the assured receipt date Effective from Issued at Net premium Name of the issuing company Total sum insured Sum insured in foreign currency Basis of valuation Country of destination Mode of transport Packaging description Commodity description Terms of insurance 5. Cart Ticket: A cart ticket is also known as a cart chit, vehicle or gate pass and is prepared by the exporter. Following are the contents of a cart ticket: Shipper’s name Number of packages Shipping bill number Port of destination Number of vehicles carrying the cargo 6. Shipping Advice: The exporter sends this document to the buyer soon after the shipment is made. The shipping advice provides all the shipment details to the buyer.

Documents Related to Bank Processing 1. Bank Realisation Certificate: The bank realisation certificate is a declaration by the exporter that it has forwarded the documentary export bill to its bank for the collection or negotiation or purchase as per the particulars given in bank certificate. The bank verifies the information given by the exporter and certifies the same. This certificate contains the information of export consignment and is submitted to the bank for each and every consignment. The information required for making a bank certificate is obtained from various shipment documents such as invoice, shipping bill, bill of lading, airway bill, insurance bill, freight memo, etc.

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Three copies of bank certificate addressed to the Joint Director of Foreign Trade is prepared and submitted to the bank. Copies of export invoice, custom attested EP (Export Promotion), copy of shipping bill and other relevant documents are also submitted along with the bank certificate. The bank forwards the original copy with the relevant copy of attested documents to the exporter and duplicate copy to the licensing authority. Bank retains the triplicate copy for its record. The bank realisation certificate contains the following information: Invoice number Export promotion copy of shipping bill duly authenticated by custom Description of goods as given in custom authenticated-shipping bill Bill of lading number Destination of goods Bill amount Foreign exchange used Freight amount as per bill of lading Insurance amount as per bill receipt Date of realisation of export proceeds SDF (Sales Declaration Form) number and signature of exporter 2. Bank Covering Letter: This is a letter issued to the bank after the shipment of goods. Mostly it is issued in case of advance document against payment (D/P) or document against acceptance (D/A). This document is used to bring own balance of payment through bank. Through this letter, the exporter informs the bank about the price to be collected from the buyer. 3. Exchange Earners Foreign Currency: It is a type of current account. This account holds only foreign currency, when the buyer pays the price for the goods and transfers the payment through bank to bank. The exporter’s payment by the buyer is collected in this account and is kept in the form of foreign currency. When the exporter wants Indian currency (rupees) then it writes a letter to the bank for foreign currency conversion into rupees. 4. Foreign Inward Remittance Certificate: This is a document prepared by the exporter addressing the bank to which the payment has been made by the buyer, asking the bank to transfer the payment to his / her bank or to the bank in which he / she has to receive the amount.

Documents Related to Payment 1. Bill of Exchange: Bill of exchange, also known as a ‘draft’, is an instrument used for payment realisation. It is a written unconditional order for payment from a drawer to a drawee. The drawee is ordered to pay a specified amount of money in a given currency to the drawer or a named payee at a fixed or determinable future date. Bill of exchange is drawn by the exporting firm, in the context of an export-import transaction, directing the importing firm to make the payment/order to it. Here, the importing firms have to pay a certain amount of money to a certain person or to the bearer of bill of exchange. In this case, the exporter is the drawer and draws (prepares and signs) unconditional order in writing upon the importer (drawee) asking him to pay a certain amount of money either to himself or his nominee (endorsee). This order may also be made for payment on demand, called a bill of exchange at sight or payment at a future date. Such bill of exchange is called a ‘usance bill

102 Export Import Management of exchange’. Export consignment is passed on to the importing firm only when the importing firm’s order contains bill of exchange. This document provides the following information: Amount of bill Place Name and address of the bank in which amount is to be paid Order by exporter Invoice number Name and address of the import Exporter’s signature 2. Letter of Credit (L/C): A letter of credit is a signed instrument embodying an undertaking by the buyer’s bank to pay the seller a certain sum of money on presentation of documents evidencing shipment of specified goods and subject to compliance with stipulated terms and conditions. The International Chamber of Commerce (ICC) has a published set of universally recognised guidelines governing the issue of a Letter of Credit in Uniform Custom and Practice of Documentary Credit (UCPDC). In the issue of letter of credit, following parties are involved: Applicant: The business firm asking for a letter of credit is the applicant. Usually the applicant is an importer who imports the goods, but it is not in position to pay for the goods currently. Beneficiary: Beneficiary is a firm named in the letter of credit to whom the bank insures payment if the importer does not pay. Usually, the beneficiary of a letter of credit is the exporter. Issuing Bank: It is that bank which issues the letter of credit to the importer. It has the contractual obligation to pay the beneficiary (exporter) on the presentation of necessary documents by the exporter when importer fails to pay. Advising Bank: In a letter of credit transaction, the advising bank determines whether the issuing bank is a legitimate bank and the terms of the letter of credit offered by the issuing bank on behalf of the importer are appropriate. Generally, the advising bank is the exporter’s regular bank. But in some cases, the exporter’s bank may delegate this role to another bank which is more experienced. Steps in Processing of Letter of Credit

The main steps in the processing of a letter of credit are: (i) Issuance of letter of credit, (ii) Shipment under letter of credit, and (iii) Payment under letter of credit. (i) Issuance of Letter of Credit: First of all, the exporter and the importer agree on a sale under ‘Letter of Credit’ terms. The exporter sends a pro forma invoice to the importer. Thereafter, the importer takes the pro forma invoice to its bank and requests for a letter of credit. After receiving the pro forma invoice, the importer’s bank issues a letter of credit and sends it to the exporter’s bank, which receives and revises it. Then the exporter’s bank notifies the exporter that it is ready to ship the merchandise to the importer (Figure 4.5).

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Figure 4.5 Process of Issuance of Letter of Credit

(ii) Shipment under Letter of Credit: The exporter sends the merchandise to the importer but gathers all the documents and sends them to his bank. The exporter’s bank verifies that whether the documents fulfill the requirement of letter of credit or not, and then sends them to the importer’s bank. The importer’s bank also checks the documents that they match with the requirement and notifies the importer (Figure 4.6).

Figure 4.6

Process of Shipment under Letter of Credit

(iii) Payment Procedure: L/C is used for a larger quantity order shipped via sea. A typical L/C scenario takes 14–21 days to complete. The L/C payment procedure involves the following steps: The importer applies to open an L/C to the exporter through a bank that can open the L/C in its country. The opening bank informs the exporter that has been established. Exporter checks all the terms and conditions listed in the L/C. If all the terms and conditions are acceptable then he will arrange the shipment within the time specified in the letter of credit. After the goods are loaded onto the ship without any damage, the captain of the ship issues a clean bill of lading to the exporter. With a clean bill of lading, only they can claim the ownership of goods. Clean bill of lading and other relevant documents are to be submitted to the bank to gather the irrevocable letter of credit. The exporter’s bank sends the clean bill of lading and relevant documents to the opening bank.

104 Export Import Management Opening bank then confirms the receipt of all documents. Then importer goes to the bank to make the payment to get the clear bill of lading and relevant documents. With all these documents, importer can clear the import customs and pick up the goods after they arrive on the destination sea port.

Official Documents 1. Purchase Order: A purchase order is a commercial document issued by the buyer or seller. Sending a purchase order to a supplier constitutes a legal offer to buy a product. It indicates the type, quantities and agreed price for products, the seller provides to the buyer. Following are the contents of a purchase order: Serial number Order date Order by Due date Product description 2. Manufacturing Order: Once the order is being placed, the next step is to finalise the details as to how the products are to be manufactured. The document which contains the order to manufacture is called the manufacturing order, issued by the buyer to seller. Following is the information in the manufacturing order: Manufacturing order number Due date Shipment date Port of loading Shipment made Order status Product instruction General instruction Port of destination 3. Export Order Monitoring Format: This document is a review of the export order received and its execution by the exporter. This document discusses about the following: Format number revision number Order number Due date of delivery Dispatch date Expected date of delivery

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Key Terms Commercial Documents: Commercial documents are used by exporters/importers to meet their respective legal and other incidental responsibilities under sales contract. Auxiliary Commercial Documents: These documents are required to prepare and procure principal export documents. Commercial Invoice: A commercial invoice is the seller’s bill of merchandise. It is the basic and one of the most important documents in an export transaction. Pro Forma Invoice: A pro forma is a quote and is very commonly used in international trade. Certificate of Origin: Certificate of origin is a proof of the country of origin of goods for the importer in his/her country. Shipping Bill: Any goods moving out of a country need to be approved by the customs by mandatory filing of a legal document called shipping bill. Bill of Lading: It is a document of title of goods which is issued by the shipping company upon the shipment of goods. Letter of Credit (L/C): It is a signed instrument embodying an undertaking by the buyer’s bank to pay the seller a certain sum of money on presentation of documents evidencing shipment of specified goods and subject to compliance with stipulated terms and conditions.

In revIew Export documentation in India has evolved a great deal of interest since 1990. Before 1990, export documentation was manual and it lacked proper coordination. To study and recommend ways to reduce the number of mandatory documents required for export and import, the Department of Commerce had set up an Inter-Ministerial Committee under the Chairmanship of DGFT in July 2014. After issue of DGFT's notification, only three documents each would be mandatory for export and import. Commercial documents are used by exporters/importers to meet their respective legal and other incidental responsibilities under sales contract. Principal commercial documents are used to physically transfer of goods and title of the goods from exporter to the buyer and to realise export sales proceeds. The auxiliary commercial documents are required to prepare and procure principal export documents. Pre-shipment procedure starts from receiving the order and ends with handling over the goods to the transporters. Shipment procedure stars with the handing over of the goods to the clearing agent. To clear the goods from the customs in the importer country, some documents are needed and they form the post shipment documentation category of export documents. Sales contract is a legal contract to facilitate the exchange of goods, services or property from seller to buyer (in case of export: from exporter to importer) for a pre-decided value in money or money equivalent. A packaging list is a useful document for the port personnel while planning the loading and offloading of cargo.

106 Export Import Management The certificate of inspection is issued by the export inspection agency after the pre-shipment inspection of goods. This certificate is required by only those goods which fall under the notified category of goods requiring compulsory shipment of inspection. Certificate of measurement attests the goods confirming the measurements described and purity levels contained in the invoice provided by the exporter. The mate’s receipt is issued by the chief of vessel after cargo is loaded and it is duly signed and stamped by the chief officer or master of vessel. Any goods moving out of a country need to be approved by the customs by mandatory filing of a legal document called shipping bill. The Marine Insurance Policy Certificate provides cover against perils of sea and other connected risks to which goods are exposed to while being transported via sea. A cart ticket is also known as a cart chit, vehicle or gate pass and is prepared by the exporter. The bank realisation certificate is a declaration by the exporter that it has forwarded the documentary export bill to its bank for the collection or negotiation or purchase as per the particulars given in the bank certificate. Bill of exchange is a written unconditional order for payment from a drawer to a drawee, directing the drawee to pay a specified amount of money in a given currency to the drawer or a named payee at a fixed or determinable future date. A purchase order is a commercial document issued by the buyer or seller. Sending a purchase order to a supplier constitutes a legal offer to buy a product. Manufacturing order is issued by the buyer to the seller and contains the order to manufacture.

mulTIple ChoICe QuesTIons 1. Export documentation in India has evolved a great deal of interest since _______. (a) 2012 (b) 2001 (c) 1990 (d) 1947 2. The rBI has agreed to do away with the _______ by incorporating the declaration in the shipping bill for exports. (a) Foreign Exchange Control Form (Form A-1) (b) Foreign Exchange Control Form (SDF) (c) Both (a) and (b) (d) None of these 3. _______ are used by the exporters/importers to meet their respective legal and other incidental responsibilities under sales contract. (a) Commercial documents (b) regulatory documents (c) Export assistance documents (d) Documents required by importing countries 4. _______ are required for claiming assistance under the various export assistance measures as may be in operation from time to time. (a) Commercial documents (b) regulatory documents

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(c) Export assistance documents (d) Documents required by importing countries _______ means only freight charges will be paid by the exporter and insurance charges will be borne by the buyer himself. (a) CIF (Cost including Insurance and Freight) (b) FOB (Free on Board) (c) C&F (Cost including Freight) (d) None of these _______ means freight charges will be paid by the exporter and goods will be insured. (a) CIF (Cost including Insurance and Freight) (b) FOB (Free on Board) (c) C&F (Cost including Freight) (d) None of these _______ is not an invoice at all but a quote and is very commonly used in international trade. (a) Sales contract (b) Pro forma invoice (c) Shipping bill (d) Commercial invoice _______ is also an essential document for the custom authorities so that they can carry out the physical examination of the cargo. (a) Certificate of origin (b) Packaging slip (c) Packaging list (d) Certificate of inspection _______ is issued by the chief of vessel after cargo is loaded and it is duly signed and stamped by the chief officer or master of vessel. (a) Certificate of origin (b) Mate’s receipt (c) Certificate of inspection (d) Shipping bill _______ is a declaration by the exporter that it has forwarded the documentary export bill to its bank for the collection or negotiation or purchase. (a) Certificate of origin (b) Certificate of inspection (c) Bank realisation certificate (d) Foreign inward remittance certificate

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ConCepT QuesTIons 1. Write a short note on the following: (a) Commercial documents (b) regulatory documents (c) Export Assistance documents (d) Documents required by importing countries 2. How many types of documents are there based on sequence of activity flow? Discuss in detail. 3. Throw some light on various documents used for goods in export documentation in India. Discuss all the documents in detail. 4. What do you understand by a shipping bill? Discuss the procedure for processing the shipping bill and its importance. 5. Explain the meaning of bill of lading and its types in detail. 6. What documents are related to bank processing in export documentation? Explain in detail. 7. Write a short note on the following: (a) Documents related to payment in export documentation (b) Documents for official purpose in export documentation

FurTher readIng Government of India, Ministry of Commerce and Industry, Department of Commerce. Handbook of Procedures. 1 April 2015–31st March 2020 http://dgft.gov.in/Exim/2000/FTPproc2015-20E.pdf; accessed on 30 January 2017 https://india.gov.in/topics/commerce/export; accessed on 30 January 2017 https://www.archive.india.gov.in/business/taxation/export_procedure.php; accessed on 30 January 2017 http://saltcomindia.gov.in/Transport_procedure.html; accessed on 30 January 2017

Answers to Multiple ChoiCe Questions 1. (c) 7. (b)

2. (b) 8. (c)

3. (a) 9. (b)

4. (c) 10. (c)

5. (c)

6. (a)

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Case Study XYZ is a big exporter from Goa exporting sea food to various countries. The company had a contract with a French company for the export of cuttlefish. The French importer was concerned about the quality of goods forming the subject matter of the contract; hence, he hired an agency to conduct an inspection of the cuttle fish at the premise of XYZ. After conducting a thorough examination, the agency certified that the goods forming the subject matter of the contract were meeting all the requirements of export order. Despite all precautions, an error was committed in the bill attached to L/C pertaining to the description of goods. The French importer received the goods in his country, but did withhold the payment for the price of goods as the description of goods in the bill was different from that of export order. The importer intimated the same to the bank of XYZ in India; however, the bank did not communicate this information with XYZ for next six months. XYZ did not enquire about this incident as the export firm had already got the payment by discounting the bill. After six months, XYZ was surprised to know that the Bank in India debited the money of equal sum from its account and issued a letter informing about the concerns of the French importer and withholding of payment at his end. Disappointed with the act of its bank, XYZ filed a complaint in the National Consumer Commission and alleged that the bank was guilty of negligence and deficient service. XYZ claimed the refund of the amount debited by the bank with interest on the same. It also claimed compensation for the inconvenience caused to the company by the deficient services of the Bank. The Bank denied any negligence or deficient service at their end and stated that XYZ was verbally informed about the concerns of the French importer.

Discussion Questions 1. Was the bank guilty of negligence and deficient service? 2. What precautions should the company take to avoid such incident in future?

Chapter

5 Export Procedure

Learning Outcomes After reading this chapter, you will be able to: LO1 Understand the procedure of obtaining export licence, registration of export firm and export of samples from India LO2 Explain the requirement of packaging and labeling of export items LO3 Describe the certification and quality control process involved in export procedure LO4 Know the documents involved in export and custom procedure for export in India LO5 Review the meaning and importance of invisible exports in international trade and get the insights of export to SAARC countries from India

INTRODUCTION How to start export is a fair question that every new export business firm wants to ask. A lot of preparation is required by the firm before starting an export business. The preparations start with developing a clear understanding and detail knowledge of the products to be exported. In order to be a success in exports, the firm must fully research and understand the business environment of its foreign market. It is also important to study overseas design and products properly and consider them carefully. In the age of globalisation and liberalisation, export has become one of the most lucrative businesses in India. The Indian government also extends its support to the exporters by means of several incentives and schemes that aid in promoting the Indian export, which in turn help in meeting the much needed requirements for importing modern technology and adopting new technology from various multinational corporations (MNCs) via joint ventures and collaborations. There are specific laws and documentary requirements dealing with international trade and foreign business in different countries. It is imperative that the export firms familiarise themselves with the export procedures before starting their business. This chapter will provide an overview of export procedures in India.

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LO1 Understand the procedure of obtaining export licence, registration of export firm and export of samples from India

EXPORT LICENCE, REGISTRATION OF FIRMS AND EXPORT OF SAMPLES Obtaining Export Licence Export licence is a document issued by the appropriate licencing agency after which an exporter is allowed to transport his products in a foreign market. An application for grant of export licence for such items is to be submitted to the Director General of Foreign Trade (DGFT). In India, majority of goods are allowed to be exported without obtaining a licence. However, Schedule 2 of ITC (HS) classifications of export and import items provide a list of items for which export licences are required. (refer Exhibit 5.1 for details).

Exhibit 5.1 ITC (HS), 2012 Schedule 2—Export Policy General Notes to Export Policy—Goods under Restrictions 1. Free Exportability: All goods other than those listed in the export licencing schedule along with its appendices are freely exportable. The free exportability is however subject to any other law for the time it is in force. Goods not appearing in the schedule are deemed to be freely exportable without conditions under the Foreign Trade (Development and Regulations) Act 1992 and also under the rules, notifications and other public notices and circulars issued under this act from time to time. However, the export licencing policy in the schedule and its appendices does not preclude control by way of a Public Notice Notification under the Foreign Trade (Development and Regulations) Act 1992. Goods listed as free in the export licencing schedule can be exported without an export licence as such, but they are subject to conditions laid out against the respective entry. The fulfilment of these conditions may be checked by authorised officers during the course of export. 2. Code does not limit the item description: The export policy of a specific item is determined mainly by the description and nature of restriction explained in the schedule. The code number is illustrative of classification but does not limit the description by virtue of the standard description of the item against the code in the import section of the ITC (HS) classification. 3. Classes of Export Trade Control (i) Prohibited Goods: These items are not permitted to be exported. An export licence will not be issued in the normal course for goods in this prohibited category. No export of rough diamonds shall be permitted unless accompanied by Kimberley Process (KP) Certificate as specified by the Gem and Jewellery EPC (GJEPC). (ii) Restricted Goods: The restricted items may be permitted for export under licence. The procedures/conditions wherever specified against the restricted items are required to be complied with, in addition to the general requirements of licence in all cases of restricted items. (iii) State Trading Enterprises: Export through STE(s) is permitted without an export licence through designated STEs only as mentioned against an item. However, the export of these items is subject to conditions mentioned in Paragraph 2.11 of the Foreign Trade Policy 2009–14. Contd...

112 Export Import Management (iv) Restrictions on Countries of Export

could contribute to Iran’s enrichment related reprocessing or heavy water related activities, or development of nuclear weapon delivery systems including those listed in INFCIRC/254/ Rev.9/Part 1 and INFCIRC/254/Rev.7/Part 2 (IAEA Documents) and items listed in S/2010/263 (UN Security Council Document) or any items related to nuclear and missile development programmes is prohibited. All the UN Security Council Resolutions/Documents and IAEA Documents referred to above are available on the UN Security Council website (www. un.org/Docs/sc) and IAEA website (www.iaea.org). Republic of Korea (DPRK), to DPRK is prohibited: All items, materials equipment, goods and technology including as set out in lists in documents S/2006/814, S/2006/815 (including S/2009/205), S/2009/364 and S/2006/853 (United Nations Security Council Documents) INFCIRC/254/Rev.9/Part 1a and INFCIRC/254/Rev.7/Part 2a (IAEA documents) which could contribute to DPRK’s nuclear-related, ballistic missile-related or other weapons of mass destruction programmes. Security Council Resolution (UNSCR) 1643 (2005). be subjected to ITC (HS), 2012 Schedule 2—Export Policy 893, Prohibited in view of volNo Kimberley Process Certificate shall be accepted, endorsed, or issued for export of rough

in Paragraph 2.1 of the Foreign Trade Policy 2009–14 and Paragraph 2.2 of the Handbook (HS) classification of export and import items. Source: ITC (HS), 2012, Schedule 2—Export Policy, http://dgft.gov.in/Exim/2000/NOT/itc(hs)/Eschedule2.pdf, accessed on 30 January 2017

A careful reading of Exhibit 5.1 reveals that India permits the export of most of the items without pressing the requirement of obtaining any license for the same purpose. However, there are specific items listed under restricted goods category demanding a specific export license for the export of such items. This other category of goods not permitted to be exported from the country at all is known as prohibited goods. The other type of restriction on exporting the items from India comes in the form of limiting the export of specific goods to a specific country.

Application for an Export Licence As discussed above, to determine whether a licence is needed to export a particular product or service, the export firm must first classify the item by identifying what is called ITC (HS) classifications. A proper application has to be submitted to the Director General of Foreign Trade (DGFT). The Export Licencing Committee under the chairmanship of Export Commissioner considers such applications

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on merit, for issue of export licences. The licence is only issued after a careful review of the facts surrounding the given export transaction. Export licence depends on the nature of goods to be exported as well as the destination country. While determining the licence requirement the export firm has to consider the following necessary points: What is the firm exporting? Where is the firm exporting? Who will receive firm’s items? How will the items be used? Export of Special Chemicals, Organisms, Materials, Equipment and Technologies (SCOMET) items are also permitted under a licence or prohibited altogether. Guidelines for export of SCOMET items can be viewed here.

Canalisation It is an important feature of export licence which restricts the import of certain goods unless it is done through designated agencies. For example, gold in bulk can be imported only by specified banks like SBI and some foreign banks or designated agencies. Exports free unless regulated The Director General of Foreign Trade (DGFT) from time to time declares public notice according to which any goods not included in the ITC (HS) classifications of export and import items may be exported without a licence. Such terms and conditions may include Minimum Export Price (MEP), registration with specified authorities, quantitative ceilings and also the compliance with other laws, rules, and regulations.

Registration of Export Firms The next important step of export procedure in India is to get the export firm registered with the various government authorities. Till 1997, before starting the export operations, every first time exporter was required to apply to Reserve Bank of India (RBI) to obtain IEC number. In place of approaching RBI for the aforesaid purpose, now DGFT is required to be approached. Following are the authorities with which the firm is to be registered: (i) Registration with Director General of Foreign Trade (DGFT), (ii) Registration with Export Promotion Council, (iii) Registration with Commodity Boards, and (iv) Registration with Income Tax Authorities. 1. Registration with Director General of Foreign Trade (DGFT): For every new exporter, it is necessary to get their firm registered with the DGFT (Director General of Foreign Trade), Ministry of Commerce, Government of India. DGFT provides the export firm a unique IEC (Importer Exporter Code) number. IEC number is a ten-digit code required for the purpose of export as well as import. No exporter is allowed to export his goods abroad without IEC number. Application for IEC number can be submitted to the nearest regional authority of DGFT. The process of obtaining IEC has been discussed in details in Chapter 4. If the goods are exported to Nepal, or to Myanmar through Indo-Myanmar border or to China through Gunji, Namgaya, Shipkila or Nathula ports and the CIF value of a single consignment does not exceed 2. Registration with Export Promotion Council: A registered company under the Indian Company Act must get itself registered with the Export Promotion Council or EPC, which is a non-profit

114 Export Import Management organisation for the promotion of various goods exported from India in international market. The council works in close association with the Ministry of Commerce and Industry, Government of India and act as a platform for interaction between the exporting community and the government. Therefore it is important for an export firm to obtain a registration-cum-membership certificate (RCMC) from the EPC. An application for registration should be accompanied by a self-certified copy of the IEC number. A membership fee is to be paid in the form of a cheque or draft after ascertaining the amount from the concerned EPC. The RCMC certificate remains valid from 1st April of the licencing year in which it was issued till next five years ending on 31st March of the licencing year, unless otherwise specified. 3. Registration with Commodity Boards: The Ministry of Commerce, Government of India, has designated the Commodity Boards for the export promotion of specific products. Theses boards have a number of offices spread all over the country and outside the country also. Currently the Department of Commerce has five statutory Commodity Boards looking after the production, distribution and export of five specific products; those are tea, coffee, rubber, spices and tobacco. 4. Registration with Income Tax Authorities: India grants exemptions to all exported goods from Value Added Tax and Central Sales Tax. It must be noted here that only registered exporter with tax authorities can avail the benefit of these exemptions.

Export of Samples Other important aspect of the export business is export of samples and its procedure in a specific country. Sometimes the foreign customer may ask for product samples before placing a confirmed order. So, it is essential that the samples are made from good quality raw materials and after getting an order, the subsequent goods are made with the same quality product. Before exporting a product sample an export firm must also know the government policy and procedures for export of samples.

Sending Export Samples from India In India, export of samples up to specified limits is freely allowed. However, in such cases where indelible marking is not available, the samples may be allowed for a value not exceeding US$ 10,000 per consignment. Samples with permanent marking as ‘sample not for sale’ are allowed freely for export, without any limit. The export firm has to be registered with the appropriate Export Promotion Council to avail of this benefit. If an exporter wishes to export the sample products falling in the category of restricted goods, then he must make an application to DGFT to seek permission for this purpose. On the basis of the value of sample products, these can further be categorised in following three (i) Samples of v any foreign exchange. (ii) Samples of value l exchange. The exporting firm involved in such export has to submit a commercial invoice to certify that the export will not involve any foreign exchange and the aggregate value of the export in that calendar year will remain within the specified limit.

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(iii) Samples of v to obtain GR/PP (Guaranteed Remittance) waiver from the Reserve Bank of India. While exporting an expensive sample product, the export firm must take extra care to avoid the risk related to loss or damage of such sample product. Another area of concern for the export firm is related to secrecy and probability of copying the ordinal items especially when the product is sensitive for intellectual property right infringements.

Export Samples against Payment If a sample against which an overseas buyer agrees to make a payment is exported, it is done in the same manner as normal goods are exported. In such cases, the export firm has to follow the complete export procedure as is followed for exporting goods from India. An exporter can personally carry with him the sample products after obtaining due clearances from the respective authorities. While such sample products are precious stones or jewellery, before leaving the country the exporter must provide necessary information to the customs authorities. Such an exporter will also have to obtain endorsement on export certificate issued by Jewellery Appraiser of the Customs.

Export of Garment Samples Special provisions dealing with the export of sample garments state that only registered export firm with Apparel export Promotion Council (AEPC) are permitted to export sample of garments. For exporting the samples of wool, the export firm must be registered with Woolen Export Promotion Council.

Export of Software and Electronics Electronics and Computer Software Export Promotion Council (ESC) provides the opportunity to export firms exporting sample of all kinds electronic and computer software product from India. As discussed before, the firm must be registered with ESC to avail this opportunity. For exporting the samples of any other product, the export firm must be a member of respective Export Promotion Councils (EPC) of India.

LO2 Explain the requirement of packaging and labeling of export items

PACKAGING AND LABELING OF GOODS An important stage of exporting goods is the preparation of goods for shipment, which involves packaging and labeling of the goods to be exported. Proper packaging and labeling makes the final product look attractive and also saves a huge amount of money by saving the product from wrong handling during the export process.

Packaging Packaging refers to the process of designing, evaluating, and production of packages. The export firm may choose to get the packaging done by employing its own resources or can even get this done through outsourcing. Besides providing protection to the goods, packaging offers many other benefits to the export goods. Following are some of the most important benefits offered by packaging:

116 Export Import Management Physical Protection: One of the most visible benefit of packaging is that protects the goods from shock, vibration, temperature, moisture and dust, thus keeping them safe from any damages. Containment: Packaging by agglomeration of small objects into one offers a cost effective solution to the export firm and thus improving the efficiency of the firm. Marketing: An attractive packaging of the items plays a vital role in capturing the attention of the potential buyers and thus improving the output of marketing efforts. Convenience: An appropriate packaging by adding some features to the product offers a lot of convenience in distribution, handling, display, sale, opening, use, and reuse of the product. Security: The most important role of packaging is to reduce the security risk of goods during shipment. The packaging is an indication that the goods are not counterfeited and thus serving the purpose of authenticating seal. By adding the anti-theft devices, such as dye-packs, RFID tags, or electronic article surveillance tags, the packaging may be very effective in loss prevention of the export goods.

Labeling Labeling of a product provides information, such as how to use, transport, recycle, or dispose of the package or product. With pharmaceuticals, food, medical, and chemical products, some specific information is required by governments in different countries. Labeling on product provides the following important information Shipper’s mark Country of origin Weight marking (in pounds and kilograms) Number of packages and size of cases (in inches and centimeters) Handling marks (international pictorial symbols) Cautionary markings, such as ‘This Side Up’ Port of entry Labels for hazardous materials Like packaging, labeling also is to be done with extra care. It is important for an export firm to be familiar with all kinds of sign and symbols to maintain the national and international standards while using these symbols. Words indicating country of origin should be large and prominent on the package or label.

LO3 Describe the certification and quality control process involved in export procedure

INSPECTION CERTIFICATES AND QUALITY CONTROL An important aspect about the goods to be exported is compulsory quality control and pre-shipment inspection. To meet this purpose, Export Inspection Council (EIC) was set up by the government of India under Section 3 of the Export (Quality Control and Inspection) Act 1963. EIC promotes manufacturing export firms to implement best quality management systems to produce a consistent quality product in order to meet the buyer’s specification and gain his confidence.

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The export inspection agency is controlled by Export Inspection Council (EIC). The sub offices under export inspection council are actively involved in pre-shipment inspection, quality control and certification, and they have many laboratories countrywide. They are engaged in consignment-wise inspection, in-process quality control and self-certification schemes. There is a group for compulsory pre-shipment inspection which has more than 1000 commodities. This group includes food and agriculture, fishery, minerals, organic and inorganic chemicals, rubber products, refractoriness, ceramic products, pesticides, light engineering, steel products, jute products, coir and coir products, footwear and footwear products.

ISI and Agmark Certification Products having ISI certification mark or Agmark do not undergo any type of inspection by any agency. The products bearing these marks are not required to undergo the inspection conducted by export inspection agencies. Thus the customs authorities may allow the export of such goods without producing the pre-shipment inspection certificate after being satisfied that the goods are carrying ISI certification or the Agmark. Following are further details of these marks: ISI Certification: Indian Standards Institute now known as Bureau of Indian Standard (BIS) was founded in the year 1931 by Government of India. BIS is entrusted with the duty of developing technical standards, product quality and management system certifications and consumer affairs. BIS functions under the control of GoI and has been awarded the status of an Institution of National Importance by an act of the Indian Parliament in 1959. Agmark Certification: Agmark is an acronym used for the marketing of agricultural goods. It certifying that the goods bearing this mark are of good quality. In the current times, other quality standards including the non-manufacturing standard ISO 9000 have dominated the market place thus diluting the value of Agmark.

In-Process Quality Control (IPQC) In-Process Quality Control (IPQC), which is applied at various stages of production of a product, is mainly required for engineering. Some units are granted approval under IPQC system of in-process quality control and such authorised units can issue the certificate of inspection. However this certification can be granted for those products for which the authorised units hold the IPQC facilities. Those products which have the certificate of inspection under IPQC system are entitled to receive a final certificate of inspection on the end-products without in-depth study at the shipment stage.

Self-Certification Scheme There is a scheme of self-certification for big size export firms. Under this scheme big size export firms can inspect their products without involving any outside party for this purpose. The manufacturers of engineering products, chemical and allied products and marine products are entitled under this scheme. The scheme of self-certification works on the logic that an export itself can be the best judge the quality of its products and no export firm would compromise with the quality of its products as it may lead to spoiling its reputation in the international market. Only the export firms with proven reputation in domestic and international market can apply to Director (Inspection and Quality Control) for obtaining the permission for self-certification. The permission for self-certification under this scheme will be granted for a period of one year.

118 Export Import Management

ISO 9000 Established in 1987, ISO 9000 is a series of international standards having worldwide acceptance as the norm for the assurance of high quality of goods. The current version of ISO 9000 is ISO 9000:2000.

LO4 Know the documents involved in export and custom procedure for export in India

EXPORT DOCUMENTS Export from India requires a special set of documents depending upon the type of product and the destination to be exported. Export documents not only give details about the product and its destination port but are also used for the purpose of taxation and quality control inspection certification. All the important export documents involved in the export procedures in India have been discussed in Chapter 4. In this section, we will have an overview of these documents. 1. Shipping Bill / Bill of Export: Shipping bill or bill of export is the main document demanded by the customs authority for allowing shipment. A shipping bill is issued by the shipping agent and represents a kind of certificate for all parties, including ship's owner, seller, buyer and some other parties. For each of these parties, it represents a kind of certificate document. 2. Documents Required for Post Parcel Customs Clearance: In case of Post Parcel, shipping bill is not required. The relevant documents required are as follows: Customs Declaration Form: It is prescribed by the Universal Postal Union (UPU) which is an international apex body coordinating activities of the national postal administration. It is known by the code number CP2/CP3 and is to be prepared in quadruplicate, signed by the sender. Dispatch Note: This note is to be filled by the export firms to specify the action to be taken by the postal department at the destination. In case the address is non-traceable or the parcel is refused acceptance, the dispatch note is used to take an appropriate action. Commercial Invoice: It is issued by the export firm for the full realisable amount of goods as per the trade terms. Consular Invoice: It is prepared in the prescribed format and is signed or certified by the counsel of the importing country located in the country of export. It is mainly demanded by the countries like Kenya, Uganda, Tanzania, Mauritius, New Zealand, Burma, Iraq, Australia, Fiji, Cyprus, Nigeria, Ghana, Zanzibar, etc. Customs Invoice: If the firm is exporting to countries like USA, Canada, etc., custom invoice is prepared on a special form, to be presented by the customs authorities of the importing country. It facilitates entry of goods in the importing country at preferential tariff rates. legalised/visaed Invoice: This shows the exporter’s genuineness before the appropriate consulate, or chamber of commerce/embassy.

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119

Certified Invoice: A certified invoice is required when the export firm needs to certify on the invoice that the goods are of a particular origin or manufactured or packed at a particular place and in accordance with a specific contract. Packing list: This list shows the details of goods contained in each parcel or shipment. Certificate of Inspection: It is a type of document describing the condition of goods and confirming that they have been inspected. Black list Certificate: It is required for countries which have strained political relations with other countries. This certificate is used to certify that the ship or the aircraft carrying the goods has not touched those country(s). Manufacturer’s Certificate: Manufacturer’s certificate is required only when goods are originated from specific countries. The purpose of this certificate is to certify that country of origin of these goods and their availability. Certificate of Chemical Analysis: It serves the purpose of certifying the quality and grade of certain items such as metallic ores, pigments, etc. Certificate of Shipment: This certificate confirms the shipment of a certain lot of goods. Health/veterinary/Sanitary Certification: This certification is required to be obtained by the export firm exporting the foodstuff, marine products, hides, etc. Certificate of Conditioning: A competent office issues the certificate of conditioning certifying that the requirements related to humidity factor, dry weights, etc. have been complied with. Antiquity Measurement: In case of export of antique items, antiquity measurement is issued by Archaeological Survey of India. Shipping Order: The shipping line issuees the shipping order to the export firm to confirm that a space has been reserved for the goods in the cargo through specific vessel by a named port on a specified date. Cart/ lorry Ticket: The lorry ticket indicates that the cargo has been admitted through the port gate. The lorry tocket carries the details such as the shipper’s name, cart/lorry no., marks on packages, quantity, etc. Shut Out Advice: It is a statement of packages which are shut out by a ship. This is prepared by the concerned shed and is delivered to the export firm. 3. Short Shipment Form: The export firm applies for short shipment of good by filing an application to customs authorities at a specified port.

CUSTOM PROCEDURE FOR EXPORTS In many countries, custom clearance is a complex and time taking procedure that every export firm faces in its export business. Physical control is still the basis of custom clearance where each consignment is manually examined in order to impose various types of export duties. High import tariffs, multiplicity of exemptions, and export promotion schemes also complicate the documentation

120 Export Import Management procedures and India is no exception to this. Therefore, proper knowledge of the custom rules and regulations is essential for the export firms. For the clearance of export goods, the export firm or agent is required to undertake the following formalities. 1. Registration: Prior to filing of shipping bill for clearance of export goods, an export firm willing to export its goods has to obtain a PAN based on Business Identification Number (BIN) from the Directorate General of Foreign Trade (DGFT). The firm also has to register itself with the authorised foreign exchange dealer code and open a current account in the designated bank for credit of any drawback incentives. 2. Registration in the Case of Export under Export Promotion Schemes: An export firm willing to export under the export promotion scheme is required to get their licences/DEEC book etc. for the same purpose. 3. Processing of Shipping Bill: In case of export by sea or air, the export firm has to submit the ‘Shipping Bill’, and in case of export by road the firm has to submit the ‘Bill of Export’ in the prescribed form, containing the details such as the name of the exporter, consignee, invoice number, details of packing, description of goods, quantity, FOB value, etc. Along with the shipping bill, other documents such as copy of packing list, invoices, export contract, letter of credit, etc., are also to be submitted. There are the following five types of shipping bills (details of all these shipping bills have been discussed in Chapter 4). Shipping bill for export of duty free goods: It is a white coloured shipping bill. Shipping bill for export of goods under claim for duty drawback: This shipping bill is green coloured. Shipping bill for export of duty free goods ‘ex-bond’, i.e., from bonded warehouse: This shipping bill is pink in colour. Shipping bill for export of dutiable goods: This shipping bill is yellow coloured. Shipping bill for export under DEPB scheme: This shipping bill is blue in colour. The Bills of Export are of following types (details of all these shipping bills have been discussed in Chapter 4). Bill of export for goods under claim for duty drawback Bill of export for dutiable goods Bill of export for duty free goods Bill of export for duty free goods ‘ex-bond’ Exporters can check and track the status of shipping bills online. Processing of shipping bill – Non-EDI: In case of non-EDI, the shipping bills or bills of export must be filled in the format as prescribed in the shipping bill and Bill of Export (Form) regulations 1991. An export firm is required to apply different forms of shipping bill/bill of export for export of duty free goods, export of dutiable goods and export under drawback etc. Processing of shipping bill – EDI: Under the EDI system, the export firm needs to fill declarations in the prescribed format through the service centers of customs. Thereafter, a checklist is generated

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121

for verification of data by the export firm/CHA. The system generates a shipping bill number after verifying the data submitted to the system by the service center operator. The shipping number is endorsed on the printed checklist and returned to the exporter/CHA. For export items which are subject to export cess, the TR-6 challans for cess is printed and given by the service center to the exporter/CHA immediately after submission of shipping bill. The cess is to be paid on the strength of the challan at the designated bank. No copy of shipping bill is made available to the export firm/ CHA at this stage. 4. Quota Allocation: The quota allocation label has to be pasted on the export invoice. The allocation number of AEPC (Apparel Export Promotion Council) is required to be entered in the system at the time of shipping bill entry. The quota certification of export invoice is submitted to customs along with other original documents at the time of examination of the export cargo. For determining the validity date of the quota, the relevant date needs to be the date on which the full consignment is presented to the customs for examination and duly recorded in the computer system. 5. Arrival of Goods at Docks: The goods brought for the purpose of export are allowed entry into the dock after the due examination of check list and other declarations filed by the exporter in the service center. The custodian of the goods has to endorse the quantity of goods actually received on the reverse of the check list. After completing the examination and inspection, goods are allowed enter into the dock. At this stage, the port authorities check the quantity of the goods and match it with the documents. 6. Customs Examination of Export Cargo: There are fixed norms for examination of export consignments keeping in view the quantum of incentive, value of export goods, the country of destination, etc. The scales of physical examination of various categories of exports at the port of export are discussed in details in Exhibit 5.2.

Exhibit 5.2 Scale of Physical Examination of Export Consignment A. Factory stuffed export cargo Category of Exports

Scale of Examination

Export goods stuffed and central excise officers at the factories of manufacture, ICD/CFS, notified warehouses and other places where the commissioner has, before checking by a special order, permitted examination of goods for export.

No examination except in the presence of customs (a) where the seals are tampered with or (b) there is specific intelligence in which case, permission of deputy/assistant commissioner would be required.

B. Export under Free Shipping Bills Category of Exports

Scale of Examination

Exports under free shipping bills, i.e., where Exports under free shipping bills i.e., no examination there is no export incentive. required except where there is specific intelligence reported. Contd...

122 Export Import Management C. Export under drawback scheme Category of exports consignment – Amount Scale of Examination Export to sensitive places of drawback involved viz. dubai, Sharjah, Singapore, Hong Kong and Colombo and Others 25 per cent

2 per cent

50 per cent

10 per cent

d. Export under EPCG/dEEC schemes Category of export consignment – Amount Export to sensitive places viz. Others of drawback involved dubai, Sharjah, Singapore, Hong Kong and Colombo 25 per cent

2 per cent

50 per cent

10 per cent

E. Export under Reward schemes – Chapter 3 of FTP Category of export consignment – Amount Export to sensitive places viz. Others of drawback involved dubai, Sharjah, Singapore, Hong Kong and Colombo 25 per cent

2 per cent

50 per cent

10 per cent

Customs officer verifies the quantity of the goods actually received and enters it into the system and thereafter marks the electronic shipping bill and also hands over all original documents to the dock appraiser of the dock. The dock appraiser of the dock assigns a customs officer for the examination and intimates the officer’s name and the packages to be examined, if any, on the check list and returns it to the export firm or its agent. The customs officer may himself inspect or examine the shipment along with the dock appraiser. If the dock appraiser is satisfied that the particulars entered in the system confirm to the description given in the original documents and as seen in the physical examination, he will proceed to allow ‘let export’ for the shipment and inform the export firm or its agent. 7. variation between Declaration and Physical Examination: The check list and the declaration along with all original documents submitted with the shipping bill are retained by the concerned dock appraiser. If there is any variation between the declaration in the shipping bill and physical documents or examination report, the appraiser marks the electronic shipping bill to the assistant commissioner/ deputy commissioner of customs (exports) along with the physical documents. He instructs the export firm or its agent to meet the assistant commissioner/deputy commissioner of customs (exports) for

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123

settlement of the dispute. If the export firm agrees with the views of the department, the shipping bill is processed accordingly. But if the export firm disputes the view of the department, the issue is finalised in accordance with the principles of natural justice. 8. Drawal of Samples: If the dock appraiser (export) orders for samples to be drawn and tested, the customs officer will proceed to draw two samples from the consignment and enter the particulars thereof along with details of the testing agency in the ICES/E system. There exists no separate register for recording the dates of samples drawn. Three copies of the test memo are to be prepared and signed by the customs officer and appraising officer on behalf of customs and the export firm or its agent. Three copies of the test memo are dispersed as follows: Original: To be sent along with the sample to the test agency Duplicate: Custom’s copy to be retained with the second sample Triplicate: Exporter’s copy The assistant commissioner/deputy commissioner if he finds necessary, may also order for samples to be drawn for purposes other than testing, such as visual inspection and verification of description, market value inquiry, etc. 9. Generation of Shipping Bills: In most of the cases, there is no human intervention in the processing of shipping bills. It is processed by the system on the basis of declarations made by the exporters. Sometimes the shipping bill is also processed on screen by the customs officer. The shipping bill is generated by the system in two copies—one as custom copy and the other as exporter copy. Both the copies are then signed by the custom officer and the custom house agent. 10. Octroi Exemption for Export Goods: Since the shipping bill is generated only after the ‘Let Export’ order is issued by customs, the exporter may make use of the export invoice or such other documents as required by the octroi authorities for the purpose of octroi exemption. 11. Stuffing / loading of Goods in Containers: For the purpose of loading the goods in a container, an export firm has to produce a copy of shipping bill signed by the appraiser “Let Export’’ to the steamer agent. After receiving the copy of shipping bill, the export firm agent approaches the respective office to obtain the permission for shipment. The Customs Preventive Officer supervises the loading of stated container into the vessel and after being satisfied approves the “Shipped on Board” on exporter’s copy of shipping bill. 12. Amendments: If the documents have not yet been submitted in the system and the shipping bill number has not been generated, to incorporate the amendments or corrections in the checklist generated after filing the declaration, the firm must approach the service centres of customs. But any corrections are needed after the generation of the shipping bill number or after the goods have been brought into the Export Dock, following process must be followed to incorporate such corrections or amendments: If the goods have not yet been allowed “let export”, the amendments may be permitted by the assistant commissioner (exports). Where the “let export” order has already been given, amendments may be permitted only by the additional/joint commissioner, custom house, in charge of the export section.

124 Export Import Management In both the cases, after the permission for amendments has been granted, the assistant commissioner/ deputy commissioner (export) may approve the amendments on the system on behalf of the additional/ joint commissioner. In the cases where the printout of the shipping bill has already been generated, the exporter has to first surrender all copies of the shipping bill to the dock appraiser for cancellation, before amendment is approved on the system. 13. Drawback Claim: After the export of the goods, the drawback claim is automatically processed through EDI system by the officers of the drawback branch on first-come-first-served basis. The status of the shipping bills and sanction of drawback claim can be enquired from the query counter set up at the service center. The export firms are required to reply to such queries through the service center. The claim comes in queue of the EDI system only after reply to queries/deficiencies is entered in the service center. All the claims sanctioned on a particular day are enumerated in a scroll and transferred to the bank through the system. The bank credits the drawback amount in the respective accounts of the export firm. The bank sends a fortnightly statement to the exporters of such credits made in their accounts. 14. Export General Manifest: All the shipping lines/agents are required to furnish the ‘Export General Manifests’, shipping bill-wise, to the customs electronically before departure of the conveyance. Apart from this, the shipping lines have to continue to file manual EGMs along with the exporter copy of the shipping bills in the export department where they would be entered in a register. The shipping lines obtain acknowledgement indicating the date and time at which the EGMs were received by the export department.

LO5 Review the meaning and importance of invisible exports in international trade and get the insights of export to SAARC countries from India

INVISIBLE EXPORTS AND ITS IMPORTANCE IN INTERNATIONAL TRADE Invisible export refers to that part of international trade which does not involve the transfer of goods or tangible objects. Invisible trade is composed of invisible imports and invisible exports. It mostly includes service sectors like banking, advertising, copyrights, insurance, consultancy, etc. As discussed before, invisible export is basically associated with the person’s own skill and knowledge. In simple words we can say that under invisible export a person’s skills or knowledge is sold rather than selling a piece of software or books. As it is clear from above discussion that in invisible exports nothing tangible is transferred, and therefore the import firm receiving the service is defined as the person, group or country while the firm doing invisible export is defined as the supplier of the service. The invisible trade of a country is the the net total of a country's invisible imports and invisible export which represents a part of country’s balance of trade. Invisible trade is more important for those countries that rely on service exports or on tourism.

Export Performance of the Indian Service Industry (Invisible Trade) An analysis of the consultancy contracts secured by Indian project managers in the foreign market has been carried out by EXIM Bank of India. According to the results of the study done during 1995–96

Export Procedure

125

to 2000–01 consultancy contracts were secured largely in West Asia which accounted for 39 per cent number wise and 46 per cent value wise, followed by South East Asia Pacific and South Asia. South East Asia constituted 22 per cent both by number and by value whereas South Asia was 18 per cent number wise and 16 per cent value wise. According to the 2002 data of the Federation of Indian Export Organisations (FIEO), India's share in global trade in services was about 1.3 per cent. However, India’s share of consultancy exports is only about 0.5 per cent of the global trade in services (Exhibit 5.3).

Exhibit 5.3 Shining Indian Service Sector in International Trade The services sector in India is one of the most vibrant sectors in terms of contribution to national and state incomes, trade flows, FDI inflows, and employment. According to the economic survey 2015–16, the services sector contributed almost 66.1 per cent of its gross value-added growth in 2015-16 and became the top net foreign exchange earner and the most attractive sector for FDI (Foreign Direct Investment) inflows. Following are some important facts about the performance of service sector in India in the recent past. growth with a CAGR (Compound Annual Growth Rate) of 8.6 per cent followed by China at 8.4 per cent. 8.0 per cent. Trends 2015” states that job creation in the coming years will be mainly in the service sector. significant growth in FDI inflows in 2014–15 and 2015–16 (April–October) in general and in the services sector in particular. billion. This rising trend continued in the first seven months of 2015–16 with FDI equity inflows india’s Services Trade Services exports have been a dynamic element of India’s trade and globalisation in recent years. which constituted 7.5 per cent of the GDP, taking the country to 8th position in the tally of the largest services exporter in the world. The overall openness of the economy reflected by total trade including services as a percentage of GDP showed a higher degree of openness at 50 per cent in 2014–15 compared to 38 per cent in 2004–05. took policy initiatives to promote services exports which included the ‘Service Export from India Scheme (SEIS)’ and organising ‘Global Exhibition on Services (GES)’. Source:

Press Information Bureau, Government of India, Ministry of Finance, 26 February 2016 12:22 IST Economic Survey 2015-16: Services Sector remains the Key Driver of Economic Growth contributing almost 66.1 per cent in 2015–16, http://pib.nic.in/newsite/PrintRelease. aspx?relid=136868

126 Export Import Management Government Initiatives In the recent year, the Government of India is aiming at encouraging export of service undertook some important steps in this direction. One such initiative was the Foreign Trade Policy, 2004–09 announcing the set up of Services Export Promotion Council for promoting the Indian service sector in the foreign market. The Government also introduced Market Development Assistance (MDA), Market Access Initiative (MAI) scheme, proactive EXIM Policy and EXIM Bank schemes for the promotion of Indian service sector. To encourage export of service from India, the service tax payable on the export of consultancy services has also been exempted. However, some further clarifications are required on the provisions in the present notification. Because of less clarity and awareness, the consultancy export is not getting the benefits as it should have.

Exports from India to SAARC SAARC, or South Asian Association for Regional Cooperation, was established in the year 1985. It is a group of eight countries comprising India, Pakistan, Sri Lanka, Afghanistan, Maldives, Bhutan, Bangladesh, and Nepal. It may be noted here that all the SAARC countries are neighbour countries, sharing a lot of similarities in terms of religious and cultural environment. Because of such business environmental proximities, India has adopted a liberal trade policy with SAARC countries. Other forums in which, India is a member include: BIMSTEC (Bangladesh, India, Myanmar, Sri Lanka, and Thailand Economic Co-operation), International Monetary Fund (IMF), the World Bank and the Asian Development Bank (ADB). India is also a founding member of GATT, and the World Trade Organisation (WTO).

South Asian free Trade Area (SAfTA) On 6 January 2004, the agreement on South Asian Free Trade Area (SAFTA) was signed at Islamabad during the twelfth SAARC summit. The agreement was signed by all the member states of the South Asian Association for Regional Cooperation (SAARC), namely, India, Bangladesh, Bhutan, Maldives, Nepal, Pakistan and Sri Lanka. India, Pakistan and Sri Lanka are categorised as Non-Least Developed Contracting States (NLDCS) and Bangladesh, Bhutan, Maldives and Nepal are listed as Least Developed Contracting States (LDCS). Article 7 of the SAFTA agreement offered a phased tariff liberalisation programme (TLP). Under the same programme, in two years, NLDCS was to bring down tariffs to 20 per cent, while LDCS was to be brought down to 30 per cent. Non-LDCS brought down the tariffs from 20 per cent to 0–5 per cent in 5 years (Sri Lanka in 6 years), while LDCS were required to do so in 8 years. It was also directed that NLDCs would reduce their tariffs for LDC products to 0-5 per cent in 3 years. This TLP has coverage extending to all tariff lines except those kept in the sensitive list (negative list) by the member states.

Export to Afghanistan India signed a Preferential Trade Agreement (PTA) on 6 March 2003 with Afghanistan, according to which preferential tariff is granted by the government of Afghanistan on eight items exported from India including tea, medicines, sugar, cement. PTA is a special type of agreement that opens access to only certain goods. Table 5.1 lists top 25 commodities imported by Afghanistan. PTA is done by reducing tariffs, however tariffs are not abolished completely. It is established through trade pact and

Animal, vegetable fats and 0.30 oils, cleavage products, etc.

Iron and steel

Optical, photo, technical, 0.29 medical, etc. apparatus

Special woven fabrics; 0.16 tufted textile fabrics; etc.

Electrical, electronic equipment

Articles of stone, plaster, cement, asbestos, etc.

Vehicles other than railway, tramway

Machinery, nuclear reactors, boilers, etc.

Cocoa and cocoa preparations

Coffee, tea, mate and spices

Sugars and sugar confectionery

15

72

90

58

85

68

87

84

18

09

17

0.08

0.13

0.14

0.28

0.56

0.54

0.38

0.54

Products of the milling 0.27 industry; malt; starches etc.

11

0.15

0.16

0.12

0.32

0.30

0.26

0.24

0.34

0.35

0.41

0.49

0.52

1.47

0.12

0.13

0.14

0.15

0.16

0.20

0.20

0.24

0.32

0.35

0.35

0.47

1.64

– 20.69

– 17.93

19.76

– 53.40

– 46.47

– 23.99

– 14.71

– 29.76

– 7.17

– 16.29

– 29.40

– 9.54

11.14

% Growth (2015 over 2014)

14.06

0.79

– 0.16

– 19.14

– 34.05

– 28.64

– 18.88

15.32

3.44

– 13.72

5.01

20.72

3.73

CAGR

Afghanistan’s Imports from world 2013 2014 2015

Mineral fuels, oils, distilla- 1.47 tion products, etc.

Description

27

HS Code

0.00

0.01

0.00

0.00

0.00

0.00

0.01

0.00

0.00

0.00

0.00

0.00

0.00

0.00

0.00

0.00

0.00

0.00

0.00

0.00

0.02

0.01

0.00

0.00

0.00

0.00

– 39.97

– 19.74

– 11.81

654.63

0.00

30.56

– 15.61

– 56.20

819.12

– 29.97

0.00

– 46.38

0.02 12752.29

0.00

0.00

0.00

0.00

0.00

0.00

0.02

0.00

0.00

0.00

0.00

0.00

% Growth (2015 over 2014)

232.69

– 35.48

– 0.49

27.88

21.20

– 1.20

– 19.00

0.00

14.81

56.20

59.17

0.00

29.59

CAGR

0.20

1.84

0.60

0.50

0.06

0.00

0.79

14.00

2.26

0.01

0.12

0.00

0.01

Contd...

13.53

0.88

0.58

0.39

0.84

0.01

1.65

5.41

0.83

0.15

0.05

0.04

0.01

% % Share Share (2015) (2014)

India’s Exports to Afghanistan 2013 2014 2015

Table 5.1 Top 25 Commodities Imported by Afghanistan (Values in US$ Billion)

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127

Edible vegetables and certain roots and tubers

Live animals

Dairy produce; birds’ eggs; 0.11 natural honey; etc.

Tobacco and manufac- 0.04 tured tobacco substitutes

Meat and edible meat 0.08 offal

Wood and articles of 0.12 wood; wood charcoal

Fertilisers

Other vegetable textile 0.05 fibres; paper yarn etc.

Pharmaceutical products

Cereals

Miscellaneous articles of base metal

Rubber and articles thereof

07

01

04

24

02

44

31

53

30

10

83

40

1.36 1.82 7.56 7.73

Total of All Other Products

Afghanistan’s Total Imports from world & India’s Exports to Afghanistan

7.72

2.40

5.33

0.06

0.06

0.06

0.06

0.06

0.07

0.07

0.07

0.09

0.09

0.09

0.10

–0.08

31.56

–9.84

–10.57

42.01

–14.81

–45.81

451.45

96.49

–33.90

–21.58

57.40

–5.42

102.34

56.04

% Growth (2015 over 2014)

0.00

0.00

0.01

0.04

0.00

0.00

0.00

0.00

0.00

0.01

0.00

0.00

0.00

0.00

0.00

0.01

0.00

0.00

0.00

0.00

0.00

0.00

0.00

0.00

0.72 0.11 0.11

20.67 0.04 0.05

0.13

0.05

0.08

0.00

0.00

0.00

0.01

0.00

0.00

0.00

0.00

0.01

0.01

0.00

0.00

2013 2014 2015

–4.91 0.07 0.06

–22.54

2.58

–14.96

– 40.44

10.12

16.52

–15.97

–4.16

26.92

–5.65

47.68

30.29

CAGR

21.32

2.09

38.34

–72.75

256.63

–25.86

–20.55

734.03

0.00

0.00

–55.31

1500.00

89.10

–78.13

0.00

% Growth (2015 over 2014)

5.76

8.73

3.99

67.42

0.00

–35.28

–47.11

19.39

0.00

54.80

–8.36

0.00

15.10

–39.11

0.00

CAGR

1.42

3.71

0.92

2.73

0.37

2.61

2.47

0.41

0.00

0.00

2.53

0.97

4.08

0.11

0.00

1.69

2.83

1.34

1.43

1.71

2.68

5.03

14.20

0.06

0.11

1.01

11.95

8.68

0.02

0.92

% % Share Share (2015) (2014)

India’s Exports to Afghanistan

Source: http://www.indiantradeportal.in/vs.jsp?lang=1&id=0,25,45,858,901,978, accessed on 2 February 2017

6.19 5.91

0.06

0.04

0.07

0.11

0.01

0.03

0.10

0.09

0.06

0.09

0.04

0.06

Total of Top 25 Products

0.12

0.05

0.10

0.28

0.04

0.03

0.04

2013 2014 2015

Afghanistan’s Imports from world

Description

HS Code

128 Export Import Management

129

Export Procedure

is the weakest form of economic integration. Among the SAARC countries, India enjoys PTA with Afghanistan. Other countries that have PTA with India include Chile and MERCOSUR (trading bloc in Latin America comprising Brazil, Argentina, Uruguay and Paraguay).

Export to Bangladesh Bangladesh is one of the largest export markets for Indian trade. The Bangladesh Trade Agreement provides the guidelines for bilateral trade between the two nations. The agreement facilitates a beneficial arrangement for the passage of products through the shared use of waterways, railways and roadways between the two countries. Major items exported from India to Bangladesh include wheat, other cereals, dairy products, oils, cotton yarn, fabrics, made ups, petroleum crude and products, plastic and linoleum products, rice machinery and instruments, primary and semi-finished iron and steel, pulses, transport equipment, drugs and pharmaceuticals, fine chemicals, processed mineral man-made yarn, fabrics, made-up manufactures of metals, and fresh fruits and vegetables. Table 5.2 lists top 25 commodities imported by Bangladesh. Table 5.2 Top 25 Commodities Imported by Bangladesh (Values in US$ Billions) HS Code

Commodity

Bangladesh’s Imports from World (2013)

India’s Exports to Bangladesh (2013)

% Share

52

Cotton

4.97

1.66

33.41

84

Machinery, nuclear reactors, boilers, etc.

3.36

0.28

8.41

27

Mineral fuels, oils, distillation products, etc.

2.27

0.16

7.13

85

Electrical, electronic equipment

1.81

0.13

7.26

72

Iron and steel

1.62

0.25

15.40

15

Animal, vegetable fats and oils, cleavage products, etc.

1.34

0.00

0.16

39

Plastics and articles thereof

1.28

0.14

11.00

10

Cereals

1.21

0.77

63.00

55

Man-made staple fibres

1.20

0.17

13.87

87

Vehicles other than railway, tramway

0.96

0.46

47.72

31

Fertilisers

0.80

0.00

0.11

17

Sugars and sugar confectionery

0.76

0.02

2.45

54

Man-made filaments

0.64

0.06

10

07

Edible vegetables and certain roots and tubers

0.57

0.14

23.89

60

Knitted or crocheted fabric

0.53

0.05

9.30

29

Organic chemicals

0.51

0.15

29.65 Contd...

130 Export Import Management HS Code

Commodity

32

Tanning, dyeing extracts, tannins, derives, pigments etc.

0.51

0.12

24.23

48

Paper and paperboard, articles of pulp, paper and board

0.44

0.03

7.62

23

Residues, wastes of food industry, animal fodder

0.39

0.25

63.28

38

Miscellaneous chemical products

0.38

0.08

21.51

73

Articles of iron or steel

0.38

0.04

9.89

90

Optical, photo, technical, medical, etc., apparatus

0.35

0.03

8.92

12

Oil seed, oleagic fruits, grain, seed, fruit, etc.

0.31

0.03

8.43

04

Dairy products, eggs, honey, edible animal product

0.30

0.10

32.78

25

Salt, sulphur, earth, stone, plaster, lime and cement

0.27

0.07

24.28

All Other Items

5.67

0.81

14.24

32.84

5.99

18.25

Bangladesh’s Total Imports from World and India’s Total Exports to Bangladesh

Bangladesh’s Imports from World (2013)

India’s Exports to Bangladesh (2013)

% Share

Source: http://www.indiantradeportal.in/vs.jsp?lang=1&id=0,25,45,858,901,978, accessed on 2 February 2017

Export to Bhutan The Free Trade Agreement (FTA) signed by India and Bhutan provides for free trade between the two countries. Under this Agreement, India also provides shipment facilities through Indian territory for Bhutan's trade with other countries. All the export transactions are carried out in Indian Rupees and Bhutanese Ngultrum. Major items exported from India to Bangladesh are metals, machinery and instruments, machine tools, transport equipment, electronics goods, rice (other than basmati), spirit and beverages, miscellaneous processed items, primary and semi-finished iron and steel, and cereals. Table 5.3 lists top 25 commodities imported by Bhutan. Table 5.3 Top 25 Commodities Imported by Bhutan (Values in US$ Billion) HS Code

Commodity

Bhutan’s Imports from World (2013)

India’s Exports to Bhutan (2013)

% Share

27

Mineral fuels, oils, distillation products, etc.

0.06

0.06

99.96

84

Machinery, nuclear reactors, boilers, etc.

0.03

0.01

34.38

85

Electrical, electronic equipment

0.03

0.00

15.45

73

Articles of iron or steel

0.02

0.02

89.28

72

Iron and steel

0.02

0.01

93.88

99

Commodities not elsewhere specified

0.01

0.01

98.54 Contd...

Export Procedure

Bhutan’s Imports from World (2013)

India’s Exports to Bhutan (2013)

131

HS Code

Commodity

% Share

25

Salt, sulphur, earth, stone, plaster, lime and cement

0.01

0.01

94.08

55

Manmade staple fibres

0.01

0.00

0.09

63

Other made textile articles, sets, worn clothing etc.

0.01

0.00

1.55

87

Vehicles other than railway, tramway

0.01

0.00

36.42

30

Pharmaceutical products

0.01

0.00

11.81

61

Articles of apparel, accessories, knit or crochet

0.01

0.00

0.00

39

Plastics and articles thereof

0.00

0.00

27.89

19

Cereal, flour, starch, milk preparations and products

0.00

0.00

97.39

40

Rubber and articles thereof

0.00

0.00

79.87

90

Optical, photo, technical, medical, apparatus

0.00

0.00

31.16

62

Articles of apparel, accessories, not knit or crochet

0.00

0.00

0.25

22

Beverages, spirits and vinegar

0.00

0.00

27.05

18

Cocoa and cocoa preparations

0.00

0.00

98.21

38

Miscellaneous chemical products

0.00

0.00

73.71

94

Furniture, lighting, signs, prefabricated buildings

0.00

0.00

8.56

10

Cereals

0.00

0.00

100.00

34

Soaps, lubricants, waxes, candles, modelling pastes

0.00

0.00

80.18

36

Explosives, pyrotechnics, matches, pyrophorics, etc.

0.00

0.00

99.93

48

Paper and paperboard, articles of pulp, paper and board

0.00

0.00

58.65

All Other Items

0.02

0.01

46.60

Bhutan's Total Imports from World and India's Total Exports to Bhutan

0.26

0.16

61.31

Source: http://www.indiantradeportal.in/vs.jsp?lang=1&id=0,25,45,858,901,978, accessed on 2 February 2017

Export to Sri Lanka After Bangladesh, Sri Lanka is the second biggest export market for Indian trade. Trade between the two countries is governed as per guidelines mention in the Indo-Sri Lanka Free Trade Agreement (SAFTA). Major items of export from India include pulses, wheat, other cereals, spices, oil meals, fresh vegetables, miscellaneous processed items, drugs and pharmaceuticals, fine chemicals both inorganic and organic, agro-chemicals, rubber manufactured goods except footwear, glass, glassware, ceramic and allied products, paper/wood products, plastic and linoleum products, non-ferrous metals, manufactures of metals, machinery and instruments, iron and steel bar/rod etc., primary and semifinished iron and steel, electronic goods, cotton yarn, fabric, and petroleum crude and products.

Minerals fuels, oils, distillation products, etc.

Iron and steel

Electrical, electronic equipment

Vehicles other than railway, tramway

Machinery, nuclear, reactors, boilers, etc.

Pearls, precious stones, 0.37 metals, coins, etc.

Cereals

Pharmaceutical products

Plastic and articles thereof

Aircraft, spacecraft, and 0.02 parts thereof

Animal, vegetable fats and 0.42 oils, cleavage products, etc.

Edible vegetables and cer- 0.11 tain roots and tubers

Fertilisers

Salt, sulphur, earth, stone, 0.15 plaster, lime and cement

Edible fruit and nuts; peel 0.09 of citrus fruit or melons

27

72

85

87

84

71

10

30

39

88

15

07

31

25

08

0.16

0.26

0.14

0.19

0.35

0.33

0.33

0.68

1.21

0.11

0.15

0.12

0.14

0.26

0.06

0.28

0.18

0.34

0.39

0.49

0.45

0.51

0.61

1.50

0.10

0.12

0.14

0.15

0.17

0.19

0.25

0.26

0.32

0.34

0.41

0.41

0.49

0.58

0.88

– 5.27

–15.59

15.45

10.83

–36.05

229.06

– 9.17

43.36

– 5.38

– 12.76

– 15.96

– 7.84

– 3.61

– 5.40

– 41.14

3.73

– 5.18

– 5.91

11.98

– 26.57

99.72

– 0.97

22.54

18.39

– 2.79

5.51

7.39

13.45

– 5.25

– 10.09

CAGR

Nepal’s Imports from world 2013 2014 2015 % Growth (2015 over 2014)

Description

HS Code

0.03

0.14

0.09

0.06

0.00

0.00

0.15

0.12

0.19

0.00

0.19

0.30

0.09

0.63

1.14

0.04

0.14

0.05

0.07

0.00

0.00

0.15

0.15

0.33

0.01

0.25

0.40

0.13

0.57

1.43

0.05

0.12

0.05

0.08

0.01

0.00

0.13

0.14

0.31

0.00

0.23

0.37

0.11

0.52

0.81

29.44

– 15.30

– 8.31

12.90

326.69

– 33.36

– 12.13

– 5.91

– 5.66

– 81.96

– 9.24

– 6.22

– 11.10

– 9.05

– 43.39

26.08

– 5.37

– 19.42

11.51

86.94

11.87

– 4.50

6.55

18.60

23.36

6.75

7.24

8.65

– 6.45

– 10.91

CAGR

India’s Exports to Nepal 2013 2014 2015 % Growth (2015 over 2014)

Table 5.4 Top 25 Commodities Imported by Nepal (Values in US$ Billion)

42.78

98.02

31.82

67.71

0.70

17.88

58.89

105.34

174.36

2.33

71.76

119.72

38.02

83.38

117.59

Contd...

46.99

82.22

40.44

60.34

4.86

4.92

48.40

77.22

93.80

0.40

46.59

83.53

22.31

84.33

53.91

% Share % (2014) Share (2015)

132 Export Import Management

Articles of iron or steel

Optical, photo, technical, 0.07 medical, etc., apparatus

Articles of apparel, ac- 0.07 cessories, not knit or crochet

Oil seed, oleagic fruits, 0.09 grain, seed, fruits, etc. nes

Aluminium and articles 0.05 thereof

Man-made staple fibres

Organic chemicals

Essential oils, perfumes, 0.06 cosmetics, toileteries

73

90

62

12

76

55

29

33

6.45 7.59

Nepal’s Total Imports from World & India’s Exports to Nepal

– 24.97

– 6.45

16.31

16.66

– 18.64

– 5.60

– 27.00

– 24.30

– 15.52

– 2.50

6.61 – 12.89

1.07 – 10.69

5.54 – 13.30

0.06

0.06

0.06

0.07

0.07

0.08

0.08

0.08

0.08

0.09

0.82

3.75

0.29

– 1.99

6.65

– 5.47

10.14

– 5.24

3.82

4.05

13.71

0.16

9.13

4.10

0.56

3.54

0.04

0.02

0.05

0.02

0.07

0.03

0.01

0.04

0.06

0.06

4.94

0.71

4.23

0.06

0.03

0.03

0.03

0.06

0.04

0.02

0.07

0.07

0.09

4.01

0.63

3.37

0.04

0.03

0.04

0.05

0.03

0.04

0.02

0.05

0.06

0.08

– 18.78

– 10.08

– 20.24

– 27.08

– 18.02

3.71

49.79

– 48.71

– 4.55

– 14.04

– 23.72

– 20.50

– 6.55

2013 2014 2015 % Growth (2015 over 2014)

– 0.78

4.06

– 1.60

– 1.24

3.91

– 10.62

29.29

– 24.41

8.42

7.29

10.27

– 1.03

12.25

CAGR

India’s Exports to Nepal

Source: http://www.indiantradeportal.in/vs.jsp?lang=1&id=0,25,45,858,901,978, accessed on 2 February 2017

5.49 6.39 0.96 1.20

Total of Top 25 Products

0.08

0.06

0.05

0.06

0.09

0.08

0.11

0.10

0.10

Total of all Other Products

0.05

0.07

0.05

Paper and paperboard, 0.08 articles of pulp, paper and board

48

0.09

CAGR

Nepal’s Imports from world 2013 2014 2015 % Growth (2015 over 2014)

Residues and waste from 0.07 the food industries etc.

Description

23

HS Code

76.49

73.71

76.98

92.04

64.52

46.38

59.25

68.21

58.34

31.18

125.87

85.90

124.88

52.81

53.01

52.77

53.48

40.78

66.21

77.49

33.45

46.98

17.37

49.44

57.42

87.56

% Share % (2014) Share (2015)

Export Procedure

133

Electrical, electronic equipment

Wood and articles of wood, 0.05 0.06 wood charcoal

Aircraft, spacecraft, and parts 0.06 0.06 thereof

Salt, sulphur, earth, stone, 0.04 0.06 plaster, lime and cement

Plastic and articles thereof

Furniture, lighting, signs, prefabricated buildings

Dairy products, eggs, honey, 0.05 0.05 edible animal products nes

Meat and edible meat offal

Articles of iron or steel

Edible vegetable and certain roots and tubers

Edible fruit, nuts, peel of citrus fruit, melons

Iron and steel

Vehicles other than railway, 0.02 0.03 tramway

85

44

88

25

39

94

04

02

73

07

08

72

87

0.02 0.03

0.04 0.04

0.04 0.04

0.03 0.03

0.05 0.05

0.05 0.05

0.04 0.05

0.12 0.14

Machinery, nuclear reactors, 0.14 0.17 boilers, etc.

84

0.04

0.04

0.04

0.04

0.05

0.05

0.05

0.06

0.06

0.08

0.09

0.09

0.15

0.18

0.31

2013 2014 2015

20.38

55.39

4.63

8.44

42.71

0.27

– 3.61

5.58

14.00

47.73

40.01

37.53

6.79

8.95

– 46.03

% Growth (2015 over 2014)

28.25 0.00

26.16 0.01

5.15 0.01

4.60 0.01

21.25 0.00

0.01 0.00

2.49 0.01

2.38 0.00

16.66 0.00

25.30 0.02

14.75 0.00

19.52 0.00

7.48 0.00

9.30 0.00

0.00

0.01

0.01

0.01

0.00

0.00

0.01

0.00

0.01

0.03

0.00

0.00

0.00

0.01

0.00

0.00

0.02

0.01

0.01

0.00

0.00

0.01

0.00

0.01

0.06

0.00

0.00

0.00

0.01

0.00

183.04

85.62

– 1.57

– 25.47

25.41

– 6.08

– 10.27

11.36

– 2.07

90.59

440.16

40.68

69.25

29.15

1769.55

44.98

28.43

1.43

–11.17

26.32

–7.54

–1.92

8.33

22.46

52.10

120.47

19.13

27.86

32.38

47.65

CAGR

India’s Export to Maldives 2013 2014 2015 % Growth (2015 over 2014)

– 15.09 0.00

CAGR

Maldives’s imports from world

Mineral fuels, oils, distillation 0.50 0.57 products etc.

Description

27

HS Code

Table 5.5 Top 25 Commodities Imported by Maldives (Values in US$ Billion)

3.88

32.15

16.75

28.67

10.62

7.99

12.18

3.46

15.47

58.59

0.61

1.17

1.96

4.98

0.05

% Share (2014)

Contd...

9.13

38.41

15.76

19.70

9.34

7.49

11.34

3.65

13.29

75.59

2.34

1.20

3.11

5.91

1.61

% Share (2015)

134 Export Import Management

Essential oils, perfumes, cos- 0.03 metics, toileteries

Cereal, flour, starch, milk 0.02 preparations and products

Ceramic products

Optical, photo, technical, 0.01 medical, etc. apparatus

Miscellaneous edible preparations

Fish, crustaceans, molluscs, 0.02 aquatic invertebrates nes

Vegetable, fruit, nut, etc. food preparations

Cereals

33

19

69

90

21

03

20

10

0.01

0.00

0.01

0.00

0.00

0.00

0.00

0.00

0.00

0.00

0.01

0.00

0.01

0.00

0.00

0.00

0.00

0.00

0.00

0.00

0.15 0.17 0.21

0.05 0.04 0.04

0.10 0.13 0.17

0.01

0.00

0.01

0.00

0.00

0.00

0.00

0.00

0.00

0.00

23.87

0.11

31.98

– 47.65

– 56.33

– 4.25

– 67.80

64.93

– 54.94

26.36

– 14.73

1994.74

– 51.85

2013 2014 2015 % Growth (2015 over 2014)

7.58

69.42

2.78

30.99

5.13

12.65

5.42

7.79

10.84

0.25

1.26

% Share (2014)

11.11

8.56

–5.93 13.78

18.12

–19.46

–26.96

0.35

–29.37

29.42

–23.55

11.43

2.70

0.00

– 29.40

CAGR

India’s Export to Maldives

Source: http://www.indiantradeportal.in/vs.jsp?lang=1&id=0,25,45,858,901,978, accessed on 2 February 2017

3.36

4.61

5.79 – 3.96

0.29 0.31 0.33

Total of All Other Products

Maldives’s Total Imports from 1.73 1.99 1.91 World & India’s Total Exports to Maldives

2.85

– 0.23

4.16

4.29

20.59

22.92

5.24

2.59

33.30

3.91

CAGR

3.10

7.48

– 10.10

– 0.64

3.08

48.73

63.08

7.17

– 10.93

22.66

– 7.27

% Growth (2015 over 2014)

– 5.79

0.02

0.02

0.02

0.02

0.02

0.02

0.03

0.03

0.03

0.04

1.44 1.68 1.58

0.02

0.02

0.02

0.02

0.02

0.01

0.02

0.03

0.02

0.04

Total of Top 25 Products

0.02

0.02

0.02

0.01

Ships, boats and other float- 0.01 ing structures

89

0.03

2013 2014 2015

Maldives’s imports from world

Beverages, spirits and vinegar

Description

22

HS Code

11.04

13.04

10.62

33.81

1.35

29.86

1.60

14.03

1.50

9.18

10.38

4.21

0.66

% Share (2015)

Export Procedure

135

Description

Mineral fuels, oils, distillation products, etc.

Machinery, nuclear reactors, boilers, etc.

Electrical, electronic equipment

Iron and steel

Plastics and articles thereof

Organic chemicals

Animal, vegetable fats and oils, cleavage products, etc.

Vehicles other than railway, tramway

Fertilisers

Oil seed, oleagic fruits, grain, seed, fruits, etc., nes

Man-made staple fibres

Miscellaneous chemical products

Manmade filaments

Pharmaceutical products

Edible vegetables and certain roots and tubers

HS Code

27

84

85

72

39

29

15

87

31

12

55

38

54

30

07

2014

0.50

0.67

0.53

0.58

0.53

0.48

0.61

1.24

1.98

2.02

1.57

1.84

2.68

3.06

0.67

0.75

0.68

0.71

0.77

0.78

0.81

1.31

2.15

1.96

1.95

2.30

3.35

3.93

15.25 14.82

2013

0.67

0.68

0.72

0.75

0.78

0.78

1.01

1.74

1.85

1.86

1.93

2.55

3.80

4.07

10.03

2015

1.29

– 9.15

6.38

5.06

2.17

0.53

24.02

32.78

– 13.81

– 5.11

– 0.97

10.86

13.61

3.61

– 32.33

% Growth (2015 over 2014)

10.52

0.14

10.96

8.81

13.71

17.89

18.50

12.11

– 2.17

– 2.57

7.19

11.50

12.33

9.98

– 13.03

CAGR

Pakistan’s imports from world

0.23

0.02

0.02

0.04

0.04

0.05

0.00

0.00

0.00

0.26

0.15

0.03

0.00

0.03

0.02

0.25

0.04

0.04

0.06

0.06

0.07

0.00

0.00

0.00

0.24

0.16

0.03

0.02

0.06

0.04 – 1.97

0.50

8.68

20.72

– 5.78

49.59 0.13 – 50.04

0.02 – 49.42

0.05

0.06 – 10.78

0.06

0.08

0.00

0.00 120.69

0.00 107.23

0.19 – 21.27

0.12 – 23.06

0.03

0.01 – 26.92

0.06

0.02 – 45.07

8.05

1.45

0.58

1.50

0.25

5.29

5.26

9.06

7.40

8.36

0.06

0.00

0.03

– 18.28 37.84

8.80

35.07

9.22

12.91

18.36

– 2.59

– 41.70

18.48

Contd...

18.66

2.94

7.39

7.69

7.87

10.04

0.05

0.00

0.06

10.04

6.25

1.31

0.37

1.42

0.20

% % Share Share (2014) (2015)

– 10.27 12.10

– 6.85

7.44

71.95

24.08

– 3.48

CAGR

India’s Exports to Pakistan 2013 2014 2015 % Growth (2015 over 2014)

Table 5.6 Top 25 Commodities Imported by Pakistan (Values in US$ Billion)

136 Export Import Management

Cotton

Articles of iron or steel

Coffee, tea, mate and spices

Rubber thereof

Paper and paperboard, articles of pulp, paper and board

Inorganic chemicals, precious metal compound, isotopes

Ships, boats and floating structures

Residues and waste from the food industries etc.

Tanning, dyeing extracts, tannins, derivs, pigments etc.

52

73

09

40

48

28

89

23

32

0.40

0.56

0.60

0.47

0.52

0.50

0.43

0.57

0.74

0.57

2014

0.40

0.48

0.48

0.52

0.52

0.55

0.59

0.63

0.66

0.67

2015

0.16

2.58

– 0.15

6.80

8.37

– 21.21

6.54

5.89

5.90

15.23

8.78

– 14.12

14.35

CAGR

1.87

0.12

1.76

0.06

0.30

0.01

0.01

0.00

0.03

0.04

0.00

0.41

0.00

19.45

39.24

– 0.92

0.09

3.07

0.07 – 67.25

0.04 – 37.17

0.02

0.00 – 25.93

0.05

0.05 – 20.01

0.00 – 63.33

0.34 – 10.54

0.00

– 6.07 2.10 1.67 – 20.69

0.19 0.17

1.92 1.49 – 22.11

0.09

0.21

0.06

0.02

0.00

0.04

0.06

0.00

0.38

0.00

2013 2014 2015 % Growth (2015 over 2014)

– 3.78

14.60

– 5.27

17.27

38.62

39.09

3.75

– 15.66

20.81

8.65

– 19.21

– 5.87

22.39

CAGR

India’s Exports to Pakistan

Source: http://www.indiantradeportal.in/vs.jsp?lang=1&id=0,25,45,858,901,978, accessed on 2 February 2017

– 7.48

Pakistan’s Total Imports from 43.78 47.54 43.99 World & India’s Exports to Pakistan

5.25

– 8.38

1.38

– 14.37

– 19.32

11.32

0.94

8.58

35.51

10.14

– 10.60

18.10

% Growth (2015 over 2014)

– 0.17

4.85

38.92 42.30 38.75

0.33

0.38

0.98

0.43

0.44

0.46

0.38

0.49

1.05

0.45

2013

Pakistan’s imports from world

5.24

Total of All Other Products

Total of Top 25 Products

articles

Optical, photo, technical, medical, etc., apparatus

90

and

Description

HS Code

4.43

3.55

4.54

22.56

37.44

10.53

3.36

0.20

7.71

13.13

0.30

51.40

0.59

3.79

3.34

3.86

22.94

14.32

8.20

2.99

0.15

9.89

7.75

0.10

51.43

0.60

% % Share Share (2014) (2015)

Export Procedure

137

138 Export Import Management Export to Nepal The India Nepal trade treaty between India and Nepal is signed for the time period of five years. According to this trade agreement, major items exported from India are drugs, pharmaceuticals and fine chemicals, petroleum products, pulses, transport equipment, rice other than basmati, tobacco, spices, oil meals, fresh fruits and vegetables, miscellaneous processed items, ores and minerals, glassware/ ceramics, manufactures of metals, primary and semi-finished iron and steel, and cotton yarn fabrics. Table 5.4 lists top 25 commodities imported by Nepal.

Export to Maldives Trade between India and Maldives is carried out as per the guidelines laid down in the Indo-Maldives trade agreement signed on 31 March 1981. According to this agreement major Indian exports items to Maldives include rice other than basmati, sugar, fresh vegetables, miscellaneous processed items, drugs, pharmaceuticals and fine chemicals, plastic and linoleum products, manufactures of metals, and machinery equipment. India and Maldives also provide the status of “Most Favored Nation” to each other. Table 5.5 lists top 25 commodities imported by Maldives.

Export to Pakistan No trade agreement has been signed between India and Pakistan. Indian exports to Pakistan are restricted to a list of 773 items known as ‘Positive List’ and this list includes rice other than basmati, spices, oil meals, iron ore, drugs, pharmaceuticals and fine chemicals, rubber manufactured products except footwear, plastic and linoleum products, manufactures of metals, and petroleum crude and products. Table 5.6 lists top 25 commodities imported by Pakistan.

Key Terms Export licence: An export licence is a document issued by the appropriate licencing agency after which an exporter is allowed to transport his product in a foreign market. Canalisation: It is an important feature of export licence under which certain goods can be imported only by designated agencies. Commodity Board: Commodity board is a registered agency designated by the Ministry of Commerce, government of India for purposes of export promotion of different products. Packaging: Packaging refers to the process of design, evaluation, and production of packages. labeling: Labeling of a product provides information like how to use, transport, recycle, or dispose of the package or product. Agmark Certification: Agmark is an acronym for Agricultural Marketing which is used to certify the food products for quality control.

Export Procedure

139

In revIew An export licence is a document issued by the appropriate licencing agency after which an exporter is allowed to transport his products in a foreign market. Whether or not a licence is needed to export a particular product or service, the export firm must first classify the item by identifying it under the ITC (HS) classifications. Licence Director General of Foreign Trade (DGFT), Export Promotion Council, Commodity Boards and Income Tax department are the authorities with which the firm is to be registered. In India, export of samples up to specified limits are allowed free. However, in such cases where indelible marking is not available, the samples may be allowed for values not exceeding US$ 10,000 per consignment. There are special provisions for the exports of garments. As per these provisions, only those exporters are allowed to send samples that are registered with the Apparel Export Promotion Council (AEPC). All kinds of electronic and computer software product samples can be exported from India only if the export firm dealing with these products is registered with the Electronics and Computer Software Export Promotion Council (ESC). Proper packaging and labeling makes the final products look attractive and also save a huge amount of money by preventing the product from wrong handling during the export process. Labeling of a product provides information like how to use, transport, recycle, or dispose of the package or product. With pharmaceuticals, food, medical, and chemical products, some specific information is required by the governments of different countries. Export inspection agency is controlled by Export Inspection Council (EIC). There is a group for a compulsory pre-shipment inspection which has more than 1000 commodities. Products having ISI Certification mark or Agmark are not required to be inspected by any agency. In-Process Quality Control (IPQC) inspection is mainly done for engineering products. The Self Certification Scheme (SCS) is available to manufacturers of engineering products, chemical and allied products, and marine products. Export from India requires a special set of documents depending upon the type of product and destination to be exported. Any export firm willing to export its goods need to obtain PAN based Business Identification Number (BIN) from the Directorate General of Foreign Trade (DGFT) prior to filing of shipping bill for clearance of export goods. The quota certification of export invoice is submitted to customs along with other original documents at the time of examination of the export cargo. After completing the examination and inspection, goods are allowed to enter into the dock. There are fixed norms for examination of export consignments keeping in view the quantum of incentive, value of export goods, the country of destination, etc. If the dock appraiser (export) orders for samples to be drawn and tested, the customs officer will proceed to draw two samples from the consignment and enter the particulars thereof along with details of the testing agency in the ICES/E system. The export firm or export agent has to hand over the exporter’s copy of the shipping bill signed by the appraiser as “Let Export” to the steamer agent. After the export of the goods, the drawback claim is automatically processed through EDI system by the officers of drawback branch on first-come-first-served basis. Invisible export refers to that part of international trade which does not involve the transfer of goods or tangible objects.

140 Export Import Management

mulTIple ChoICe QuesTIons 1. _______ is a document issued by the appropriate licencing agency after which an exporter is allowed to transport his product in a foreign market. (a) An export licence (b) IEC (Importer Exporter Code) number (c) Permanent Account Number (PAN) (d) Shipping Bill 2. For every new exporter, it is necessary for the firm to get registered with the _______. (a) ECI (Export Import Council) (b) DGFT (Director General of Foreign Trade) (c) IIFT (Indian Institute of Foreign Trade) (d) Commodity Board 3. _______ is a non-profit organisation for the promotion of various goods exported from India in international market. (a) ECI (Export Import Council) (b) DGFT (Director General of Foreign Trade) (c) IIFT (Indian Institute of Foreign Trade) (d) Commodity Board 4. Where indelible marking is not available, the samples may be allowed for a value not exceeding _______ per consignment. (a) US$ 20,000 (b) US$ 10,000 (c) US$ 5,000 (d) US$ 1,000 5. For samples of _______, it is compulsory for the export firm to file a simple declaration that the sample does not involve foreign exchange and its value is less than (a) (b) (c) value more than (d) none of these 6. Only those exporters are allowed to send samples that are registered with the _______. (a) Electronics and Computer Software Export Promotion Council (ESC) (b) Apparel Export Promotion Council (AEPC) (c) Export Promotion Council (EPC) of India (d) Commodity Boards 7. Samples of other export products can be exported outside India under the membership of various _______. (a) Electronics and Computer Software Export Promotion Council (ESC) (b) Apparel Export Promotion Council (AEPC) (c) Export Promotion Council (EPC) of India (d) Commodity Boards 8. Products having _______ are not required to be inspected by any agency. (a) ISI Certification mark (b) Agmark (c) both (a) and (b) (d) either (a) or (b)

Export Procedure

141

9. _______ is available to manufacturers of engineering products, chemical and allied products and marine products. (a) Automatic generation of shipping bill facility (b) The Self Certification Scheme (c) Both (a) and (b) (d) Either (a) or (b) 10. In case of _______, the shipping bills or bills of export are required to be filled in the format as prescribed in the Shipping Bill and Bill of Export (Form) Regulations, 1991. (a) EDI System (b) Non-EDI System (c) both (a) and (b) (d) either (a) or (b) 11. Under _______ export firm has to fill declarations in the prescribed format through the service centers of customs. A checklist is generated for verification of data by the export firm/CHA. (a) EDI System (b) Non-EDI System (c) both (a) and (b) (d) either (a) or (b)

ConCepT QuesTIons 1. Discuss in detail the process of obtaining export licence. 2. Which are the government authorities with which an export firm must get itself registered to avail various benefits extended by the government? 3. Write short notes on the following: (i) Export of sample (ii) Packaging and labeling of export goods (iii) Certification and quality control process involved in export from India 4. What are various activities and formalities to be met by an export firm to get the custom clearance of goods in India? Discuss each step in details. 5. Write a short note on the meaning and importance of ‘Invisible Export’.

FurTher readIng Guidelines for Export of SCOMET Items, http://dgft.gov.in/exim/2000/scomet/scomet2011. pdf, accessed on 2 February 2017. http://www.indiantradeportal.in/vs.jsp?lang=0&id=0,25,44, accessed on 2 February 2017.

Answers to Multiple ChoiCe Questions 1. (a) 7. (c)

2. (b) 8. (d)

3. (a) 9. (b)

4. (b) 10. (b)

5. (a) 11. (a)

6. (b)

142 Export Import Management

Exercise Conduct a research to analyse India’s exports of major categories of handicrafts and assess the USA import market for each of these product categories with a view to provide recommendations to enhance India’s export performance therein. The report must focus on following: 1. Country Information Demographic profile Macro-economic data Principal trading partners Legal system Communication system 2. Trade Regulations Exchange regulations Import licencing Credit and payment conditions Customs tariff US’ GSP scheme with reference to handicrafts exports 3. Documentation and Specific Requirement 4. Foreign Trade Zones in USA 5. Shipping Restrictions 6. Inland Transportation

Chapter

6 Payments for Exports

Learning Outcomes After reading this chapter, you will be able to: LO1 Learn the methods and terms of payment for export in international market LO2 Understand the characteristics and risk of cash in advance method of payment LO3 Explain the meaning, characteristics and different types of Letter of Credit LO4 Discuss the important aspects and types of Documentary Collections payment method in international trade LO5 Elaborate the process of open account method of payment in international trade LO6 Describe the exporting on consignment

INTRODUCTION To ensure success in today’s global marketplace and win sales against foreign competitors, export firms have to offer their customers attractive sales terms supported by appropriate payment methods. International trade carries a spectrum of risk, which causes uncertainty over the timing of payments between the export firm (seller) and import firm (foreign buyer). For an export firm, any sale is a gift until it receives the payment, and therefore it is important for the export firms to ensure that payment is received at the earliest or soon after the order is placed. Sometimes the export firms insist on payment in advance after the confirmation of the order. On the other hand, the import firm would like to postpone the payment till it receives the goods and inspects them to its satisfaction, because payment before receiving the goods is no better than donation for an import firm. The import firm sometimes may insist on delaying the payment until the goods are resold. It is clear from the above discussion that getting full and timely payment is the ultimate goal for each export sale. An appropriate payment method must be chosen carefully to minimise the payment risk, while also accommodating the needs of the buying firm. There are some primary methods of payment for international transactions. During or before contract negotiations, the export/import firm

144 Export Import Management must consider which method is mutually desirable for both the parties. These payment methods are discussed in details in this chapter.

LO1 Learn the methods and terms of payment for export in international market

METHODS AND TERMS OF PAYMENTS FOR EXPORTS Firms involved in cross border businesses generally adopt these payment methods: 1. Clean Payment, 2. Collection of Bills, and 3. Letters of Credit (L/C).

Clean Payments In the clean payment method the bank plays a very limited role as the trading partners themselves handle all important documents between them. Since there is hardly any involvement of a third party, this method is comparatively cheaper and simple for both the export firm as well as the import firm. There are basically the following two types of clean payments: 1. Advance Payment: Under the advance clean payment method the import firm makes the advance payment and thereafter the export firm ships the goods. 2. Open Account: Under the open clean payment method the import firm makes the payment only after receiving the goods in desired state and thus the export firm has to ship the goods without receiving the payment. As it is clear from the above discussion that under the advance payment method the import firm bears the risk of loss of goods in transit and under the open payment method the export firm bears same risk. Both these methods will be discussed in details in the following section of this chapter.

Payment Collection of Bills in International Trade “Uniform Rules for Collection” is another term used for the payment collection of bills in international trade. These rules were published by International Chamber of Commerce (ICC) under the document number 522 (URC522). More than 90 per cent of the banks worldwide follow this payment method in cross border transactions. The export firms using this method hand over all commercial and sometimes financial documents to their bank and keep issuing instructions at regular intervals for the release of these documents to the import firm. This payment method is considered to be one of the most cost effective methods of evidencing a transaction for buyers where documents are manipulated via the banking system. There are the following two methods of collection of bills: 1. Documents against Payment D/P: Here the documents are released to the import firm only after receiving the payment for exported goods. 2. Documents against Acceptance D/A: In this case documents are released to the import firm only against the acceptance of a draft. Both these methods are discussed in details in a later section of this chapter.

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145

Letter of Credit (L/C) Letter of Credit is also known as ‘Documentary Credit’. It is published by the International Chamber of Commerce under the provision of Uniform Custom and Practices (UCP) brochure number 500. It is a written undertaking by the import firm’s bank (issuing bank) on behalf of its customer the import firm (applicant). L/C promises to effect payment in favor of the export firm (beneficiary) up to the amount of money stated therein, within a prescribed time limit and against stipulated documents. This payment method and its types are discussed in details in the following section of this chapter. Table 6.1 presents the five main payment methods. Let us discuss in details these payment methods in international trade markets. Table 6.1

Main Payment Methods in International Trade Market Least Secure

Less Secure

Moderately Secure

More Secure

Most Secure

Exporter

Consignment

Open Account

Documentary Collections

Letters of Credit

Cash-inAdvance

Importer

Cash-in-Advance

Letters of Credit

Documentary Collections

Open Account

Consignment

LO2 Understand the characteristics and risk of Cash in Advance Method of Payment

CASH-IN-ADVANCE In cash-in-advance payment terms (Figure 6.1), an export firm receives the payment before the ownership of the goods is transferred, thus the export firm can completely avoid the credit risk. In this method, full or significant partial payment is required, usually via a credit card, bank or wire transfer, or escrow service, before the ownership of the goods is transferred. Export firm may select credit cards as a viable cash-in-advance option, especially for small consumer goods’ transactions. It may also select escrow services as a mutually beneficial cash-in-advance option for small transactions with import firms/buyers who demand assurance that the goods will be sent in exchange for advance payment. Payment before shipment

Payment

Payment Buyer

Seller (After Payment)

Shipment

Figure 6.1

Process of “Cash in Advance” Method

Source: http://lnweb90.worldbank.org/ECA/Transport.nsf/0/786e3f9f52ad321485256b7a0051b6be/$FILE/PAYMENTP.pdf, accessed on 27 January 2017

146 Export Import Management In international sales, wire transfers and credit cards are the most commonly used cash-in-advance options available to export firms. With the advancement of the internet and increased popularity of online payment options, escrow services are becoming another cash-in-advance option for small export transactions. However, the cash-in-advance payment method is the least attractive option for the buyer/ import firm, because it creates unfavorable cash flow. Creditworthy import firms/buyers, who prefer greater security and better cash utilisation, may find cash-in-advance unacceptable and simply walk away from the deal.

Exhibit 6.1 Highlights of Cash-in-Advance Applicability: This payment method is recommended for use in high-risk trade relationships or export markets, and appropriate for small export transactions. Risk: In this payment method, the export firm is exposed to virtually no risk as the burden of risk is shifted almost completely on the import firm/buyer. Advantage: Payment is received before shipment and it eliminates risk of non-payment. Disadvantages: Export firm may lose customers to competitors over payment terms and it has no opportunity for additional earnings through financing operations.

Insisting on cash-in-advance could ultimately cause export firms to lose customers to competitors who are willing offer more favorable payment terms to foreign buyers. Import firms or foreign buyers are also concerned about the quality, quantity, specifications and timely delivery of the goods which may be a problem if the payment is made in advance. Sometimes, the import firms have the concern that the goods may not be sent if payment is made in advance. Thus, export firms who insist on this payment method as their sole manner of doing business may lose to competitors who offer more attractive payment terms. Let us discuss the most popular methods of payment under cash in advance option. 1. Wire Transfer: This payment method is the most secure and preferred cash-in-advance method. An international wire transfer is commonly used and is almost immediate. It is the most secure and least risky method of international trading for export firms and, thus the least secure and unattractive method for import firms/foreign buyers. However, both the credit risk and the competitive landscape have to be considered. While exercising this payment option, the export firm should provide clear routing instructions to the import firm. These instructions must include the receiving bank’s name and address, SWIFT (Society for Worldwide Interbank Financial Telecommunication) address as well as the seller’s name and address, bank account title, and account number. The fee for an international wire transfer can either be paid by the import firm/buyer or can be deducted from the export firm’s account. 2. Credit Card: It is a viable cash-in-advance method. In this method of payment, export firms who sell directly to foreign buyers may select credit cards as a viable cash-in-advance option, especially for small transactions of consumer goods. Export firms must check with their credit card companies for specific rules on international use of credit cards. The rules governing international credit card transactions are different from those for domestic use. As we know that international credit card transactions are typically placed using the web, telephone, or fax, which facilitate fraudulent transactions, proper precautions have to be taken to determine the

Payments for Exports

147

validity of transactions before the goods are shipped. Although export firms have to tolerate the fees charged by the credit card companies and assume the risk of unfounded disputes, credit cards help the business grow because of their convenience and wide acceptance. 3. Escrow service: This method is a mutually beneficial cash-in-advance method. Export firms usually select escrow services method as a mutually beneficial cash-in-advance option for small transactions with importers who demand assurance that the goods will be sent in exchange for advance payment. Escrow in international trade is a service that allows both the export firm and import firm/buyer to protect a transaction by placing the funds in the hands of a trusted third party until a specified set of conditions are met. Here the import firm/buyer sends the agreed amount to the escrow service. After payment is verified, the export firm is instructed to ship the goods. Upon delivery, the import firm/buyer has to inspect and accept the goods within a pre-determined time period. Once the goods are accepted, the funds are released by the escrow service to the export firm. The escrow fee can either be paid in full by one party or split evenly between the export firm and the import firm. Cross-border escrow services are offered by international banks and firms that specialise in escrow and other deposit and custody services. 4. Payment by Cheque: This payment method is not as attractive as other available cash-inadvance methods. In this method, advance payment is received by the export firm, using a cheque drawn on the import firm’s account and mailed to the export firm. It results in a lengthy collection delay of several weeks to months. Therefore, this method generally defeats the original intention of receiving payment before shipment. If the cheque is in a foreign currency or drawn on a foreign bank, the collection process becomes more complicated and can significantly delay the availability of funds. Usually the payment of such cheque takes more than 10 business days. Moreover, if shipment is made before the cheque is collected, there is a risk that the cheque may be returned due to insufficient funds in the buyer’s account or even because of a stop-payment order.

Exhibit 6.2 Ideal Situations to Use Cash-in-Advance Terms

ments is a must to remain competitive.

LO3 Explain the meaning, characteristics and different types of Letter of Credit

LETTER OF CREDIT Letter of Credit (L/C), also known as ‘Documentary Credit’ (Figure 6.2) is a widely used term to make secure payments in domestic and international trade. These are one of the most secure instruments available to international traders. The key principle underlying letter of credit (L/C) is that banks deal only in documents and not in goods. The decision to pay under a letter of credit is based entirely on

148 Export Import Management whether the documents presented to the bank appear on their face to be in accordance with the terms and conditions of the letter of credit. This document is issued by a financial organisation at the buyer’s request. It is a commitment by a bank on behalf of the import firm/buyer that payment will be made to the export firm, provided that the terms and conditions stated in the L/C have been met and verified through the presentation of all required documents. The import firm/buyer also provides necessary instructions to prepare the document. The International Chamber of Commerce (ICC) in the Uniform Custom and Practice for Documentary Credit (UCPDC) defines L/C as: ‘‘An arrangement, however named or described, whereby a bank (the Issuing bank) acting at the request and on the instructions of a customer (the Applicant) or on its own behalf is to make a payment to or to the order of a third party (the beneficiary) or is to accept bills of exchange (drafts) drawn by the beneficiary.” It is clear from the above definition that L/C is a contractual agreement whereby the issuing bank (import firm’s bank), acting on behalf of its customer (the import firm/buyer), promises to make payment to the beneficiary or exporter against the receipt of “complying” stipulated documents. The issuing bank typically uses intermediary banks to facilitate the transaction and make payment to the exporter. It is a contract separate from the sales contract between seller and buyer, on which it is based. Therefore, the banks are not concerned with the quality of the underlying goods or whether each party fulfills the terms of the sales contract. An L /C is very useful instrument of payment when reliable credit information about an import firm/foreign buyer is difficult to obtain, but the export firm is satisfied with the creditworthiness of the foreign buyer’s foreign bank. An L/C also protects the foreign buyer since no payment obligation arises until the goods have been shipped as promised. Bank obligation to pay

Documents

Documents

Documents

2

2 Advising Bank

2 Issuing Bank

Buyer

Seller Payment 3

Payment 3

Payment 3

1

Shipment

Figure 6.2 Process of “Letter of Credit” Method Source: http://lnweb90.worldbank.org/ECA/Transport.nsf/0/786e3f9f52ad321485256b7a0051b6be/$FILE/ PAYMENTP.pdf, accessed on 27 January 2017

Payments for Exports

149

The issuing bank’s obligation to pay to the export firm or seller is solely conditioned upon the seller’s compliance with the terms and conditions of the L/C. The point to be noticed here is that in L/C transactions, banks deal in documents only, not goods. Unless the conditions of the L/C state otherwise, it is always irrevocable, which means the document may not be changed or cancelled unless the import firm/buyer, banks, and export firm/seller agree.

Exhibit 6.3 Highlights of a Letter of Credit Applicability: Risk: conditions as specified in the L/C are adhered to. Advantages: Here the payment is made after shipment and a variety of payment, financing and risk mitigation options are available. Disadvantages: It is a labour intensive process and is a relatively expensive method in terms of transaction costs.

Parties to Letters of Credit Following eight parties are involved in the enforcement of L/C: 1. Applicant or Opener: The applicant also referred to as account party is normally a buyer or customer of the goods, who has to make payment to beneficiary who is normally the seller or export firm. L/C is initiated and issued at his request and on the basis of his instructions. 2. Issuing Bank or Opening Bank: The issuing bank is the bank which creates a letter of credit and undertakes the responsibility of making the payments on receipt of the documents from the beneficiary or through their banker. The payment is to be made to the beneficiary within seven working days from the date of receipt of documents at their end, only if the documents are in accordance with the terms and conditions of the letter of credit. If the documents are discrepant, the rejection thereof is to be communicated within seven working days from the date of receipt of documents at their end. 3. Beneficiary: Beneficiary is normally an export firm/ seller of the goods, who has to receive payment from the applicant. A credit is issued in his favour to enable him or his agent to collect payment on submission of stipulated documents and comply with the term and conditions of the L/C. If L/C is a transferable one and the beneficiary transfers the credit to another party, then he is referred to as the first or original beneficiary. 4. Advising Bank: An advising bank provides advice to the beneficiary and takes the responsibility for sending the documents to the issuing bank. The advising bank is normally located in the country of the beneficiary. 5. Confirming Bank: Confirming bank adds its guarantee to the credit opened by another bank. Here it undertakes the responsibility of payment/negotiation acceptance under the credit, in additional to that of the issuing bank. Confirming bank plays an important role in cases where the export firm is not satisfied with the undertaking of only the issuing bank.

150 Export Import Management 6. Negotiating Bank: The negotiating bank takes the responsibility to negotiate the documents submitted to them by the beneficiary under the credit either advised through them or restricted to them for negotiation. On negotiation of the documents the negotiating bank will claim the reimbursement under the credit and make the payment to the beneficiary, provided the documents submitted are in accordance with the terms and conditions of the letters of credit. 7. Reimbursing Bank: Reimbursing bank is the bank that is authorised to honour the reimbursement claim in settlement of negotiation/acceptance/payment lodged with it by the negotiating bank. Normally the issuing bank has an account with the reimbursing bank from which payment has to be made. 8. second Beneficiary: Second beneficiary is the person who represents the first or original beneficiary of credit in his absence. In this case, the credits belonging to the original beneficiary is transferable. The rights of the transferee are subject to terms of transfer.

Risk Associated with Opening Import L/C Following are the factors of concern for an issuing bank while opening an import L/C as some risk is associated with them: The financial health of the Importing firm: As discussed before it is the responsibility of the issuing bank to make payment on behalf of the importing firm, it is important that before doing so the bank ensures that the importing firm has sufficient funds to pay back the amount paid on its behalf. The goods: The issuing bank needs to do a detailed analysis against the risks associated with perishability of the goods, possible obsolescence, import regulations, packing and storage, etc. Price risk is another crucial factor associated with all modes of international trade. Export firm Risk: The other type of risk borne by the banker is the risk of exporting inferior quality goods. Banks need to be protective by finding out as much possible about the exporter using status report and other confidential information. Country Risk: The country risk is mainly associated with the political and economic scenario of a country. To address this issue, most banks have specialised units which control the level of exposure that the bank will assume for each country. foreign Exchange Risk: Foreign exchange risk is the most sensitive risk associated with the banks. As the transaction is done in foreign currency, a lot depends on the exchange rate fluctuations.

Types of Letter of Credit 1. Revocable Letter of Credit (L/C): A revocable L/C may be revoked or modified for any reason, at any point of time by the issuing bank without notification. It is not very popular in international trade and not considered satisfactory for the export firm but has an advantage over that of the import firm and the issuing bank. It must be indicated in the L/C that the credit is revocable; otherwise the credit will be deemed as irrevocable. 2. Irrevocable Letter of Credit (L/C): As discussed before, there are three parties involved in an L/C they are the issuing bank, the confirming bank and the beneficiary. Under irrevocable

Payments for Exports

3.

4.

5.

6.

151

L/C no single party can revoke or amend the L/C without taking the other two parties into confidence. This type of L/C protects the interest of the beneficiary, which is an export firm, thus considered more beneficial for it. Here, the issuing bank ensures that the payment is made to the export firm after the production of necessary documents. Confirmed Letter of Credit (L/C): Confirmed L/C is a special type of L/C in which an additional bank, other than the issuing bank, adds its guarantee. Here the export firm asks the import firm/buyer to have the issuing bank authorise a bank in the export firm’s country to confirm (this bank is typically the advising bank, which then becomes the confirming bank). Although, the cost of confirming by two banks makes it costlier, this type of L/C is more beneficial for the beneficiary as it doubles the guarantee and payment is more secured. If an L/C is not confirmed, the export firm is subject to the payment risk of the foreign bank and the political risk of the importing country. sight Credit and Usance Credit (L/C): Sight credit states that the payment is to be made by the issuing bank only at sight, on demand or on presentation. In case of usance credit, drafts are drawn on the issuing bank or the correspondent bank at specified usance period. The credit indicates whether the usance drafts are to be drawn on the issuing bank or in the case of confirmed credit on the confirming bank. Back to Back Letter of Credit (L/C): Back to back letter of credit is also called ‘Countervailing Credit’. A credit is known as back to back credit when an L/C is opened with the security of another L/C. It is actually a method of financing both sides of a transaction in which a middleman buys goods from one customer and sells them to another. There are three parties involved in back to back L/C: (i) buyer and his bank as the issuer of the original letter of credit, (ii) the seller or manufacturer and his bank, and (iii) the manufacturer's subcontractor and his bank. This credit is practically used when L/C is opened by the ultimate buyer in favor of a particular beneficiary. This beneficiary may not be the actual supplier or manufacturer offering the main credit with near identical terms as security, and will be able to obtain reimbursement by presenting the documents received under back to back credit under the main L/C. Following are the conditions when the need for such credit arises: When the ultimate buyer is not ready for a transferable credit When the beneficiary does not want to disclose the source of supply to the openers. When the manufacturer demands payment against documents for goods, but the beneficiary of credit is short of funds. Transferable Letter of Credit (L/C): A transferable documentary credit is a type of credit under which the first beneficiary is usually a middleman who requests the nominated bank to transfer the credit in whole or in part to another beneficiary (secondary beneficiary). In case of transferable L/C, the first beneficiary holds the rights to change following terms and conditions of the letter of credit: Reduce the amount of the credit Reduce unit price if it is stated Reduce the expiry date of the letter of credit

152 Export Import Management Change the last date for presentation of documents. Shorten the period for shipment of goods. Unless it is clearly specified in the L/C, it cannot be treated as transferable. It can only be used when the export firm is selling the product of a third party and then also proper care has to be taken about the exit policy for money transactions that take place, like increasing the amount of the cover or percentage for which insurance cover must be effected. 7. standby Letter of Credit (L/C): The standby letter of credit is very much similar in nature to a bank guarantee. It is subject to “Uniform Customs and Practice for Documentary Credit (UCP)”, International Chamber of Commerce Publication number 500, 1993 revision, also known as “International Standby Practices (ISP)”, and International Chamber of Commerce Publication number 590, 1998 revision. The main objective of issuing this credit is to secure bank loans. Standby credits are usually issued by the applicant’s bank in the applicant’s country and advised to the beneficiary by a bank in the beneficiary’s country. Unlike a traditional letter of credit, in which the beneficiary obtains payment against documents to evidence performance, the standby letter of credit permits the beneficiary (export firm) to obtain payment from a bank even when the applicant for the credit has failed to perform as per the bond.

Import Operations Under L/C The import letter of credit (L/C) guarantees payment for an export firm for goods or services, provided the terms of the letter of credit have been met. A bank issues an import letter of credit on behalf of an import firm or buyer under the following circumstances: When an import firm is importing goods within its own country. When a trader is buying goods from his own country and selling it to another country for the purpose of merchandising trade. When an Indian export firm, executing a contract outside its own country, requires importing goods from a third country to the country where he is executing the contract.

Fees and Reimbursements There are different charges/fees payable under import L/C which are briefly described as follows: 1. Issuing Bank Charges: The issuing bank charges a fee from the applicant for opening the letter of credit. The service charges are decided on the basis of the credit of the applicant and generally includes two charges: (i) Opening Charges: The opening charges include commitment charges and usance charges to be paid upfront for the whole period of L/C. The commitment charge is the fixed fee charged by the L/C opening bank during the commitment period. Here the commitment period starts from the opening of L/C till the negotiation of documents ends or the expiry of the L/C, whichever is later. Usance charges refer to the amount paid for the usance period, where usance means the period of credit mutually agreed between the export and import firm. This period may vary from 7 days’ usance (sight) to 90 to 180 days.

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(ii) Retirement Charges: The charges payable at the time of retirement of the L/C are termed as retirement charges. According to the guidelines issued by UCPDC in this regard, after scrutinizing the bills under L/C, the opening bank decides the retirement charges based on the value of goods. 2. The Advising Bank Charges: Unless otherwise agreed, for the advice given to the client the advising bank charges a fee known as advising bank charges. These charges are not fixed and may change from country to country of the client. These charges are paid by issuing bank or reimbursed by the applicant. 3. Obligations by foreign Laws: For all obligations and responsibilities imposed by the foreign law and its usage, the applicant has to indemnify the bank. 4. Confirming Bank Charges: As per the terms of contract, the confirming bank charges are either borne by the beneficiary or by the issuing bank (applicant eventually). These charges are calculated on the basis of the credit of the issuing bank. 5. Reimbursing Bank Charges: The reimbursing bank charges are to the account of the issuing bank.

LO4 Discuss the important aspects and types of Documentary Collections (D/C) payment method in international trade

DOCUMENTARY COLLECTIONS The export firms involved in international trade use ‘Documentary Collection (D/C)’ payment method for the smooth handling of commercial and other documents to be issued to the import firm at various stages of business transactions. The export firms keep issuing necessary instructions to the bank handling their documents indicating the time and conditions for the release of the documents to the import firm. This payment method is different from L/C, as under the D/C method the bank’s role is limited to handing over the documents to the import firm and no payment guarantee is made by the bank. Uniform rules for collections published by the International Chamber of Commerce (ICC) are observed by the parties while collecting the documents. Under D/C method (Fig. 6.3), the export firm entrusts the collection of the payment for a sale to its bank, termed as remitting bank. The remitting bank sends the documents that the import firm/buyer needs to the importer’s bank (collecting bank), with instructions to release the documents to the import firm/buyer for payment. D/Cs are much less complicated and less expensive than L/Cs. The export firm’s bank (remitting bank) and the import firm’s bank (collecting bank) play an essential role in D/Cs. Although the banks control the flow of documents, they neither verify the documents nor take any risks. They can, however, influence the mutually satisfactory settlement of a D/C transaction. In a D/C transaction, the import firm/buyer is not required to pay for goods before shipment. Funds are received from the import firm and remitted to the export firm through the banks involved in the collection, in exchange for those documents. D/Cs involve using a draft that requires the import firm to pay the face amount either at sight (document against payment) or on a specified date (document against acceptance). The collection letter carries instructions to specify the documents required for the transfer of title to the goods. Although banks act as facilitators for their clients, D/C offers no verification process and limited recourse in the event of non-payment.

154 Export Import Management Banks act as intermediaries between the buyer and seller and act upon instructions received Draft

Draft

Draft 1

Seller

Remitting Bank Payment

3

Collecting/ Presenting Bank

Payment 2

Buyer

Payment

Shipment

Figure 6.3

Process of “Draft of Documentary Collection” Method

Source: http://lnweb90.worldbank.org/ECA/Transport.nsf/0/786e3f9f52ad321485256b7a0051b6be/$FILE/PAYMENTP.pdf, accessed on 27 January 2017

Exhibit 6.4 Highlights of a Documentary Collection Applicability: It is recommended for use in established trade relationships, in stable export markets and for transactions involving ocean shipments. Risk: This payment option is riskier for the exporter, though D/C terms are more convenient and cheaper than an L/C to the importer. Advantages: Bank assistance is available in obtaining payment and the process is simple, fast, and less costly than LCs. Disadvantages: Banks role is limited and payment is not guaranteed by the banks. Banks also do not verify the accuracy of the documents.

Role of Various Parties 1. Export firm: The seller ships the goods and then hands over the document related to the goods to their banks, with the instructions on how and when the buyer would pay. 2. Export firm’s Bank: The export firm’s bank that is the remitting bank remits the bill for collection with proper instructions. The role of the remitting bank is to Check the documents for consistency. Send the documents to a bank in the buyer's country with instructions on collecting payment. Pay the exporter when it receives payments from the collecting bank. 3. Buyer / Import firm: The buyer/importer is the drawee of the bill and has to make the payment for the bill as mentioned in the agreement (or promise to pay later). He will also accept the shipping documents (unless it is a clean bill) and clear the goods. 4. Import firm’s Bank: The import firm’s bank located in the country of the import firm is a branch of a correspondent bank or remitting bank. But this is no condition, and on the

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request of the export firm some other bank may also be chosen as the import firm’s bank. The collecting bank acting as an agent of remitting bank follows the instructions issued by the principal (remitting bank) covering the schedule. Under exceptional circumstances, the collecting bank may give guarantee for the payment of bills which is known as ‘availing’.

Types of Documentary Collections There are two types of D/C in practice in international trade: 1. Documents against Payment Collection (D/P), and 2. Documents against Acceptance Collection (D/A). 1. Documents against Payment Collection (D/P): This is also referred to as ‘Cash against Documents/ Cash on Delivery’ and it means payable at sight (on demand). Under this method, the collecting bank has to hand over the shipping documents including the document of title (bill of lading) only when the import firm/buyer has paid the bill. The drawee is usually expected to pay within 3 business days of presentation. The attached instructions to the shipping documents would show ‘Release Documents against Payment’. Risks involved in D/P: Under D/P terms the export firm keeps control of the goods (through the banks) until the import firm/buyer pays the bill, failing which the export firm can Protest the bill and take him to court (may be expensive and difficult to control from another country). Find another buyer or arrange a sale by an auction. With the last two choices, the price obtained may be lower but still better than shipping the goods back. Sometimes, the export firm has a contact or agent in the importer's country that extends help with any arrangements. In such a situation, an agent is often referred to as a ‘Case of Need’, which means someone who can be contacted in case of need by the collecting bank. If the import firm/buyer refuses to pay, the collecting bank can act on the export firm’s instructions shown in the remitting bank schedule. These instructions may include: Removal of the goods from the port to a warehouse and insure them. Contact the ‘case of need’ who may negotiate with the importer. Protesting the bill through the bank's lawyer. 2. Documents against Acceptance Collection (D/A): Under Documents against Acceptance (D/A), the export firm extends credit to the import firm and the credit period is known as ‘Usance’. Here the drawee accepts the bill by signing it, and thus making a promise to pay the bill on a specified date. After signing the bill in acceptance, the importing firm can take the documents and clear its goods. In case of D/A, the payment date is calculated from the term of the bill, which is usually a multiple of 30 days, and starts either from sight or from the date of shipment, as stated on the bill of exchange. The attached instructions would show ‘Release Documents Against Acceptance’. Risks involved in D/A: Under D/A terms the import firm/buyer has the opportunity to inspect the documents and if he is satisfied, accept the bill for payment on the due date, take the documents and clear the goods. In this case, the export firm loses control of the documents and goods and it runs various risks. The importer might refuse to pay on the due date because he finds that the goods are

156 Export Import Management not what he ordered, or he has not been able to sell the goods, or he is prepared to cheat the exporter, or the import firm/buyer has gone bankrupt. In such cases, the exporter will probably never get his money. Usance D/P Bills: It is an agreement between the export and import firm under which the import firm accepts the bill to be paid on a specified date and receives the documents only after such payment has been made. This bill is quite useful in the circumstances where the documents reach much before the goods are received by the import firm, as documents travel by air while the goods by sea. It is worth noticing here that the import firm is not liable to pay before the due date; however he may do so if the goods arrive before the due date. Out of the many types of usance D/P bills, some are not required to be accepted by the import firm. These bills are drawn payable at a fixed period after the date or payable at a fixed date. While the bills requiring acceptance are drawn at a fixed period after sight, it means that such bills mature for payment only after presenting them for acceptance. If the collecting bank faces problems related to storage of goods then the same must be notified to the remitting bank without any delay. It must be noted here that the remitting bank may or may not follow all the instructions issued by the collecting bank. This mode of payment is not very popular, but offers more settlement possibility.

Exhibit 6.5 Ideal Situation to Use Documentary Collections

import firm.

LO5 Elaborate the process of Open Account method of payment in international trade

OPEN ACCOUNT An open account transaction is a sale where the goods are shipped and delivered before the payment is due, which in international sales is typically in 30, 60 or 90 days. The goods, along with all the necessary documents, are shipped directly to the importer who has agreed to pay the exporter’s invoice at a specified date, which is usually in 30, 60 or 90 days. This is one of the most advantageous options to the import firm/buyer in terms of cash flow and cost, but it is consequently one of the riskiest options for an export firm. The export firm should use this method when it is absolutely confident that the import firm/buyer will accept the shipment and pay at the agreed time and that the importing country is commercially and politically secure. As there is intense competition in export markets, import firm/buyers often press export firms for open account terms, since the extension of credit by the export firm/seller to the buyer is quite common outside India. Open account terms may help win customers in competitive markets and may be used with one or more of the appropriate trade finance techniques that mitigate the risk of non-payment. Therefore, export firms which are reluctant to extend credit may lose a sale to their competitors.

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Shipment Before Payment

Shipment

Shipment

Seller

Buyer

(After Shipment/Delivery)

Payment

Figure 6.4 Process of “the Open Account” Method Source: http://lnweb90.worldbank.org/ECA/Transport.nsf/0/786e3f9f52ad321485256b7a0051b6be/$FILE/ PAYMENTP.pdf, accessed on 27 January 2017

When offering open account terms, the export firm may seek extra protection by using export credit insurance (Fig. 6.4).

Exhibit 6.6 Highlights of Open Account Transaction Applicability:

Risk: Substantial risk exists for the export firm as the buyer could default on payment obligation after shipment of the goods. Advantages: It boosts competitiveness in the global market and helps to establish and maintain a successful trade relationship. Disadvantages: There is significant exposure to the risk of non-payment and additional costs are

How to Offer Open Account Terms in Competitive Markets Open account terms may be offered in competitive markets with the use of one or more of the following trade finance techniques: Export working capital financing Government-guaranteed export working capital programs Export credit insurance Export factoring More detailed information on each trade finance technique is provided in Chapter 9.

158 Export Import Management Export firms lacking sufficient funds to extend open accounts in the global market, need export working capital financing. This financing helps such firms to cover the entire cash cycle, from the purchase of raw materials to the ultimate collection of the sales proceeds. Export working capital facilities, which are generally secured by personal guarantees, assets, or receivables, can also be structured to support export sales in the form of a loan or revolving line of credit. Export credit insurance offers protection against commercial losses (such as default, insolvency, bankruptcy) and political losses (such as war, nationalisation, and currency inconvertibility). It allows export firms to increase sales by offering liberal open account terms to new and existing customers. Insurance also offers security to the banks that provide working capital and finance exports.

Factoring Factoring in international trade is the discounting of short-term receivables (up to 180 days). Under this option, the export firm transfers title to his short-term foreign accounts receivable to a factoring house, or a factor, for cash at a discount from the face value. It allows an export firm to ship on open account as the factor assumes the financial liability of the import firm/buyer to pay and handles collections on the receivables. Factoring houses most commonly work with the export of consumer goods.

Forfaiting Forfaiting is a method of trade financing in which the exporter is allowed to sell his medium and long-term receivables (180 days to 7 years or more) to a forfaiter at a discount, in exchange for cash. Forfaiting was developed in Switzerland (1950s) to fill the gap between the export firms of capital goods, who could not deal on open account, and the import firms / buyer, who desired to defer payment until the capital equipment could begin to pay for itself. The forfaiter assumes all the risks and enables the export firm to offer extended credit terms and to incorporate the discount into the selling price. Forfaiters usually work with exports of capital goods, commodities, and large projects.

LO6 Describe the exporting on Consignment

CONSIGNMENT Consignment is a type of transaction which is based on a contractual arrangement in which the foreign distributor receives, manages, and sells the goods for the export firm who retain the title to the goods until they are sold. As it is clear, exporting goods on consignment is very risky as the export firm is not guaranteed any payment and its goods are in a foreign country in the custody of an independent distributor or agent. Consignment helps export firm become more competitive on the basis of better availability and faster delivery of goods. Selling on consignment also helps export firms to reduce the direct costs of storing and managing inventory. To ensure success in exporting on consignment, the export firm should partner with a reputable and trustworthy foreign distributor or a third-party logistics provider. Appropriate insurance should also be in place to cover consigned goods in transit or in possession of a foreign distributor as well as to mitigate the risk of non-payment. This mode of payment (Fig. 6.5) is suggested when the importing country is commercially and politically secure.

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Seller ships goods but retains ownership

Shipment Seller

Shipment Consignee

Reselling Buyer

(After Reselling)

Payment

Figure 6.5 Process of “On Consignment” Method Source: http://lnweb90.worldbank.org/ECA/Transport.nsf/0/786e3f9f52ad321485256b7a0051b6be/$FILE/ PAYMENTP.pdf, accessed on 27 January 2017

Exhibit 6.7 Highlights of Consignment Applicability: Risk: have been sold to the end customer. Advantages: It helps enhance export competitiveness on the basis of greater availability and faster delivery of goods. It also reduces the direct costs of storing and managing inventor. Disadvantages: Export firm is not guaranteed payment and additional costs are incurred for risk mitigation measures.

Appropriate insurance should be in place to mitigate the risk of non-payment as well as to cover consigned goods in transit or in possession of a foreign distributor.

How to Export on Consignment The first step to export on consignment is to select a reputable and trustworthy foreign distributor or a third-party logistics provider who is based in a market of interest. To minimise risk and ensure success in exporting on consignment, the export firm must partner with a reputed and trustworthy foreign distributor or a third-party logistics provider (3PL) that is based in selected overseas market. A 3PL firm provides logistics services with expertise in pick-up and delivery of shipments for export firms. 3PLs may also be helpful to export firms in reducing costs, mitigating risks, and managing expenses and time as well as to ensure that the consignment is shipped on the most economical and optimal route. Thereafter the export firm has to ensure that it has access to financing and credit, and appropriate insurance is in place to cover the consigned goods against loss or damage as well to mitigate the risk

160 Export Import Management of non-payment. Exporting on consignment usually requires the use of one or more of the following trade finance techniques: Export working capital financing Government-guaranteed export working capital programs Export credit insurance More detailed information on each trade finance technique is provided in Chapter 9.

Key Terms Clean Payments: In this method, all shipping documents, including title documents are handled directly between the trading partners i.e., the seller and the buyer. Letter of Credit (L/C): Letter of credit is a written undertaking by the import firm’s bank known as the issuing bank on behalf of its customer, the import firm (applicant), promising to effect payment in favor of the export firm (beneficiary) up to a stated sum of money, within a prescribed time limit and against stipulated documents. sWIfT: Society for Worldwide Interbank Financial Telecommunication. Escrow: Escrow in international trade is a service that allows both the export firm and import firm/buyer to protect a transaction by placing the funds in the hands of a trusted third party until a specified set of conditions are met. Open Account transaction: An Open account transaction is a sale where the goods are shipped and delivered before payment is due, which in international sales is typically in 30, 60 or 90 days. factoring: Factoring in international trade is the discounting of short-term receivables (up to 180 days). forfaiting: Forfaiting is a method of trade financing in which the exporter is allowed to sell his medium and long-term receivables (180 days to 7 years or more) to a forfaiter at a discount, in exchange for cash. Consignment: Consignment is a type of transaction which is based on a contractual arrangement in which the foreign distributor receives, manages, and sells the goods for the export firm who retains title to the goods until the goods are sold.

In revIew There are three standard ways of payment in the export import trade in international trade market: (i) clean payment, (ii) collection of bills, and (iii) letters of credit (L/C). The wire transfer payment method is most secure and preferred cash-in-advance method. An international wire transfer is commonly used and is almost immediate. Credit card is a viable cash-in-advance method in which the export firms, who sell directly to foreign buyers, may select credit cards as a viable cash-in-advance option. Export firms usually select escrow

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services method as a mutually beneficial cash-in-advance option for small transactions with importers who demand assurance that the goods will be sent in exchange for advance payment. In payment by cheque method, advance payment is received by the export firm, using a cheque drawn on the import firm’s account and mailed to the export firm. Eight parties are involved in the enforcement of L/C, they are—applicant or opener, issuing bank or opening bank, beneficiary, advising bank, confirming bank, negotiating bank, reimbursing bank and second beneficiary. A revocable L/C may be revoked or modified for any reason, at any point of time by the issuing bank without notification. In case of irrevocable L/C, it is not possible to revoke or amend a credit without the agreement of the issuing bank, the confirming bank, and the beneficiary. Confirmed L/C is a special type of L/C in which one more bank other than the issuing bank has to add its guarantee. Sight credit states that the payments are to be made by the issuing bank only at sight, on demand or on presentation. A credit is known as back-to-back credit when an L/C is opened with the security of another L/C. A transferable documentary credit is a type of credit under which the first beneficiary, usually a middleman, requests the nominated bank to transfer credit in whole or in part to another beneficiary (secondary beneficiary). Documentary collection (D/C) is a payment method used by the export firms to handle the documents to be given to the buyer's bank and also to give the banks necessary instructions indicating when and under what conditions these documents can be released to the importer. In a D/C transaction, the import firm/buyer is not required to pay for goods before shipment. Under Documents against Payment Collection (D/P) method, the collecting bank has to hand over the shipping documents including the document of title (bill of lading) only when the import firm/buyer has paid the bill. Under Documents against Acceptance (D/P), the export firm allows credit to the import firm. Under D/A terms the export firm keeps control of the goods (through the banks) until the import firm/buyer pays the bill. Under D/A terms, the import firm/buyer has the opportunity to inspect the documents and, if he is satisfied, accept the bill for payment on the due date, take the documents and clear the goods. A usance D/P Bill is an agreement where the import firm/buyer accepts the bill payable at a specified date in future but does not receive the documents until he has actually paid for them.

mulTIple ChoICe QuesTIons 1. In _______ method, all shipping documents, including title documents are handled directly between the trading partners that is between the seller and the buyer. (a) clean payments (b) advance payment method (c) open account method (d) all of the above 2. Main drawback of _______ method is that export firm bears all the risks while the import firm gets the advantage of the delayed use of company's cash resources. (a) clean payments (b) advance payment method (c) open account method (d) all of the above

162 Export Import Management 3. Under _______ the documents are released to the import firm only after receiving the payment for the exported goods. (a) documents against payment D/P (b) documents against acceptance D/A (c) both (a) and (b) (d) none of the above 4. _______ in international trade is a service that allows both the export firm and import firm/ buyer to protect a transaction by placing the funds in the hands of a trusted third party until a specified set of conditions are met. (a) Export working capital financing (b) Government-guaranteed export working capital programs, and (c) Escrow (d) Export credit insurance 5. _______ is a contractual agreement whereby the issuing bank (import firm’s bank), acting on behalf of its customer (the import firm/buyer), promises to make payment to the beneficiary or exporter against the receipt of “complying” stipulated documents. (a) Escrow (b) Letter of Credit (L/C) (c) Documentary Bill (d) None of the above 6. _______ is the bank which creates a letter of credit and undertakes the responsibility to make the payments on receipt of the documents from the beneficiary or through their banker. (a) Account party (b) Beneficiary (c) Issuing bank (d) Second Beneficiary 7. _______ provides advice to the beneficiary and takes the responsibility for sending the documents to the issuing bank. (a) Advising bank (b) Negotiation bank (c) Issuing bank (d) Reimbursing bank 8. _______ is the bank that is authorised to honour the reimbursement claim in settlement of negotiation/acceptance/payment lodged with it by the negotiating bank. (a) Advising bank (b) Issuing bank (c) Reimbursing bank (d) Any of the above 9. _______ is a special type of L/C in which one more bank other than the issuing bank has to add its guarantee. (a) Usance credit (b) Confirmed L/C (c) Revocable L/C (d) Irrevocable L/C 10. _______ is a sale where the goods are shipped and delivered before payment is due, which in international sales is typically in 30, 60 or 90 days. (a) Clean Payment transaction (b) Advance payment transaction (c) Open account transaction (d) All of the above

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ConCepT QuesTIons 1. What are the standard payment methods in the export import trade in the international trade market? Discuss in details. 2. What do you understand by cash in advance method of payment in international trade? Throw light on the different methods of payment under cash in advance option. 3. How is a Letter of credit (L/C) used as a payment method in international trade? What are the different types of L/Cs used to make payment to the export firms? 4. Write short notes on the following: (i) Parties involved in letter of credit (ii) Parties involved in documentary collection 5. What do you understand by documentary collection method of payment in exporting business? Discuss in details the process and parties involved in this method. 6. Write short notes on the following: (i) Consignment in exporting business (ii) Open account transaction (iii) Factoring

FurTher readIng Jaiswal Dhruv. Modes of Payment in International Trade. http://www.yourarticlelibrary.com/ international-trade/modes-of-payment-in-international-trade/77086/, accessed on 28 January 2017. Aladi Achor, J. (2015). Methods of International Trade and Payments: The Nigerian Perspective. Global Journal of Politics and Law Research. 3(1), 21-60. http://howtoexportimport.com/Terms-of-Payment-in-Export-and-Import-32.aspx, accessed on 30 January 2017. http://www.indiantradeportal.in/vs.jsp?lang=0&id=0,25,44, accessed on 30 January 2017.

Answers to Multiple ChoiCe Questions 1. (a) 7. (a)

2. (c) 8. (c)

3. (a) 9. (b)

4. (c) 10. (c)

5. (b)

6. (c)

164 Export Import Management

Case Study XYZ Ltd., a manufacturer entered into a contract of significant value for the FAS Antwerp supply of a customised machinery subject to heavy duty payable on the same. The buyer proposed to go for documentary credit (D/C) method of payment. Before deciding to accept the D/C as the payment method, the supplier consulted his bank. The bank confirmed that D/C is a safe instrument for both the export and import firms. For further assurance, the supplier consulted the authors on documentary credit, who said that the exporter would be fully protected only when he received an irrevocable and confirmed documentary credit. The parties decided to adopt the irrevocable confirmed documentary credit payment method. This stipulated a commercial invoice and buyer’s confirmation of receiving the machinery at Antwerp. Relying on the aforementioned advises, the supplier was sure that by obtaining an irrevocable confirmed credit he had taken all the necessary precautions to get full payment security. The machinery was ready to be shipped but on arrival at Antwerp, the buyer was not present to take it. The supplier could not receive the payment under the credit without producing the buyer’s certificate. A round of negotiations took place between the parties, some amount of compensation was paid to the supplier but that was not sufficient to make up the financial loss suffered by the buyer.

Discussion Questions 1. Identify the problem that led to the huge loss suffered by XYZ Ltd. 2. Advise XYZ to avoid such problems in future while exporting to a foreign buyer.

Chapter

7 Export Promotion Schemes

Learning Outcomes After reading this chapter, you will be able to: LO1 List the objectives and types of Duty Exemption Schemes LO2 Discuss the Duty Remission Schemes LO3 Explain reward schemes for export-import firms LO4 Know different schemes available for the import of goods

INTRODUCTION A number of export promotion schemes have been formulated by the Government of India to support and promote exports. Except for the Duty Drawback Scheme, the policy framework for various export promotion schemes was laid down in the Foreign Trade Policy 2004–09, and the procedures governing the schemes were detailed in the Handbook of Procedures. The fundamental principle followed in international trade is that levies and duties should not be exported and therefore the objective of most of the export promotion schemes is to neutralise the incidences of levies and duties on the inputs for export products. Usually the export promotion schemes are duty exemption schemes or duty remission schemes by nature. Duty exemption schemes exempt the duties payable on the import of inputs used for the export items, while duty remission schemes replenish or remit the duties paid on the inputs for export items after the export has taken place. There is a third type of scheme to extend benefits to the exporters which is the Drawback scheme. This scheme neutralises the central taxes paid by the exporter on the inputs used to manufacture the export items. The aforementioned schemes aim to encourage exports from the country but there is a category of schemes that offer rewards to the exporters instead of offering relaxation or exemptions in duties. These schemes were launched to reward the efforts of high performing exporters for their extraordinary performance. ‘Target Plus’, ‘Served from India’ and ‘Vishesh Krishi Upaj Yojana’ are some of the key reward schemes belonging to this category. Under these schemes, rewards are given on the basis of

166 Export Import Management incremental exports/export turnover, and it must be noted that the amounts awarded are not linked to the duties and taxes payable on the export items. Thus the export promotion schemes can be divided into following categories: 1. Duty Exemption Scheme (DES): To permit duty free import of inputs required for export production, viz., Advance Authorisation and Duty Free Import Authorisation (DFIA) 2. Duty Remission Scheme (DRS): To enable post-export replenishment/remission of duty paid on inputs, viz., Duty Entitlement Pass Book Scheme 3. Reward Schemes (RS): To extent the entitlement of exporters to duty credit scrips subject to specific conditions like Served from India Scheme (SFIS), Vishesh Krishi Gram Udyog Yojana (VKGUY), Focus Market Scheme (FMS), Focus Product Scheme (FPS) and status holder incentive scheme. 4. Schemes for the import of goods: To permit an exporter to import capital and other goods at concessional/nil duties against an export obligation to be fulfilled in a specified time. Such schemes include Advance Customs Clearance Permit, Project Imports, Manufacture under Bond and Export Promotion Capital Goods (EPCG) scheme that is for the import of capital goods. Let us discuss all the above mentioned export promotion schemes in details.

LO1 List the objectives and types of Duty Exemption Schemes

DUTY EXEMPTION SCHEMES (DES) Duty exemption schemes permit duty free import of inputs required for export production. This includes the import of raw materials, components and consumables physically incorporated in the export product. The ‘Deemed Exports’ also qualify under this scheme. Following duties are exempt under DES: 1. Basic Customs Duty 2. Additional Customs Duty including education cess. 3. Anti-Dumping Duty/Safeguard Duty (these are however payable on deemed exports under Paragraph 8.2 (i) and (j).

Exhibit 7.1 New Export Incentive Schemes in New Foreign Trade Policy (FTP) 2015-20

Export Promotion Schemes

Source:

167

http://www.pharmexcil.com/uploadfile/ufiles/BDOIndiaLLPNV.pdf, accessed on 8 February 2017

Application Stage At the application stage, there are some important points to be considered for extending the benefits under the duty exemption schemes. Except in case of deemed exports, all export contracts and invoices are freely convertible currency. If the norms are fixed, it is the duty of the manufacturerexporter or merchant-exporter as the case may be, to notify the registered office/head office/branches/ manufacturing unit about the same by filing an application in the prescribed form. However in case of no fixed norms, an application must be addressed to the DGFT for fixing the standard input output norms. At the same time, by self-declaration, the export firm must apply to the Regional Authority for advance authorisation with actual user condition, along with 15 per cent value addition. DFIA can be transferred after receiving EODC where minimum value addition goes up to 20 per cent. Other than raw materials, an export firm may also apply for the duty free import of other related items like import components, packing material, fuel, oil and energy catalysts. A special endorsement may be obtained by the export firm for the import of inputs on free of cost basis. It is also possible under advance authorisation scheme to import mandatory spares for the production of export items up to 10 per cent of the CIF.

Export Stage The export firm can arrange the export supplies at any stage of export after obtaining online file number by submitting an application in the prescribed form to the regional authority. The hard copy of the same is required to be submitted within five days from the date of issuance. Quantity and CIF of the goods are the limiting factors for the issuance of advance authorisation. The description, quality and technical standards as per notified Standard Input Output Norms (SION) must be adhered to by the firm. The export obligation period of a licence is 36 months and no extension of this period is possible.

Import Stage By submitting a bank guarantee/LUT to the customs authorities, the authorisation holder can import the inputs against the advance authorisation, even before the export. If the goods have already been imported or shipped or arrived in advance but not cleared from customs, they can also be cleared against the duty free authorisation issued subsequently. The Advance Authorisation/DFIA remains

168 Export Import Management valid for a period of 24 months for the imports. If the import firm has used the CENVAT credit facility on inputs for the goods to be exported, then after fulfilling the export obligations the goods imported under this facility have to be used to manufacture dutiable goods in the same factory or at a different place under a supporting manufacturer. The Duty Exemption Schemes (DSE) consists of following streams: (1) Advance Authorisation, and (2) Duty Free Import Authorisation (DFIA).

1. Advance Authorisation An advance licence is issued under the duty exemption scheme to allow import of inputs which are physically incorporated in the export product (making normal allowance for wastage). In addition to such inputs, fuel, oil, energy, catalysts, etc., which are consumed in the course of their use to manufacture the export product, may also be allowed under the scheme. This scheme may be treated as replenishment/reimbursement of all kinds of taxes, duties, levies, etc. Inputs imported under this scheme are subject to actual users’ condition. Inputs and its quantities are decided and permitted either as per SION or ad hoc norms, based on average consumption data of the relevant industry. But if the input norms are not fixed, authorisation can be obtained on self-declaration basis. DGFT is authorised by means of public notice to exclude any product(s) from purview of advance authorisation. As discussed before, duty free import of mandatory spares (up to 10 per cent of CIF value of authorisation) which are required to be exported/supplied with the resultant products are allowed under advance authorisation. Advance authorisation can be issued either to manufacturer-export firms or merchant-export firms tied to supporting manufacturer(s). However, for pharmaceutical products manufactured through non-infringing processes, advance authorisation is issued to manufacturerexport firms only. Advance authorisations are exempted from payment of basic customs duty, additional customs duty, education, antidumping duty and safeguard duty, if any. But the imports for supplies covered under this scheme are exempted from payment of applicable antidumping and safeguard duty, if any. It is necessary that the exports under advance authorisation add a positive value. But the exports to SEZ units/supplies to developers/co-developers, irrespective of currency of realisation, are covered under this scheme. Physical exports for which payments are not received in freely convertible currency are subjected to value addition as specified. Eligibility: Advance authorisation is issued either to a manufacturer-exporter or merchant-exporter tied to supporting manufacturer(s) for: Physical exports (including exports to Special Economic Zones (SEZ); on the basis of annual requirements in respect of export products for which SIONs have been notified, and/or Intermediate supplies, and/or Supply of ‘stores’ on board a foreign going vessel/aircraft subject to condition that there is specific SION in respect of item(s) supplied. It is to be noted that Advance authorisation must have minimum 15 per cent value addition and advance authorisation is with actual user condition, i.e. it can never be transferable, even after EODC is obtained.

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Advance Authorisation for Specified projects: As discussed earlier, under DES scheme, the advance authorisations are issued for duty free imports required for export production. In addition, in respect of supply of goods to specified projects mentioned in Foreign Trade Policy (FTP), an advance authorisation can also be availed by sub-contractors to such projects, provided the name of the subcontractor(s) appears in the main contract. Such authorisation is also issued for supplies made to United Nations Organisations or under ‘Aid Programme’ of the United Nations or other multilateral agencies and which are paid for in free foreign exchange. Advance authorisation and / or materials imported herein will only be with actual user condition and cannot be transferred even after the completion of export obligation. However, the authorisation holder has the option to dispose of the product manufactured out of duty free inputs after the export obligation is complete. Free of cost Supply by Foreign buyer: The facility of advance authorisation is also available where some or all inputs are supplied free of cost to the export firm by a foreign buyer. In such cases, for the calculation of value addition, a notional value of free of cost inputs along with the values of other duty-free inputs is taken into consideration. Advance Authorisation for Annual Requirement: Advance authorisation is also issued for annual requirements. Status certificate holders and all other categories of exporters having export performance in the preceding two years are entitled for advance authorisation for annual requirement. Entitlement in terms of CIF value of imports is up to 300 per cent of the FOB value of physical exports and/or FOR value of deemed exports in preceding licensing year or Advance Release Orders (ARO) and invalidation Letter: Holders of advance authorisation, advance authorisation for annual requirement, Diamond Imp Rest Authorisation, and duty free import authorisation who intend to source inputs from indigenous sources/state trading enterprises in lieu of direct import, may source them either against ARO or invalidation letter, denominated in free foreign exchange/Indian rupees. However, supplies may be obtained against authorisation from EOU/EHTP/BTP/STP/SEZ units, without conversion into ARO or invalidation letter. Transferee of DFIA is also eligible for ARO/invalidation letter facility. prohibited items: Prohibited items of imports mentioned in India Trade Classification Harmonised System code ITC (HS) cannot be imported under advance authorisation / DFIA schemes. Further items reserved for imports by STEs can also not be imported under advance authorisation / DFIA. However these items can be procured from STEs against ARO or invalidation letter. Similarly prohibited items of exports mentioned in ITC (HS) cannot be exported under advance authorisation / DFIA scheme. Export of restricted items is subject to all conditions or requirements of export authorisation or permission, as applicable, under schedule II of ITC (HS). STEs are also permitted to sell goods on ‘High Sea Sale’ basis to holders of advance authorisation / DFIA holder. In addition, STEs are allowed to issue a No Objection Certificate (NOC) for import by advance authorisation / DFIA holder. Admissibility of Drawback: In case of an advance authorisation, drawback is available for any duty paid material, whether imported or indigenous, used in goods exported, as per drawback rate fixed by DoR, Ministry of Finance (Directorate of Drawback). Drawback allowed is to be mentioned in the authorisation.

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2. Duty Free Import Authorisation (DFIA) Under Duty Free Import Authorisation (DFIA) scheme, import licence can be obtained only for the products covered under SION on post-export and pre-export basis. Pre-export basis carries the actual user condition while post-export basis are transferable. Unlike advance authorisation scheme DFIA is transferable after obtaining EODC. However both the schemes are similar in many aspects. Eligibility: DFIA is issued to the following: To manufacturer-exporters or merchant-exporters tied to manufacturer(s) for duty-free import of inputs. Supply of goods under deemed exports to the ultimate exporter holding another advance authorisation / duty free import authorisation. Supply of goods to the various categories mentioned in Chapter 8.2 of the Foreign Trade Policy (10 notified categories). Further, there are specific provisions for availing DFIA in different cases. These provisions are as follows: post-Export DFiA: In case of post-export DFIA, a merchant exporter/export firm is required to mention only the name(s) and address(es) of manufacturer(s) of the export product(s). Applicant is required to file application to concerned RA before effecting exports under DFIA. pre-Export DFiA: Pre-export authorisation is issued based on actual user condition and is exempted from payment of basic customs duty, additional customs duty/excise duty, education cess, anti-dumping duty and safeguard duty, if any. Actual user DFiA: In case of actual user DFIA and where CENVAT credit facility on inputs has been availed for the exported goods, even after the completion of export obligation, the goods imported against such DFIA are to be utilised in the manufacture of dutiable goods whether within the same factory or outside (by a supporting manufacturer). It is to be noted that DFIA has maximum 20 per cent value addition and SION of the export product has to be fixed. Transferability of DFiA: After fulfilling the export obligation, request for transferability of authorisation or inputs imported against it can be made before the concerned RA. Once transferability is endorsed, the authorisation holder may transfer DFIA or duty free inputs to the transferee, except fuel and any other item(s) notified by the DGFT. Fuel import entitlement can be transferred only to companies which have been granted authorisation to market fuel by the Ministry of Petroleum and Natural Gas. After the endorsement of transferability, imports/domestic procurement against authorisation or transfer of imported inputs/domestically procured inputs are subject to payment of applicable additional customs duty/excise duty. While endorsing transferability, authorisation bears a note as to the liability of such additional customs duty/excise duty. In the cases where CENVAT facility has not been availed, exemption from additional customs duty/excise duty can be available even after endorsement of transferability on DFIA. Wherever SIONs prescribe actual user conditions, and in cases of acetic anhydride, ephedrine and pseudo ephedrine, DFIA is issued with actual user condition for these inputs and no transferability is allowed for these inputs even after fulfillment of export obligation.

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preferential Rates: Any type of import incentive under preferential rate is only applicable for the import of goods from certain preferential countries. Such countries include Mauritius, Seychelles and Tonga, provided certain conditions are satisfied. The certificate of origin is very important in order to avail of the benefits of such concessional rates of duty.

Exhibit 7.2 Schemes for Exports from India Under New FTP 2015–20 1. MEIS (Merchandise Exports from India Scheme)

Duty Credit Scrips in MEIS

SEIS (Service Exports from India Scheme)

Highlights of SEIS

Source: http://howtoexportimport.com/Export-Financial-benefits-Export-incentives-and-su-4103. aspx, accessed on 8 February 2017

172 Export Import Management LO2 Discuss the Duty Remission Schemes

DUTY REMISSION SCHEMES A duty remission scheme permits duty free replenishment of inputs used in the export product. These schemes facilitate the post-export replenishment/remission of duty on inputs used in the export product and also allow drawback of import charges on inputs used in the export product.

Exhibit 7.3 Advance Authorisation under New FTP 2015–20

SCOMET

Source:

http://www.pharmexcil.com/uploadfile/ufiles/BDOIndiaLLPNV.pdf; accessed on 8 February 2017

These schemes are mostly available for those imported products which are to be used for manufacturing of goods meant for export. This not only stimulates the industrial growth and development but also brings foreign currency during the final export process. Through these schemes, some important import incentives are offered by the Government of India, which significantly reduce the effective tax rates for the import firms. Duty remission schemes consist of following: (1) DFRC (Duty Free Replenishment Certificate), (2) DEPB (Duty Entitlement Passbook Scheme), and (3) Duty Drawback Scheme. 1. Duty Free Replenishment certificate (DFRc) Scheme Duty Free Replenishment Certificate (DFRC) scheme offers import incentives to the export firms for the import of inputs used in the manufacture of goods without payment of the basic customs duty. Such inputs are subject to the payment of additional customs duty equal to the excise duty at the time of import. It is to be noted here that DFRC is issued for import of inputs, as per SION, having same quality, technical characteristics and specifications as those used in the end product and as indicated in the shipping bills.

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Such licences remain valid only for 24 months. DFRC and the material imported against it are freely transferable. The DFRC is subject to a minimum value addition of 33 per cent. The export products, which are eligible for modified VAT, are eligible for CENVAT credit. However, under this scheme the non-excisable, non-dutiable or non-centrally VAT-able products are eligible for drawback at the time of exports in lieu of additional customs duty to be paid at the time of imports. The exporters are entitled for drawback benefits in respect of any of the duty paid materials, whether imported or indigenous, used in the export product as per the drawback rate fixed by Directorate of Drawback (Ministry of Finance). The drawback is however limited to the duty paid materials not covered under SION. Exports under deferred payment scheme to Russia are also entitled for issuance of DFRC. 2. Duty Entitlement passbook (DEpb) Scheme DEPB is an export incentive scheme of Indian Government offered to export firms in India. The main objective of DEPB scheme is to neutralise the incidence of basic custom duty on the import content of the exported products. The neutralisation is provided by grant of duty credit against the export product. Under the DEPB, an exporter may apply for credit, as a specified percentage of FOB value of exports, made in freely convertible currency. As on 4 April 1997, the DEPB scheme consisted of (i) Post-export DEPB, and (ii) Pre-export DEPB. The pre-export DEPB scheme was abolished w.e.f. 1 April 2000. Under the post-export DEPB, the export firm is given a duty entitlement pass book scheme at a value is Under the DEFB scheme, an export firm can import raw materials, intermediates, components, parts, packaging material, etc., except those items mentioned as restricted items for imports in ITC (HS) classification of export and import items. DEPB benefit is available on post export basis only. The rates of import duty credit under DEPB scheme are mentioned in the Hand Book of Procedures Vol. I. The DEPB on post export basis is granted only after the proceeds have been realised by the export firm. Both the merchant exporter and manufacture exporter are eligible for DEPB on the post export basis. The import of inputs for the manufacturing of export goods is allowed without payment of basic customs duty and surcharge, as well as additional duty of customs against the import duty credit granted under this scheme. The holder of DEPB has the option to pay additional customs duty, if any, in cash as well. Third party exports are also covered for grant of credit under DEPB. The DEPB holds validity for a period of 24 months from the date of its issuance. The goods already imported/shipped/arrived in advance but not cleared from customs may also be cleared against the DEPB issued subsequently. An exporting firm, exporting any goods out of India, has two options. It can either avail Drawback or DEPB benefit. At the time of export, the export firm has to file either Drawback or DEPB shipping bill. The credit earned by the export firm by exporting the goods under DEPB is given by the DGFT in the form of DEPB scrip against which the firm can import any goods, and instead of paying customs duty the export firm can get DEPB scrip debited. DEPB provides a transferable benefit.

174 Export Import Management Deemed Exports: Deemed exports is the term used for the transactions in which the goods supplied do not leave the country and the payment for such supplies is received either in Indian rupees or in free foreign exchange. Deemed exports are eligible for any/all of the following benefits in respect of manufacture and supply of goods qualifying as deemed exports subject to the terms and conditions as given in Handbook of Procedures (Vol. I) published by DGFT (the handbook can be accessed at http://dgftcom.nic.in/exim/2000/procedures/ftp-hbcontents0910.pdf). Deemed exports can avail the benefit of duty free imports of inputs for the manufacturing of export goods. Supply of such goods is eligible for refund of terminal excise duty provided the recipient of the goods does not avail CENVAT credit/rebate on such goods. Similarly, supplies are eligible for deemed export drawback on the central excise paid on inputs/components, provided CENVAT credit facility/rebate has not been availed by the applicant. Such supplies are however eligible for deemed export drawback on the customs duty paid on the inputs/components. 3. Duty Drawback Scheme Duty drawback is the special rebate given under Section 75 of the Indian Customs Act on exported products or materials. Duty drawback rates or concessions are only applicable on those products which are used in the processing of goods manufactured in India and then exported to other countries. The duty drawback facility on export of duty paid imported goods is available in Section 74 of the Customs Act, 1962. For customs purpose, drawback means the refund of duty of customs and duty of central excise that are chargeable on imported and indigenous materials used in the manufacture of exported goods. Under this scheme, a part of the customs duty paid at the time of import is remitted on export of the imported goods, subject to their identification and adherence to the prescribed procedures. Necessary Elements: The elements necessary to claim drawback under Section 74 are: (i) The goods on which drawback is claimed must have been previously imported. (ii) Import duty should have been paid on these goods at the time of their import. (iii) The goods must be entered for export within two years from the date of payment of duty on their importation (whether provisional or final duty). The period can be further extended to three years by the commissioner of customs after presentation of sufficient reasons. (iv) The goods must be identified as the goods imported. (v) The goods must actually be re-exported to any place outside the country. (vi) (vii) Act. Duty drawback is not based on inputs obtained without payment of customs or excise duty. In case of re-export of goods, it must be done within two years from the date of payment of import duty. About 98 per cent of the duty is allowable as drawback, only after inspection. If the goods imported are used before their re-export, the drawback will be allowed at reduced per cent.

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Eligibility: Goods eligible for drawback are: (i) Export goods imported into India as such (ii) Export goods imported into India after use (iii) Export goods manufactured/produced out of imported material (iv) Export goods manufactured/produced out of indigenous material (v) Export goods manufactured/produced out of imported indigenous materials. Types of Duty drawback: All industry drawback rates are fixed by the Directorate of Drawback, Dept. of Revenue under the Ministry of Finance, Government of India. These rates are periodically revised, normally on 1st June every year. Section 37B of the Central Excise Act empowers the central government to frame rules for purpose of the act. Under these powers, Customs and Central Excise Duties Drawback Rules, 1995, have been framed. Duty Drawback is of following types: 1. All industry rate, 2. Brand rate, and 3. Special brand rates. 1. All industry Rate: The All Industry Rate (AIR) is essentially an average rate based on the average quantity and value of inputs and duties (both excise and customs) borne by a particular export product. It includes the service tax suffered by the product. Government has fixed duty drawback rates for many products which are regularly exported through a drawback schedule. Drawback on export of such products can be availed at the prescribed rates for the customs of the port of export. The All Industry Rates (AIR) is notified by the government in the form of a drawback schedule every year. The present schedule covers 2,837 entries of such products under AIR. The legal framework in this regard is provided under Sections 75 and 76 of the Customs Act, 1962, and the Customs and Central Excise Duties and Service Tax Drawback Rules, 1995. 2. brand Rate: The Brand Rate of Duty Drawback is allowed in cases where the export product does not have any AIR of Duty Drawback or the same equals less than 4/5th of the duties paid on materials used in the manufacture of export goods. Thus, if the export product is not covered under the schedule, the export firm has to file for drawback under the brand rate of fixation, to recover the duties actually paid in the production of the export product. This work is handled by the jurisdictional commissioners of customs and central excise. Export firms willing to avail of the Brand Rate of Duty Drawback need to apply for fixation of the rate for their export goods to the jurisdictional Central Excise Commissionrate. The Brand Rate of Duty Drawback is granted as specified by Rules 6 and 7 of the Drawback Rules, 1995. 3. Special brand Rates: If the export firm is not satisfied with the industry rate (less than 80 per cent of the actual duties), it can opt for the fixation of special brand rate. procedure for claiming Drawback: The drawback on export goods whether under AIR or Brand Rate has to be claimed at the time of export of goods. For this purpose, requisite particulars have to be filled in the prescribed format of shipping bill/bill of export under Drawback. Triplicate copies of the shipping bill are treated as claim for Drawback. The claim must also be accompanied by certain documents as specified in the Duty Drawback Rules. If the requisite documents are not furnished or has any deficiencies, the claim may be returned after shipment for complying with the requirements and furnishing requisite information/documents (for example, Brand Rate letter which may not be available at the time of export but becomes available after shipment).

176 Export Import Management imported goods Re-exported–Drawback: If some goods, imported on the payment of duty are later sought to be exported within a specified period, the customs duty paid at the time of import, with certain cuts, can be claimed as duty drawback at the time of export of such goods. Such duty drawback is granted under Section 74 of the Customs Act, 1962, read with re-export of imported goods (Drawback of Customs Duty) Rules, 1995. Before extending the benefits to such goods, under the duty drawback scheme, the identity of the export goods is cross verified with the particulars furnished at the time of import of such goods. In this category, two types of cases are covered as follows: 1. imported goods exported as such, i.e., without putting to use: 98 per cent of duty is refunded. 2. imported goods exported after use: The percentage of duty is refunded according to the period between the date of clearance for home consumption and the date when the goods are placed under customs control for export purpose. The percentage of duty drawback is notified under Notification Number 19 of the Customs Act, dated 6 February 1965, which is amended from time to time. Thus it is clear that where the goods are not put into use after import, 98 per cent of Duty Drawback is accepted under Section 74 of the Customs Act, 1962. In certain cases where the goods have been put to use after import, Duty Drawback is granted on a sliding scale basis depending upon the extent of use of the goods. If the goods are exported 18 months after import, no Duty Drawback is available. Application for Duty Drawback has to be made within 3 months from the date of export of goods, which can be extended up to 12 months subject to conditions and payment of requisite fees as provided by the Drawback Rules, 1995.

LO3 Explain reward schemes for export-import firms

REWARD SCHEMES Besides the duty exemption and duty remission schemes, there are other schemes in operation which are basically reward schemes to reward high performing export firms. Rewards are given on the basis of incremental exports/export turnover and such rewards have no linkage whatsoever with the duties and taxes borne on export goods. Following is the discussion on major reward schemes: 1. Served From india Scheme (SFiS) Served From India Scheme (SFIS) incentivises exports of specific types of goods to certain countries. The objective of SFIS is to “accelerate growth in export of services so as to create a powerful and unique ‘Served From India’ brand, instantly recognised and respected the world over.” SFIS was enforced vide notification number 91/2009-Cus., dated 11 September 2009. The entitlement/goods (imported/procured) are subject to actual user condition. Thus the benefits extended by this scheme are non-transferable (except within group companies and managed hotels).

Scheme, duty credit scrip @10 per cent of free foreign exchange earnings are given to the exporter. The duty credit scrip can be used for import of any capital goods including spares, office equipment and professional equipment, office

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furniture and consumables that are otherwise freely importable and/or restricted under ITC (HS). Such imports must be related to a service sector business of the applicant. It is to be noted that import of vehicles per se is not permitted under this scheme. But the vehicles in the nature of professional equipment to the service provider like Air Fire Fighting and Rescue Vehicles (AFFRVS), Heavy Duty Modular Trailer Combination etc. are permitted. In case of hotels or clubs having residential facility of minimum 30 rooms, golf resorts and stand-alone restaurants having catering facilities, duty credit scrip can also be used for the import of consumables including food items and alcoholic beverages. 2. Vishesh Krishi and gram Udyog Yojana (VKgUY) or Special Agriculture and Village industry Scheme The objective of VKGUY is to promote exports of specified agricultural products, gram udyog products, and forest based products. The scheme came into operation vide notification number 94/2009-Cus., and number 95/2009-Cus., both dated 11 September 2009. Under this scheme, duty credit scrip is granted at 5 per cent of FOB value of exports in free foreign exchange. This rate is reduced to 3 per cent in cases where export firm has also availed benefits of: Drawback at rates higher than 1 per cent, and/or Specific DEPB rate, i.e., other than miscellaneous category – serial numbers 22D and 22C of product group 90 of the DEPB Schedule, and/or Advance authorisation or DFIA import for inputs other than catalysts, consumables and packing materials. Some specified flowers, fruits, vegetables and other products are entitled to an additional duty credit scrip equivalent to 2 per cent of FOB value of exports. The status holders (as defined in paragraph 3.10.2 of the FTP) exporting specified agricultural products are also entitled to Agri Infrastructure Incentive Scrip (AIIS) equal to 10 per cent of FOB value of agricultural exports (including VKGUY benefits). The following capital goods/equipment are permitted for import against AIIS: Cold storage units including Controlled Atmosphere (CA) and Modified Atmosphere (MA) stores; pre-cooling units and mother storage units for onions, etc. Pack houses (including facilities for handling, grading, sorting and packaging, etc.) Reefer van/containers, and Other capital goods/equipment as may be notified in Appendix 37F. The goods imported against AIIS are subject to actual user condition and hence cannot be transferred. However, the credit scrip issued under AIIS can be freely transferred amongst status holders as well as to units (not including developers) in food parks for import of cold chain equipment. 3. Focus Market Scheme (FMS) The objective of Focus Market Scheme (FMS) is to offset the high freight costs and other disabilities to select international markets with a view to enhance India’s export competitiveness in these countries. Under this Scheme, exports to 41 countries are incentivised with an additional 1 per cent duty credit for exports made with effect from 1 April 2011. The export firms are entitled to a credit of 2.5 per cent of the FOB value of the exports made in these 41 countries. This duty credit is over and above the duty credit granted under FMS, i.e., if an item covered under FMS is exported to the countries listed under SFMS, the total duty credit would be at 4 per cent.

178 Export Import Management 4. Focus product Scheme (FpS) The objective of Focus Product Scheme is to reward and encourage export of products which have high employment intensity in rural and semi-rural areas, to all countries (including SEZ units), so as to offset the inherent infrastructure inefficiencies and other associated costs involved in the marketing of these products. The export firms are entitled for duty credit scrip at 2 per cent of the FOB value of exports in free foreign exchange. However, special focus product(s)/sector(s), covered under tables 2 and 5 of Appendix 37D, are entitled for duty credit scrip equivalent to 5 per cent of the FOB value of exports in free foreign exchange. Further, focus product(s)/sector(s) notified under Table 7 of Appendix 37D are eligible to claim additional duty credit scrip equivalent to 2 per cent of the FOB value of exports in free foreign exchange over and above the existing rate for that product/sector. This is notified from the admissible date of export /period specified in the public notice issued to the product/sector. 5. Market Linked Focus products Scrip (MLFpS) The export of products/sectors of high export intensity/employment potential, which are not covered under the present focus product scheme list, are incentivised at 2 per cent of the FOB value of exports in free foreign exchange under focus product scheme when exported to the ‘Linked Markets (countries)’ which are not covered in the present FMS list. The SHIS is issued with actual user condition, hence it is non-transferable. This may be used for imports of capital goods (as defined in FTP) relating to certain specified sectors. 6. Status Holders incentive Scrip (SHiS) The status holders of specified sectors are offered an extra scrip called the SHIS at 1 per cent of the FOB value of exports of these sectors made during 2009–10, 2010–11, 2011–12 and 2012–13. The objective of the Scheme is to promote investment in upgradation of technology in some specific sectors. This Scheme came into operation vide notification number 104/2009-Cus., dated 14 September 2009. The SHIS is not issued to the export firms in a particular year if they have availed the benefits of Technology Upgradation Fund Scheme (TUFS) or/and have got zero per cent EPCG authorisation in that year.

LO4 Know different schemes available for the import of goods

SCHEMES FOR IMPORT OF GOODS There is a specific category of schemes dealing with the import of goods to the country. These schemes encourage the export firms to import capital goods and other goods required for the production of goods for export from the country, by offering various exemption from import duties and other benefits. Let us discuss some important schemes under this category. 1. Export promotion capital goods Scheme (Epcg) EPCG is a special type of incentive offered to the EPCG licence holder. Capital goods imported under EPCG scheme are subject to actual user conditions, hence the same cannot be transferred /sold till the fulfillment of export obligation as specified in the licence. Under EPCG, additional flexibility is given to the export firms for fulfillment of export obligation under EPCG scheme in order to reduce difficulties of exporters of goods and services. The scheme facilitates and incentivises technological upgradation.

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In case of movable capital goods in the service sector, the requirement of installation certificate has been done away with. Under EPCG, export obligations for specified projects are calculated based on the concessional duty permitted to them in order to improve the viability of projects. To ensure that capital goods are imported under the EPCG scheme, the licence holder has to produce a certificate from the jurisdictional Central Excise Authority (CEA) or Chartered Engineer (CE), confirming installation of such capital goods in the declared premises. Under Export Promotion Capital Goods (EPCG) scheme, a licence holder is allowed to import capital goods such as plant machinery, equipment, components and spare parts of the machinery at concessional rate of customs duty of 5 per cent and without CVD and special duty. Entitlement: EPCG scheme is extended to manufacturer exporters with or without supporting manufacturer(s)/ vendor(s), and to merchant exporters tied to supporting manufacturer(s) and service providers. The scheme is also open for the service providers who are designated/certified as a Common Service Provider (CSP). EPCG authorisation holder can export either directly or through third party(s). It is to be noted that for the entitlement of EPCG scheme, export proceeds are required to be realised in freely convertible currency except for deemed exports. Import of capital goods under the EPCG scheme is subject to actual user condition till export obligations are completed. Export Obligation: Export Obligation under EPCG scheme has to be fulfilled by export of goods manufactured/services rendered by the applicant. There are two types of export obligations that are mandatory to be fulfilled: (i) Annual Average Export Obligation: The first type is the annual average obligation, in which export obligation is over and above the average level of exports achieved by the authorisation holder in the last three licensing years for the same and/or similar products within the overall export obligation period including extended period, if any. Such average is the arithmetic mean of export performance in the preceding three years for the same and/or similar products. (ii) Specific Average Export Obligation: Specific average is six times the duty-saved amount, in which the authorisation holder has to also fulfill a minimum of 50 per cent export obligation in each block of years, where first block is of four years and the second is of two years. Scope of Epcg Authorisation: Royalty payments received in freely convertible currency and foreign exchange received for R&D services are also counted for discharge under EPCG. EPCG authorisation holders also have the option to source capital goods from a domestic manufacturer. Such domestic manufacturer is eligible for deemed export benefit under FTP. EPCG authorisation holders can opt for technological upgradation of existing capital goods imported under EPCG authorisation. It is to be noted here that import of second hand capital goods is not permitted under the EPCG scheme. There is a provision for early redemption to incentivise fast track companies to accelerate exports. This happens in cases where the authorisation holder has fulfilled 75 per cent or more of the specific export obligations and 100 per cent of average export obligations till date, if any, in half or less than half the original export obligation period specified, then the remaining export obligation is condoned. The authorisation holder needs to submit a report on fulfillment of export obligation to the RA concerned by 30th April of every year. The scheme permits one or more requests for grant of extension in the export obligation period. This extension can be granted for one year, on the payment of composition fees equal to 2 per cent of the proportionate duty saved amount on unfulfilled export obligation, or an enhancement in export obligation imposed to the extent of 10 per cent of the total export obligation

180 Export Import Management imposed under authorisation, as the case may be. Such first extension in the export obligation period can be for a maximum period of two years. Zero Duty Epcg Scheme: Zero duty EPCG scheme was introduced in the Foreign Trade Policy 2009–14 which allows import of capital goods for pre-production, production and post-production (including CKD (complete knock-down)/SKD (semi-knocked-down) thereof as well as computer software systems) at zero customs duty, subject to an export obligation equivalent to six times of the duty saved on capital goods imported under EPCG scheme, to be fulfilled in six years reckoned from the authorisation issue date. This Scheme is available for export firms of engineering and electronic products, basic chemicals and pharmaceuticals, apparels and textiles, plastics, handicrafts, chemicals and allied products, leather and leather products, paper and paperboard and articles thereof, ceramic products, refractories, glass and glassware, rubber and articles thereof, plywood and allied products, marine products, sports goods and toys. However, where leather and leather products are concerned, zero duty EPCG scheme is not available for import of capital goods. concessional 3 per cent Duty Epcg Scheme: This scheme allows the import of capital goods for pre-production, production and post-production (including CKD/SKD thereof as well as computer software systems) subject to payment of 3 per cent Basic Customs Duty (BCD). Under this scheme, Export Obligation (EO) is eight times of the duty saved amount (i.e., difference between duty payable and 3 per cent BCD) and the Export Obligation Period (EOP) is 8 years reckoned from the authorisation issue date. 2. Manufacture Under bond The manufacture under bond scheme furnishes a bond of adequate amount with the manufacturer, to undertake the export of his production. This scheme exempts all factories registered to produce their goods for export from import duty and other taxes on inputs used to manufacture such goods even if they obtain it from the domestic market without any excise duty. Against this the manufacturer is permitted to import goods without paying any customs duty. Here the production is made under the supervision of a customs or excise authority. 3. Advance customs clearance permit Under Sub-section (1) of Section 25 of the Customs Act, 1962 (52 of 1962), the Central Government provides exemption to the goods imported into India, against an advance customs clearance permit issued on or before 31 March 1995 under Paragraph 58 of the Export and Import Policy 1992–1997. This scheme allows an import company to import raw materials, components, packing and labeling materials etc., without payment of customs duty in India. The imported product is then used by the Indian manufacturer to make the final product as required by the foreign buyers on work basis. The final manufactured product is then exported without imposing kind of taxes from the customs department. If EPCG authorisation holder fails to fulfill prescribed export obligation, he has to pay duties of customs plus interest as prescribed by the customs authority. This facility can also be availed by the EPCG authorisation holder to exit at his option. 4. project imports Imports Scheme is applicable to industrial plants, irrigation projects, power projects, mining projects, and projects for oil or mineral exploration. The incentives under this Scheme are offered to those

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imported items needed for setting up an independent project. After establishment of the project, its final manufactured product is to be used for export purposes. The items eligible for project imports are specified in Heading 98.01 of the Customs Tariffs Act 1975, which mostly include machinery items. A number of initiatives have been taken to encourage export from the country under the new Foreign Trade Policy 2015–20, and a summary of the initiatives is presented in Exhibit 7.4.

Exhibit 7.4 New Initiatives for EOU/EHTP/STP/BTP in New Foreign Trade Policy 2015–2020

Source: http://www.pharmexcil.com/uploadfile/ufiles/BDOIndiaLLPNV.pdf, accessed on 8 February 2017

Key Terms Duty Exemption Schemes (DES): Duty exemption schemes are the schemes permitting the duty free import of inputs required for export production.

182 Export Import Management Duty Free import Authorisation (DFiA): Under Duty Free Import Authorisation Scheme, import licence can be obtained only for the products covered under SION on post-export and pre-export basis. Duty Remission Scheme: This Scheme permits duty free replenishment of inputs used in the export product. Duty Free Replenishment certificate (DFRc): It offers import incentives to the export firms for the import of inputs used in the manufacture of goods without payment of basic customs duty. Duty Entitlement passbook (DEpb): This is an export incentive scheme of the Indian government offered to export firms in India to neutralise the incidence of basic custom duty on the import content of the exported products. Duty Drawback: This is the special rebate given under Section 75 of Indian Customs Act on exported products or materials. Export promotion capital goods Scheme (Epcg): This is a special type of incentive offered to the EPCG licence holder in terms of additional flexibility given to the export firms for fulfillment of export obligation and to reduce difficulties of exporters of goods and services.

In revIew All export contracts/invoices are required to be freely convertible currency except deemed exports. The advance authorisation is issued with actual user condition and with 15 per cent value addition. However, DFIA is transferable after obtaining EODC and minimum value addition is 20 per cent. At the export stage exports/supplies can be made any time after obtaining an online file number confirming submission of the application to the Regional Authority (RA). An advance licence is issued under Duty Exemption Scheme to allow import of inputs which are physically incorporated in the export product (making normal allowance for wastage). Advance authorisations are exempted from payment of basic customs duty, additional customs duty, education, antidumping duty and safeguard duty, if any. Under Duty Free Import Authorisation (DFIA) scheme import licence can be obtained only for the products covered under SION on post-export and pre-export basis. DFIA has maximum 20 per cent value addition and SION of the export product has to be fixed. These schemes are mostly available for those imported products which are to be used for manufacturing of goods meant for export. Duty Remission Scheme consist of DFRC (Duty Free Replenishment Certificate) and DEPB (Duty Entitlement Passbook Scheme). Main objective of DEPB scheme is to neutralise the incidence of basic custom duty on the import content of the exported products. Deemed Exports is the term used for the transactions in which the goods supplied do not leave the country and the payment for such supplies is received either in Indian rupees or in free foreign exchange. Under Duty Drawback Scheme, a part of the customs duty paid at the time of import is remitted on export of the imported goods, subject to their identification

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and adherence to the prescribed procedures. All Industry Rate (AIR), Brand Rate and Special Brand Rate are different types of Duty Drawbacks. Served From India Scheme (SFIS) incentivises exports of specific type of goods/exports to certain countries. The objective of SFIS is to accelerate growth in export of services so as to create a powerful and unique ‘Served From India’ brand, instantly recognised and respected the world over. The objective of VKGUY is to promote exports of specified agricultural products, Gram Udyog products, and forest based products. The objective of Focus Market Scheme (FMS) is to offset high freight costs and other disabilities to select international markets with a view to enhance India’s export competitiveness in these countries. Under EPCG, additional flexibility is given to the export firms for fulfillment of export obligations, and in order to reduce difficulties of exporters of goods and services. EPCG scheme is extended to manufacturer exporters with or without supporting manufacturer(s)/vendor(s), merchant exporters tied to supporting manufacturer(s), and service providers. The manufacture under bond scheme furnishes a bond with the manufacturer of an adequate amount to undertake the export of his production. Imports Scheme is applicable to industrial plants, irrigation projects, power projects, mining projects, and projects for oil or mineral exploration.

mulTIple ChoICe QuesTIons 1. _______ permit duty free import of inputs required for export production. (a) Duty Exemption Schemes (b) Duty Remission Schemes (c) Reward Schemes (d) Schemes for the Imports of Capital Goods 2. _______ duty/duties are exempt under DES. (a) Basic Customs Duty (b) Additional Customs Duty including education cess (c) Antidumping Duty/Safeguard Duty (d) All of the above 3. Advance Authorisation can be issued to _______. (a) a manufacturer export firm. (b) a merchant export firm tied to supporting manufacturer(s). (c) either a manufacturer export firm or a merchant export firm tied to supporting manufacturer(s). (d) neither a manufacturer export firm nor a merchant export firm tied to supporting manufacturer(s). 4. Advance Authorisation can _______. (a) be freely transferable (b) be transferable after EODC is obtained

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5. 6.

7.

8.

9.

10.

11.

12.

(c) never be transferable (d) none of the above Duty Free Replenishment Certificate remains valid only for _______. (a) one year (b) two years (c) five years (d) ten years The Duty Free Replenishment Certificate is subject to a minimum value addition of _______. (a) 15 per cent (b) 20 per cent (c) 33 per cent (d) 40 per cent Under _______ a part of the customs duty paid at the time of import is remitted on export of the imported goods, subject to their identification and adherence to the prescribed procedures. (a) Duty Drawback Scheme (b) Focus Market Scheme (c) EPCG Scheme (d) Manufacture under Bond Scheme Where the goods are not put into use after import, _______ of Duty Drawback is accepted under Section 74 of the Customs Act, 1962. (a) 50 per cent (b) 75 per cent (c) 80 per cent (d) 98 per cent The objective of _______ is to offset high freight cost and other disabilities to select international markets with a view to enhance India’s export competitiveness in these countries. (a) Duty Drawback Scheme (b) Focus Market Scheme (FMS) (c) EPCG scheme (d) Manufacture under Bond Scheme Import of capital goods under the EPCG Scheme is subject to actual user condition _______. (a) forever (b) even before export obligation is completed (c) till export obligation is completed (d) none of the above _______ exempts all factories registered to produce their goods for export from import duty and other taxes on inputs used to manufacture such goods even if they obtain it from the domestic market without any excise duty. (a) Duty Drawback Scheme (b) Focus Market Scheme (c) EPCG scheme (d) Manufacture under Bond Scheme The incentives under _______ are offered to those imported items needed for setting up an independent project. (a) Focus Market Scheme (FMS) (b) Advance Customs Clearance Permit (c) Project Imports (d) EPCG scheme

ConCepT QuesTIons 1. What is the main objective of the Duty Exemption schemes? Throw light on the major schemes under this category of export promotion schemes. 2. What are main differences between the following, on the basis of features of these schemes: (a) Advance Authorisation (b) Duty Free Import Authorisation (DFIA)

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3. “Duty Remission Schemes not only stimulates the industrial growth and development but also brings foreign currency during the final export process.” Do you agree with the statement? Support your answer with relevant details. 4. Write short notes on following: (a) Duty Free Replenishment Certificate (DFRC) (b) Duty Entitlement Passbook Scheme (DEPS) 5. What are major objectives of ‘Reward Schemes’? Explain various reward schemes operational in India. 6. Which schemes are in operation in India to promote the import of goods? Discuss details of these schemes.

FurTher readIng Chand Smriti. 3 Different Schemes to Promote Exports and to Obtain Foreign Exchange. Yourarticle.http://www.yourarticlelibrary.com/export-management/3-different-schemes-to-promote-exports-and-to-obtain-foreign-exchange/5872/, accessed on 5 February 2017. http://www.customsandforeigntrade.com/FTP%20Chapter4.pdf, accessed on 5 February 2017. http://howtoexportimport.com/Export-Financial-benefits-Export-incentives-and-su-4103.aspx, accessed on 7 February 2017.

Answers to Multiple ChoiCe Questions 1. (a) 7. (a)

2. (d) 8. (d)

3. (c) 9. (b)

4. (c) 10. (c)

5. (b) 11. (d)

6. (c) 12. (c)

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Case Study Ramaiya is a medium-sized garment exporter from Mysore. She just got an export order from a buyer in France for supply of 10,000 linen shirts at $110 each. Ramaiya will need to buy linen fabric and manufacture shirts from it. She can either import or buy it locally. She currently imports duty-free using the EPCG scheme. In return, she needs to undertake the export of garments six times the value of the duty saved amount in six years. Alternatively, if she decides to buy a machine from an indigenous manufacturer, she will have to export 25 per cent less compared to the amount she would have had to if she had imported the machine. In this way the EPCG scheme nudges exporters to use indigenous machines. Post-GST, imports under EPCG will become expensive. Her manager tells her that the total customs duty would be 24 per cent of the import value of the linen. Some relevant facts for Ramaiya’s business are as follows: GST will usher in a new regulatory regime for India’s exports. For the manufactured product exporters, the most significant impact would be the increased requirement and blockage of working capital. For manufacturing a product, a business firm buys locally or imports raw material and machinery. The current export schemes permit firms to buy these without payment of applicable duties through ab-initio exemption or subsequent refund of duties. The proposed GST system mandates that all duties have to be paid at the time of a transaction while refund for these can be obtained after exports. This means the exporter will have to arrange money for the inputs, manufacturing and payment of duties and taxes. Ramaiya can use the advance authorisation scheme for import of the required quantity of linen from Italy. Currently, she is not required to pay any duty on imports. However, post-GST, while she will get an exemption from payment of only basic customs duty (7%), she has to pay integrated GST which (let us assume) will be around 18 per cent of the import value. However she can get the refund of this duty only after the exports and realisation of money. Considering a value addition of 15 per cent and cost of capital at 12 per cent, Ramaiya’s working capital equals 15.65 per cent of export value, and will be blocked for six to 12 months. Post-GST, Ramaiya cannot use the two regularly used variants of advance authorisation. One, currently she can buy linen from a domestic manufacturer who will supply without payment of duty. Post-GST, the domestic manufacturer cannot supply without charging duties.

Discussion Question 1. Keeping the post-GST scenario in view, have a look at the current export options available to Ramaiya and suggest the best exporting option.

References http://dgftcom.nic.in/exim/2000/policy/chap-04.htm, accessed on 17 January 2017. http://www.eximpolicy.com/duty_exemption_remission_scheme.html, accessed on 17 January 2017.

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http://pib.nic.in/archieve/eximpol/eximpol00-01/Chap-07.htm, accessed on 17 January 2017. http://www.cbec.gov.in/htdocs-cbec/customs/cs-tariff2015-16/csgenexpemtns-idx, accessed on 1 February 2017. Srivastava Ajay. Exporters need to prepare for GST. Business Line. 16 October 2016. http://www.thehindubusinessline.com/opinion/gst-and-exports-in-india/article9226928.ece, accessed on 8 February 2017. http://www.thehindubusinessline.com/opinion/gst-and-exports-in-india/article9226928.ece, accessed on 8 February 2017.

Chapter

Foreign Trade Financing and Insurance Schemes

8

Learning Outcomes After reading this chapter, you will be able to: LO1 Know about pre- and post-shipment financing options LO2 Understand the functions and roles of Export Credit Guarantee Corporation of India Limited (ECGC) LO3 Review various ECGC schemes available for export firms LO4 Explain the role of EXIM Bank in promoting export-import business in India

INTRODUCTION International trade is important for the optimum utilisation of the overall efficiencies of world production. Increasing significance of international trade has resulted in the supporting activities assuming their own importance and the most important supporting activity is that of financing international trade. Financing here means the instruments and techniques of international payments and of financial accommodation given to international trading firms by credit institutions. So far as techniques and institutional aspects of financing are concerned, in India, nearly 50 per cent of the total foreign trade is being financed through bills. Coming to the credit institutions, the most important source of finance for foreign trade is the banks in India. Examining the method and nature of financial accommodation given by banks to foreign trading firms, we find that for the goods sold by reputed firms and moving through well-established traditional channels there is no dearth of bank finance in the country. However, a number of small and uneconomic traders become an obstacle to the smooth flow of credit for foreign trade because financing of small firms is often risky and banks, which are the main source of finance, do not show much willingness to extend credit to them. This chapter will provide information about the various insurance and financing options available for exporting firms in India.

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LO1 Know about pre- and post-shipment financing options

PRE- AND POST-SHIPMENT FINANCE There are specific financial institutions in almost all the countries to provide credit to export firms. Such institutions aim to promote export and encourage export firms by offering them a number of financing options and sharing the risks of non-payment. As there could be considerable lag in receiving the actual export order and final payment from the overseas import firm/foreign buyer, financial institutions provide loans to facilitate export. The export credit is broadly classified as pre- and postshipment export finance. Like other countries India also has a dedicated financial institution to promote international trade. This bank is known as Export and Import Bank of India (EXIM Bank). Export and Import Bank of India was started with the sole purpose of promoting international trade. The objectives and other details of Export and Import Bank of India will be discussed in a subsequent section of this chapter. In this section, pre- and post-export finance aspects are discussed in details.

Pre-shipment Export Finance Pre-shipment loan is provided by banks and financial institutions to an export firm even before the firm has exported goods. Basically the loan is nothing but a working capital loan. The export firm uses the loan to meet following requirements: Procurement of raw materials. Incur expenses towards manufacturing and other expenses. Process and pack the goods. Ship the goods to the overseas importer. Meet other financial costs of the business. Pre-shipment loan is normally given to those export firms which have confirmed export orders in their name. Sometimes, even without a confirmed order in their name, financial institutions may grant loan but only when the export firm is a third party supplier to another export firm having a confirmed order in their name. Pre-shipment credit can be either in the form of packing credit or in the form of advance against cheque/draft received by the export firm as ‘Advance Payments’. Packing credit is the generic term used to provide loans to finance the activities related to exporting goods. Packing credit is granted only when the export firm produces the following documents The confirmed order received from the foreign buyer/import firm which should have detailed information about the overseas importer, description, quantity and value of goods (FOB or CIF, etc.), destination port and the last date of payment. Firm order or irrevocable L/C or original cable/fax/telex message exchange between the exporter and the overseas importer. Licence issued by the DGFT (Directorate General of Foreign Trade) if the goods to be exported belong to the restricted category. If the item falls under quota system, proper quota allotment proof needs to be submitted.

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Post-shipment Export Finance Post-shipment finance is a loan provided by a bank to an export firm after the shipment of goods has happened. As there is a time lag between the date of shipment and receipt of money from the foreign buyer, export firms can avail the financial facilities during this interim period. Here, banks or financial institutions provide finance for export sales receivable after the date of shipment of goods to the date of realisation of the export proceeds. As part of export financing, the banks obtain the documents of the title of the goods from the export firm. The finance is extended against evidence of export shipment which is documents of title of goods in this case. If the export bill purchased / negotiated / discounted is not realised on due date, these obligations are converted to rupee obligation. This is known as ‘crystallisation of export bill’. Different forms of post-shipment finance have been discussed in Exhibit 8.1. Besides providing preand post-shipment loan facilities, financial institutions of almost all countries also provide insurance cover for different types of risk faced by exporters. Let us discuss in detail different types of insurance covers available to export firms in India.

Exhibit 8.1 Forms of Post-shipment Finance Post-shipment credit is a finance against export receivables granted after the shipment of goods/ services till the date of repatriation of the export proceeds. Post-shipment finance can be granted in the following forms:

receivable from Government of India.

Source: http://www.unionbankofindia.co.in/pdf/HKB_%2007CredMoniPolicyPostShipFinance.pdf, accessed on 9 February 2017

LO2 Understand the functions and roles of Export Credit Guarantee Corporation of India Limited (ECGC)

EXPORT CREDIT INSURANCE AND EXPORT CREDIT GUARANTEE CORPORATION OF INDIA LIMITED (ECGC) The payment for the exported goods is one of the biggest worries of an export firm as it is a risky affair even at the best of times. This risk comes in a bigger way in a business environment where political and economic changes are sweeping the world. The payment of exported items may be delayed because of some uncontrollable events like outbreak of war or civil war. Because of the economic difficulties

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or balance of payment problems faced by a country, it may sometimes impose import restrictions on certain goods or may even restrict the transfer of payment for the imported goods, adding to the difficulties faced by export firm in recovering payment for the exported goods. Besides these, another risk faced by the export firm may appear in the form of commercial risk of insolvency or protracted default of overseas buyers/import firms. This type of risk may aggravate because of the political and economic uncertainties in the import firm’s country. Thus we can say that one of most important concerns of an export firm is the risk of loss of payment for the exported goods. To mitigate this risk, export credit insurance is preferred by the export firms to protect themselves from payment risks, both political and commercial. The export credit insurance thus offers a protected environment to export firms to expand their overseas business without any fear of payment risks. In order to provide export credit insurance support to Indian export firms, the Government of India set up the ‘Export Credit Guarantee Corporation of India Limited/ECGC’.

Export Credit Guarantee Corporation of India Limited ECGC is a Government of India enterprise offering export credit insurance facilities to export firms and banks in India. In terms of coverage of national exports, ECGC is the seventh largest credit insurer of the world. The present paid up capital of the ECGC is Industry. The board of directors of ECGC manages the affairs of the company having a representation of the Government, Reserve Bank of India, banking, insurance and export community. Over the years, ECGC has introduced various export credit risk insurance products to meet the upcoming requirements of the Indian exporters and commercial banks.

Historical background The need for export promotion started immediately after the country’s Independence in 1947. In 1953, during the meeting of the export advisory council, a proposal for initiation of an export credit guarantee scheme was put forward. The Ministry of Commerce & Industry went through the proposal in depth and analysed in details the pros and cons of the Export Credit Insurance Scheme. It was the year 1955 when a revised draft proposal on the scheme was presented to the export advisory council. Further to a debate on the revised draft proposal, Shri T.T. Krishnamachari, then Finance Minister in Pandit Nehru’s cabinet, appointed a special committee under the chairmanship of Shri T.C. Kapur to explore the feasibility of setting up an effective organisation to offer insurance against export credit risks. The Government appreciated and accepted the recommendations of the Kapur Committee and gave green signal to the formation of Export Risk Insurance Corporation (ERIC). ERIC came into inception on 30 July 1957 in Mumbai as a private limited company. The company was entirely state lakh. Shri Ratilal M. Gandhi was appointed as the first chairman, and Shri T.C. Kapur took the position of the first managing director of the corporation. Shri Morarji Desai, Union Commerce Minister, inaugurated ERIC and the first policy was issued by ERIC on 14 October 1957. For the period 1962–64, after introduction of insurance covers to banks, ERIC’s name was changed to Export Credit & Guarantee Corporation Ltd., in 1964. To bring the Indian identity in the name, ECGC was renamed again, in 1983, as Export Credit Guarantee Corporation of India Ltd. (Exhibit 8.2).

192 Export Import Management Exhibit 8.2 ECGC tying up with Export Credit Insurance Agencies of BRICS Countries

Export Credit Agencies of BRICS:

Source: http://www.thehindubusinessline.com/economy/ecgc-signs-pact-with-brics-countries-export-credit-insurance-agencies/article6217173.ece, accessed on 9 February 2017

Functions of ECGC ECGC is essentially an export promotion organisation, aiming to improve the competitive capacity of Indian export firms by giving them credit insurance covers comparable to those available to their competitors in most other countries. It keeps its premium rates at the lowest level possible and provides a range of credit risk insurance covers to protect exporters against loss in export of goods and services. It also offers guarantees to banks and financial institutions to enable exporters obtain better facilities from them. Apart from the services mentioned above, ECGC offers overseas investment insurance in the form of equity or loan to Indian firms investing in joint ventures outside India. Following are the main facilities offered by ECGC: ECGC protects the export firms against the payment risks by offering insurance It guides the export firms in export related activities It provides detailed information of different countries on the basis of its own credit ratings ECGC helps the export firms in obtaining finance from financial institutions Export firms can recover their bed debts with the help of ECGC. Information on credit worthiness of the overseas buyer is also made available by ECGC.

Exporter Co-Insurer It is customary in credit insurance to keep the insured share at a small percentage of the risk. ECGC normally pays a maximum of 90 per cent in case of losses due to political or commercial risks. In case of loss due to repudiation of contractual obligations by the buyer, ECGC indemnifies the export

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firm up to 90 per cent of the loss if final and enforceable decree against the overseas buyer is obtained in a competent court of law in the buyer’s country. ECGC at its discretion may waive legal action, where the corporation is satisfied that such legal action is not worthwhile, and in the event of loss are indemnified up to 60 per cent recoveries made after payment of claim are shared with the ECGC in the same proportion in which the loss was borne.

Whole Turn over Principle The corporation wishes for a fair spread of the risks insured. Therefore, an export firm has to insure all the shipments that may be made by them during the next 2 or 4 years, except those made against advance payment or irrevocable letters of credit confirmed by banks in India. Exclusion of shipments are however possible where the items are not of an allied nature.

How to obtain Policy To obtain a policy of the corporation, an intending export firm needs to fill in a proposal form available with all ECGC offices and submit it to the nearest office. After examining the proposal, ECGC sends an acceptance letter to the firm stating the terms of its cover and premium rates.

Maximum liability Maximum liability is the limit up to which ECGC accepts liability for shipments made during the period of the policy, or where the policy is issued for four years for shipments made in each of the policy years. It is advisable for export firms to estimate the maximum outstanding payments due from overseas buyers at any time during the policy period and to obtain the policy with maximum liability of equal value. The maximum liability fixed under the policy can be enhanced subsequently if required.

Declaration of shipments and Payment of Premium The premium rates are closely related to the risks involved and vary from country to country to which goods are exported and also with the payment terms. An export firm which has taken out a shipment’s policy has to send, by the fifteenth of each month, a declaration of shipment in the previous month in the prescribed Form Number 203. An export firm which obtains a contract policy needs to send a declaration of all outstanding contracts immediately after the policy is issued. Thereafter it has to send a monthly declaration of contracts concluded and shipments made by the firm during the previous month.

Drawee-wise Credit limit Credit limit is the limit up to which a claim can be paid by ECGC under the policy for losses on account of commercial risks. As commercial risks are not covered, in the absence of a credit limit export firms need to apply to ECGC for approval of credit limit through banks and credit information agencies. On the basis of credit information and its own experience, ECGC fixes suitable credit limits on overseas buyer/import firms.

Restricted Cover Countries Where payment risk is too high in a country, ECGC provides cover to such countries on a restricted basis. Policy holders intending to export to such countries are required to obtain specific approval of

194 Export Import Management ECGC for each shipment / contract or series of shipments/contracts, on payment of specific approval fees. No cover is available for political risk in such countries unless prior approval has been taken.

Exchange transfer delay If the proceeds of shipment are held up due to foreign exchange shortage in the buyer’s country, ECGC considers the claim only after the waiting period (as applicable for the country concerned), is over. Exchanged transfer delay claim has to be made with documentary proof to the effect that the buyer has: made the payment in local currency complied with all exchange control regulations necessary to effect transfer of payments

Debt recovery Receipt of claim from ECGC does not relieve an export firm from obligations to the Exchange Control Authority for recovering the amount from the overseas buyers. In simple words, we can say that payment of claim by ECGC does not relieve an export firm of its responsibility for taking recovery action and realising whatever amount is to be recovered from the outside market. The export firm must therefore, in consultation with ECGC, take prompt and effective steps for recovery of the debt. For its part, ECGC helps the export firm by providing the name of a reliable lawyer or debt collecting agency and by enlisting the help of India’s commercial representative in the buyer’s country. All amounts recovered, less recovery expenses, are to be shared with ECGC in the ratio in which the loss was originally shared.

LO3 Review various ECGC schemes available for export firms

EXPORT CREDIT GUARANTEE CORPORATION (ECGC) SCHEMES The covers issued by ECGC can be divided broadly into four groups: (i) Standard Policy or Shipment (Comprehensive Risk) Policy, (ii) Specific Policies, (iii) Financial Guarantees, (iv) Special Schemes.

Standard Policy or Shipment (Comprehensive Risk) Policy (SCR) Shipments (Comprehensive Risks) policy, which is commonly known as the ‘Standard Policy’, is the policy which is ideally suitable to cover risks in respect of goods exported on short term credit, i.e., credit not exceeding 180 days. The standard policy covers only the post shipment risks, including both commercial and political risks from the date of shipment. It is issued to export firms whose anticipated export turnover for the next 12 months is more than

Risks Covered under the standard Policy Under the Standard Policy, from the date of shipment, the following risks are covered: 1. Commercial Risks: Commercial risks include: Insolvency of the buyer. Failure of the buyer to make the payment within a specified period, normally four months from the due date. Buyer’s failure to accept the goods, subject to certain conditions.

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2. Political Risks: Different political risks covered under the Standard Policy are: Restrictions imposed by the government of the import firm’s country or any other action by its government resulting in delay or blocking the transfer of payment to the foreign firm. Outbreak of war, civil war, civil disturbance or revolution in import firm’s country. New restrictions on import or cancellation of an import licence in import firm’s country. Any diversion of voyage outside the country resulting in additional expenses not recoverable from the import firm. Any other loss incurred by the export firm not covered under the general insurance when the reason for such loss was beyond the control of both export and import firm.

Risks not Covered under the Policy The Standard Policy does not provide cover for the losses due to the following risks: Commercial disputes by the overseas buyer, unless the export firm obtains a decree from a competent court of law in the buyer’s country is his favour. Cause inherent in the nature of the exported goods. Buyer’s failure to obtain necessary import or exchange authorisation from the authorities in his country. Insolvency or default of any agent of the export firm or of the collecting bank. Loss or damage to goods which can be covered by commercial insurers. Exchange fluctuation.

shipment Covered under standard Policy This Policy provides cover to all the shipments that may be made by an export firm, on credit terms during a period of the next 24 months. The export firm has to get the insurance approved by the policy for each and every shipment that is made by it in the next 24 months on DP, DA or open delivery terms to all overseas buyers/import firms other than his own associates. It is to be noted here that the Standard Policy cannot be issued for selected shipments, selected buyers or selected markets. Following are some important aspects to get the insights of the Standard Policy: Shipments against letters of Credit: Unless a bank in India gives confirmation to the exports, payment under irrevocable letters of credit are subject to political risks. An export firm can either obtain political risks cover only, or can even get a cover for comprehensive risks, i.e., for all political risks and the risk of insolvency or default of the bank in opening the irrevocable letter of credit. In both the cases, ECGC will provide the cover only if the export firm gives consent to get all the shipments made against the irrevocable letter of credit covered under the Policy. It must be noted that cover is not available for select transactions, as mentioned earlier. Shipments to associates: Foreign buyers/import firms in whose business the export firm has a financial interest are treated as associates. Usually such associates are not covered under the Policy. However associates can get a cover against the political risks at the option of the export firm. If the associate is a public limited company, in which the export firm's shareholding does not exceed 40 per cent, cover can also be provided for insolvency risks in addition to the political risks.

196 Export Import Management Shipments on Consignment basis: In certain cases, shipments are made to an overseas agent under an agreement where the agent will receive the goods as an agent of the export firm and remit the proceeds after the goods are sold by him. Such transactions are kept away from the scope of the policy. However, a cover against political risks can always be provided. But if goods are sold to ultimate buyers on credit terms, comprehensive risk cover is available for such buyers. Shipments made by air: In the cases where shipments are made by air, the buyers/import firms are usually able to obtain delivery of the goods from the airlines, before making payment of the bills or accepting them for payment, as the case may be. Earlier such shipments were covered only if the export firm was holding an appropriate credit limit on open delivery (OD) terms and had paid premium at the higher rates applicable for OD. Later, ECGC changed the provisions and decided that credit limits sanctioned under DA would be valid for OD also. Moreover, for shipments made after 1 April 2003, the premium rates for DA were applicable to OD also. As a result, shipments by air are now covered by the standard policy provided the export firm holds a valid credit limit under DA and has paid premium at the rates applicable for the relevant credit period under DA. additional Cover for Shipments to government buyers: The policy offers cover against political risks for all shipments made to government buyers. Here, ECGC considers the following entities as government buyers: A department of the Central Government A government body like a board, state government, municipality or government owned corporation companies If the performance of the contract is guaranteed by the Central Government When a country falls in the list of restricted cover countries, the corporation's specific approval is required by the export firm for getting the political risk covered under the standard policy. However, this cover does not protect the policy holder from commercial risks like default or non-acceptance of goods. If an export firm wishes to cover the commercial risks also, then it has to write to the corporation asking that risk number (XI) described in the policy also be covered. In its letter, the export firm provides information about the name and address of the buyer/import firm, the status of the buyer and the details of the contract also. Contract Cover: As discussed above, the standard policy offers cover only for the postshipment stage. However there is no policy available that covers the pre-shipment losses which may be incurred by an export firm due to failure in exporting of goods already manufactured or purchased, for reasons like ban on export of the item, restrictions on import of the item into the buyer’s country or war, civil war, etc. It is also true that the risk is very low in respect of raw materials, primary products, consumer goods or consumer durables which can easily be resold. But if the export consignment includes an item which is manufactured to non-standard specifications of a buyer/import firm, a cover can be provided for the pre-shipment risks by adding an endorsement to the standard policy. Shipments made on Credit exceeding 180 days: The policy also provides cover for the shipments involving a credit period not exceeding 180 days. However, in exceptional cases, cover

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may be granted for shipments with longer credit periods, subject to the condition that such longer periods can be justified by the export firm for the specific export items concerned.

Specific Policies Specific Policies are issued separately for each specific contract, and cover risks normally from the date of contract. ECGC provides for an insurance cover named ‘Construction Works Policy’ to provide cover to an Indian contractor who executes a civil construction job abroad (details of construction works policy will be shared subsequently in the chapter). Specific Policies, beside the risks covered under standard policies, are issued to meet the specific requirements of export transactions. As discussed earlier, the Standard Policy is a whole turn-over policy designed to provide a continuing insurance for the regular flow of an export firm’s shipment which normally would not take more than 180 days for liquidation. Contracts for export of capital goods or turnkey projects, construction works, or rendering services abroad are not of a repetitive nature. Therefore such transactions need a case to case examination by ECGC. These transactions involve medium/long-term credits and are insured by ECGC on a case-to-case basis under Specific Policies. Specific Policies are designed to protect Indian export firms against payment risks involved in the following cases: Export on deferred terms of payment Services rendered to foreign parties Construction works and turnkey projects undertaken abroad All contracts for exports on deferred payment terms exceeding for turnkey projects and construction works abroad need to get prior clearance of the group consisting of representatives from RBI, EXIM bank and ECGC. The applications for this purpose are to be sent to EXIM bank through the export firm’s bank. In principle, clearance at the working group enables the export firm to get necessary facilities from the institutions concerned. Project exports include the export of capital goods on deferred payment conditions and execution of turnkey projects, contracts of construction works, and also any contract of rendering services. These transactions are not repeated by the firms and generally involve long or medium-terms credit. Therefore the insurance covers offered by ECGC are transaction-specific which are offered under specific policies. As discussed above these contracts are of high value involving longer credit periods, hence the country’s political risks that may affect such transactions are more unpredictable. Most often these contracts are financed by international financial institutions and payments due under these contracts are secured by a bank guarantee. Sometimes a country’s government or central banks also provide bank guarantees for payments due under these contracts. However, such bank guarantees do not mitigate the political risks like war, civil disturbances, exchange transfer delay etc. Therefore the insurance cover offered by ECGC is very useful to protect the payment risks of export firms. ECGC offers following types of covers: To cover supply contracts and turnkey projects specific contract/shipments policy can be taken. This policy can be used for covering only political risks or for covering comprehensive risks i.e., both commercial and political risks. For covering a construction contract, a ‘Construction Works’ Policy can be obtained. This policy can be either for political risks alone or for comprehensive risks. The Comprehensive

198 Export Import Management Risks Policy provides protection against commercial risks such as insolvency of buyer, protracted default, non-acceptance of goods shipped in addition to covering political risks of war, civil war, exchange transfer delay etc. The Political Risk Policy, on the other hand, provides protection against political risks. For covering services contract, which involves only technical and/or professional services, a ‘Services Policy’ can be obtained. This can be either for political or comprehensive risks. In addition to the policy covers which are issued to export firms, ECGC also extends its guarantee support to banks in India against both funded and non-funded facilities to project export firms. ECGC’s approval of project exports and services contracts is based on the following aspects: (i) The Capacity of the Project export firm to Carry out large value Contracts—technical, professional, and managerial, and their past experience in the line of business. (ii) Country to which the export is to be made—stability of political set-up/government, soundness of economy, payment records, relations with IMF, World Bank and other international financial institutions and donor countries. (iii) Overseas Contract/Project—value, type of project, whether cleared by local authorities, profitability. (iv) Import firm/buyer/employer—private/government. (v) Payment terms and security—rate of interest for deferred receivables. (vi) eCgC's underwriting Policy on the Country—ECGC’s experience, whether any transfer delay experienced. (vii) berne union experience—whether the credit period offered is in line with Berne union understanding. (viii) Reinsurance back-up—available or not. (ix) Whether there is a need for covering the contract under ‘National Export Insurance Account’ set-up by the Government of India.*

Types of specific Policies Specific Shipment Policy–Short Term (SSP–ST)

Unlike Standard Policy, SSP–ST provides cover to Indian export firms against commercial and political risks involved in export of goods on short-term credit not exceeding 180 days. Export firms can take cover under these policies for either a shipment or a few shipments to a buyer under a contract. These policies can be availed by: (i) exporters who do not hold SCR Policy (ii) exporters having SCR Policy Specific Contract Policy

Specific Contract Policy can be obtained by export firms that have secured contract for turnkey projects, EPC contract or any other contract which involves supply of capital goods and services for erection and commissioning of the project. The cover under the policy provides protection against non-receipt of payments due to commercial and/or political risks. Thus Specific Contract Policy may *

Adapted from projectexports.com

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cover comprehensive risks i.e., both commercial and political risks. This policy provides cover from the date of contract. Losses that may be sustained by an export firm at the pre-shipment stage due to frustration of contract are covered under this policy, in addition to the cover provided by the shipment policy. Specific Services Policy

When Indian firms render services to foreign parties, viz. technical or professional services, hiring or leasing, they are also exposed to payment risks similar to those involved in the export of goods. Specific services policy provides cover to the contracts under which only services are to be provided. The cover offers protection to the Indian export firms against payment risks involved in rendering services to the foreign buyers. A wide range of services like technical or professional, hiring or leasing are covered under these policies. ECGC has two policies under this category: one covering comprehensive risk and the other covering political risks only.

Financial Guarantees Financial guarantees are required by the banks in India to protect them from risks of loss involved in their extending financial support at pre-shipment and post-shipment stages. Export firms require adequate financial support from banks to carry out their export contracts. ECGC protects the banks from losses on account of their lending to the export firms. The financial guarantees also cover nonfund based facilities that are extended to export firms. ECGC provides financial guarantees to the banks for five purposes, which are: (i) Packing credit guarantee under the whole turn over pre-shipment credit guarantee, (ii) Post-shipment export credit guarantee under (ECIB-INPS), (iii) Export finance guarantee, (iv) Export performance guarantee, and (v) Whole turnover pre-shipment and post-shipment credit guarantee.

(i) Packing Credit Guarantee Timely and adequate credit facilities at the pre-shipment stage are essential for export firms to realise their full export potential. Export firms may not, however, be able to easily obtain such facilities from their bankers for several reasons. Some of the reasons may be that the export firm may be relatively new to the export business, the extent of facilities needed by it may be out of proportion to the equity of the firms or the value of collateral offered by the export firm is inadequate. To address all such issues, the Packing Credit Guarantee of ECGC helps the export firms to obtain better and adequate facilities from their bankers. The guarantees assure the banks that if an export firm fails to discharge its liabilities to the bank, ECGC would make good a major portion of the bank’s loss. Here the bank is required to be co-insurer for the remaining loss. eligibility: The Packaging Credit Guarantee is available to all export firms for those loans which are taken by the export firm for manufacturing, processing, purchasing or packing the goods to be exported against a firm order or letter of credit. The cover under this guarantee can also be taken by the export firms which have taken pre-shipment advance from the bank to meet the preliminary expenses for the export of service or construction work outside the country under a contract. For obtaining packaging credit guarantee, the letter of credit or export order is not required to be produced if the advance granted by the bank was released to the party in accordance with the instructions of RBI issued in this regard.

200 Export Import Management (ii) Post-shipment Export Credit Guarantee under (ECIb-INPs) Packing credit sanctioned to an export firm is treated as repaid once the export firm effects the shipment and submits all required export documents to the bank. If the export firm wishes to continue the credit facilities till the value of shipment is realised from the foreign buyer/import firm, the export firm needs to avail of post-shipment credit. The post shipment credit guarantee offers protection to banks against non-realisation of export proceeds and the resultant failure of the export firm to repay the advances availed. Post-shipment finance provided to the export firm by banks through purchase, negotiation or discount of export bills or advances against bills sent on collection basis qualifies for this guarantee. It is necessary, however, that the export firm concerned should hold suitable policy of ECGC to cover the overseas credit risks. Individual post-shipment credit guarantee is also available for finance granted against L/C bills, even when an export firm does not hold an ECGC policy, provided that the export firm makes shipments the highest amount outstanding on any day during the month, and 75 per cent of loss is covered under the policy for the individual post-shipment guarantee. Prior approval of the corporation is required for granting advances against bills under letter of credit or confirmed order if such bill/order is issued by the bank/buyer in the country placed under restricted cover. Post-shipment credit guarantee with a higher percentage of cover at a reduced rate of premium is also available on whole turnover basis. Under whole turnover post-shipment credit guarantee, the percentage of cover is as high as 90 per cent for those export firms which are also holding ECGC policy; while the cover available to non-policy holders is limited to 65 per cent only. If advances against L/C bills are also covered under the guarantee, a premium of 5 paisa per month is charged for every eligibility: Any bank or financial institution which is an authorised dealer in foreign exchange is entitled to obtain the individual post-shipment export credit cover in respect of each of its export firm’s clients who is holding the standard policy of ECGC without any exclusion. The guarantee remains valid for one year. All post-shipment advances given through purchase, negotiation or discount of export bills or advances against bills sent on collection are covered under post-shipment credit guarantee. The protection under the guarantee is available against losses that may be incurred in extending postshipment advances due to protracted default or insolvency of the exporter-client limited to a maximum liability of 75 per cent of the post-shipment limits of the account. Obligations of the bank: The bank holding the post shipment credit guarantee is required to submit a monthly declaration of the advances granted and pay the premium before 10th of the succeeding month. The bank has to apply for approval of the corporation for extension of the due date for an additional 180 days, if required. It is the responsibility of the bank to report the default within four months from due date or extended due date of advances, if not recovered and claim is to be filed within six months of the report of default. The bank also has to ensure that recovery action is initiated after payment of claim and the recovered amount is shared between the bank and the corporation.

(iii) Export Finance Guarantee Export finance guarantee covers post-shipment advance granted by banks to export firms against duty draw back etc. If a bank finances an overseas project and provides a foreign currency loan

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to the contractor, it can protect itself from the risk of non-payment by the contractor by obtaining export finance (overseas lending) guarantee. The maximum liability undertaken under export finance guarantee is limited to 75 per cent of the post-shipment limit sanctioned to the account. Under this scheme protection is provided against losses that may be incurred in extending postshipment advances against incentives due to protracted default or insolvency of the export firm’s client. Here advances against incentives such as cash assistance, duty drawback, etc., receivable at the post-shipment stage are admitted. eligibility: All the banks authorised to deal in foreign exchange are eligible to obtain the export finance cover in respect of their export firm’s client who has been classified as a standard asset and whose CR is acceptable to ECGC. The cover is provided for 12 months. Banks having Export Credit Insurance for Banks (ECIB-WTPS) are eligible for concessionary premium rates and higher percentage of cover as applicable. Obligations of the bank: The bank has to send to the corporation a monthly declaration of advances granted and payment of premium before 10th of the succeeding month. Approval of the corporation for extension of due date beyond 360 days (from the due date) has to be obtained by the bank seeking cover under this guarantee. Any default has to be reported within 4 months from due date or extended due date of advances, if not recovered, filing of claim is to be made within 6 months of the report of default. The bank has to initiate recovery action after the payment of claim by ECGC and subsequently the recovery is to be shared between the bank and the corporation.

(iv) Export Performance Guarantee Bank guarantees are also required to be furnished by the export firms to the customs, central excise, or sales tax authorities for the purpose of clearing goods without payment of duty or to claim exemption from tax for goods procured for exports. Export firms also furnish guarantee to commodity boards, state trading corporations, minerals and metals trading corporations or recognised export houses. An export firm desirous to quote for a foreign tender usually is required to furnish a bank guarantee for bid bond. If the firm wins the contract it may have to furnish bank guarantees to foreign buyers/import firms to ensure due performance, or against advance payment, or in lieu of retention money, or to a foreign bank where the export firm has to raise overseas finance for its contract. Thus it is clear that export firms are called upon to execute bonds duly guaranteed by an Indian bank, at various stages of international trade. To provide protection to banks which issue the above type of guarantee, ECGC provides export performance guarantee to the banks issuing guarantees to export firms for various purposes. Export performance guarantee gives counter guarantee to the banks which issue the above referred guarantees. It protects the banks against losses that it may suffer, on account of the guarantees given by it, on behalf of the export firms. eligibility: Bank guarantees are issued in support of export obligations to EPCs, CBs, STC, MMTC or recognised export houses, bid bond, performance bond, customs, central excise and sales tax authorities, L/Cs opened for purchase/import of raw materials in respect of export transactions. For the banks that hold ECGC Whole-turnover Packing Credit Cover (ECIB-WTPC), cover under EP is provided for all their standard accounts, irrespective of credit ratings. On the other hand, for other banks cover is considered only for standard accounts with acceptable credit ratings. The period of the cover is decided as per the period of the bank guarantee.

202 Export Import Management Under export performance guarantee, protection is offered against the losses that the bank may suffer on account of bank guarantees given by it on behalf of export firms and due to protracted default or insolvency of the exporter-client. Maximum liability borne by the corporation is limited to 75 per cent of the core values of export. Obligations of the bank: The premium for export performance guarantee is to be paid in advance. For banks seeking an extension in the period of the bank guarantee under the scheme, approval of the Corporation has to be obtained in advance. If the export firm fails to meet the payment as and when the guarantee is invoked or when it falls due under L/C, necessary steps are to be taken for recoveries, including recall of advances and institution of legal proceedings. The bank has to report to the corporation any default within 4 months from due date or extended due date of advances, if not recovered. The claim for default must be filed within 6 months of the report of default. It is to be remembered that the bank has to initiate the recovery action after payment of claim and the recovered amount is to be shared between the corporation and bank in a proportion as agreed.

(v) Whole Turnover Pre-shipment and Post-shipment Credit Guarantee Whole Turnover Pre-shipment Credit Guarantee (WTPCGS)

Under whole turnover pre-shipment credit guarantee scheme (WTPCGS), banks provide packing credit to export firms having export orders / letters of credit, for procuring raw materials, manufacturing, processing, and shipping the goods under order / LC. This scheme covers all the pre-shipment credit granted by a bank to an export firm. This is the most popular form of guarantee offered by the corporation because of the fact that the packing credits generally clean advances involving relatively higher risks than that of post-shipment advances extended in the form of purchase or discount of bonafide commercial bills of exchange. The cover provided by ECGC under this category is 75 per cent of the default. However for perishable goods the cover available is limited to 66.67 per cent. Credit facilities under packing credit sanctioned to the bank’s constituents are covered automatically up to the limit of Whole Turnover Post-shipment Credit Guarantee Scheme

The whole turnover post-shipment guarantee scheme of the ECGC provides protection to banks against non-payment of post-shipment credit by export firms. The scheme covers post-shipment credit/advance given by the banks to the export firms who have obtained shippers policy with drawee-wise limit. The scheme is also available to export firms that have not taken shippers policy. The scheme provides an option to banks to cover LC bills as well. Banks may, in the interest of export promotion, consider opting for the whole turnover post-shipment Policy. Whenever a bank sanctions a credit facility to an export firm under this scheme, the same is covered automatically under whole turn over post-shipment credit guarantee scheme WTPSG. There is no stipulation regarding shipper’s policy to be taken by the export firm in order to be covered under this scheme. The bank also has an option to cover LC transactions under the guarantee. If the option is exercised they have to include or cover all such LC transactions without any exclusion. The percentage of cover under this guarantee is 85 per cent for policy holder and 60 per cent for non-policy holder. the available cover for policy holder is 90 per cent and non-policy holder 65 per cent.

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As the main objective of post-shipment guarantee is to benefit the banks, the cost of premiums in the whole turnover post-shipment guarantee taken out by a bank is absorbed by the bank itself, and not passed on to the export firms. However banks must initiate the realisation efforts and should not slacken their efforts towards realisation of their dues against long outstanding export bills. Banks have to take prior permission from ECGC for extension of period beyond 180 days of realisation of export proceeds period for reporting and submission of claims. A report of default is also to be made by banks under the guarantee within four months from the due date or extended date as the case may be, or within one month from the date of recalling the amount due from the concerned export firm by the insured, or subsequent claim under the policy should be made within six months from the report of default.

special facilities to small scale Exporters To enable and encourage the small-scale export firms to participate to a greater extent in the export

firms through the following, which are qualified for small scale export status. Cooperative of artisans Cooperatives or associations or consortia of small scale industries Handloom and handicrafts export corporation, or state export corporation. State small scale industries corporation National small industries corporation special schemes

Special Schemes There are three special schemes: (i) Transfer Guarantee, (ii) Overseas Investment Guarantee, and (iii) Exchange Fluctuations Risk Cover.

(i) Transfer Guarantee Transfer guarantee is meant to protect banks which add confirmation to Letters of Credit (L/c) opened by foreign banks, insurance cover for buyers credit and lines of credit, and Exchange Fluctuation Risk Insurance. Under this scheme a bank in India adds its confirmation to a foreign letter of credit and binds itself to honour the drafts drawn by the beneficiary of the letter of credit without any recourse to him, provided such drafts are drawn strictly in accordance with the terms of the letter of credit. A letter from ECGC guarantees that a foreign buyer's payment to an export firm is received on time and for the correct amount. In the event that the foreign buyer is unable to make payment on the purchase, the bank will cover the full or remaining amount of the purchase. The confirming bank suffers a loss if the foreign bank fails to reimburse it with the amount paid to the export firm due to political risks such as war, transfer delays, or moratorium. The transfer guarantee seeks to safeguard banks in India against losses arising out of such risks.

204 Export Import Management (ii) overseas Investment Insurance ECGC has developed a scheme for providing protection for Indian investments abroad. Any investments made by way of equity capital or untied loan for the purpose of setting up or expansion of overseas projects are eligible for cover under the investment insurance. Under this scheme, ECGC offers protection for joint venture schemes for participating in turnkey projects from India, and in the investment of export firms for capital participation in overseas joint venture projects. Both the investment in cash or in the form of exports of Indian capital goods and services are covered under the scheme. The cover is available for the original investment with annual dividends and interest payable. The risks of war, expropriation and restriction on remittances are protected under the schemes. As the investor keeps the control of the management of the joint venture, no cover for commercial risks is provided under this scheme. For investment in any country to qualify for investment insurance, it is preferred that there is a bilateral agreement protecting the investment of one country in the other. ECGC sometimes may consider providing cover in the absence of any such agreement provided the general laws of the country afford adequate protection to the investments. The period of insurance cover generally does not exceed 15 years. In case of projects involving long construction periods, cover may be extended for a period of 15 years from the date of completion of the project subject to a maximum of 20 years from the date of commencement of the investment. Amount insured is reduced progressively in the last five years of the insurance period.

(iii) Exchange Fluctuation Risk Cover The exchange fluctuation risk cover provides protection to export firms involved in the trading of capital goods, civil engineering contractors and consultants. This scheme is of benefit where export firms often receive payments over a period of years for their exports, construction works or services. If payments for the exports are to be received in a foreign currency, which is open to exchange fluctuation risks, then the scheme does not cover deferred payments. Exchange fluctuation risk cover is available for payments scheduled over a period of 12 months or more, up to a maximum of 15 years. At the stage of bidding itself, an export firm/contractor can obtain exchange fluctuation risk (bid) cover. The basis for cover is a reference rate agreed upon. The reference rate can be the rate prevailing on the date of bid or the rate approximating it. If the bid is successful, the export firm/contractor has to obtain exchange fluctuation (contract) cover for all payments due under the contract. The reference rate for the contract cover will be either the reference rate used for the bid cover or the rate prevailing on the date of contract, at the option of the exporter/contractor. If the bid is unsuccessful, then 75 per cent of the premium paid by the export firm/contractor is refunded to him. Construction Works Policy

Construction Works Policy offers a cover to the Indian contractors executing a civil construction work outside the country. ECGS has evolved two different types of policies for the contracts where the other parties are a government buyer and a private buyer. The policy available for the contracts with an overseas government buyer also covers political risk; while the political risk under the contracts with any other private party are covered by the policy only if the payments are guaranteed by a bank or covered by L/C.

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features of Construction Contracts: Following are the distinguishing features of a construction contract: Throughout the period of contract, between one billing period and another, the contractor keeps raising the bills at regular intervals for the value of work completed; The bill are admitted for payment under the scheme only when the raised bills are certified by the consultant or supervisor appointed by the employer for this purpose; and The bills raised by the contractor are not considered as the conclusive evidence of the debt as according to the terms of contract some amount may be deducted against the penalties imposed by the employer or against other adjustments on various counts. Computation of Premium Rate: It is the classification of the foreign party’s country that decides the premium rate for the policy. The corporation quotes the payment terms only on request by the party. On the basis of the estimated contract values, the rate of premium payable to the corporation is decided. The premium is paid in advance to the corporation. It is the duty of the contractor to notify any subsequent changes taking place in the estimated contract value. On receiving such information, the corporation makes necessary adjustments in the premium. Risks Covered: Under the construction works policy, 85 per cent of the losses sustained by contractor due to the following risks are covered: Insolvency of the foreign party when the other party is a non-government entity; Failure of the foreign party to pay the amounts that become payable to contractor under the terms of the contract, including any amount payable under an arbitration award; Restrictions on transfer of payments from foreign party’s country to India after it has made the payments in local currency; Failure of the contractor to receive any sum due and payable under the contract for reasons of war, civil war, rebellion etc.; The failure of the contractor to receive any sum payable to him on termination or frustration of the contract if such failure is due to specific reasons, such as the difficulty in ascertaining the amount or its due date because of war, civil war, rebellion etc.; Imposition of restrictions on import of goods or materials (not a part of the contractor’s plant or equipment) or cancellation of authority to import such goods or cancellation of export licence in India, for reasons beyond his control; and Interruption or diversion of voyage outside India, resulting in the contractor’s incurring additional handling, transport or insurance charges which cannot be recovered from the other party. Risks not Covered: The risks sustained by following causes are not covered under the Construction Work Policy: Failure of the contractor and/or the foreign party (where the foreign party is not a government) to obtain, issue or deliver any authority necessary under the laws of India or the other party’s country for execution of the project and making payment thereof. Risks which are normally insured with commercial insurers. Insolvency, default or negligence of any agent, seller or sub-contractor.

206 Export Import Management Execution of any work or incurring of any expenses by the contractor after the foreign party defaults in making any payment for a period of 120 days, unless on an application made by the contractor for the purpose within 90 days of such default, where the corporation has agreed to his continuing execution of the contract despite the said default of the other party. Execution of any work or incurring of any expenses by the contractor after the estimated date for completion of the contract provided the corporation has not agreed to such a change in date at the request of the contractor. ascertainment of loss: When a contractor incurs a loss due to an insured risk, he is required to file a claim under the policy. After receiving the claim from the contractor, the corporation ascertains the amount of loss according to the provisions of Clause 16 of the policy. In the cases where the contractor has been executing more than one project with the same foreign party, the amounts paid by the contractor are allocated to the amounts outstanding under all the contracts in the chronological order of the due dates of payment; here it does not matter whether such other contracts were insured by the corporation or not. Payment of Claim: After admitting the claim made by the contractor, the payment is made directly to the bank of the contractor in India having right of lien on the receivables under the contract. However the payment is released only after receiving an undertaking from the contractor that he will take all necessary steps as suggested by the corporation to recover the dues from the foreign party and will transfer the share of corporation after recovery. Along with the undertaking, the corporation may also demand a bank guarantee of the amount equal to the amount of claim. If the contractor fails in taking necessary steps to recover dues from the foreign party, the amount of claim paid by the corporation must be refunded.

LO4 Explain the role of EXIM Bank in promoting export-import business in India

OvERvIEW OF EXIM BANk OF INDIA Export-Import Bank of India (EXIM Bank) is a specialised financial institution wholly owned by government of India. It was set up in 1982 for financing, facilitating and promoting foreign trade of India. EXIM Bank extends Lines of Credit (LOCs) to foreign financial institutions, regional development banks, sovereign governments and other entities outside the country, to enable foreign buyers in those countries to import developmental and infrastructure projects, equipment, goods and services from India, on deferred credit terms. EXIM Bank puts major emphasis on enhancing project exports, the funding options for which have been enhanced with introduction of the Buyer's Credit-National Export Insurance Account (BC-NEIA) programme. The Bank facilitates two-way technology transfer by financing import of technology into India, and investment outside the country by Indian companies for setting up joint ventures, subsidiaries or undertaking overseas acquisitions. To promote hi-tech exports from India, the bank has a special lending programme to finance research and development (R&D) activities of export-oriented companies. In the year 2013, EXIM Bank sanctioned loans of crore as on 31 March 2013.

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Objective of eXIm bank: The main objective of Export-Import Bank (EXIM Bank) is to extend financial assistance to promote the export production in India. The financial assistance provided by the EXIM bank widely includes the following: Direct financial assistance Foreign investment finance Term loaning options for export production and export development Pre-shipping credit Buyer’s credit Lines of credit Re-loaning facility Export bills re-discounting Re-finance to commercial banks Besides the above mentioned facilities, the EXIM Bank also provides non-funded facility in the form of guarantees to the Indian exporters. various Stages of exports Covered by eXIm bank: EXIM Bank provides financial assistance to export firms at different stages of export. Following are such stages for which the bank offers the financing facilities: Development of export makers Expansion of export production capacity Production for exports Financing post-shipment activities Export of manufactured goods Export of projects Export of technology and software

EXIM Bank Initiatives EXIM Bank offers a range of funded and non-funded facilities, guarantees, information and advisory services to support project exports from India. In the CIS region, the Bank has supported a number of Indian project exporters to secure contracts in various sectors including mining, energy, and transportation. EXIM Bank also provides a range of information, advisory and support services to Indian companies to effectively participate in projects funded by multilateral funding agencies such as the World Bank, Asian Development Bank, European Bank for Reconstruction and Development (EBRD). The Bank operates a comprehensive range of financing, advisory and support programmes to promote and facilitate India’s trade and investment with the CIS countries. As mentioned above, the bank extends Lines of Credit (LOCs) to overseas governments, financial institutions, regional banks and other overseas entities, to finance India's exports to those countries. EXIM Bank’s LOC is a riskfree, non-recourse export financing facility available to Indian export firms to promote their export business. Under this arrangement, overseas import firms are required to make an advance payment

208 Export Import Management to Indian export firms, which is usually 10 per cent of the contract value. Upon shipment of goods, EXIM Bank pays the balance amount, which is normally 90 per cent of the contract value, to Indian export firms through negotiating banks in India. The bank also operates LOCs, announced by the Government of India, to the country’s trading partners.

Forms of Financial Assistance provided by EXIM Bank to Indian Companies delayed Payment exports: The bank provides term loans to those export firms who deal with export of goods and services and this enables them to offer delayed credit to the foreign buyers/import firms. This system of deferred credit covers Indian consultancies, technology, and other services. Commercial banks take part in this program either directly or under risk syndication arrangements. Pre-shipment Credit: Indian companies having high involvement in the execution of export activities beyond the cycle time of six months are funded by EXIM Bank. The construction or turnkey project export firms enjoy the provision of rupee mobilisation. Term loans for export Production: EXIM Bank provides term loans to 100 per cent export oriented units, units involved in free trade zones, and software export firms in India. It also works in association with International Finance Corporation Washington, to provide financial assistance to the small scale and medium industrial units in terms of ameliorating the export production capacity of these units in India. The bank also offers funded and non-funded facilities to deemed exports from India. foreign Investment finance: The bank extends financial assistance for equity contribution to the Indian companies who form joint venture with the foreign companies. financing export marketing: EXIM Bank also helps the firms to carry out their export market development in the Indian market.

Financial Assistance provided by EXIM Bank to Overseas Companies foreign buyer’s Credit: The foreign firms are entitled to financial assistance in order to import goods and services from India on deferred payments. lines of Credit: The bank also provides financial assistance to the overseas financial institutions and various government agencies for import of goods and services from India. Re-loaning Options to foreign banks: The foreign banks are entitled to receive funds from EXIM bank in order to provide the same to their clients across the globe for importing goods from India. With a view to help Indian companies in their internationalisation efforts, EXIM bank offers term loans both for equity investment in their ventures outside the country as well as for lending purposes. To create an enabling environment for enhancing two-way flow of trade, investment and technology, EXIM bank has forged alliances/linkages with several institutions in the CIS region. In the CIS region, the bank has supported Indian companies to set up joint ventures, for instance in Kazakhstan, Ukraine and Uzbekistan in the pharmaceuticals sector. EXIM Bank also maintains correspondent relations/ arrangements with banks, export credit agencies and development finance institutions in this region.

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Key Terms Pre-shipment export finance: Pre-shipment loan is provided by banks and financial institutions to an export firm even before the firm has exported goods. Post-shipment export finance: Post-shipment finance is a loan provided by a bank to an export firm after the shipment of goods has happened. export Credit guarantee Corporation of India ltd. (eCgC): Export Credit Guarantee Corporation of India Ltd. is a government of India enterprise which offers export credit insurance facilities to export firms and banks in India. Standard Policy or Shipment (Comprehensive Risk) Policy (SCR): It is commonly known as the ‘Standard Policy’, which ideally suits to cover risks in respect of goods exported on short term credit i.e., credit not exceeding 180 days. Specific Shipment Policy-Short Term (SSP-ST): SSP-ST provides cover to Indian export firms against commercial and political risks involved in export of goods on short-term credit not exceeding 180 days. export finance guarantee: Export Finance Guarantee covers post-shipment advance granted by banks to export firms against Duty Drawback etc. Whole Turnover Pre-shipment Credit guarantee (WTPCgS): Here banks provide packing credit to export firms having export orders/letters of credit, for procuring raw materials, manufacturing, processing, and shipping the goods under order or L/C. The Whole Turnover Post-shipment guarantee Scheme: This scheme of the ECGC provides protection to banks against non-payment of post-shipment credit by export firms. Construction Works Policy: It is designed to provide cover to Indian contractors who execute a civil construction job abroad. export-Import bank of India (eXIm bank): EXIM Bank is a specialised financial institution, wholly owned by Government of India, set up in 1982, for financing, facilitating and promoting foreign trade of India.

In revIew As there could be a considerable time lag between receiving the actual export order and the final payment from the overseas import firm, financial institutions provide loans so as to facilitate export. The export credit is broadly classified as pre- and post-shipment export finance. Pre-shipment loan is basically a working capital loan, whereas post-shipment finance is a loan provided by a bank to an export firm after the shipment of goods has taken place. Export credit insurance is designed to protect export firms from the consequences of the payment risks, both political and commercial, and to help them expand their overseas business without fear of loss. Export Credit Guarantee Corporation of India Ltd. (ECGC) is a Government of India enterprise which offers export credit insurance facilities to export

210 Export Import Management firms and banks in India. The covers issued by ECGC can be divided broadly into four groups: (i) Standard Policy or Shipment (Comprehensive Risk) Policy, (ii) Specific Policies, (iii) Financial Guarantees, and (iv) Special Schemes. Shipments (Comprehensive Risks) Policy, which is commonly known as the Standard Policy, is the policy which ideally covers risks in respect of goods exported on short term credit i.e., credit not exceeding 180 days. Specific policies are issued separately for each specific contract, and cover risks normally from the date of contract. Financial Guarantees are required by the banks in India to protect them from risks of loss involved in their extending financial support at pre-shipment and post-shipment stages. Packing credit guarantee assures the banks that if an export firm fails to discharge its liabilities to the bank, ECGC would make good a major portion of the bank’s loss. The post-shipment credit guarantee offers protection to banks against non-realisation of export proceeds and the resultant failure of the export firm to repay the advances. Export Finance Guarantee covers post-shipment advances granted by banks to export firms against duty draw back etc. Under whole turnover pre-shipment credit guarantee scheme (WTPCGS), banks provide packing credit to export firms having export orders/letters of credit, for procuring raw materials, manufacturing, processing, and shipping the goods under the order/LC. The Whole Turnover Post-shipment Guarantee Scheme of the ECGC provides protection to banks against non-payment of post-shipment credit by exporters. Transfer guarantee is meant to protect banks which add confirmation to Letters of Credit (L/C) opened by foreign banks, insurance cover for buyers credit and lines of credit, and exchange fluctuation risk insurance. Overseas investment insurance offers protection for joint venture schemes for participating in turnkey projects from India, and in the investment of export firms in capital participation in overseas joint venture projects. The exchange fluctuation risk cover provides protection to export firms involved in the trading of capital goods, civil engineering contractors and consultants. Construction works policy is designed to provide cover to Indian contractors who execute a civil construction job abroad. Export-Import Bank of India (EXIM Bank) offers a range of funded and non-funded facilities, guarantees, information and advisory services to support project exports from India. To create an enabling environment for enhancing two-way flow of trade, investment and technology, EXIM Bank has forged alliances/linkages with several institutions in the CIS region.

mulTIple ChoICe QuesTIons 1. _______ is normally given to those export firms which have confirmed export orders in their name in hand. (a) Pre-shipment Export Finance (b) Post-shipment Export Finance (c) Export Finance Guarantee (d) Whole Turnover Post-shipment Guarantee Scheme

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2. Packing credit is granted only when the export firm produces _______. (a) the confirmed order received from the foreign buyer/import firm (b) licence issued by DGFT (Directorate General of Foreign Trade) (c) firm order or irrevocable L/C or original cable/fax/telex message exchange between the exporter and the overseas importer (d) all of these 3. _______ is designed to protect export firms from the consequences of the payment risks, both political and commercial. (a) Pre-shipment export finance (b) Post-shipment export finance (c) Export credit finance (d) Export finance guarantee 4. ECGC normally pays maximum of _______ of losses on account of political or commercial risks. (a) 75 per cent (b) 80 per cent (c) 90 per cent (d) 95 per cent 5. The _______ covers only the post shipment risks and both commercial and political risks from the date of shipment. (a) standard policy (b) specific policy (c) financial guarantees (d) none of these 6. _______ are issued separately for each specific contract, and cover risks normally from the date of contract. (a) Standard Policy (b) Specific Policy (c) Financial Guarantees (d) None of these 7. Unlike Standard policy, _______ provides cover to Indian export firms against commercial and political risks involved in export of goods on short-term credit not exceeding 180 days. (a) SSP-ST (b) Specific Contract Policy (c) Specific Services Policy (d) Financial Guarantee 8. _______ are required by the banks in India to protect them from risks of loss involved in their extending financial support at pre-shipment and post-shipment stages. (a) SSP-ST (b) Specific Contract Policy (c) Specific Services Policy (d) Financial Guarantee 9. The _______ scheme of the ECGC provides protection to banks against non-payment of post-shipment credit by export firms. (a) overseas Investment Insurance (b) Transfer Guarantee (c) whole Turnover Post-shipment Guarantee (d) All of these 10. Under _______, ECGC offers protection for joint venture schemes for participating in turnkey projects from India, in the investment of export firms in capital participation in overseas joint venture projects. (a) Overseas Investment Insurance (b) Transfer Guarantee

212 Export Import Management (c) Whole Turnover Post-shipment Guarantee (d) All of these

ConCepT QuesTIons 1. Write short notes on the following: (a) Pre-shipment Export Finance (b) Post-shipment Export Finance 2. Throw some light on the functions and roles of ECGC in promoting foreign trade in India and providing credit facilities to export firms. 3. What are the different types of covers available to export firms to protect them from various types of risks involved in foreign trade? Discuss in details. 4. Write short notes on the following: (a) Transfer Guarantee (b) Overseas Investment Guarantee (c) Exchange Fluctuations Risk Cover (d) Construction Works Policy 5. What are the major objectives of Export Import Bank of India (EXIM bank)? Discuss in details the various initiatives of EXIM Bank to provide financial assistance to export firms in India.

FurTher readIng Sharda G. Swamy N. Singh C. (2014). Impact of Foreign Banks on the Indian Economy. Working Paper No. 451. IIMB, https://www.iimb.ernet.in/research/sites/default/files/WP%20 No.%20451.pdf Guruprasad M. (2015) Economics for Everyone - India’s Foreign Trade Policy (FTP/EXIM). IIFL.http://www.indiainfoline.com/article/news-top-story/economics-for-everyone-indias-foreign-trade-policy-ftp-exim-115052500326_1.html https://www.ecgc.in/ www.eximin.net

Answers to Multiple ChoiCe Questions 1. (a) 7. (a)

2. (d) 8. (d)

3. (c) 9. (c)

4. (c) 10. (a)

5. (a)

6. (b)

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Exercise Vaishno Pvt. Ltd. is an export company based in Tirupur, South India dealing in knitwear. Tirupur, once an obscure little town in the southern Indian state of Tamil Nadu, had over the years earned a name and goodwill for itself as the knitwear capital of the country, accounting for more than 80 per cent of India’s knitwear exports. The exports from Tirupur have grown multifold in last decade with a compounded growth rate of more than 45 per cent per annum. This is often cited as the testimony to the entrepreneurial spirit of the exporters in Tirupur. around Vaishno Pvt. Ltd. was no exception to this. Since then, the company has been facing a challenge with regards to fluctuations in the value of the Indian Rupee in currency market. The company has to take a decision regarding its currency hedging.

Question 1. Which international trade financing and insurance options are available to Vaishno Pvt. Ltd. to cover the risk of fluctuating currency?

Chapter

State Trading and International Trading Houses

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Learning Outcomes After reading this chapter, you will be able to: LO1 Understand the meaning and role of state trading LO2 Learn about the objectives and major functions performed by International Trading Houses LO3 Know the details of key Indian State Trading Organisations, their objectives and major activities undertaken by them LO4 Describe the entitlement of status of recognised export trading houses in India

INTRODUCTION There is a general presumption in the sphere of international trade that business firms act on the basis of commercial considerations and their decisions are guided by the theories of comparative advantage while expanding their cross-border trade. This argument may not hold true in case of a powerful business firm in a specific market. Such a firm may distort trade and cause economic detriment by using its powerful position in the market. Government also may significantly influence international trade by influencing world trade in an uneconomic direction. While doing so, the government may restrict imports or advance exports to the determinants of foreign manufacturing firms. This is the reason why the drafters of general trade agreements place the state trading enterprises and the government support to private business firms at the same competitive position. This chapter discusses the concept of state trading and major functions and roles performed by international trading houses, and also the key Indian state trading houses.

LO1 Understand the meaning and role of state trading

STaTe TRaDINg There are various types of government participation in foreign trade, all of which can be defined as state trading. However, there is no precise definition of state trading. Early definitions focused

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on state conduct or operations of foreign trade, on governments monopolising foreign trade, and on government ownership of an enterprise. A functional definition gradually replaced these approaches. Kostecki (1982)1 argued that state trading occurs when a government or a government backed agency determines the essential conditions (including prices or quantities) on which exports and imports have to take place. Sorenson (1991)2 picked up on Kostecki’s theme and proposed that the impact exercised by governments over individual transactions is particularly important. He explained that state trading exists when a government, an agency of the government, or an institution granted exclusive rights by the government controls trade or materially affects the conditions of trade on a transaction-bytransaction basis. This definition suggests that the use of tariffs, quotas, and other traditional trade instruments does not constitute state trading, while trade by government-chartered marketing boards with monopolies does. In the centrally planned economies, the entire foreign trade is nationalised and is therefore conducted directly by government departments or government owned business firms. On the other side, there exist other types of countries which are essentially free enterprise economies but export and import of specific commodities are entrusted to government trading organisations or departments. For example, import of raw un-manufactured tobacco is a state monopoly in France, the Government Food Agency of Japan regulates the import, export and internal distribution of rice, wheat and barley, similarly, Japan Monopoly Corporation which is a state body has the exclusive rights of tobacco importation and the Australian Wheat Board has the exclusive rights for exports of wheat. There are many such examples all over the world. The third type of state trading is observed in mixed economies like India. In India, the state participates in foreign trade mostly through government departments. The government owned trading corporations are, however, commercial entities registered under the Companies Act and have the same rights and obligations as any private sector firm.

Objectives of State Trading State trading is one of the most common features of many economies where agriculture is an important sector of trade. Thus, state trading organisations are found in developed countries with significant agricultural trading interests, as well as in agriculture-based developing countries. When these firms emphasise on agriculture in state trading activities, it would seem to indicate governments’ belief that state trading is an appropriate means of implementing agriculture-related policy objectives, such as providing price support for important agricultural products or ensuring food security. In the area of industrial goods, state trading evolved as a by-product of the nationalisation of an ailing industry or as a means of pursuing government policies on products or industries considered to have strategic importance. Main objectives of state trading are to: Make available supplies of essential commodities to consumers at reasonable prices on a regular basis;

1

M. M. Kostecki (ed.), “State trading and the theory of international trade”, in State Trading in International Markets, London: Macmillan. 2 Sorenson, V.L. “The Economics and Institutional Dimension of State Trading”, in Sorenson, Vernon L., and others, editors, State Trading in International Agricultural Markets: Institutional Dimension and Select Cases. International Policy Council on Agriculture and Trade, Washington, DC, Dec. 1991.

216 Export Import Management Ensure that farmers get a fair price of their produce so that there may be an adequate incentive to increase production; Minimise violent price fluctuations occurring as a result of seasonal variations in supply and demand; Ensure uninterrupted supply of such inputs as fertilisers and insecticides so that the tempo of increased production is maintained; Undertake the procurement and maintenance of buffer stock, and their distribution, whenever and wherever necessary; Make arrangements for storage, transportation, packaging and processing; Conduct surveys and provide the required statistics to the government so that it may improve the conditions of the farmers; and Check hoarding, black-marketing and profiteering.

Rationale of State Trading State trading is resorted to for a number of reasons. In a centrally planned economy, foreign trade as a matter of state policy is nationalised. In such countries, foreign trade is conducted by state trading organisations so that the central planning mechanisms function properly. On the other hand, in the developed free enterprise economies, state trading sometimes is practiced as a source of revenue. This is the reason that usually trade in products like alcohol and tobacco is subject to state monopoly. In the same manner, trade in drugs and arms and ammunition is managed through state bodies in the interest of health and national security of the country. State trading in a number of agricultural products is quite popular in most of the economies because state intervention is necessary to avoid fluctuations in the prices and prevent deterioration in the income of the producers of agricultural products. State trading, however, is a more popular practice in the developing economies. The reasons behind this are varied. First, such countries generally do not have adequately developed private sector trading bodies which can effectively participate in international trade and also protect the national interest. The other reason is that the private sector bodies, though possessing adequate trading expertise, are solely motivated by profit considerations. However, it is necessary in the national interest to promote new export items and cultivate new export markets even by sustaining short terms losses. This can only be assured by government bodies having a development role, which are backed by the government so that the financial losses do not hamper the pursuit of long term objectives. The centrally planned economies have emerged as important export markets for a large number of developing countries including India. Therefore it is important that foreign trade of these countries is conducted through state trading organisations. The government trading bodies are in a better position to negotiate with their counterparts in the centrally planned economies. Canalisation of imports: The state not only participates in exports but also facilitates imports. State participation in imports is generally motivated by some important considerations. Firstly, being a bulk purchaser, state trading gets better discount and trading terms. Secondly, since the bulk purchaser will be a monopolist, the possibility that prices of commodities in short supply can be pushed up by competitive bidding by the Indian importers, is eliminated. Thirdly, since the international markets of many importable items are monopolistic, state trading gives rise to countervailing power which may mitigate to some extent the ill effects of the monopolistic market structure.

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Types of State Trading Depending upon the extent of intervention desired by the government, state trading may be partial or complete. Let us discuss the difference between partial and complete state trading. Partial state trading: In partial state trading, private traders and the government co-exist. Private traders are free to buy and sell in the market. The government may impose some restrictions on them, such as declaration of stocks, limits on the stocks which can be held at a point of time and submission of regular accounts. The government enters the market for purchasing commodities directly from producers at notified procurement prices. It undertakes the distribution of commodities to consumers through a network of fair price shops. In this way, government safeguards the interest of both producers and consumers at the same time and keeps a check on the undesirable activities of traders. Complete state trading: The government adopts the extreme form of trading when partial state trading fails to ensure fair prices to producers and makes goods available to consumers at reasonable price. This type of state trading is called ‘complete state trading’. Here the purchase and sale of commodities is undertaken entirely by the government or its agencies. Private traders are not permitted to enter the market for purchase or sale. Under this form of state trading, the government remains the sole purchaser and distributor of the commodity. Complete state trading requires the outlay of huge finance, and the provision of storage facilities at important production and consumption centres. It calls for appointment of efficient men so that the purchase and distribution functions of professional traders may be effectively taken over by a governmental agency. In India, complete wholesale trade in wheat was taken over by the government in 1973, but it was given up in a very short span of time.

LO2 Learn about the objectives and major functions performed by International Trading Houses

INTeRNaTIONaL TRaDINg HOUSeS International or export trading houses exist in a number of countries in various forms and types, known by different names in different countries. Their activities and organisation keep changing according to the historical background and the scenario in which they operate. It also depends on the national priorities and government policies of the country from where the export trading house is operating. Japanese ‘Sogo Shosha’ is one such example, which has evolved organically over time to operate in a manner different from the Indian export houses which came into being comparatively recently as a response to policy initiatives of the government. The Indian export houses, in turn, look quite different from the export management companies of the US or the trading houses of Canada, which grew out of the necessities of their own contexts. However, some similarities and resemblances can always be observed in certain important aspects in the organisational structures of most international trading houses. Such resemblances enable them to be analysed as one generic entity. It is because of some common similarities that it is possible to describe a typical international trading house’s activities and organisation. An International Trading House can be defined as follows: “International Trading Houses are commercial intermediaries specialised in the long term development of trade in goods and services supplied by other parties. They focus on exporting, importing and third

218 Export Import Management country trading as their core activity and use overseas marketing organisation and infrastructure as well as procurement networks to service suppliers and customers.”

As it clear from the above definition that international trading houses serve as commercial intermediaries between suppliers and buyers located in different countries. To this end, they adopt the role of merchants and trade facilitators. As merchants they buy and sell on their own account and earn a margin. There is no rigid pattern followed by the international trading houses as sometimes they procure from local markets to sell in the international market, while on other occasions we may find an international trading house procuring internationally and selling locally or even selling internationally. Some of them may also act as agents most frequently on behalf of the manufacturer or sometimes on behalf of the buyer and earning a commission for their various services. Acting as an agent, the international trading houses do not take title to the merchandise and are responsible for only the possession of the goods. Theses trading houses get deeply involved in trading activities by providing some specific valueadded services to their clients. They are often certified by and registered with their governments or with Chambers of Commerce as organisations equipped with the requisite capabilities for performing their roles. Sometimes they receive special support from their governments. These houses maintain a network outside the domestic market and have experts for sourcing and procurement. They also maintain specialist departments to provide expertise in trade support services. These trading houses are known among their clients for providing essential value-added services economically and they serve foreign customers as well as domestic and foreign manufacturers. They generally operate with low margins on high volumes and make their profits mainly by quick and frequent turnaround of funds.

Services Provided to Manufacturing Firms Trading houses maintain their own databases and establish information networks as well as a presence in cross border markets. These maintained facilities are used continually to scan for global opportunities for the export client firms. They search for demand/supply gaps, locate availability of finance, study the long term plans of organisations and governments, price trends and even political scenarios. Thus they play a key role in monitoring the competition and help the export client firms to decide which product to sell at which location. As discussed above, trading houses vary considerably in their activities and functions. However, typical trading houses provide many of the following services to manufacturers: Customer identification and evaluation: The trading houses collect information about potential foreign customers and their credit worthiness, reliability and reputation. For this purpose, they closely study the overseas customer’s current activities and future plans. The ultimate focus of the trading houses is building relationships of confidence, trust and friendship with the potential overseas customers. Commercial and technical negotiations: We know that trading houses are efficient in making business offers through their marketing organisation by mobilising their well-established communication systems and networks. Because of this reason, the manufacturer makes the techno-commercial offer to the trading house which then negotiates all the terms, secures

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the order, arranges delivery of the goods, pays the manufacturer and obtains the payment from the overseas customer. Vendor development: The trading house also maintain an organisation in the home country which has geographically dispersed regional facilities to facilitate vendor development and procurement. These houses identify, support, and develop manufacturers and also make sure that the long-term arrangements are satisfactorily implemented. Product / Packaging adaptation and technology upgrading: Trading houses keep updating the manufacturers in the home country about developments in foreign countries regarding the technical features of the product, production techniques, design changes and packaging methods. For keeping the domestic manufacturers updated with international developments, the trading houses use their overseas network and specialised product experts who travel very extensively and attend the major international fairs and exhibitions. imports, Particularly of items required for export Production: Trading houses facilitate and support exports as well as imports through their well-established networks spread all over the world. They negotiate favorable terms for the export import client firms because of their capacity to buy in bulk and their wide presence in the global market. This extensively helps manufacturers who often need some imported components and raw materials for export production. Often the trading houses stock these imported goods in customs bonded warehouses and supply to the manufacturer as and when required. Financial arrangements including securing Credits: Since trading houses borrow in bulk from the financial institutions they are able to get it at comparatively low rates of interest and thus help the export/import firms by providing financial assistance with cheaper funds. Trading houses also extend financial assistance to the manufacturer by arranging deferred payments, financial guarantees and advance payments. Counter-trading: Counter-trading by trading houses leverages governmental and sometimes also other imports to generate reciprocity by requiring foreign suppliers to buy products and services from the domestic country. Trading houses handle counter trading very efficiently because they offer the required size, range and infrastructure to deal with diverse requirements of its foreign suppliers, thus offering them a better deal. Such type of counter-trading opens up new and large markets for manufacturers to export their products. Protection against export risks including insurance: The risk involved in international trade is a big factor which inhibits most export firms. Trading houses remain involved on continuous basis in ascertaining and minimising the risks in foreign trade. On the basis of their rich and varied experience as well as expertise in risk management, which no single manufacturer can accumulate, the trading houses with their successful track records get better terms from insuring organisations. Also they have access to expert advice on currency exchange rate fluctuations, thus enabling them to handle these risks as well. ensuring Payments: Collecting payment for the export client firms is a part of the regular service offered by the trading houses. Equipped with vast experience, databases, and information networks, they are able to avoid the problem of bad debts. The trading houses remain in touch with major international credit rating agencies, banks, etc., for keeping an eye on foreign customers. Again, because of their size they obtain these services at low rates.

220 Export Import Management export documentation and shipping: Trade documents must be carefully examined as these are very important to avoid problems in transportation, shipping, clearing customs, obtaining payment as well as handling any subsequent claims. Trading houses have trained staff to handle export trade documentation for the manufacturers in the home country, to help them prepare full proof trade documents. This is one of the main services provided by the trading houses to the manufacturers. They also help the manufacturers in choosing the best modes of transport in terms of cost and quality of service. They can advise to consolidate cargo which may often be going to its own warehouse overseas, thus lowering costs. Managing Crises and disasters: Export activity largely depends on a number of variable factors and many of them are beyond the export firm’s control. This sometimes may lead to unforeseen occurrences, for example the inability of a supplier to deliver at the last moment or an overseas buyer being unable to accept delivery of ordered goods etc. In such cases, the international trading houses provide an alternative buyer or supplier as required to their client firms. dealing with Claims: In many emerging economies and economies in transition, there are bureaucratic hurdles involved in remitting funds abroad to settle claims or to re-import rejected goods. In such cases, trading houses, which are recognised by the government as a trusted organisation with a stake in developing long-term trading, manage to obtain such approvals and permissions with relative ease for the client firms. Because of the commitment of trading houses to international trading on a long-term basis, they earn credibility and a reputation for honouring their commitments, particularly with respect to quality and delivery of goods and services. Trading houses ensure that all the claims are dealt with promptly and efficiently to keep their credibility intact in the international market. after-sale service and spare-parts availability: Where the items to be exported require after sales service, the trading houses also make adequate arrangements for after-sales service for the foreign buyer. They ensure that proper stocking of spare-parts is done and that repairs and maintenance is well looked after before such products are exported. Often it is the trading house itself which creates the facilities in the foreign market for after-sales service. Firms who associate with trading houses are protected from additional expense and effort. Since the trading houses arrange the after-sales service facilities at their disposal, which otherwise would have to be arranged in the manufacturer’s country market. Project exports, Consortia and tender business: Trading houses play an important role when the overseas customers need goods and services from a number of different organisations, often against tenders. Here the trading house undertakes an overall responsibility and subcontracts the supply of various products and services to a number of companies. If necessary, the same service is provided in order to arrange the goods from another overseas company. This is a very useful service offered by trading houses to the manufacturing firms because most of the time, the firms would not even come to know about the tender, particularly if the tender is related to a large project or supply of a variety of products of which the manufacturing firm’s product forms only a small part. Creating distribution networks abroad: Trading houses’ long-term involvement with the export of carefully chosen products to select markets help them to go beyond doing just

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one-off deals. In fact, even at the stage of preparing the market entry strategy for a product, it simultaneously is able to develop long-term plans for selling the product through effective and appropriate distribution channels. The trading house usually chooses suitable locally available channels only. However, for some specific products it creates its own channels including a warehouse for just-in-time delivery to customers, when such arrangements are very expensive for individual manufacturing firms. special relations with the government: In many countries, committed and trusted trading houses work closely with the governments in formulating and implementing the trading objectives and help governments in achieving national goals. There are specific export promotion schemes for extending benefits to small export manufacturers; such schemes can be easily handled by the organisations of trading houses. This is how the trading houses having required expertise and infrastructure can share the administrative and monitoring work of governments. As discussed earlier, the selection of trading houses is done after a detailed verification of track records and other information. The selected trading house can be relied upon for the efficient handling of such tasks.

Selection of Trading House The nature of international trading is such that the trading house, which is the manufacturing firm’s exporting arm, needs to act with considerable independence. Thus it is essential that both have complete trust and understanding between them. So the choice of the trading house is crucial for the manufacturing firm, and vice versa. The name and addresses of the trading houses can be obtained from the government export promotion boards, but it is more important for the manufacturing firm to dig out further information about the trading house. Such information is not normally available in directories. The firm must tap both formal and informal sources to find out about the reputation of the chosen trading house, its track record, its strengths and its limitations before finalising the deal with it. The manufacturing firm must be in a position to specify its needs to the trading house, and also define its objectives and then match these with the attributes of the trading house. The attributes to be considered for this purpose are product / market expertise, types of services offered, quality of management and reputation. Let us now discuss some of the important aspects to be analysed before selecting an international trading house for exporting business. size of the trading house: A large trading house is suitable for a firm which is involved in the business of products where it needs to negotiate favourable terms with the overseas buyer. However, a smaller trading house would be more beneficial to a firm involved in the production of the items where personalised services are important. Product expertise of the trading house: Product expertise is an important qualification of the trading house particularly if the product of the manufacturer is technically sophisticated. Often trading houses are oriented strongly towards a single product group and the firm must choose a trading house whose focus is on products similar to its own. Market orientation of the trading house: Trading houses do not have equal strengths in all markets, and they generally concentrate on a few types of markets depending on their

222 Export Import Management main product orientation. For example, a trading house mainly exporting small-scale projects would develop a deep knowledge of the emerging countries, and may not be appropriate for a firm which would like to export some different types of products. service expertise of the trading house: A trading house’s involvement in a particular product category enables the trading house to provide certain specific services better than others. For example, a trading house which specialises in exporting vehicles and thus has an after-sales service organisation in foreign countries would be a better choice for a firm which also requires after-sales service. However the same trading house may not be of interest for an export firm of flowers. Management’s experience, quality and reputation: There are other important, though intangible, factors which are important for the selection of an appropriate trading house that a manufacturer must bear in mind. These relate to the quality of service and the experience of its management as well as its reputation in the international market. The reputation of the trading house is not only important from the point of view of safeguarding the firm but is also crucial for its success in marketing its product. With respect to quality of management it is not only competence and efficiency that matter but also the trading houses’ philosophy, vision and approach. It strengthens the working relationship between both the parties. interest in the Product: Even if all the above attributes are present in a particular trading house, they may not add the expected value to the product if the trading house is not interested in the product. The firm must particularly check whether the management of the trading house feels good about its product and is confident about its success.

LO3 Know the details of key Indian State Trading Organisations, their objectives and major activities undertaken by them

INDIaN STaTe TRaDINg ORgaNISaTIONS The key Indian state trading organisations are: (1) State Trading Corporation of India Limited (STC), (2) MMTC Limited, (3) India Trade Promotion Organisation Limited, (4) Export Credit and Guarantee Corporation Limited, and (5) The Projects and Equipment Corporation of India Limited.

1. State Trading Corporation of India Limited (STC) STCL Ltd. is a subsidiary of State Trading Corporation. It was initially established in 1982 as Cardamom Trading Corporation Ltd., a Government of India undertaking under the Ministry of Commerce & Industry. STC evolved from a solely cardamom trading corporation to become Spices Trading Corporation Ltd., in 1987. With globalisation and opening up of global trade, Spices Trading Corporation Ltd. was renamed as STCL Ltd. STCL became a wholly owned subsidiary of the State Trading Corporation of India Ltd., in 1999. STC came into existence on 18 May 1956, primarily with a view to undertake trade with the East European countries and to supplement the efforts of private trade and industry in developing exports from the country. STCL is involved in import, export and domestic trading of a varied range of products, both agricultural as well as non-agricultural. It plays an important role in country’s economy by arranging imports of essential items of mass consumption (such as wheat, pulses, sugar, etc.) into India and developing exports of a large number of items from India. The core strength of STC lies in handling

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exports / imports of bulk agricultural commodities. During last 4-5 years, STC has also diversified into exports of steel raw materials, gold jewellery, and imports of bullion, hydrocarbons, minerals, metals, fertilisers, petrochemicals, etc. Achieving record breaking performances year-after-year, the corporation is now able to structure and execute trade deals of any magnitude, as per the specific requirement of its customers. The Board of Directors of the Corporation comprises of a whole time chairman-cum-managing director, five whole-time directors, two ex-officio directors from the Ministry of Commerce, and independent directors appointed by the Govt. from time to time. At present, it has seven independent directors on its board. role of stC: The State Trading Corporation of India Ltd. (STC) is a premier international trading company of the government of India involved primarily in export and import operations. It was set up primarily with a view to undertake trade with the East European countries and to supplement the efforts of private trade and industry in developing exports from India. It is registered as an autonomous company under the Companies Act 1956 and functions under the administrative control of the Ministry of Commerce & Industry, Govt. of India. STCL, headed by a chairman, is headquartered in Bengaluru. The corporation has played a vital role in the growth of Indian economy. In the pre-liberalisation era, it acted as an arm of Indian government not only to regulate foreign trade but also for intervention in the domestic market. It handled canalised exports and imports of a large number of items that included different types of items like chemicals and drugs to bulk commodities such as edible oils, cement, sugar, newsprint, wheat, urea, etc. The corporation thereby ensured timely availability and equitable distribution of mass consumption items as well as essential raw materials for the industry. Canalisation also helped India to benefit from economies of scale and keeping a close watch on the scarce foreign exchange available with the country during that period. Functions and objectives of stC: As a part of its export development effort, STC provides technical, marketing and financial assistance to export firms by arranging import of machinery and raw material for export production, setting up design centres, providing testing laboratories, taking products of small manufacturers to overseas markets by organising their consortia, participation in exhibitions and trade fairs, etc. Major objectives of STC are to: Develop core competencies in selected areas and exploit the market opportunities in these areas to the best advantage of the corporation. Regularly undertake horizontal and vertical diversifications thereby enabling sustained growth of business. Optimally utilise financial strength of the corporation in expanding its business. Lay emphasis on quality of services to customers so as to develop long-term business relationship with buyers and suppliers in and outside the country. Undertake market intervention operations as and when advised by the Government of India. Develop new infrastructure and make optimum utilisation of infrastructure available with the corporation. Strive to ensure adequate returns to the stakeholders.

224 Export Import Management Fulfill corporation’s social responsibility by following ethical business practices and reinforcing commitment to customers, employees, partners and communities. Undertake on a regular basis training / re-training of existing manpower and induct professionally qualified young talent, in order to create a cadre of highly professional and motivated managers. Ensure an efficient and streamlined system of operations, with minimum transaction costs. Facilitate small and medium-export and import firms. Exhibit 9.1 shows the STCs annual procurement plan 2016–17.

Exhibit 9.1 STC’s Annual Procurement Plan : 2016–17 In line with the public procurement policy for Micro & Small Enterprises (MSEs) order 2012, notified by the Government of India, STC encourages participation of micro and small enterprises in procurement tenders. For the year 2016–17, STC planned the procurement of goods and services in such a way as to achieve an overall procurement of minimum 20 per cent of its total annual purchases through products /services rendered by Micro and Small Enterprises (MSEs) including 4 per cent from MSEs owned by SC/ST entrepreneurs. Following are the benefits to be extended to MSEs as per Government guidelines:

least 20 per cent of the total tendered value. In case of more than one such MSE, the supply shall

Source: http://www.stclimited.co.in/corporate-commitments/stcs-plan-for-procurement-from-mses. aspx, accessed on 10 February 2017.

Major activities: Indian foreign trade got liberalised in the year 1991 resulting in decanalisation of all export and import items that were earlier canalised through STC. This adversely affected the turnover and profitability of the corporation requiring reorientation of the entire business profile of the corporation. At present, STC does not exclusively canalise the export or import of any item. Now STC undertakes exports/imports of a diverse range of items to/from countries all over the world. Its export basket includes wheat, rice, tea, coffee, cashew, extractions, pharmaceuticals, light engineering goods, construction materials, consumer goods, processed foods, textiles, garments, jewellery, leather ware, etc. The corporation also monitors counter trade commitments against government purchases. Major items imported through STC include gold, silver, edible oils, sugar, pulses, fertilisers, metals, minerals, ores, hydrocarbons, petrochemicals and raw materials for the Indian industry. It also undertakes import of technical and scientific equipment on behalf of Forensic Science Laboratories, State Police and Intelligence Departments, and Paramilitary organisations, and so on.

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Present businesses handled by STC can broadly be classified into the following three categories: (i) import of items like edible oils, pulses and fertilisers on behalf of the Government of India (ii) Business carried out on behalf of business associates on back-to-back basis (iii) Direct buying and selling in items like tea, soya bean seed, chana, etc. Imports on behalf of the Government of India are arranged by STC through floating of global tender and imported quantities are either handed over to the agency (such as FCI, Department of Fertilizers) nominated by the government or sold in the domestic market through tenders. If there is a back-to-back business, the terms of trade are finalised in consultation with the business associate and STC charges a fixed trade margin in the range of 1 to 1.5 per cent.

2. Minerals and Metals Trading Corporation Limited (MMTC) The MMTC Limited was set up in 1963 as an individual entity on separation from State Trading Corporation of India Ltd. Primary aim of setting up MMTC was to deal in exports of minerals and ores and imports of non-ferrous metals. In 1970, MMTC took over imports of fertiliser raw materials and finished fertilisers. Over the years import and export of various other items like steel, diamonds, bullion, etc., were progressively added to the portfolio of the company. Keeping pace with the national economic development, MMTC over the years has grown to become the largest trading organisation of the country and the first public sector enterprise to be accorded the status of ‘Five Star Export House’ by the Government of India for its long standing contribution to exports. The company is one of the two highest foreign exchange earners for India, and a leading international trading company with a turnover of around US$ 10 billion. objectives and Functions of MMtC: Main objectives of MMTC are to: Be a leading international trading house in India operating in the competitive global trading environment, with focus on “bulk” as core competency and to improve returns on the capital employed. Retain the position of the single largest trader in the country for product lines like minerals, metals and precious metals. Promote development of trade-related infrastructure. Provide support services to the medium and small scale sectors. Render high quality of service to all categories of customers with professionalism and efficiency. Streamline system within the company for settlement of commercial disputes. Upgrade employee skills for achieving higher productivity. Major activities: MMTC is major global player in the minerals trade and is the single largest export firm of minerals from the country. With its comprehensive infrastructural expertise to handle minerals, it provides full logistic support from procurement, quality control to guaranteed timely deliveries of minerals from different ports, through a wide network of regional and port offices in the country, as well as international subsidiaries. MMTC is the largest non-oil importer in India. Its diverse trade activities encompass all modern tools of international trading like third country trade, joint ventures, link deals etc. MMTC maintains a

226 Export Import Management vast international trade network, which includes a wholly owned international subsidiary in Singapore, spans almost all countries in Asia, Europe, Africa, Oceania and Americas, giving the company global market coverage. Apart from oil and minerals, MMTC has been actively involved in the trading of gold and silver. The company is the largest importer of gold and silver in the Indian sub-continent. MMTC supplies gold on loan and outright basis to the export firms, bullion dealers and jewellery manufacturers on all-India basis. Besides organising major jewellery exhibitions in India and abroad, MMTC also has a medallion manufacturing unit for minting of Gold / Silver medallions. Disinvestment by the Government in MMTC and STC has been highlighted in Exhibit 9.2.

Exhibit 9.2 Disinvestment by Government in MMTC and STC The government announced its intention to hire bankers for divesting a part of its stake in stateto sell the stakes through the offer-for-sale (OFS) route, according to details available on the website of the Department of Disinvestment. The divestment plans for MMTC and STC follow several other asset sale announcements in the near future by the government which includes the sale of stake in

fetch the government as much as government holds a 90 per cent stake in STC. Source: Singh Dhanjal S. (2016). Government to divest stakes in MMTC, State Trading Corp. livemint – E Paper.http://www.livemint.com/Money/moqLtGJIS3Cxt0EXq0cPIN/Govt-todivest-stakes-in-MMTC-State-Trading-Corp.html, accessed on 10 February 2017.

As a leading player in fertilisers and fertiliser raw material, MMTC has become a major fertiliser marketing company of the country. Through planned forward integration of its import activities with the direct marketing of urea, DAP, MOP sulphur, rock phosphate, SSP and other farming and agricultural inputs, MMTC has been able to grow its business many folds. Other areas of business of MMTC is the selling of imported non-ferrous metals viz., copper, aluminium, zinc, lead, tin and nickel. It also sells imported minor metals like magnesium, antimony, silicon and mercury, as also industrial raw materials like asbestos and steel and its products. The company imports quality products conforming to international specifications like ASTM or BSS or LME approved brands.

3. India Trade Promotion Organisation (ITPO) India Trade Promotion Organisation is a premier trade promotion agency of the Government of India. It has been charting a multi-dimensional course for itself in conformity with its mandated role. It came into inception in the year 1992 and since then played a multi-faceted role in bringing out the strengths of the Indian economy and giving a thrust to the country’s exports as a nodal export promotion organisation. Prior to 1992 its earlier incarnations were Trade Fair Authority of India (TFAI) and Trade Development Authority (TDA).

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Functions and objectives of itPo: Major functions of ITPO include the following: Organising fairs and exhibitions in India. Participating in select overseas fairs and in organising of exclusive Indian trade shows in select locations abroad. Promoting through department stores, contact and product promotion programmes, and market surveys. Disseminating information on products and markets among trade and industry in India and abroad. Organising seminars, conferences and workshops on trade-related issues. Upgrading the facilities of Pragati Maidan to exacting international standards. Major activities: ITPO takes a lead in promoting the ‘Fair Culture’ all over the country. ITPO has a major activity of organising participation by Indian companies in over 50 international fairs in various parts of the world. These fairs provide export firms a forum for an array of merchandise ranging from textiles and garments, leather goods, handlooms and handicrafts to engineering goods, hardware, hand and machine tools, electronic and computer items. Over the years, ITPO has regularly taken Indian products, technologies and services to more than 100 cities in different parts of the world. The identification and selection of overseas fairs is based on the opportunities that these exhibitions offer to Indian export firms. ITPO provides a variety of services to participants including market information, publicity and visitor promotion, design and display of inputs, freight handling and clearing, and insurance of cargo. Some of the new initiatives of the ITPO have been discussed in Exhibit 9.3.

Exhibit 9.3 New Initiatives of ITPO Mobile Application: Mobile applications are developed for various exhibitions organised by ITPO. These applications are built on various mobile platforms including Android, Apple and Windows. The applications are smart phone/tablet friendly mobile applications which contains the fair specific visit to the exhibition. The mobile applications provide features like exhibitor’s search, product search, hall-wise search, fair facts, facilities, parking, ticket details, navigation facilities from one hall to another hall, layout of various exhibition halls, etc. E-Procurement: E-Procurement came into effect from 8 February 2016 in ITPO. Under the e-procurement system all tenders for procurement of goods and services of estimated value of lakh and above are invited through e-procurement only. Online Space Bookings: As part of e-governance initiative, an online space booking facility has been created for the participants who wish to participate in domestic exhibitions organised by ITPO. A hassle-free, easy-to-use software has been developed and the link for this is available at the specific fair website where the applicant can fill-up online application forms and submit the same visiting ITPO. Source: http://indiatradefair.com/, accessed on 10 February 2017

228 Export Import Management It has taken major initiatives through negotiations and discussions with the state governments for setting up of exhibition complexes in West Bengal, Assam, and the North-Eastern region. The significant achievement in this direction includes the setting up of Regional Trade Promotion Centres at Chennai in January 2001 and at Bengaluru in September 2004. The Chennai Trade Centre has been set up as a joint venture between ITPO and Tamil Nadu Industrial Development Corporation (TIDCO). Similarly, trade centre at Bengaluru has been set up as a joint venture between ITPO and Karnataka Industrial Area Development Board (KIADB). This is in consonance with ITPO’s policy to provide an impetus to the country’s overall export efforts.

4. export Credit and guarantee Corporation Limited Export Credit Guarantee Corporation of India Ltd. (ECGC) is a Government of India enterprise which offers export credit insurance facilities to export firms and banks in India. ECGC is the seventh largest credit insurer of the world in terms of coverage of national exports. The present paid up capital of the company is administrative control of Ministry of Commerce and Industry, and is managed by a Board of Directors having representatives of the Government, Reserve Bank of India, banking, insurance and exporting community. Over the years, ECGC has evolved various export credit risk insurance products to suit the requirements of Indian exporters and commercial banks (details of the Corporation have already been discussed in Chapter 8).

5. Projects and equipment Corporation of India Ltd. (PeC) Initially PEC was incorporated as the subsidiary the State Trading Corporation of India Ltd. and was registered with a name “The Projects & Equipment Corporation of India Ltd.”. It was in the year 1971 when PEC was incorporated as an independent company under the Ministry of Commerce & Industry, Government of India. The prime objective of PEC at the time of its incorporation was to take over the canalised business of STC’s railway equipment division. It was also tasked with the diversification in exports of engineering equipment and turnkey projects. In 1991, under the liberalisation policy of Government of India, the export of railway equipment was also decanalised and therefore PEC had to explore other areas to remain profitable. This was the time when PEC diversified into export and import of commodities etc. Keeping the financial viability of PEC in view, the Ministry of Commerce and Industry, Government of India, allowed the aforementioned diversification of the corporation. PEC Ltd., over last three decades, has expanded its role to become an international business organiser and a provider of integrated trade facilitating services to export import firms in the country. Through its diversification activities since the early 1990s, it has emerged as a competent body to facilitate the exchange of commodities, goods and services between India and other nations of the world. PEC as a trading company is an initiator, intermediary, developer as well as facilitator for global trade. PEC is headed by a chairman-cum-managing director and one whole time director. The total manpower of the corporation is 202, including 175 officers and remaining 27 staff. Its headquarter is in New Delhi and it has 14 branch offices spread all over India including 7 port offices. Functions and objectives of PeC: PEC’s client services are geared to perform two objectives:

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(i) Conducting international transactions (ii) Developing whole new business ventures that will contribute to India’s trade. The corporation bring buyers and sellers from India and countries around the globe together on the common ground of mutually profitable trade. The acquired expertise and up-to-date information of PEC guides the firms involved in foreign trade to rich market opportunities. The corporation arranges for the funds required for financing a transaction and the logistics of transporting goods to their destinations. Following are the key functions of PEC: Reviewing and refining the trade objectives of the client firm, and crafting a strategic plan for profitable business of its client. Advising the client firm by providing valuable insights of product, pricing and distribution of the product to meet the local requirements of the new market. Providing data of a transaction demanded by the client firm to judge the creditworthiness of a customer of the client firm. Helping the client in negotiating the transactions as per local cultures, customs, languages and monetary systems prevalent in that particular market. Preparing the necessary legal documents for its client and doing all necessary paperwork demanded by the legal and regulatory framework of the client’s market. Arranging the funds required to settle the client’s transaction in motion and overseeing payment and collection at its conclusion. Major activities: So far as the exports of projects and equipment are concerned, PEC concentrates on exports from small and medium sectors. Its major markets are in Bangladesh, Nepal, Bhutan, Sri Lanka, Myanmar, Vietnam, Mauritius, Syria, Zambia, Ethiopia, Surinam, Brazil, etc. The corporation exports engineering items like conductors, line-hardware, transformers, buses, defence stores, bulk handling equipment, etc. PEC has also been involved in export of small projects like tea factories, textile mills, cement units, transmission line and associated sub-station, pre-fabricated steel structures etc. PEC also undertakes exports of agro commodities viz., wheat, rice, corn and soya-meal and industrial raw materials like iron ore, ferrochrome, finished steel, etc. Import activities of PEC include the import of agro commodities like wheat, sugar, pulses, edible oils, etc. Import of industrial raw materials and chemicals include coal/coke, steel, petro-products, steel, manganese and zinc concentrates, penicillin crystals, soda ash, sulphur. The corporation also undertakes import of bullion. The corporation actively participates in domestic trading of agro commodities like wheat, pulses, edible oils, etc. Domestic trading of coal/coke, steel and other items like cotton yarn, home appliances, defence equipment, etc., are also the functional areas of business of PEC.

LO4 Describe the entitlement of status of recognised export trading houses in India

ReCOgNISeD eXPORT aND TRaDINg HOUSeS IN INDIa The objective of recognising the status of established exporters/export firms as ‘Export House’, ‘Trading House’, ‘Star Trading House’ and ‘Super Star Trading House’ is to build marketing infrastructure

230 Export Import Management and expertise required for export promotion. Such houses should operate as highly professional and dynamic institutions and act as important instruments of export growth. eligibility for export and trading houses status: DGFT declares merchant as well as manufacturer export firms, service providers, Export Oriented Units (EOUs) and units located in Special Economic Zones (SEZs), Agri Export Zones (AEZs), Electronic Hardware Technology Parks (EHTPs), Software Technology Parks (STPs) and Bio-Technology Parks (BTPs) eligible for the status of export and trading houses. status Category: Applicants are categorised depending on their total FOB (FOR - For Deemed Exports) export performance during the current and previous three years (taken together) upon exceeding the limits given in Table 9.1 below. To get the Export House (EH) status, export performance is necessary in at least two out of four years (i.e., current plus previous three years). Table 9.1

Export Performance as per Status Category Status Category

Export House (EH)

Export Performance FOB/FOR Value (Rupees in crore) 20

Star Export House (SEH)

100

Trading House (TH)

500

Star Trading House (STH)

2500

Premier Trading House (PTH)

7500

double weightage and other Conditions for grant of status: Besides the eligibility criteria mentioned above, following conditions are required to be fulfilled to get the status of export and trading house in India: Exporters/export firms in Small Scale Industry (SSI)/Tiny Sector/Cottage Sector, units registered with KVICs/KVIBs, units located in North Eastern States, Sikkim and Jammu & Kashmir, units exporting handloom/handicrafts/hand knotted or silk carpets, exporters exporting to countries in Latin America/CIS/sub-Saharan Africa as listed in Appendix-9, units having ISO 9000 (series)/ISO 14000 (series)/WHOGMP/HACCP/SEI CMM level-II and above status granted by agencies listed in Appendix-6 of HBP v1, exports of services and exports of agro products are entitled for double weightage on exports made for grant of status. Double weightage is admissible to merchant as well as manufacturer exporters/export firms. It is to be noted that a shipment can get double weightage only once in any one of above mentioned categories. Export performance cannot be transferred from one to another. Therefore disclaimer system is not allowed for counting of export turnover. Exports made on re-export basis are not counted for recognition. Exports made by subsidiary of a limited company are counted towards export performance of limited company for recognition only if limited company has a majority shareholding in its subsidiary company. Exhibit 9.4 shows the various status holders under the FTP 2015–20 and their details.

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Exhibit 9.4 Status Holders under Foreign Trade Policy 2015–20 Status Holder Qualifying Criteria: Business leaders who have excelled in international trade and have successfully contributed to country’s foreign trade are proposed to be recognised as ‘Status Holders’ and given special treatment and privileges to facilitate their trade transactions, in order to reduce their transaction costs and time. Changed Nomenclature: The nomenclature of Export House, Star Export House, Trading House, Star Trading House, Premier Trading House certificate has been changed to One, Two, Three, Four, Five Star Export House. Criteria for Export Performance: The criteria for export performance for recognition of status holder have been changed from Rupees to US dollar earnings. The new criterion is shown in the table ahead: Status category One Star Export House

Export Performance FOB/FOR (as converted) Value (in US$ million) during current and previous two years 3

Two Star Export House Three Star Export House

100

Four Star Export House Five Star Export House

2000

Approved Exporter Scheme: Self certification by status holders manufacturers who are also status holders will be enabled, in order to self-certify their manufactured goods as originating from India Trading Agreements [PTAs], Free Trade Agreements [FTAs], Comprehensive Economic Cooperation Agreements [CECAs] and Comprehensive Economic Partnerships Agreements [CEPAs] which are in operation. They shall be permitted to self-certify the goods manufactured as per their Industrial Source: http://dgft.gov.in/exim/2000/highlight2015.pdf; www.eximbits.com, accessed on 30 March 2017.

Privileges of export and trading house status holders: A status holder is eligible for privileges as follows: (i) Authorisation and customs clearances for both imports and exports is done on self-declaration basis. (ii) Input-output norms are fixed on priority within 60 days. (iii) Compulsory negotiation of documents through banks is exempted for status holders. Remittance / Receipts, however is received through banking channels. (iv) 100 per cent retention of foreign exchange is allowed in EEFC account.

232 Export Import Management (iv) Status holders are exempted from furnishing of BG in schemes under FTP. (v) SEHs and above are permitted to establish export warehouses, as per DOR guidelines. (vi) For status holders, a decision on conferring of ACP status is communicated by customs within 30 days from receipt of application by customs. (vii) As an option, for Premier Trading House (PTH), the average level of exports under EPCG Scheme is the arithmetic mean of export performance in last five years, instead of three years. (viii) Status holders of specified sectors are eligible for Status Holder Incentive Scrip. (ix) Status holders of Agri. sector are eligible for Agri. Infrastructure Incentive Scrip under Vishesh Krishi and Gram Udyog Yojana (VKGUY). Validity Period: Export House/Trading House/Star Trading House/Super Star Trading House certificates issued to the status holder remain valid for a period of three years starting from 1st April of the licensing year unless otherwise specified. On the expiry of such certificate, application for renewal of status certificate is required to be made within a period of six months. During this period, the status holders are eligible to claim the usual facilities and benefits. golden status Certificate: Exporters/Export firms who have attained Export House, Trading House, Star Trading Houses and Super Star Trading Houses status for three terms or more and continue to export are eligible for golden status certificate which enables them to enjoy the benefits of status certificate.

Key Terms state trading: According to Kostecki (1982), state trading occurs when a government or a government backed agency determines the essential conditions (including prices or quantities) on which exports and imports have to take place. Partial state trading: In partial state trading, private traders and government co-exist. Private traders are free to buy and sell in the market. Complete state trading: The government adopts the extreme form of trading when partial state trading fails to ensure fair prices to producers and make goods available to consumers at reasonable prices, this type of state trading is called complete state trading. international trading houses: They serve as commercial intermediaries between suppliers and buyers located in different countries. state trading Corporation of india Limited (stC): STC plays an important role in country’s economy by arranging imports of essential items of mass consumption (such as wheat, pulses, sugar, etc.) into India and developing exports of a large number of items from India. Minerals and Metals trading Corporation (MMtC): The MMTC Limited deals in exports of minerals and ores and imports of non-ferrous metals. In 1970, MMTC took over imports of fertiliser raw materials and finished fertilisers.

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india trade Promotion organisation (itPo): ITPO is a premier trade promotion agency of the Government of India, charting a multi-dimensional course for itself in conformity with its mandated role.

In revIew There are various types of government participation in foreign trade, all of which can be defined as state trading. State trading exists when a government, an agency of the government, or an institution granted exclusive rights by the government controls trade or materially affects the conditions of trade on a transaction-by-transaction basis. In the centrally planned economies, the entire foreign trade is nationalised and is therefore conducted directly by government departments or government owned business firms. In India, state participates in foreign trade mostly through government departments. State trading in a number of agricultural products is quite popular in most of the economies because state intervention is necessary to avoid fluctuations in the prices and preventing deterioration in the income of the producers of agricultural products. In partial state trading, private traders and government co-exist. Private traders are free to buy and sell in the market. In complete state trading, the purchase and sale of commodities is undertaken entirely by the government or its agencies. International or export trading houses exist in a number of countries in various forms and types, known by different names in different countries; and play a key role in monitoring the competition and help the export client firms to decide which product to sell where. The choice of the trading house is crucial for the manufacturing firm, and vice versa. STCL Ltd. is a subsidiary of State Trading Corporation (STC). It is involved in import, export and domestic trading of a varied range of products, both agricultural and non-agricultural. The Minerals and Metals Trading Corporation (MMTC Ltd.) was set up in 1963 as an individual entity on separation from State Trading Corporation of India Ltd., to majorly deal in exports of minerals and ores and imports of non-ferrous metals. India Trade Promotion Organisation (ITPO) is a premier trade promotion agency of the Government of India. Export Credit Guarantee Corporation of India Ltd. (ECGC) is a Government of India enterprise which offers export credit insurance facilities to export firms and banks in India. In 1971, Projects & Equipment Corporation of India Ltd. (PEC) was incorporated as a separate and independent Company, directly under Ministry of Commerce & Industry, Government of India. PEC’s client services have two objectives: (i) conducting international transactions, and (ii) developing whole new business ventures that will contribute to India’s trade. The objective of recognising the status of established exporters/export firms as Export House, Trading House, Star Trading House and Super Star Trading House is to build marketing infrastructure and expertise required for export promotion. Export House/Trading House/ Star Trading House/Super Star Trading House certificates issued to the status holder remain valid for a period of three years starting from 1st April of the licensing year unless otherwise specified.

234 Export Import Management

mulTIple ChoICe QuesTIons 1. State trading exists when _______ controls trade or materially affects the conditions of trade on a transaction-by-transaction basis. (a) a government (b) an agency of the government (c) an institution granted exclusive rights by the government (d) all of these 2. In _______ export and import of specific commodities are entrusted to government trading organisations or departments. (a) centrally planned economies (b) free enterprise economies (c) mixed economies (d) all of these 3. State trading is more popular practice in the developing economies because (a) such countries generally do not have adequately developed private sector (b) private sector bodies, though possessing adequate trading expertise, are solely motivated by profit consideration. (c) both (a) and (b) (d) none of these 4. In the case of _______ government enters the market for purchasing commodities directly from producers at notified procurement prices, and undertakes the distribution of commodities to consumers through a network of fair price shops. (a) partial state trading (b) complete state trading (c) both (a) and (b) (d) none of these 5. _______ serve as commercial intermediaries between suppliers and buyers located in different countries. To this end they adopt the role of merchants and trade facilitators. (a) Public private partnership firms (b) International trade promotion organisations (c) International trading houses (d) None of these 6. _______ a subsidiary of State Trading Corporation (STC), was initially established in 1982 as Cardamom Trading Corporation Ltd., a Government of India undertaking under the Ministry of Commerce & Industry. (a) State Trading Corporation Limited (STCL Ltd.) (b) Minerals and Metals Trading Corporation (MMTC) Limited (c) India Trade Promotion Organisation (ITPO) (d) The Projects & Equipment Corporation of India Ltd. (PEC) 7. _______ was set up in 1963 as an individual entity on separation from State Trading Corporation of India Ltd.

State Trading and International Trading Houses

235

(a) State Trading Corporation Limited (STCL Ltd.) (b) Minerals and Metals Trading Corporation (MMTC) Limited (c) India Trade Promotion Organisation (ITPO) (d) The Projects & Equipment Corporation of India Ltd. (PEC) 8. _______ is the first public sector enterprise to be accorded the status of “Five Star Export House” by Government of India for its long standing contribution to exports. (a) State Trading Corporation Limited (STCL Ltd.) (b) Minerals and Metals Trading Corporation (MMTC) Limited (c) India Trade Promotion Organisation (ITPO) (d) The Projects & Equipment Corporation of India Ltd. (PEC) 9. _______ has taken major initiatives through negotiations and discussions with the state governments for setting up of exhibition complexes. (a) State Trading Corporation Limited (STCL Ltd.) (b) Minerals and Metals Trading Corporation (MMTC) Limited (c) India Trade Promotion Organisation (ITPO) (d) The Projects & Equipment Corporation of India Ltd. (PEC) 10. _______ came into inception primarily to take over the canalised business of STC’s railway equipment division and also to diversify in exports of engineering equipment and turnkey projects. (a) State Trading Corporation Limited (STCL Ltd.) (b) Minerals and Metals Trading Corporation (MMTC) Limited (c) India Trade Promotion Organisation (ITPO) (d) The Projects & Equipment Corporation of India Ltd. (PEC)

ConCepT QuesTIons 1. What do you understand by the term “State Trading”? Discuss various types of state trading and its major objectives in details. 2. How do international trading houses serve as commercial intermediaries between suppliers and buyers located in different countries? Discuss in details. 3. Which are the important factors to be kept in mind while selecting an export trading house? 4. Write short notes on following: (a) State Trading Corporation of India Limited (STC) (b) MMTC Limited (c) India Trade Promotion Organisation Limited (d) The Projects and Equipment Corporation of India Limited 5. Which types of Exporters / Export firms are entitles to get the status of export trading house in India? Discuss in detail the privileges of export and trading house status holders in India.

236 Export Import Management

FurTher readIng Karen Z. Ackerman and Praveen M. Dixit. An Introduction to State Trading in Agriculture. EconPapers.http://econpapers.repec.org/paper/agsuerser/33909.htm STATE TRADING ENTERPRISES, ftp://ftp.fao.org/docrep/fao/010/a1477e/a1477e02.pdf http://dgft.gov.in/exim/2000/policy/chap-03.htm http://pib.nic.in/archieve/eximpol/eximpol00-01/Chap-12.htm http://www.eximin.net/NewsDetails.aspx?name=29088

Answers to Multiple ChoiCe Questions 1. (d) 7. (b)

2. (b) 8. (b)

3. (c) 9. (c)

4. (b) 10. (d)

5. (c)

6. (a)

State Trading and International Trading Houses

237

Exercise Y.M.R.A. Fashions is a leading manufacturer and exporter in the garment industry, based in Pune. The organisation was incorporated in the year 2000, in the name and style of “Y.M.R.A. Fashions”. Initially the business was started in the name of M/s Ram Lal Dev Raj, in the year 1944 with the efforts of Late Shri Dev Raj, dealing in yarns and knitted cloth and then the business expanded and the firm diversified its activities in a phased manner. Since then the organisation has never looked back and has been moving towards its objective of success. This organisation has a manpower of around 550 people engaged in various activities. The firm is a major manufacturer and exporter of products including knitted fabric in cotton, blends, lycra or polyester, fleece blankets, single jersey, double jersey, jacquards, pique, fleece, rib, dyed stripers, single jersey jacquard, sherpa, terry, coral knits, all types of T-shirts, bermudas, capri, lowers, sweat shirts, summer track suits, winters track suits and sando nicker-sets.

Question 1. The company is currently exporting to the United Arab Emirates. They look forward to expanding their market in Europe. Keeping in view the company’s size, age and experience in export trading, suggest a strategy to select an appropriate export trading house to expand its business in Europe.

Chapter

Policy for Special Economic Zones and Export Processing Zones

10

Learning Outcomes After reading this chapter, you will be able to: LO1 Explain the salient features of SEZ Act, 2005, and major incentives offered to the business firms under the Act LO2 Know the purpose, salient features, incentives and benefits offered by EOU scheme to export firms in India LO3 Understand the purpose and scope of Software Technology Park (STP) Scheme and Electronic Hardware Technology Park (EHTP) Scheme

INTRODUCTION Free Trade Zones (FTZs) and Export Processing Zones (EPZs) have emerged as effective instruments to encourage and facilitate export of manufactured products. India was one of the first countries in Asia to recognise the importance of the Export Processing Zone (EPZ) in promoting exports. Asia’s first EPZ was set up in Kandla in 1965 to attract larger foreign investment in India. The zones (SEZ/ EPZ) provide basic infrastructural facilities like developed land, standard design factory buildings, built-up sheds, roads, power supply and drainage, in addition to a wide range of monetary incentives to the export firms by way of customs, excise and income tax exemptions. Customs clearance facilities are offered within the zone at no extra charge, while facilities like banking, post office and clearing agencies are also made available in the service centers attached to these zones. The Free Trade Zones (FTZs)/Export Processing Zones (EPZs) are set up as enclaves separated from the Domestic Tariff Area (DTA) by physical barriers to provide an internationally competitive duty free environment for export production at low costs. The basic objectives of EPZs are to enhance foreign exchange earnings, develop export-oriented industries and to generate employment opportunities. The first such zone was set up at Kandla (Gujarat) in 1965, followed by SEEPZ, Mumbai in 1972. Later on, four more zones were set up at Noida (UP), Falta (West Bengal), Cochin (Kerala), Chennai (Tamil Nadu) in 1984 and at Visakapatnam (Andhra Pradesh) in 1989. In 1997, Surat Export Processing

Policy for Special Economic Zones and Export Processing Zones

239

Zone came into existence. In the year 2000, Special Economic Zone Scheme was announced and soon after it, four Export Processing Zones/FTZ, namely Kandla, SEEPZ, Cochin and Surat were converted into Special Economic Zones with effect from 1 November 2000.

LO1 Explain the salient features of SEZ Act, 2005, and major incentives offered to the business firms under the Act

SPECIAL ECONOMIC ZONES (SEZs) The Special Economic Zones (SEZs) policy was announced in April 2000, aiming to make SEZs an engine for economic growth supported by quality infrastructure and an attractive fiscal package, both at the centre and the state level, with the minimum possible regulations. The functioning of the SEZs in India is guided by the provisions of the Foreign Trade Policy and fiscal incentives offered to the export units operating from SEZ were made effective through the provisions of relevant statutes.

SEZ Act, 2005 To gain the confidence of investors and to impart stability to the SEZ regime, thereby generating greater economic activity and employment through the establishment of SEZs, a comprehensive draft SEZ Bill was prepared after consulting the stakeholders. Subsequently, the Special Economic Zones Act, 2005, was passed by Parliament in May 2005 and received presidential assent on the 23 June 2005. After extensive consultations, the SEZ Act 2005, supported by SEZ Rules, came into effect on 10 February 2006, providing for drastic simplification of procedures and for single window clearance on matters relating to central as well as state governments. The SEZ Act 2005 plays a key role for the state governments in promoting and facilitating exports, and creation of related infrastructure. The act provides a single window SEZ approval mechanism through a 19-member inter-ministerial SEZ Board of Approval (BoA). The applications duly recommended by the respective state governments/UT administrations are considered by the BoA periodically and final decisions are taken with consensus. Objectives of the Act: The act intended to trigger a large flow of foreign and domestic investments in SEZs, in infrastructure and productive capacity, leading to generation of additional economic activity and creation of employment opportunities. The main objectives of the SEZ Act are to: Generate additional economic activity Promote exports of goods and services Promote investment from domestic and foreign sources Create employment opportunities Develop infrastructure facilities Salient features of the SEZ rules: Important provisions of the SEZ rules are as follows: Every SEZ is divided into a processing area where the SEZ units alone would come up, and the non-processing area where the supporting infrastructure is to be created Procedures are simplified for development, operation and maintenance of the SEZs and for setting up units and conducting business in SEZs

240 Export Import Management Single window clearance is available for setting up of an SEZ Single window clearance is available for setting up a unit in an SEZ Single window clearance is available for matters concerning central or state governments Compliance procedures are simplified Documentation lays an emphasis on self-certification The state-wise distribution of approved SEZs has been provided in Table 10.1. Table 10.1 State-wise Distribution of Approved SEZs (as on 17 July 2013) State Andhra Pradesh

Formal approvals In-principle approvals Notified approvals

Exporting SEZs

109

6

78

39

Chandigarh

2

0

2

2

Chhattisgarh

2

1

1

1

Delhi

3

0

0

0

Dadra & Nagar Haveli

2

0

1

0

Goa

7

0

3

0

Gujarat

43

7

30

18

Haryana

46

3

35

5

Jharkhand

1

0

1

0

Karnataka

61

1

40

22

Kerala

29

0

24

8

Madhya Pradesh

19

2

9

2

102

16

65

20

Manipur

1

0

0

0

Nagaland

2

0

2

0

10

1

5

1

Pondicherry

1

1

0

0

Punjab

8

0

2

2

Rajastan

10

1

10

5

Tamil Nadu

67

6

53

33

Uttar Pradesh

31

1

21

9

Uttarakhand

2

0

1

0

West Bengal

18

3

9

6

Grand Total

576

49

392

173

Maharashtra

Orissa

Source: Ministry of Commerce and Industry, SEZ India, GOI

Policy for Special Economic Zones and Export Processing Zones

241

Fiscal incentives for SEZ units: With a view to attract larger investments including FDI, a number of tax and other fiscal incentives are offered to the units in the SEZs. Exhibit 10.1 discusses the fiscal incentives offered to SEZ units.

Exhibit 10.1 Fiscal Incentives for SEZ Units

Major tax Exemptions for SEZ developers: Besides the fiscal incentives offered to SEZ units, with a view to attract private sector investments in infrastructure development, a number of fiscal incentives in the form of tax exemptions are also available to SEZ developers. The major tax exemptions available to SEZ developers are summarised in Exhibit 10.2.

Exhibit 10.2 Tax Exemptions to SEZ Developers

i i i

LO2 Know the purpose, salient features, incentives and benefits offered by EOU scheme to export firms in India

EXPORT ORIENTED UNDERTAKINGS (EOU) SCHEMES Historical Background and Purpose of EOUs Scheme EOUs Scheme was introduced in the year 1980 vide Ministry of Commerce resolution dated 31 December 1980. The EOUs scheme is complementary to the SEZ scheme having same production regime but offering wide options in locations with reference to factors like source of raw materials,

242 Export Import Management ports of export, hinterland facilities, availability of technological skills, existence of an industrial base and the need for a larger area of land for the project. The main purpose of the scheme was to boost exports by creating additional production capacity. In the early 1960s and 70s, Free Trade Zones (FTZ)/Export Processing Zones (EPZ) were set up in India as enclaves, notified as customs area, separated from Domestic Tariff Area (DTA) by physical barriers intended to provide an internationally competitive duty free business environment. However, there were inherent limitations to the FTZ/EPZ concept such as fixed geographical area, non-suitability for medium and large industrial units, and for units which intended to set up manufacturing facilities near the source of raw material or specialised labour. Thus the scheme introduced in the 1960s could not attract many units due to the above mentioned restrictions. The export firms showed willingness to set up units with long term commitment to exports under customs bond operations provided they had the freedom to locate the export units in places of their choice and given most of the benefits as provided to units set up in the SEZ or EPZ. Keeping these emerging demands in view, the EOUs scheme was introduced to compliment the Free Trade Zones/ Export Processing Zones (EPZs). EPZs were to be supplemented by variants like Export Oriented Unit (EOUs) which provided freedom of location at a place of their choice subject to long-term commitment by the Ministry of Commerce in 1980.

Objectives The main aims and objectives of the EOU scheme are as follows: Boosting exports Earning foreign exchange Attracting foreign investments Generating employment Backward and forward linkage by way of sourcing of raw materials from and supply of finished goods to DTA Attracting latest technology into the country Upgrading the skills and creating sources of skilled man-power Development of backward areas

Scope of the Scheme The export firms are treated as a special class in every country. These firms are given specific premises to operate their trade activities and provided with the required tariff, non-tariff and policy support to facilitate their export efforts. Export Oriented Units (EOU) scheme remains in the forefront of country’s export production schemes. The EOU scheme permits the units operating under its ambit to import or procure locally, without payment of duty, all types of goods including capital goods, raw materials, components, packing materials, consumables, spares and various other specified categories of equipment including material handling equipment required for export production or in connection therewith. As discussed earlier, not only the manufacturing units but also the units engaged in the services, development of software, trading, repair, remaking, reconditioning, re-engineering including making of gold/silver/platinum jewellery etc. are covered under the EOU scheme. Even the goods appearing in the restricted list of the EXIM policy are permitted to be imported. However, the goods

Policy for Special Economic Zones and Export Processing Zones

243

prohibited for import are not permitted. It is also to be noted that in the case of EOUs engaged in agriculture, animal husbandry, floriculture, horticulture, pisciculture, viticulture, poultry, sericulture and granite quarrying, only specified categories of goods mentioned in the relevant notification have been permitted to be imported duty-free.

Implementation of the Scheme EOUs basically function under the administrative control of the deputy commissioner of Special Economic Zones (SEZs), formerly known as Export Processing Zones (EPZs). The jurisdictions are notified by the Ministry of Commerce. In all, there are seven DCs located at Mumbai, Gandhidham, Chennai, Cochin, Visakhapatnam, Noida and Kolkata and all policy decisions relating to the EOUs are taken by the Board of Approvals (BoA) set up under the Ministry of Commerce and Industry. The provisions of the customs and central excise law, pertaining to EOUs are administered by the commissioners of customs and central excise under the supervision and control of Central Board of Excise and Customs (CBEC). Monitoring achievement of VA/NFEP and, in default, levy of penalty under Section 11(2) of Foreign Trade (Development and Regulation) Act, 1992 are within the jurisdiction of the DCs functioning under the Ministry of Commerce. Recovery of customs duty in case of shortfall in VA/NFEP falls within the purview of the concerned commissionerates of customs/ central excise. With the approval of DC/BoA, EOU can be de-bonded on their inability to achieve EO/VA or other requirements, subject to levy of penalty and payment of duty applicable at the time of de-bonding.

Policy Changes in the EOUs Scheme The scheme has witnessed many changes over the last 24 years, in the context of the ever changing economic realities. However, the basic premise remains the same. Because of the changes the scheme has undergone, its scope has also expanded substantially as compared to the original scheme, which was basically covering the manufacturing sector with certain minimum value addition in terms of export earnings. Now, the units undertaking to export their entire production of goods are allowed to be set up as an Export Oriented Undertaking (EOU) irrespective of the fact whether these units are engaged in manufacturing, or providing services, developing software, repairing, remaking, reconditioning, re- engineering including making of gold/silver/platinum jewellery and articles thereof, agriculture including agro-processing, aquaculture, animal husbandry, bio-technology, floriculture, horticulture, pisiculture, viticulture, poultry, sericulture and granites. Thus the EOUs can export all products/services except the prohibited items of exports in ITC (HS). Thus, today the EOUs Scheme has emerged as a dynamic policy initiative facilitating increased exports in the exporting community. Exhibit 10.3 elaborates on major policy changes in EOUs Scheme.

Exhibit 10.3 Major Policy Changes in the EOUs Scheme

Contd...

244 Export Import Management

EOUs Permitted under the Scheme Following are three categories of EOUs permitted under the scheme: (i) EOUs established anywhere in India and exporting 100 per cent products except certain fixed percentage of sales in the Domestic Tariff Area (DTA) as may be permissible under the policy. (ii) Units in Free Trade Zones in Special Economic Zones (SEZs) and exporting 100 per cent of their products. (iii) EOUs set up in Software Technology Parks (STPs) and Electronic Hardware Technology Parks (EHTPs) of India for development of software and electronic hardware. The EOUs are licenced to manufacture goods only within the bonded premises for the purpose of export. According to the policy, the period of bonding is initially for five years, which is extendable to another five years by the development commissioner. On the expiry of the bonding period, it is for the unit to decide whether to continue or to opt out of the scheme. The imported capital goods are allowed to be warehoused for a period of five years. For other goods, the warehousing period is only one year, which can be extended further by the commissioner/chief commissioner of customs on receiving the application made by the unit seeking extension. Extension of the time limit is granted in all cases unless there is mala fide diversion of duty free materials.

General Conditions of Duty Free Import The facility of duty free import extending exemption both from basic and countervailing duty is subject to certain general conditions as laid down by the EXIM Policy and these are summed up as follows: To get the entitlement for duty free import, the goods are required to be imported into the EOU premises directly. However, granite quarrying units, agriculture and allied sector units are allowed to supply/transfer the capital goods and the inputs in the farms/fields with prior permission of customs. Prior to undertaking import/local procurement duty free, the unit has to get their premises customs-bonded. The unit also has to execute a B-17 bond with surety/security with jurisdictional customs/central excise officers and take out a licence under Section 58 of the Customs Act 1962.

Policy for Special Economic Zones and Export Processing Zones

245

The goods, except capital goods and spares, have to be utilised within a period of one year or within such period as may be extended by the customs authorities. The import firm/importer has to maintain a proper account of the import, consumption and utilisation of all imported/locally procured materials and exports made and submit them periodically to the development commissioner/ customs. The import firm/importer needs to achieve minimum Net Foreign Exchange earnings as a Percentage of Exports (NFEP)/export performance as per the provisions of the EXIM Policy. The import firm/importer has to abide by the terms and conditions of the letter of permission/ letter of intent/industrial licence issued to the unit. Apart from the conditions mentioned above, the sector specific customs/excise duty exemption notification(s) have certain additional conditions, which are also required to be followed by the units.

DTA Sale The EOUs other than gems and jewellery units are permitted to sell goods (including rejects and byproducts) manufactured by them in DTA up to 50 per cent of FOB value of exports on payment of concessional duty subject to the achievement of prescribed NFEP. However, the DTA sale facility is not provided for certain products such as motor car, alcoholic liquor, tea (except instant tea), books etc. The EOUs are allowed to remove the goods into DTA on an invoice and the invoice is used both as a transport document and as a document for determining the assessable value. The EOUs can pay the duty by depositing the invoice in an authorised bank or the duty can also be debited from the Personal Ledger Account if a current account is maintained. Section 3 of the Central Excise Act 1944 states that the valuation of goods manufactured in the EOU and cleared into DTA has to be done in accordance with the provisions of the customs law. Thus, when the invoice price of the goods under assessment is in the nature of transaction value, such invoice values can be accepted.

Incentives/Facilities to Special Economic Zone Units Customs and Excise: The units under SEZ may import or procure from domestic sources, public or private bonded warehouses, or international exhibitions held in India, duty-free all goods, namely capital goods, raw materials, consumables, spares, packing materials, office equipment, DG sets etc., without any licence or specific approval. This list of goods also includes the goods required for setting up of the unit. It is to be noted that goods imported/ procured locally duty free are to be utilised within validity period of LOP. income tax: 100 per cent income tax exemption is extended under section 10A of the Income Tax Act 1961 for first five years, 50 per cent for three years thereafter to the SEZ units (for units set up prior to 1 April 2005) and for next five years 50 per cent of the profits, if such profits are reinvested into the SEZ units which began to manufacture or produce articles, or provide any services during the previous year relevant to any assessment year commencing on or after 1 April 2006.

246 Export Import Management Cess: The SEZ units are exempted from payment of cess on goods exported out of SEZ or procured from DTA. Foreign direct investment (Fdi): FDI up to 100 per cent is permitted through the automatic route for all manufacturing activities in Special Economic Zones (SEZs), except for the activities mentioned below: Arms and ammunition, explosives and allied items of defence equipment, defence aircrafts and warships. Atomic substances. Narcotic and psychotropic substances and hazardous chemicals. Distillation and brewing of alcoholic drinks. Cigarettes/Cigars and manufactured tobacco substitutes. However, sectoral norms as notified by the government remain applicable to foreign investment in services. The cases not covered by automatic route are considered and approved by the Board of Approvals. Automatic route: FDI in sectors/activities to the extent permitted under the automatic route does not require any prior approval either of the Government or the Reserve Bank of India. As discussed above, FDI up to 100 per cent is permitted under the automatic route in all activities/sectors, except where the provisions of the consolidated FDI policy (paragraph on ‘entry routes for investment’) issued by the Government of India from time to time are applicable. Government route: FDI in activities not covered under the automatic route need prior approval of the government. Such activities are considered by the Foreign Investment Promotion Board (FIPB), Department of Economic Affairs, Ministry of Finance. Indian companies having foreign investment approval through FIPB route need not apply for any further clearance from the Reserve Bank of India, for receiving inward remittance and for the issue of shares to non-resident investors. Off-shore Banking units (OBus): The off-shore banking units are virtually foreign branches of the banks, but located in India. Setting up of off-shore banking units is allowed in SEZs. Applications for setting up of off-shore banking units need to be made to the Reserve Bank of India in Form-VI prescribed under Section 23 of the Banking Regulation Act, 1949. These units are exempted from Cash Reserve Ratio (CRR), Statutory Liquidity Ratio (SLR) and give financial access to SEZ units and SEZ developers at international rates. The major incentive available to off-shore banking units includes 100 per cent income-tax exemption for five consecutive years and 50 per cent for next five years under section 80LA of the income tax act (second schedule to the SEZ act). Banking/External Commercial Borrowings: Following are the points worth mentioning in context with incentives to units under SEZ for banking/external commercial borrowings: External commercial borrowings by units up to US$ 500 million a year are allowed without any maturity restrictions. The units have the freedom to bring in export proceeds without any time limit.

Policy for Special Economic Zones and Export Processing Zones

247

Flexibility is extended to SEZ units to keep 100 per cent of export proceeds in EEFC account. The units are free to make overseas investment from it. Commodity hedging is permitted. The units are exempted from the payment of interest rate surcharge on import finance. Write-off of unrealised export bills is allowed to SEZ units. Exemption from Central Sales tax: The units under SEZ are exempted from the payment of central sales tax on sales made from the Domestic Tariff Area to SEZ units under Section 26(1)(g) of SEZ Act 2005. Exemption from Service tax: Services rendered to the SEZ developers or an SEZ unit is to be exempted from the payment of service tax under Section 26(1)(e) of the SEZ Act 2005. The service provided in the SEZ and wholly consumed within the SEZ are allowed upfront exemption. While for services provided outside the SEZ or partially consumed within the SEZ, the exemption is allowed only by way of refund. requirement under Environment (Protection) Act: Information technology SEZ does not require any environment clearance. However, environmental clearance as mentioned under the law is required, and the board of approvals does not include environmental clearance. For the development of SEZs, public hearing is not exempted and the process of Environmental Impact Assessment (EIA) as laid down in the notification of the Ministry of Environment is to be adhered to. Concession under Companies Act: Following are major relaxations provided to the units under SEZ: Enhanced limit of Regional office of Registrar of Companies is to be located in SEZs. The units in SEZ are exempted from the requirement of domicile in India for 12 months prior to appointment as Director. Concession under drugs and Cosmetics Act: Units are exempted from port restriction under ‘Drugs and Cosmetics’ rules. Sub-contracting: The EOUs, other than gem and jewellery units, are allowed to sub-contract a part of their production process in DTA. These units may also sub-contract up to 50 per cent of production for job work in DTA. Sub-contracting of both production and production process are also permitted to be undertaken through other EOU/EPZ/EHTP/STP/SEZ units on the basis of records maintained by the unit. However, for the sub-contractual work performed outside, the units are required to take annual permission from the customs authorities and are required to furnish necessary information to the concerned authorities, such as processes to be carried out on a sub-contract basis and the name, address of the sub-contractor etc. Public utility Status: SEZs have been declared as a public utility by the state governments of Andhra Pradesh, Madhya Pradesh, Maharashtra, West Bengal, Karnataka and Uttar Pradesh from the inception of the zone. Public utility status is at present given only for six months at a time, as per the Industrial Disputes Act to prevent strikes without due notice. drugs and Cosmetics: The units in SEZ are exempted from port restriction under the Drugs & Cosmetics Rules. The units are also allowed for sub-contracting/contract farming. SEZ units

248 Export Import Management may sub-contract a part of production or production process through units in the Domestic Tariff Area or through other EOU/SEZ units, and also sub-contract a part of their production process abroad. Labour Laws: The labour laws are applicable to SEZs as enforced by the respective state governments. However, state governments may consider simplifying the procedures/returns and for introduction of a single window clearance mechanism by delegating appropriate powers to the development commissioners of SEZ. Exemption from Employees’ Provident Fund Act and ESi Act: In respect of SEZs, the state government has to apply for exemption to the central government under Section 16 (2) of the Employees’ Provident Fund and miscellaneous act for five years. The central government takes the decision on case-to-case basis. While in respect of the Employees’ State Insurance Act 1948, the state government being the appropriate government, may take a decision as per the powers provided under the Act. Benefits to domestic Supplies / Supplier to SEZ: Supplies from Domestic Tariff Area (DTA) to SEZ are treated as physical exports and are entitled to the following benefits: Duty drawback/DEPB/DFRC/Advance Licence Exemption from payment of central excise duty CST exemption Exemption from state levies Discharge of export obligation, if any, on the supplier Duty Drawback/DEPB can be claimed by the DTA supplier subject to production of disclaimer from SEZ unit/developer. Exhibit 10.4 summarises the incentives offered to SEZs.

Exhibit 10.4 Incentives /Facilities to SEZ Units at a Glance

Policy for Special Economic Zones and Export Processing Zones

249

LO3 Understand the purpose and scope of Software Technology Park (STP) Scheme and Electronic Hardware Technology Park (EHTP) Scheme

SOFTWARE TECHNOLOGY PARK (STP)/ELECTRONIC HARDWARE TECHNOLOGY PARK (EHTP) SCHEME Historical Background and Implementation of the STP/EHTP Scheme Software Technology Park (STP) Scheme and Electronic Hardware Technology Park (EHTP) Scheme, introduced in years 1991 and 1993 respectively, are sector specific EOU schemes. At the time of introduction of sector-specific STP Scheme in 1991, and EHTP Scheme in 1993, it was felt that the ministry dealing with similar type of work would be more appropriate as the requirement was highly technical in nature. With this intention, the STP and EHTP schemes were placed under the administrative control of Ministry of Communication & Information Technology unlike general EOU Scheme which is placed under the administrative control of Ministry of Commerce & Industry. Thus the administration of STP/EHTP Scheme is under the control of Department of Information Technology (under the Ministry of Communication & Information Technology) through Director, Software Technology Park of India (also known as Director, STPI).

Purpose and Scope of the Schemes Under STP Scheme, units can be set up to develop software, data entry and conversion, data processing, data analysis and control, data management or call centre services for export outside the country. Under

250 Export Import Management EHTP Scheme, units can be set up for the manufacture and development of electronic hardware, or electronics hardware and software in an integrated manner, for export out of India. An STP unit may be an individual unit by itself (standalone) or it may be one of many such units located in an area designated as the STP complex by the Ministry of Information Technology. In these parks, all the required infrastructural facilities are provided. Software technology park complex is a place where a number of units can be set up by the Central Government, state government, public or private sector undertakings or any combinations thereof. Further, any private entity may also set up a software technology park for the purpose of export of software developed by the units operating under the STP Scheme. Such infrastructure provider (for STP units) can import specified telematic infrastructure equipment without payment of duty under notification number 153/93-Cus, dated 13 August 1993. However, there is no corresponding central excise exemption for purposes of procuring telematic infrastructure equipment duty free from the domestic market. Such private software technology parks consist of representatives of the Department of Information Technology, Department of Revenue and Department of Commerce, etc., headed by the secretary (Information Technology).

Procedure under the Scheme The policy provisions governing STP schemes are more or less similar to the general EOU scheme. However, considering the specific needs of the software sector, specific provisions have been made for the STP/EHTP units in the policy as well as notifications issued by Department of Revenue governing the scheme. For setting up a unit under STP Scheme, application and procedure is the same as applicable to the EOUs. In case of a unit being set up for development of software and IT enabled services under STP scheme, the approval is given by the Director, Software Technology Park of India (STPI). In the foreign trade policy under the EOU scheme, whenever any permission has to be obtained from the development commissioner (in case of STP units) the same is given by the officer designated by the Ministry of Communication and Information Technology, i.e., the director, STPI. Therefore, for the purpose of STP/EHTP, the director, STPI has the same role as that of development commissioner in case of EOUs other than STP/EHTP.

Specific Provisions The sector specific provisions in respect of STP/EHTP units are as follows: EHTP/STP units can make DTA sale of software developed through data communication/ telecommunication links. This is subject to the condition that the Director of STPI certifies the valuation of such software sold in DTA. STP units are permitted to import telematic infrastructure equipment for creating the central facility system for export of software without payment of duty. The central facilities developed by STP units for transmission of data/software for export can be utilised for export by other STP units and DTA units engaged in development of software, but such facility is not available for the EHTP unit. However, the agency/society authorised to set up the EHTP/STP complex are allowed to create a central facility system for each unit located within such complex. Under STP Scheme, the units are also permitted to render consultancy services for development of software “on site”/abroad, and consultancy fees received by such units in convertible foreign

Policy for Special Economic Zones and Export Processing Zones

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currencies is deemed to be an export for the purposes of fulfillment of export obligation under the scheme. The STP units are free to use the computer systems for trainings including commercial trainings, provided the unit has achieved the prescribed NFEP. However, computer terminals cannot be installed outside the bonded premises for the purpose of imparting training. In case of EHTP, the units can use computer system for imparting training to the workers only. The STP units can freely share specific goods with other STP units or EOUs belonging to the same owner, as mentioned in the notification numbers 52/2003-customs and 22/20004-CE, both dated 31 March 2003.

Key Terms SEZ Act, 2005: The Act provides a single window SEZ approval mechanism through a 19member inter-ministerial SEZ Board of Approval (BoA). Export Oriented undertakings (EOus) Schemes: The EOUs Scheme is complementary to the SEZ Scheme having the same production regime but offering a wide option in locations with reference to factors like source of raw materials, ports of export, hinterland facilities, availability of technological skills, existence of an industrial base and the need for a larger area of land for the project. Off-shore Banking units (OBus): The off-shore banking units are virtually foreign branches of the banks but located in India. Software technology Park (StP) Scheme and Electronic Hardware technology Park (EHtP): STP Scheme and EHTP Scheme, introduced in years 1991 and 1993 respectively, are sector specific EOU schemes.

In revIew The functioning of the SEZs in India is guided by the provisions of the foreign trade policy and fiscal incentives offered to the export units operating from SEZ were made effective through the provisions of relevant statutes. The Special Economic Zones Act 2005 was passed by Parliament in May 2005, and received presidential assent on 23 June 2005. The SEZ Act 2005 plays a key role for the state governments in promoting and facilitating exports, and creation of related infrastructure. With a view to attract larger investments including FDI, a number of tax and other fiscal incentives are offered to units in the SEZs. Besides the fiscal incentives offered to SEZ units, a number of tax exemptions are also available to the SEZ developers, with a view to attract private sector investments in infrastructure development. The EOUs Scheme is complementary to the SEZ Scheme, having the same production regime but offering wide options in locations with reference to factors like source of raw materials, ports of export, hinterland facilities etc. Not only the manufacturing unit but also the units engaged in the services, development of software, trading, repair, remaking, reconditioning,

252 Export Import Management re-engineering including making of gold/silver/platinum jewellery etc., are covered under the EOU scheme. The EOUs are licenced to manufacture goods only within the bonded premises for the purpose of export. The EOUs other than gems and jewellery units are permitted to sell goods (including rejects and by-products) manufactured by them in DTA up to 50 per cent of FOB value of exports on payment of concessional duty subject to achievement of the prescribed NFEP. Incentives / Facilities to Special Economic Zone units under the EOU Scheme include income tax exemption, exemption from payment of cess on goods exported, FDI up to 100 per cent is permitted through the automatic route, exemption from central sales tax, exemption from service tax etc. The STP and EHTP Schemes were placed under the administrative control of Ministry of Communication & Information Technology unlike general EOU scheme which is placed under the administrative control of Ministry of Commerce and Industry. Under STP Scheme, units can be set up to develop software, data entry and conversion, data processing, data analysis and control, data management or call center services for export outside the country. The policy provisions governing the STP Scheme are more or less the same as for the general EOU Scheme.

mulTIple ChoICe QuesTIons 1. The Act provides a single window SEZ approval mechanism through a 19-member interministerial SEZ Board of Approval (BoA) for _______. (a) single window clearance is available for setting up of an SEZ (b) single window clearance is available for setting up a unit in an SEZ (c) single window clearance is available for matters concerning central or state governments (d) all of the above 2. 100 per cent income tax exemption on export income for SEZ units under section 10AA of the income tax act is available for _______. (a) first 5 years, 50 per cent for next 5 years thereafter (b) first 5 years, 50 per cent for next 10 years thereafter (c) first 5 years, 60 per cent for next 5 years thereafter (d) first 5 years, 60 per cent for next 10 years thereafter 3. Income tax exemption on export income is allowed for a block of _______. (a) 10 years in 15 years (b) 5 years in 15 years (c) 10 years in 20 years (d) 5 years in 20 years 4. The main objective/objectives of EOU Scheme is/are _______. (a) boosting exports (b) earning foreign exchange (c) attracting foreign investment (d) all of these

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5. The EOUs can export _______. (a) all products/services (b) prohibited items of exports in ITC (HS) (c) all products/services except prohibited items of exports in ITC (HS) (d) only specific products and services 6. The EOUs are licenced to manufacture goods _______ for the purpose of export. (a) anywhere in the country (b) only within the bonded premises (c) in any premises owned by the export firm/exporter (d) outside the country 7. FDI up to 100 per cent is permitted through the automatic route for all manufacturing activities in Special Economic Zones (SEZS), for the activities like _______. (a) arms and ammunition (b) explosives and allied items of defence equipment (c) defence aircrafts and warships (d) none of the above 8. The STP and EHTP Schemes were placed under the administrative control of _______. (a) Ministry of Communication & Information Technology (b) Ministry of Commerce & Industry (c) Ministry of Finance (d) None of the above 9. _______ may be an individual unit by itself (standalone) or it may be one of such units located in an area designated as the STP complex by the Ministry of Information Technology. (a) An STP unit (b) An Export Oriented Unit (c) A Small and Medium Enterprise (d) Any of the above 10. Software Technology Park complex is a place where number of software technology park unit can be located can be set up by _______. (a) Central Government (b) state government (c) public or private sector undertakings (d) any combination thereof

ConCepT QuesTIons 1. Discuss the salient features of the SEZ Act 2005. Also discuss major incentives offered to the units operating from SEZ. 2. What do you understand by the concept of Export Oriented Units (EOUs)? Discuss in details the objectives and scope of the EOUs Scheme. 3. What are the major incentives/facilities provided to SEZ units under the SEZ Act 2005? Explain in details.

254 Export Import Management 4. What was the purpose of bringing the Software Technology Park (STP) scheme and Electronic Hardware Technology Park (EHTP) scheme into force? Explain in details. 5. Discuss in details the specific provisions in respect of STP/EHTP units provided under STP Scheme.

FurTher readIng Chandrachud S., Gajalakshmi N. (2014). A study on Special Economic Zones (SEZ) in Tamil Nadu State. Journal of Humanities and Social Science. 19(3).http://iosrjournals.org/iosr-jhss/ papers/Vol19-issue3/Version-3/E019333541.pdf Dhingra T., Sinha A., Singh T. Location strategy for competitiveness of Special Economic Zones in India – A Generic framework. http://www.iitk.ac.in/infocell/announce/convention/ papers/Context per cent20and per cent20Human per cent20Resource-02Tarun per cent20Dhingra, per cent20Ambalika per cent20Sinha, per cent20Tripti per cent20Singh.pdf Babu M.S. SEZs in India : Some Issues. https://hss.iitm.ac.in/courses/sureshbabu/SEZ.pdf

Answers to Multiple ChoiCe Questions 1. (d) 7. (d)

2. (a) 8. (a)

3. (a) 9. (a)

4. (d) 10. (d)

5. (c)

6. (b)

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Case Study The formation of SEZs was not welcomed by all groups and people of the country. In the year 2003, the government had to face strong protests from the farmers against the decision of formation of the Polepally SEZ. The farmers were not ready to give their lands to government for this purpose. The protestors blocked the Hyderabad-Bangalore national highway in protest against land acquisition. The protest continued and an alliance against the Polepally SEZ was formed under the name Polepally SEZ Vyathireka Aikya Sanghatana. Saurabh, an old man of 55 years and a father of three sons belonged to a backward caste farming community. His elder son was doing a technical course after completing his 12th class and another one also had passed the 12th class. Saurabh after losing his 12 acres land was very disappointed and his pain could be seen on his face all the time. Out of frustration, he used to show his land to everyone, which was still there but no longer under his control. He explained about everything he used to grow and how well they lived. Saurabh was one of the most active members of the group protesting against the land acquisition for the SEZ. He attended all the meetings held for this purpose and questioned the officers about the land acquisition process. Many other villagers of his village trusted his advice and supported him in the struggle. For him the most painful moment was losing his old good friends in the village who either left the village after the land acquisition process, or became very busy in arranging an alternate source of income for their families. The involvement of middlemen and local politicians had divided the entire village on caste lines. Any one approaching these people used to become the talk of the village. Some of the active group members who were also his fellow caste members tried to take control of the village committee and reunite the villagers but failed to do so. After receiving a relatively good compensation from the government for acquiring his land, Saurabh continued with his caste based occupation, which was the toddy business. He never invested the money received as compensation. His elder son had to pick up the job of a security guard, since farming was no more an option for the family. The family used to recollect the good old days when they used to spend days and nights in the fields. In those times, food was plentiful in their house, with the availability of many fruits like mangoes, guava, and banana. Now the family is not comfortable buying rice, jowar, pulses, fruits and vegetables from the market as all was grown in their fields. Every time he asked, “Why the government lies and occupies our lands? We the poor were never dependent on them. If they do not give us money we are fine with that. Unfortunately, instead of giving and supporting us, they took away our land which was our culture, our dignity and our life.”

Discussion Questions 1. Analyse the socio economic impact of the land acquisition process to build Special Economic Zones in various parts of the country. 2. “Was it displacement in the name of development”? Discuss. Contd...

256 Export Import Management

References https://neerajmishra.wordpress.com/2008/07/26/sez-special-economic-zone-an-overviewchallenges-and-future/, accessed on 25 February 2017. Reddy, C. H. Prashanth, 2009, “Displaced Farmers in Andhra contesting to highlight their plight.” Business Standard, Hyderabad, April 14, http://www.businessstandard.com/india/ storypage.php?autono=355057, accessed on 29 February 2017.

Chapter

Import Documentation and Procedure

11

Learning Outcomes After reading this chapter, you will be able to: LO1 Understand the import procedures and documentation in detail LO2 Review the details of various import duties levied during the process of import

INTRODUCTION As discussed in Chapter 10, in India, the import and export of goods is regulated by the Foreign Trade (Development and Regulation) Act 1992 and India’s Export Import (EXIM) policy. India’s Directorate General of Foreign Trade (DGFT) is the principal governing body dealing with all issues related to the EXIM policy. This chapter discusses in detail the procedures of importing in India and also the documents required to be filed for the same purpose.

LO1 Understand the import procedures and documentation in detail

IMPORT PROCEDURE AND DOCUMENTATION For getting engaged in export import activities, the first step for the importers is to register with the DGFT to obtain an Importer Exporter Code (IEC) number issued against their Permanent Account Number (PAN). After obtaining IEC, the source of items for import must be identified and declared.

The Indian Trade Classification The Harmonised System (ITC-HS) permits the free import of most items without the requirement of obtaining a special import licence. However there are certain categories of items that require special permission or licencing for their import. Following are the different categories of goods which can be imported only after obtaining the necessary licence and therefore cannot be imported freely: Licenced (Restricted) Items: The items of this category are called restricted items because these items can only be imported after obtaining an import licence from the DGFT. This

258 Export Import Management category includes some consumer goods such as precious and semi-precious stones, products related to safety and security, seeds, plants, animals, insecticides, pharmaceuticals and chemicals, and some electronic items. Canalised Items: Another category of items can only be imported via specified transportation channels and methods, or through government agencies, and such items are known as canalised items. Some such items are petroleum products, bulk agricultural products such as grains and vegetable oils, and some pharmaceutical products. Prohibited Items: There is category of items which are strictly prohibited from import and the country does not permit the import of these items by any means. These include tallow fat, animal rennet, wild animals, and unprocessed ivory.

Import Procedure All importing firms are required to follow detailed customs clearance formalities for importing goods into India. Either the importer or his customs broker can file the necessary documents for import customs clearance procedures in India. A comprehensive overview of EXIM procedures is discussed in Figure 11.1. 1. Filing of Bill of Entry

2. Determining the rate of duty clearance from warehouse

3. Filing of requisite documents with customs department

4. Receiving permission to import goods

Figure 11.1

An Overview of Export Procedures

1. Filing of Bill of Entry Every importer is required to begin by submitting a document certifying the description and value of goods entering the country, this document is called ‘Bill of Entry’. Bill of entry is one of the major import documents for import customs clearance. It is a legal document to be filed duly signed by the importer. It is one of the indicators of ‘total outward remittance of country’ regulated by Reserve Bank and customs department. Bill of entry must be filed within 30 days of arrival of goods at a customs location. The bill of entry is required to be submitted to various bodies for different purposes. Following is the description of the same: Original and duplicate for customs Copy for the importer Copy for the bank Copy for making remittances

Import Documentation and Procedure

259

Under the Electronic Data Interchange (EDI): No formal bill of entry is required if the importer uses the EDI system because the filing of bill of entry is automatically recorded. But the importer has to file a cargo declaration after prescribing the particulars required for processing of the entry for customs clearance. Bills of entry can be one of three types: (i) Bill of Entry for Home Consumption: Home consumption means use within India. It is white colored and hence often called the ‘white bill of entry’. This form of bill of entry is used when the imported goods are to be cleared on payment of full duty. (ii) Bill of Entry for Housing: This type of bill of entry is used when the imported goods are not required immediately, and importers may store the goods in a warehouse without the payment of duty under a bond and then clear them from the warehouse when required, on payment of duty. By using this form of bill of entry, the importer is able to defer the payment of the customs duty until goods are actually required. It is printed on yellow paper and is thus often called the ‘yellow bill of entry’. Since the bond is executed for the transfer of goods in a warehouse without paying duty, it is also called the ‘into bond bill of entry’. (iii) Bill of Entry for Ex-Bond Clearance: This type of bill of entry is for ex-bond clearance. It is used for clearance from the warehouse on payment of duty and is printed on green paper. Figure 11.2 provides a sample bill of entry for home consumption, and Figure 11.3 presents a sample declaration to be filed by the importer. Other non-EDI Documents: A bill of entry filed without using the Electronic Data Interchange (EDI) system has to be supplemented with the following documents: Signed invoice Packing list Bill of lading or delivery order/air waybill GATT declaration form Importer/CHA declaration Import licence wherever necessary Letter of credit/bank draft Insurance document Industrial licence, if required Test report in case of chemicals Ad hoc exemption order DEEC Book/DEPB in original, where applicable Catalogue, technical write up, literature in case of machineries, spares or chemicals as may be applicable Separately split up value of spares, components, and machinery Certificate of Origin, if preferential rate of duty is claimed 2. Determining the Rate of Duty Clearance from warehouse It must be noted here that the rate of duty applicable is as it prevails on the date when goods are removed from a warehouse. Therefore, if the rate of duty gets changed after goods have been cleared from a customs port, the customs duty as printed on a yellow bill of entry (bill of entry for housing)

(2)

(3)

(4)

(5)

Weight/ Volume Number etc.

(6)

Description -------R.I.T.C. No. (Give details of each class separately)

Line Number

(7)

(9)

Assessable Value Under Section 14 Customs Act, 1962

(11)

AMOUNT Basic ------Auxiliary

(12)

C.E.T. Item ----Exemption Notification No. and year

CUSTOMS DUTY

(13)

Value for purposes of Section 3 Customs Tarriff Act, 1975 (Column 9 + Column 11)

Country of Consignment (if different) and Code

Importer Code

(By pin-point typerwriter)

RUPEES

(14)

RATE Basic -----Auxiliary

(15)

AMOUNT Basic -----Auxiliary

(16)

Total DUTY (Column 11 + Column 15)

ADDITIONAL DUTY

Bill of Lading Date

Importer’s Name and Address

Source: www.allworldshipping.com/bl/default.php?MSG=Session%20time%20out, accessed on 27 February 2017

TOTAL

TOTAL AMOUNT OF DUTY (IN WORDS)

(10)

RATE Basic -----Auxiliary

Country of Origin and Code

Customs House Agent Code

Licence No.

Figure 11.2 Bill of Entry for Home Consumption

Import Clerk

(8)

Customs Nature Tariff heading of Duty --------Code Exemption Notification No. and Year

GOODS

Port of Shipment

Gross Weight TOTAL NUMBER OF PACKAGES (IN WORDS)......……..

(1)

No. and Marks Serial Unit Descrip- and No. Code tion Numbers

PACKAGES

Rotation No. and Date

S. No. and Date

[Refer Bill of Entry Regulations, 1976]

Prior Entry Import Dept. Stamp

QUANTITY

L = Land

A = Air

S = Sea

Vessel’s Name

Port Code

Bill of Entry for Home Consumption

260 Export Import Management

Import Documentation and Procedure

261

DECLARATION (To be signed by an Importer) With Custom* House Agent

1. I/We declare that the contents of invoice(s) No.(s)........... dated ........... of M/s........... and of other documents relating to the goods covered by the said invoice (s) and presented herewith are true and correct in every respect. OR

Without Custom* House Agent

2.

3. 4.

5.

I/We declare that the contents of this Bill of Entry for goods imported against Bill of Lading No........... dated ........... are in accordance with the invoice No........... dated ........... and other documents presented herewith. I/We also declare that the contents of the above mentioned invoice (s) and documents are true and correct in every respect. I/We declare that I/we have not received and do not know of any other documents or information showing a different price, value (including local payments, whether as commission or otherwise), quantity or description of the said goods and that if at any time hereafter I/we discover any information showing a different state of facts, I/we will immediately make the same known to the Commissioner of Customs. I/We declare that goods covered by the bill of entry have been imported on outright purchase/consignment account. I/We am/are not connected with the suppliers/manufacturers as:— (a) Agent/distributor/indentor/Branch/subsidiary/concessionaire, and (b) Collaborator entitled to the use of trade mark, patent or design, (c) Otherwise than as ordinary importers or buyers. I/We declare that the method of invoicing has not changed since the date on which my/our books of accounts and/or agreement with the suppliers were examined previously by the Customs House (s). Signature of Importer......…... *Strike out whichever is inapplicable. Figure 11.3 Declaration

Source: www.allworldshipping.com/bl/default.php?MSG=Session%20time%20out, accessed on 27 February 2017

and paid on the value listed on the green bill of entry (bill of entry for ex-bond clearance) cannot be the same. 3. Filing of Requisite Documents with Customs Department Important documents other than bills of entry required for import customs clearance procedures and formalities are discussed in this section. Commercial Invoice: This invoice (Figure 11.4) is the prime document in any business transaction. It is one of the documents required for import customs clearance for value appraisal of the imported items by the concerned customs official. Assessable value is calculated according to the terms of delivery of goods mentioned in the commercial invoice produced by importer at customs location. The value mentioned in the commercial invoice is matched with the actual market value of the same goods by the concerned authorities, to defeat the fraudulent activities of importer or exporter by overinvoicing or under-invoicing. Thus, invoice plays a pivotal role in value assessment in import customs clearance procedures.

262 Export Import Management COMPANY NAME COMPANY ADDRESS COMMERCIAL INVOICE (NOTE: All shipments must be accompanied by a Federal Express International Air Waybill.)

INTERNATIONAL AIR WAYBILL NO. DATE OF EXPORTATION

EXPORT REFERENCES (i.e., order no., invoice no.)

SHIPPER/EXPORTER (complete name and address)

CONSIGNEE (complete name and address)

COUNTRY OF EXPORT

IMPORTER — IF OTHER THAN CONSIGNEE (complete name and address)

COUNTRY OF MANUFACTURE

COUNTRY OF ULTIMATE DESTINATION

MARKS/NOS.

NO. OF PKGS.

TYPE OF PACKAGING

FULL DESCRIPTION OF GOODS

QTY.

UNIT OF MEASURE

TOTAL NO. OF PKGS.

WEIGHT

TOTAL WEIGHT

UNIT VALUE

TOTAL VALUE

TOTAL INVOICE VALUE

SEE REVERSE SIDE FOR HELP WITH THE ABOVE SECTION For U.S. EXPORT ONLY: THESE COMMODITIES, TECHNOLOGY, OR SOFTWARE WERE EXPORTED FROM THE UNITED STATES IN ACCORDANCE WITH THE EXPORT ADMINISTRATION REGULATIONS. DIVERSION CONTRARY TO UNITED STATES LAW IS PROHIBITED.

Check one

I DECLARE ALL THE INFORMATION CONTAINED IN THIS INVOICE TO BE TRUE AND CORRECT. SIGNATURE OF SHIPPER/EXPORTER (Type name and title and sign.)

F.O.B. C & F C.I.F.

DATE

Figure 11.4 Commercial Invoice Source: www.dhl.com/content/dam/downloads/g0/.../commercial_invoice_template.doc, accessed on 24 February 2017

Import Documentation and Procedure

263

Bill of Lading / Airway bill: It is another important document required for import customs clearance. Bill of lading under sea shipment or airway bill under air shipment is the carrier’s document required to be submitted with customs for import customs clearance purposes. It is issued by the carrier which provides the details of cargo along with terms of delivery. A sample bill of lading has been shown in Figure 11.5. DATE _________

Bill of Lading

Bill of Lading # _________ Carrier Name _________

Shipper

Pieces

Consignee Destination

Description

Weight (Ibs)

Class

Rate

Amount

Total Shipper’s Last Name

Time

Date

Received in Good Condition Excepts As Noted

Driver’s Signature

×

×

Trailer Loaded By:

Freight Counted By:

Shipper

Shipper

Driver

Driver/Pallets said to contain

Shipper’s Signature

Special Instructions:

Driver/Pieces Figure 11.5 Bill of Lading Source: ugcnetstudy.xyz/diqt/WJY.htm, accessed on 29 February 2017

$C.O.D

264 Export Import Management Import Licence: Import licence is required as one of the documents for import customs clearance procedures and formalities for those products only which do not fall in the category of items that can be freely imported. Import of such specific products is regulated by the government from time to time, and the government insists on an import licence as one of the documents required for import customs clearance to bring those materials from foreign countries. The details of these items have already been discussed in the chapter. Insurance Certificate: It is a supporting document against the importer’s declaration of the terms of delivery. Insurance certificate under import shipment helps customs authorities to verify whether the selling price includes insurance or not. This is required to find the assessable value which determines the import duty amount. Purchase Order/Letter of Credit: A purchase order reflects almost all terms and conditions of sale contract. It enables the customs official to confirm the value assessment. If an import consignment is under letter of credit basis, the importer can submit a copy of the letter of credit along with the documents for import clearance. Technical write up, Literature etc. for Specific Goods, if any: Technical write up, literature of imported goods or any other similar documents is also required for import clearance of some specific goods. For example, if an importer imports machinery, a technical write up or literature explaining its function can be attached along with the other importing documents. This document enables the customs official to derive the exact market value of such imported machinery, additionally it also helps for value assessment. Industrial Licence if any: An industrial licence copy is required for the import of specific goods. When an importer claims any import benefit as per guidelines of the government, such industrial licence can be produced to avail the benefits declared by the government for these goods. In such case, the industrial licence copy can be submitted with customs authorities as one of the import clearance documents. Registration cum Membership Certificate (RCMC), if any: It is required to produce RCMC to customs authorities to avail import duty exemption from government agencies for specific goods. In such cases, the importer needs to submit a ‘Registration Cum Membership Certificate’ along with other import customs clearance documents. Test Report, if any: Sometimes the customs officials are not able to identify the quality of goods imported. In order to assess the value of such goods, customs official draw a sample of such imported goods and arrange to send them for testing to government authorised laboratories. The appraisement of such goods is complete only after obtaining the test report. So test report is one of the documents required for import customs clearance and formalities for some specific goods. DEEC/DEPB/ECGC or any other Documents for Duty Benefits: To avail any duty exemptions against imported goods under different schemes like DEEC/DEPB/ECGC etc. the licence is required to be produced along with other import clearance documents. Clearance Central Excise Document, if any: When the importer avails any central excise benefits for the imported goods, the documents pertaining to the same need to be produced along with other import customs clearance documents.

Import Documentation and Procedure

265

GATT/DGFT Declaration: According to the guidelines of Government of India, every importer is required to file GATT Declaration and DGFT declaration along with other import customs clearance documents with customs. GATT Declaration has to be filed by the importer as per the terms of General Agreement on Tariff and Trade. Any other Specific Documents other than the above mentioned: Apart from the above mentioned documents, importer needs to file additional documents if required as per the guidelines of government/customs department for import of specific goods. 4. Receiving Permission to Import Goods After filing the bill of entry along with the other necessary import customs clearance documents, assessment and examination of goods are carried out by concerned customs officials. After completion of import customs formalities, a ‘pass out order’ is issued for such bill of entry. After paying necessary import charges, if any, to the carrier and producing the documents required for import customs clearance of goods and custodian of cargo, the goods can be taken out of customs area to importer’s place.

LO2 Review the details of various import duties levied during the process of import

IMPORT DUTIES 1. Basic Customs Duty (BCD): BCD represents the standard tax rate applied to goods, or the standard preferential rate in the case of goods imported from specified countries. The rates of customs duties are specified in the first and second schedules of the Customs Tariff Act 1975. While the First Schedule provides the rates of import duty, the second outlines the rates of export duty. BCD is divided into standard and preferential rates. The goods imported from countries holding trade agreements with the Indian Government are eligible for lower preferential rates. 2. Additional Customs Duty (Countervailing Duty-CVD): CVD is equal to central excise duty which is payable on imported goods produced in India. With CVD, the process of production is treated as ‘manufacture’ as provided under the Central Excise Act 1944. CVD is based on the aggregate value of goods including landing charges and BCD. An additional CVD may be levied on the imported goods which is equivalent to sales tax or VAT. The additional CVD cannot exceed four per cent of total duty. This duty is refunded if the importing firm meets following requirements: The importing firm pays all customs duties, The sales invoice indicates that credit is not allowed, and The importing firm pays VAT/sales tax on the sale of the goods. Other CVDs may be levied on specific imported goods to neutralise the effect of a subsidy in the country of origin. The Central Government notifies these specified goods and such notification remains valid for five years. Such validity period may be further extended for not more than 10 years. Subsidies related to research activities, assistance to disadvantaged regions in the destination country, and assistance in adapting existing facilities to new environmental requirements are exempted from the application of CVDs.

266 Export Import Management 3. Antidumping Duty: If the Central Government finds that an imported good has moved to the country at below fair market price then the government may impose an antidumping duty on such goods. An importing firm for such goods is notified and the notification remains valid for five years with the possibility of being extended to 10 years. It must be noted here that the antidumping duty cannot exceed the difference between the import and normal price (margin of dumping). However, the goods imported 100 per cent by the Export Oriented Units (EOU), and units in Free Trade Zones (FTZs) and Special Economic Zones (SEZs) are exempted from the application of antidumping duty. 4. Safeguard Duty: For the imposition of safeguard duty, it is not required that the central government should determine that the good is being imported at below fair market price. This duty may be imposed even if the government decides that a sudden increase in exports is causing, or threatens to cause, serious damage to the domestic industry. A notification regarding the imposition of safeguard duty remains valid for four years with possible extension up to 10 years. 5. Protective Duty: A duty imposed for the protection of domestic industry from imported goods is named as protective duty. Protective duty is imposed by the central government on the recommendations of the tariff commission, at a rate that does not exceed the rate recommended by the tariff commission. The central government may also specify the period up to which the protective duty will remain in force. The Central Government reserves the right to reduce or extend the period, and adjust the effective rates. 6. Education Cess: Education cess is a tax aiming to fund education and healthcare initiatives. It is levied at two per cent and higher education cess at one per cent of the aggregate of customs duties. The education cess does not include safeguard duty, countervailing duty on subsidised articles, or antidumping duty.

Key Terms Licenced (Restricted) Items: The items that can only be imported after obtaining an import licence from the DGFT. Canalised Items: Items which can only be imported via specified transportation channels and methods, or through government agencies such as the State Trading Corporation (STC). Prohibited Items: Some goods are strictly prohibited from import and cannot be imported to the country by any means.

In revIew The Indian Trade Classification – Harmonised System (ITC-HS) permits the free import of most goods without a special import licence. However, there are certain categories of goods that require special permission or licencing. Bill of entry is one of the major import documents for import customs clearance. It is a legal document to be filed by importer, duly signed. The rate of duty applicable is as it exists on

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the date a good is removed from a warehouse. Bill of lading under sea shipment or airway bill under air shipment is issued by the carrier which provides the details of cargo along with terms of delivery. Insurance certificate is a supporting document against importer’s declaration of the terms of delivery. BCD is the standard tax rate applied to goods, or the standard preferential rate in the case of goods imported from specified countries. CVD is equal to central excise duty and is payable on imported articles produced in India. If the central government determines that a good is being imported at below fair market price, then the government may impose an antidumping duty on such goods. A duty imposed to protect domestic industry from imports is named as protective duty. Education cess is a tax designed to fund education and healthcare initiatives.

mulTIple ChoICe QuesTIons 1. _______ can only be imported after obtaining an import licence from the DGFT. (a) Licenced (Restricted) Items (b) Canalised Items (c) Prohibited Items (d) None of these 2. _______ are items which can only be imported via specified transportation channels and methods, or through government agencies such as the State Trading Corporation (STC). (a) Licenced (Restricted) Items (b) Canalised Items (c) Prohibited Items (d) None of these 3. _______ are strictly prohibited from import and cannot be imported to the country by any means. (a) Licenced (Restricted) Items (b) Canalised Items (c) Prohibited Items (d) None of these 4. _______ is a document certifying the description and value of goods entering the country. (a) Bill of Lading (b) Bill of Entry (c) Education cess (d) Ex-Works 5. _______ is white coloured and hence often called the ‘white bill of entry’. (a) Bill of Entry for Ex-Bond Clearance (b) Basic Customs Duty (BCD) (c) Bill of Entry for Home Consumption (d) None of these 6. _______ is a type of Bill of Entry is for ex-bond clearance. (a) Bill of Entry for Ex-Bond Clearance (b) Basic Customs Duty (BCD) (c) Bill of Entry for Home Consumption (d) None of these 7. _______ is the standard tax rate applied to goods, or the standard preferential rate in the case of goods imported from specified countries. (a) Bill of Entry for Ex-Bond Clearance (b) Basic Customs Duty (BCD) (c) Bill of Entry for Home Consumption (d) None of these

268 Export Import Management 8. If the Central Government determines that a good is being imported at below fair market price then the government may impose _______ on such goods. (a) antidumping duty (b) safeguard duty (c) protective duty (d) basic custom duty

ConCepT QuesTIons 1. Discuss the various steps involved in import procedures in India. 2. Write short notes on following: (a) Bill of entry (b) Commercial invoice (c) Import licence 3. Define the following in detail: (a) Basic Customs Duty (BCD) (b) Additional Customs Duty (Countervailing Duty CVD) (c) Protective duty (d) Education cess

FurTher readIng Custom Manual, 2014, Central Board of Excise & Customs, Department of Revenue, Ministry of Finance, Government of India. “Passage to India: Selling to India’s Consumer Market”, India Briefing Magazine, July 2014.

Answers to Multiple ChoiCe Questions 1. (a) 7. (b)

2. (b) 8. (a)

3. (c)

4. (b)

5. (c)

6. (a)

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Exercise Ms. Sheena Ahluwalia is the CEO of a company dealing in consumer electronics. Her company leads the domestic industry in production of computer tablets. Sheena’s company has been an exporter and has successfully exported its tablets all over the world, including Canada, Mexico, the European Union, Australia and several countries in Asia. As we know, companies will often import goods or components that can be more effectively and cheaply produced by another company may be from a different country and focus on producing and exporting the goods in which it excels. For similar reasons, Sheena’s company has decided to import different components necessary to manufacture its computer tablets from other countries. Importing goods from outside the country is a new activity for Sheena’s company and Sheena is aware that documentation plays a vital role in import export activities as it facilitates the smooth flow of physical goods and payments thereof across national frontiers. Documentation is, however, complex as the number of documents to be filled in is large, so also is the number of concerned authorities to whom the relevant documents are to be submitted. Sheena needs your services to help in understanding the process of importing goods and also preparing documents necessary for importing goods.

Question 1. Prepare a detailed project report to be referred by Sheena for understanding import procedure and documentation.

References http://dgft.gov.in/exim/2000/Guide%20to%20Exports.pdf, accessed on 25 February 2017 http://www.india-briefing.com/news/import-policy-procedures-duties-8728.html/, accessed on 25 February 2017

Chapter

12 Incoterms

Learning Outcomes After reading this chapter, you will be able to: LO1 Explain the meaning and objectives of Incoterms LO2 Understand the application of different Incoterms Rules 2010

INTRODUCTION In international trade, it is very important that importers and exporters agree in advance on their respective roles and the terms, conditions and definitions of the sale. A buyer and seller should know where a risk begins and ends, who is responsible for what (e.g. costs and documentation), who owns what and at what geographical point. Here the ‘Incoterms’ come into picture, which addresses all these issues. All-important Incoterms are explained in the subsequent part of this chapter.

LO1 Explain the meaning and objectives of Incoterms

INCOTERMS The ‘Incoterms’ Rules or International Commercial terms are a series of pre-defined commercial terms published by the International Chamber of Commerce (ICC) and is a registered trademark of the ICC. These are widely used in international commercial transactions. Incoterms are a series of three-letter trade terms related to common sales practices. These rules intend primarily to clearly communicate the tasks, costs and risks associated with the transportation and delivery of goods. The Incoterms Rules are accepted by governments, legal authorities and practitioners worldwide for the interpretation of most commonly used terms in international trade. Thus, Incoterms help in reducing or removing altogether uncertainties arising from different interpretation of the rules in different countries. First published in 1936, the Incoterms Rules have been periodically updated, with the eighth version, Incoterms 2010 having been published on 1 January 2011.

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Purpose of Incoterms The purpose of the Incoterms is to: Remove barriers caused by distance, language, and local business practices in global business dealings Eliminate uncertainties and different interpretations of trade terms on a worldwide scale Minimise the risks, delays, and disruptions caused by misunderstandings, disputes, and litigation Provide a universal vocabulary of the major international financial institutions, which is accepted by all Reduce problems at critical points One of the critical points of international trade occurs where the seller’s responsibility ends and the buyer’s responsibility for the shipment begins. This critical point witnesses the hand-off of costs, risks, and documents. A misunderstanding of responsibility at a critical point may delay a shipment, cause customs problems, and impact the letter of credit payment. Thus it is essential for an importer to familiarise himself with Incoterms Rules, as they are considered essential in contracts for the sale of goods internationally. The Incoterms Rules are standard sets of trading terms and conditions designed to assist traders when goods are sold and transported. Incoterms defines divisions of tasks, responsibilities, costs and risks involved in delivering goods from the seller to the buyer. Each Incoterms Rule specifies: the obligations of each party (e.g., who is responsible for services such as transport, import and export clearance) the point in the journey when risk transfers from the seller to the buyer Thus buyers and sellers demarcate the responsibilities associated with the delivery of goods between them, including responsibilities regarding transportation costs, insurance etc. This is how Incoterms significantly reduce misunderstandings among traders and thereby minimise trade disputes and litigation.

LO2 Understand the application of different Incoterms Rules 2010

ThE INCOTERMS 2010 RUlES The Incoterms Rules are created and published by the International Chamber of Commerce (ICC) and are periodically revised from time to time. The most recent revision is Incoterms 2010 which came into force on 1 January 2011.The reduction in Incoterms from 13 to 11 different terms was accomplished by substituting two new Incoterms, DAT (Delivered at Terminal) and DAP (Delivered at Place), for DAF (Delivered at Frontier), DES (Delivered Ex-Ship) and DEQ (Delivered Ex-Quay) for DDU (Delivered Duty Unpaid). Incoterms 2010 (Fig. 12.1) addresses duties to provide information regarding securityrelated clearances, such as Importer Security Filings and other chain-of-custody information. Eleven rules of Incoterms are divided into two main groups: Group 1: This category of Incoterms applies to any mode of transport. It includes following: EXW Ex Works FCA Free Carrier CPT Carriage CIP Carriage DAT Delivered at Terminal

272 Export Import Management

Customs

Seller

Carrier

Border

Customs

Port

Ship

Port

Named Place

Buyer

EXW (Ex Works)

FCA (Free Carrier) CPT (Carriage Paid To)

Obligation

CIP (Carriage And Insurance Paid To)

Recommended

DAT (Delivered At Terminal)

DAP (Delivered At Place) DDP (Delivered Duty Paid)

With Import Clearance

FAS (Free Alongside Ship)

FOB (Free On Board) CFR (Cost And Freight)

Recommended

CIF (Cost, Insurance And Freight)

*

Named place of destination can be defined individually (e.g., at port, warehouse, quay)

The risk is borne by the seller The costs are borne by the saller Transport insurance is the responsibility of the seller

The risk is borne by the buyer The costs are borne by the buyer Incoterms for sea and inland water transport

Figure 12.1 Risks and Cost Distribution under INCOTERMS 2010 Source: http://www.egetrans.com/fileadmin/inhalte/News-EnglishEgetrans/Rules-Chamber-of-CommerceEgetrans.pdfCategorization of Incoterm Rules 2010, accessed on 13 February 2017

DAP Delivered at Place DDP Delivered Duty Paid Group 2: Incoterms that apply to sea and inland waterways transport only form this group. It includes the following: FAS Free Alongside Ship FOB Free on Board CFR Cost and Freight CIF Cost, Insurance, and Freight It is important to note here that in general the “transport by sea or inland waterways only” rules should only be used for bulk cargos (e.g., oil, coal) and non-containerised goods, where the exporter can load the goods directly onto the vessel. On the other hand if the goods are containerised, the “any transport mode” rules are more appropriate. Major difference between the rules in these two groups

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273

is the point at which risk transfers from seller to buyer. For example, the “Free on Board” (FOB) rule provides that risk transfers when the goods have been loaded on board the vessel. However, the “Free Carrier” (FCA) rule states that risk transfers when the goods have been taken in charge by the carrier. Classification of rules on the basis of responsibility for main Carriage: Another important and meaningful way of classifying the rules is by considering the responsibility for the main carriage between the buyer and seller. It is important to understand, if the seller is responsible for the main carriage, at what stage does the risk pass from the seller to the buyer, that is, before the main carriage, or after it? On this basis we find the following four groups: 1. Buyer responsible for all carriage – EXW 2. Buyer arranges main carriage – FAS, FOB, FCA 3. Seller arranges main carriage, risk passes after main carriage – DAT, DAP, DDP 4. Seller arranges main carriage, but risk passes before main carriage – CFR, CIF, CPT, CIP Let us discuss these terms in details.

Group 1: Applicable to any mode of transport 1. Ex Works (EXW): In case of Ex Works, the buyer bears all costs and risks involved in taking the goods from the seller’s premises to the desired destination. Here seller's responsibility is limited to making the goods available at his premises (works, factory, and warehouse). This term presents minimum obligations and responsibilities for the seller. This term is popularly used across all modes of transport. Thus the buyer has to bear all costs and risks involved in taking the goods from the seller’s premises. But if the parties wish, the seller may be entrusted with the responsibility for the loading of the goods on departure, and to bear the risks and all the costs of such loading. This should be made clear by adding explicit wording to this effect in the contract of sale. This term is not used when the buyer cannot carry out the export formalities directly or indirectly. In such circumstances, the FCA term should be used, provided the seller agrees that he will load at his cost and risk. 2. Free Carrier (FCA): FCA is the rule of choice for containerised goods where the buyer is responsible for the arrangement of the main carriage. It is a very flexible rule that may be applied in all situations where the buyer arranges the main carriage and seller arranges pre-carriage from seller’s depot to the named place, which can be a terminal or transport hub, forwarder’s warehouse, etc. Delivery and transfer of risk takes place only when the truck or other vehicle reaches at a place ready for unloading. Thus in case of FCA it is the carrier that is responsible for unloading the goods. If there is more than one carrier, then risk gets transferred on delivery to the first carrier. Under this term, the seller’s obligation is to hand over the goods, cleared for export, into the charge of the carrier at a place or point decided by the buyer. If no precise point is indicated by the buyer, the seller has an option to choose within the place or range stipulated, where the carrier is required to take the goods into his charge. If seller’s assistance is required to make the contact with the carrier, the seller acts at the buyer’s risk and expense. This term is popularly used across all modes of transport and can be applied for any transport mode, or even in the cases where there are more than one transport modes are involved. In all cases, the seller is responsible for export clearance and the buyer undertakes all risks and costs after the goods have been delivered at the named place.

274 Export Import Management 3. Carriage Paid To (CPT): This term requires the seller to clear the goods for export and can be used across all modes of transport. It can be used for any transport mode, or where there is more than one transport mode. Under this term, the seller is responsible for arranging carriage to the named place, but not for insuring the goods to the named place. However delivery of the goods takes place, and risk is transferred from seller to buyer at the point where the goods are taken in charge by a carrier. Thus the risk of loss or damage to the goods occurring after the delivery has been made to the carrier is transferred from the seller to the buyer. The seller pays the freight for the carriage of goods to the named destination. 4. Carriage and Insurance Paid (CIP): Under this term, the seller has the same obligations as under CPT, in addition to the responsibility of obtaining insurance against the buyer's risk of loss or damage of goods during the carriage. Although the seller is obliged to arrange for insurance for the journey, the rule requires a minimum level of cover, which may be commercially unrealistic. Therefore, the level of cover may be addressed elsewhere in the commercial agreement. This term can be used for any transport mode, including cases where there is more than one transport mode. 5. Delivered at Terminal (DAT): This term requires the seller to arrange transportation for delivering the goods which are unloaded from the arriving conveyance, at the named place. This term can be used for any transport mode, or where there is more than one transport mode. Under this term, the seller delivers when the goods, once unloaded from the arriving transportation, are placed at the disposal of the buyer at a named terminal at the named port or destination. Here ‘‘Terminal’’ includes quay, warehouse, container yard or road, rail or air terminal. The seller bears the costs and risks of bringing the goods to the point specified in the contract and also ensures that their forwarding contract mirrors the contract of sale. The seller is responsible for the export clearance procedures while the importer is responsible for clearing the goods for import, arranging import customs formalities, and paying the import duty. If the parties intend the seller to bear the risks and costs of taking the goods from the terminal to another place then the DAP term may apply. 6. Delivered at Place (DAP): Under DAP the seller undertakes the responsibility and bears the risks to deliver the goods to the named place. He is responsible for the clearance of goods for export. If the seller incurs additional unloading costs at the place of destination, unless previously agreed, he is not entitled to recover any such costs. On the other hand, the importing firm is responsible for effecting customs clearance, and paying custom duties, if any. Risk gets transferred from seller to buyer when the goods are available for unloading, and therefore unloading is at the buyer’s risk. This term can be used for any transport mode, or where there is more than one transport mode. If the seller is responsible for clearing the goods, paying duties etc., consideration should be given for using the DDP term. 7. Delivered Duty Paid (DDP): This term may be used irrespective of the mode of transport. Under this term, the seller is responsible for delivering the goods to the named place in the country of importation, including all costs and risks in bringing the goods to the import destination. This includes duties, taxes and customs formalities. Risk is transferred from seller to buyer when the goods are made available to the buyer, ready for unloading from the arriving conveyance. This is how maximum obligation is placed on the seller. This is the only rule that places the responsibility of import clearance on the seller and expects the seller to make payment of taxes and/or import duty.

Group 2: Incoterms applicable to sea and inland waterway transport only 1. Free Alongside Ship (FAS): This term requires the seller to place the goods alongside the ship at the named port. Seller delivers the goods, cleared for export, alongside the vessel at a named port and this is the point at which the risk transfers to the buyer. The buyer undertakes the responsibility for

Incoterms

275

loading the goods and all costs thereafter. This term is suitable only for maritime transport but not for multi-modal sea transport in containers. FAS is typically used for heavy-lift or bulk cargo. Use of this rule is restricted to goods transported by sea or inland waterway. Usually it is used for situations where the seller has direct access to the vessel for loading, e.g., bulk cargos or non-containerised goods. 2. Free On board (FOb): The seller has to himself load the goods on board the vessel nominated by the buyer and there is no reference to, or provision for, the use of a carrier or forwarder. Once the goods have been loaded on board, risk transfers to the buyer, who bears all costs thereafter. Cost and risk are divided when the goods are actually on board the vessel. Here the seller agrees to take the responsibility to clear the goods for export. The term is applicable for both maritime and inland waterways transport but not for multi-modal sea transport in containers. Use of this rule also is restricted to goods transported by sea or inland waterways.

Delivered To Destination

Duty & Taxes

Arrival Charges

Freight

Loading On Vessel

Insurance

Terminal Charges

Inland Freight

Loading Changes

Distribution of Responsibility between Buyer and Seller under Incoterms 2010s

Packing

Exhibit 12.1

EXW FCA FAS FOB CFR CIF CPT CIP DAT DAP DDP SELLER BUYER

Contd...

276 Export Import Management EXW – EX WORKS: Maximum obligation is placed on the buyer by making him responsible for the delivery of goods from door to door. On the other hand, the seller is required to ensure freight is available for shipping and, beyond collection they have no legal liability for anything that occurs to the goods while in transit. FCA – FREE CARRIER: FCA expects the seller to transport goods from origin to a nominated carrier of the buyer's choice. After handing over the goods to the nominated carrier, costs and associated risks get transferred from the seller to the buyer who is then responsible for onward shipping till the destination. FAS – FREE ALONGSIDE SHIP: It is used exclusively for sea freight transport. Here the responsibility of seller gets passed to the buyer after the delivery of goods alongside a ship. FOB – FREE ON BOARD: The buyer is held responsible for the delivery of goods to the destination following transport of freight on board a vessel at the port of origin (sea freight only). CFR – COST AND FREIGHT: In case of CFR, the seller undertakes the responsibility to nominate a freight forwarder and arranges for the transportation of cargo from origin to destination port (sea freight only). Risk transfer to the buyer for insurance cover takes place when the goods are delivered on board a vessel at the port of origin. The buyer is expected to pay for all destination charges. CIF – COST INSURANCE AND FREIGHT: It is similar to CFR, with the difference that here the seller is responsible for the insuring of goods during the maritime leg of the voyage. All risks and costs get transferred to the buyer after the delivery of goods at the port of destination. CPT – CARRIAGE PAID TO: In CPT while the seller is responsible for freight and clearance to destination, the buyer has to arrange a cover for any costs arising after the goods are delivered to the carrier including loss and damage. CIP – CARRIAGE AND INSURANCE PAID TO: It is similar to CPT, but risk of loss and damage to goods during carriage stays with the seller. DAT – DELIVERED AT TERMINAL: In DAT, the seller assumes all risks and costs of transport to destination port or terminal. The buyer has to bear the payment for all destination charges including relevant duties and taxes, customs clearances and onward delivery. DAP – DELIVERED AT PLACE: The seller undertakes the responsibility for all risks and costs of delivery to the buyer's facility. Import duties and taxes are paid by the buyer. DDP – DELIVERED DUTY PAID: Under this term, minimal obligation is placed on the buyer and more responsibility on the seller who bears all risks and costs up to the destination facility, including import duties and taxes. Source: http://www.championfreight.co.nz/incoterms2010.pdf, accessed on 13 February 2017

3. Cost and Freight (CFr): Under this term, the seller arranges and pays for transport to the named port and gets the goods, which have been cleared for export, loaded on board the vessel. However, risk transfers from seller to buyer once the goods have been loaded on board, i.e., before the main carriage takes place. This includes the cost of insuring the goods for the main carriage, which is no longer the seller’s responsibility. This term should only be used for sea or inland waterways transport. In practice, it should be used for situations where the seller has direct access to the vessel for loading, e.g., bulk cargos or non-containerised goods.

Incoterms

277

4. Cost Insurance and Freight (CIF): The seller has the same obligations as under CFR, however he is also required to provide insurance against the buyer's risk of loss or damage to the goods during transit. This term requires the seller to arrange and pay for transport to the named port. He delivers goods which are cleared for export, loaded on board the vessel. The risk transfer from seller to buyer takes place once the goods have been loaded on board, i.e., before the main carriage takes place. Seller also arranges and makes payment for insurance for the goods for carriage to the named port. However the rule requires a minimum level of cover, which may be commercially unrealistic. Therefore the level of cover may need to be addressed elsewhere in the commercial agreement. This term is used in situations where the seller has direct access to the vessel for loading, e.g. bulk cargos or non-containerised goods.

Key Terms Incoterms: These are a series of pre-defined commercial terms published by the International Chamber of Commerce (ICC). Ex Works (EXW): The buyer bears all costs and risks involved in taking the goods from the seller's premises to the desired destination. Free Carrier (FCA): FCA is the rule of choice for containerised goods where the buyer arranges for the main carriage. Carriage Paid To (CPT): This term requires the seller to clear the goods for export and can be used across all modes of transport. Carriage and Insurance Paid (CIP): Under this term the seller has the same obligations as under CPT but also has the responsibility of obtaining insurance against the buyer's risk of loss. Delivered at Terminal (DAT): This term requires the seller to arrange carriage for delivering the goods, unloaded from the arriving conveyance, at the named place. Delivered at Place (DAP): The seller bears the responsibility and risks to deliver the goods to the named place. He is required to clear the goods for export.

In revIew The Incoterms Rules or International Commercial terms are a series of pre-defined commercial terms published by the International Chamber of Commerce (ICC) and is a registered trademark of the ICC. Group 1 category of Incoterms applies to any mode of transport while Group 2 applies to sea and inland waterways transport only. Under Ex-Works, the buyer bears all costs and risks involved in taking the goods from the seller's premises to the desired destination and seller's responsibility is limited to making the goods available at his premises. FCA is the rule of choice for containerised goods where the buyer arranges for the main carriage. Under CPT, the seller is responsible for arranging carriage to the named place, but

278 Export Import Management not for insuring the goods. Under CIP, the seller has the responsibility of obtaining insurance against the buyer's risk of loss or damage of goods during the carriage. DAT requires the seller to arrange carriage for delivering the goods, unloaded from the arriving conveyance, at the named place. DAP expects the seller to bear the responsibility and risks while delivering the goods to the named place. Under DPP, the seller is responsible for delivering the goods to the named place in the country of importation, including all costs and risks in bringing the goods to the import destination. Under FAS, the seller has to place the goods alongside the ship at the named port. Under FOB, the seller has to load the goods on board the vessel nominated by the buyer and there is no reference to, or provision for, the use of a carrier or forwarder. CFR requires the seller to arrange and pay for transport to named port and delivers goods, cleared for export, loaded on board the vessel. Under CIF the seller has the same obligations as under CFR, however he is also required to provide insurance against the buyer’s risk of loss or damage to the goods during transit.

mulTIple ChoICe QuesTIons 1. _______ category of Incoterms applies to any mode of transport. (a) Group 1 (b) Group 2 (c) Both (a) and (b) (d) Neither (a) nor (b) 2. Under _______ the buyer has to bear all costs and risks involved in taking the goods from the seller’s premises. (a) Carriage and Insurance Paid (CIP) (b) Ex Works (EXW) (c) Free Carrier (FCA) (d) Carriage Paid To (CPT) 3. Under _______ the seller is obliged to arrange for insurance for the journey, the rule only requires a minimum level of cover. (a) Carriage and Insurance Paid (CIP) (b) Ex Works (EXW) (c) Free Carrier (FCA) (d) Carriage Paid To (CPT) 4. _______ term requires the seller to arrange carriage for delivering the goods, unloaded from the arriving conveyance, at the named place. (a) Delivered at Place (DAP) (b) Delivered at Terminal (DAT) (c) Delivered Duty Paid (DDP) (d) Free Alongside Ship (FAS) 5. Under _______ risk transfers from seller to buyer when the goods are available for unloading, so unloading is at the buyer’s risk. (a) Delivered at Place (DAP) (b) Delivered at Terminal (DAT) (c) Delivered Duty Paid (DDP) (d) Free Alongside Ship (FAS) 6. The _______ term is applicable for maritime and inland waterways transport only but not for multimodal sea transport in containers. (a) Free On Board (FOB) (b) Cost and Freight (CFR) (c) Cost Insurance and Freight (CIF) (d) Free Alongside Ship (FAS)

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279

ConCepT QuesTIons 1. What do you understand by ‘Incoterms’? What is the importance of Incoterms in international trade? Discuss in detail. 2. Explain following in detail: (a) EXW—Ex Works (b) FCA—Free Carrier (c) CPT—Carriage (d) FAS—Free Alongside Ship (e) FOB—Free on Board (f) CFR—Cost and Freight

FurTher readIng International Chamber of Commerce, webpage: http://www.iccwbo.org/ A brief overview of INCOTERMS 2010 (pdf) A video with a short explanation of INCOTERMS 2010 with realistic simulations YouTube: https://www.youtube.com/watch?v=D_Bw9F4BagM Interactive toll for choosing the best rule http://www.incotermsexplained.com/featured-tools/rule-selection-matrix/

Answers to Multiple ChoiCe Questions 1. (a)

2. (b)

3. (a)

4. (b)

5. (a)

6. (a)

280 Export Import Management

Exercise R. S. P. Pvt. Ltd. is a twenty-year-old company dealing in manufacturing of leather items in India. The company imports leather from South Africa. The company selected Ex-Works Incoterms for importing a sizable amount of leather. The company wants to know from you the impact of selection of Ex-Works Incoterms on the total landing cost of imported leather. Also prepare a summary of Incoterms 2010, providing the classification of Incoterms Rules on the basis of responsibility and cost distribution between seller and buyer in international trade.

References http://www.incotermsexplained.com/the-incoterms-rules/the-logic-of-the-rules/, accessed on 15 February 2017 http://www.india-briefing.com/news/import-policy-procedures-duties 8728.html/, accessed on 15 February 2017 The lNCOTERMS 2010 rules (pdf)

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Learning Outcomes After reading this chapter, you will be able to: LO1 Know different international distribution channels and their selection process adopted by business firms LO2 Understand the concept of international marketing logistics, its significance and objectives LO3 Discuss the issues in international supply chain management and its role in logistics LO4 Explain the role of transportation in international logistics management, different modes of transportation and modal selection LO5 Describe the future prospects of logistics in international business

INTRODUCTION In trade, logistics has been performed since the beginning of civilisation; it is hardly new. However, in the last decade, implementing best practices of logistics has become one of the most exciting and challenging operational areas of business and public sector management. Earlier, all the functions comprising logistics were not viewed as components of a single system. But the emergence of logistics as an integrative activity has gained significant importance. This process starts with the movement of raw materials from their sources of supply to the production line and ends with the movement of finished goods to the customer. Currently, logistics occupies an important place in corporate strategy. Due to certain developments in the field of international marketing, it has gained special significance. From the point of view of management, marketing logistics or physical distribution is explained as the planning, implementation and control of the processes of physical flow of materials and final products from the point of origin to the point of use. This is done in order to meet customer’s needs, usually at a profit. Thus as a concept, it means the art of managing the flow of raw materials and

282 Export Import Management finished goods from the source of supply to their place of consumption. Primarily, it involves efficient management of goods from the end of the product line to the consumers. In some cases, it includes the movement of raw materials from the source of supply to the beginning of the production line. These activities include transportation, warehousing, inventory control, order processing and information monitoring. All these activities are considered vital to the effective management of logistics because of two reasons—they either contribute most to the total cost or they are essential for the effective completion of the task. However, the firms should carry out these activities as an essential part of providing the customer with the goods and services they desire.

LO1 Know different international distribution channels and their selection process adopted by business firms

DISTRIBUTION CHANNELS At market and business levels, something that has received much attention is the phenomenon of globalisation of markets. This phenomenon has been extensively debated both at the general/ societal/institutional/cultural levels and at market and business levels. In any globalisation process, distribution of goods and services between and within local business and consumer markets is of significant importance. Research has proved that globalisation of markets and re-organisation of distribution channels are mutually dependent processes that involve changes in market structures. As markets within and beyond geographical boundaries expand, and new opportunities arise for satisfying consumer’s demand, greater specialisation in distribution is evident both at the level of distribution and in the goods and services handled. With the expansion of the global marketplace, distribution channels’ excellence has become a powerful source of competitive differentiation. In the 1980s and 1990s, companies began to view distribution channels as more than simply a source of cost savings. It was recognised as a source of enhancing product or serve offerings as part of the broader supply chain process, to create competitive advantage.

International Distribution Channels In order to sustain the growth of the international marketplace and the integration of the world’s economic activities, it is essential to conduct efficient and cost-effective distribution. The major challenge to global distribution management is to put in place a supply chain that is responsive and flexible enough to cope with differences in customer’s requirements and yet achieves the benefits of focused manufacturing. In the last two decades, the global marketplace has witnessed some of the most rapid and substantive changes in channels of distribution for goods and services in developed economies. It is worth keeping in mind that the choice of distribution channel is quite complicated in the home market of a company, but even more complicated in the international export market. It is vital for business firms who are about to establish themselves internationally to realise that the choice of distribution channel is crucial for future success and growth. There are many alternative distribution channels to choose from and the conditions may vary for different firms and markets. Furthermore, the choice of distribution channel is often quite complex and expensive, in case it involves a subsequent change of choice. Therefore, it is important that this decision is given the attention and

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acknowledgement which it deserves, due to the fact that it has such a long-term effect on a company’s success at the level of its international operations.

Exhibit 13.1 Distribution Channel Intensity One of the channel strategies in the international market is the intensity of the distribution channel. Companies need to decide on the number of intermediaries to use at each channel level. Three approaches are available: 1. Intensive distribution: It consists of the manufacturer placing the goods or services in as many outlets as possible. This approach is usually adopted for everyday goods such as milk, bread, tobacco products and soap, products for which the consumer requires a great deal of location convenience. Manufacturers are constantly tempted to move from exclusive or selective distribution to more intensive distribution, to increase coverage and sales. 2. Selective distribution: It involves the use of more than a few but less than all of the intermediaries who are willing to carry a particular product. It is used by established companies and by new companies seeking distributors. The company is not required to dissipate its efforts over too many outlets; it enables the producer to gain adequate market coverage with more control and less cost than intensive distribution. This approach is generally applied on rarely bought goods such as DVDs, computers and cameras. 3. Exclusive distribution: Exclusive distribution means severely limiting the number of intermediaries. It is used when the producer wants to maintain control over the service level and service outputs offered by the re-sellers. While minimising costs, exclusive distribution tends to maximise channel goodwill and channel control. By granting exclusive distribution, the producer hopes to obtain more dedicated and knowledgeable selling. This approach is mostly used on capital goods such as cars, bikes etc.

International Distribution Channel Selection Since investment in distribution channels is one of the most expensive investments for a producer, he must put much effort and consideration into this selection. When the exporting company decides to use an intermediary, it must initiate a selection process in order to select high-quality intermediaries. The decision process for the selection of international distribution channels has four phases: 1. Preparing the intermediary profile, 2. Locating intermediary prospects, 3. Evaluating intermediary prospects, and 4. Selecting the intermediary. 1. Preparing the Intermediary Profile The intermediary profile must list all the criteria a company should look for in a prospective intermediary for a foreign target market. The potential intermediaries are compared and contrasted against the determining criteria. If the intermediaries have different capacities, needs, and goals, it may result in conflicts with the exporting company. Therefore, it is vital for the exporting company that the intermediaries’ outlook and approach complements their own. Especially when various criteria are being weighed, these lists are required to be updated to reflect changes in the environment and the

284 Export Import Management marketer’s own situation. Some criterion can be characterised as determinant, in that they form the core dimensions along which potential intermediaries must perform well, whereas some criteria, although important, may be used only in preliminary screening. 2. Locating Intermediary Prospects There are numerous sources to collect information on prospective intermediaries in a target country, such as government agencies, banks, trade publications, trade fairs and personal visits. However personal visits are the most common way to come in contact with potential intermediaries. Even though personal visits cost quite high to the exporting company they are vital in order to evaluate the intermediaries’ competence and opportunities in the local market. Furthermore, personal visits may establish close relations with the intermediary, which is beneficial because the exporting company can evaluate the needs of the intermediary. Another way of locating a prospective intermediary is to ask existing and potential customers in the foreign market for guidance and advice. The exporting company may ask their potential end customers about the intermediaries that they have co-operated with and have confidence in. However, there is a risk in trusting the recommendations of customers because they often suggest those intermediaries who distribute competitive products. In order to minimise this risk, the exporting company can go to customers of similar products for advice in order to locate prospective intermediaries. These intermediaries are most likely to distribute a complementing product in their assortment than intermediaries distributing competitive products. 3. Evaluating Intermediary Prospects Exporting companies may collect references from banks and existing customers to evaluate prospective intermediary prospects. It is also essential to find out the history of the intermediary, how long the intermediary has been in the business, what marketing the distribution channel uses and what storage capacity it has. When the exporting company has found intermediary prospects, the next step is to establish contact by letters, or e-mail, in order to find out if there is any interest to distribute the product in question. 4. Choosing the Intermediary After the evaluations of the prospective intermediaries and further limiting the prospects, it is time to choose the intermediary. The exporting firm must meet the intermediary in person in order to find out if the choice is a sound one. The final choice of intermediary is well worth the time and money, due to the fact that the success of the exporting company’s product in the foreign target market will depend largely on the intermediary’s efforts. Furthermore, if the exporting company makes a bad choice, it will be a time consuming and costly affair to undo the arrangements. The whole selection process must start all over again.

LO2 Understand the concept of international marketing logistics, its significance and objectives

INTERNATIONAL MARkETINg LOgISTICS The word ‘Logistics’ is derived from the French word ‘loger’, which means art of war pertaining to movement and supply of armies. Thus, logistics is basically a military concept, which is now

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commonly applied to marketing management. Fighting a war demands setting of an objective, and to achieve this objective, meticulous planning is needed so that the troops are properly deployed and the supply line consisting of weaponry, food, medical assistance, etc., is maintained. Similarly, the plan should be to minimise the loss of men and materials and, at the same time, it should be flexible enough to accommodate emerging requirements, if the need arises. As in the case of fighting a war in the battlefield, the marketing managers also need an effective logistics plan that has the ability of satisfying the company’s objective of meeting profitably the demands of its customers. Firms having cross border operations implement various strategies in order to remain competitive in foreign markets. Logistics is one of the most important areas in the process of international marketing as the delivery of goods to the buyer is as important as any other activity in business and marketing. Quite often, the most crucial part in international business is the timely delivery of goods at a reasonable cost to the foreign buyer by the exporting company. In fact, the prospective buyer may be willing to pay an even higher price for timely supplies. Before discussing the important aspects of logistics, let us look at its definition. According to the council of logistics management, ‘Logistics is the process of planning, implementing and controlling the efficient, effective flow and storage of goods, services and related information from point of origin to point of consumption for the purpose of conforming the customer requirement’. This definition highlights the inherent nature of logistics which conveys that logistics is concerned with getting products and services where they are needed whenever they are desired. Logistics is unique as it never stops, it is happening around the globe 24 hours a day, seven days a week, and 52 weeks a year. Few areas of business involve the complexity or span that is typical of logistics.

Significance of Marketing Logistics The importance and significance of a logistics system lies in the fact that it leads to ultimate consummation of the sales contract. The buyer is not interested in the promises of the seller that he can supply goods at a competitive price, but that he actually does so. Delivery according to the contract is essential to meeting the commercial and legal requirements. In case of failure to comply with the stipulated period of supply, the seller may not only return the sale amount, but may also be legally penalised, if the sales contract so specifies. A better delivery schedule is a good and effective promotional strategy when buyers are reluctant to invest in warehousing and keeping higher level of inventories. Similarly, better and / or timely delivery largely helps in getting repeat orders through creation of goodwill for the supplier. Thus, an effective logistics system contributes immensely to the achievements of the business and marketing objectives of a firm. By creating time and place utilities in the products, it helps in maximising the value satisfaction to consumers. It ensures quick deliveries at minimum time and cost, thereby relieving the customers of holding excess inventories. In nutshell, an efficient system of physical distribution/logistics has a great potential for improving customer service and reducing costs. Following are some trends which have been instrumental in gaining importance for logistics in corporate strategy:

286 Export Import Management Rise in transportation cost Production efficiency is reaching a peak Fundamental change in inventory philosophy Product line proliferated Reduction in economic regulations Growing power of retailers Globalisation Increased use of computers/technological devices Increased public awareness of products Growth of several new and big retail chains or mass merchandise with large demands and very sophisticated logistics services, by-passing the traditional channels and distribution. As a result of these developments, a business firm has a number of choices to work out the most ideal marketing logistics system. Essentially, this system implies that people at all levels of management think and act in terms of integrated capabilities, and adoption of a total approach to achieve the predetermined logistics objectives. Logistics is equally important on the global scale. Efficient logistics systems throughout the world economy are the basis for trade and a high standard of living for people. An efficient logistics system facilitates a geographical region to exploit its inherent advantage by specialising its efforts in those products in which it has an advantage over other regions. Logistics has gained importance in the international operations of a business firm for the following reasons: Transformation in the customers’ attitude towards the total cost approach rather than direct cost approach. Technological advancement in the fields of information processing and communication. Technological development in transportation and material handling. Restructuring and centralisation of production facilities on a global scale to gain economies of scale. Declining value added by manufacturing as the cost of materials and distribution climbs. Revolutionisation of logistics control systems through high volume data processing and transmission. Advancement of new technologies facilitating quick update of sales and faster and frequent inventory planning leading to a quick response from production facilities to volatile market conditions. Rising stock levels in both field and factory because of proliferation in product line. Shifting balance of power in the distribution chain from the manufacturers to the traders.

Objectives of Marketing Logistics The general objectives of the logistics include cost reduction, capital reduction and service improvement. This implies that the logistics system of a business firm aims to maximise the customer service and

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minimise the distribution cost. The process starts with the fulfillment of the customer’s need through product supplies and during this process, logistics management considers all aspects of performance which include arranging the inputs, manufacturing the goods, and the physical distribution of the products. However, there are some definite objectives to be achieved through a proper logistics system which is described in this section. 1. Improving Customer Service: According to the marketing concept, the sure way to maximise profits in the long run is through maximising customer satisfaction. As such, an important objective of all marketing efforts, including the physical distribution activities, aims to improve the customer service. An efficient management of physical distribution helps in improving the level of customer service by developing an effective system of warehousing, quick and economic transportation, and maintaining an optimum level of inventory. But, as discussed before, the level of service directly affects the cost of physical distribution. Therefore, while setting the level of service, it is very important to carefully analyse the customer’s wants and the policies of the competitors. A customer may be interested in several things like timely delivery, careful handling of merchandise, reliability of inventory, economy in operations, and so on. However, the relative importance of these factors in the minds of customers may vary. Hence, an effort has to be made to ascertain whether they value timely delivery or economy in transportation, and so on. Once the relative weights are known, an analysis of what the competitors are offering in this regard should also be considered. This, together with an estimate about the cost of providing a particular level of customer service, would help in deciding the appropriate level of customer service. 2. Rapid Response: Rapid response is concerned with a business firm's ability to satisfy customer service requirements in a timely manner. Information technology has increased the capability of firms to postpone logistical operations to the latest possible time, and then accomplish rapid delivery of required inventory. This has eliminated excessive inventories traditionally stocked in anticipation of customer requirements. Rapid response capability can shift operational emphasis from an anticipatory mode based on forecasting and inventory stocking to responding to customer requirements on a shipment-to-shipment basis. Since inventory is typically not moved in a time-based system until customer requirements are known and performance is committed, little tolerance exists for operational deficiencies. 3. Reduce Total Distribution Costs: Another important objective of the logistics system is to minimise the cost of physical distribution of the products. As we know, the cost of physical distribution consists of various elements such as transportation, warehousing and inventory maintenance, and any reduction in the cost of one element may result in an increase in the cost of the other elements. Thus a firm must strive to reduce the total cost of distribution and not just the cost incurred on any one element. To achieve this objective, the total cost of alternative distribution systems should be analysed and the one which has the minimum total distribution cost should be selected. 4. Generating Additional Sales: An effective logistics system is also able to generate additional sales for the firm. A firm can attract additional customers by offering better services at lowest prices. For example, by decentralising its warehousing operations or by using economic and efficient modes of transportation, a firm can achieve larger market share.

288 Export Import Management Thus a firm can win new customers by offering better customer services related to timely delivery of the goods. Also by avoiding the out-of-stock situation, the loss of loyal customers can be arrested. 5. Creating Time and Place Utilities: The logistical system helps a firm in creating time and place utilities of the products. Unless the products are physically moved from the place of their origin to the place where they are required for consumption, they do not actually serve any purpose to the users. Similarly, the products have to be made available at the time they are needed for consumption. Both these purposes can be achieved by having adequate number of warehouses located at appropriate places from where the goods can be delivered quickly and where sufficient stocks are maintained so as to meet the emergency demands of the customers. Moreover, a good selection of the modes of transport ensures movement of the products from one place to another in the shortest possible time. Thus, time and place utilities can be created in the products through an efficient system of physical distribution. 6. Price Stabilisation: Logistical system of a firm also aims at achieving stabilisation in the prices of the products. It can be achieved by regulating the flow of the products to the market through a judicious use of available transport facilities and compatible warehouse operations. For example, if a product usually faces heavy fluctuations in the supply of raw materials and if the market forces are allowed to operate freely, the raw material would be very cheap at some time and very dear during another time in the same year. By stocking the raw material during the period of excess supply (harvest season) and making it available during the periods of short supply, the prices can be stabilised. 7. Quality Improvement: The long-term objective of the logistical system is to ensure continuous quality improvement. Total quality management (TQM) has become a major commitment throughout all facets of business and logistics. Overall commitment to TQM is one of the major forces contributing to the logistical renaissance. If a product becomes defective or if the service commitments are not honoured by the firm, little value can be added by the logistics. Logistical costs, once expended, cannot be reversed. In fact, when quality standards are not met, the logistical performance typically needs to be reversed and then repeated. Logistics itself must perform to the high quality standards. The management challenge of achieving a ‘zero defect’ logistical performance is magnified by the fact that logistical operations typically must be performed across a large geographical area at all times of the day and night. Reworking a customer's order as a result of incorrect shipment or in-transit damage is more costly than performing it right the first time. 8. Movement Consolidation: As discussed above, the logistical system aims at cost reduction through integration and consolidation. One of the most significant logistical costs is transportation. Transportation cost depends on the type of product, size of shipment, and distance. Many logistical systems that feature premium service depend on high-speed, small shipment transportation. To reduce transportation costs, it is desirable to achieve movement consolidation. As a general rule, the larger the overall shipment and the longer the distance it is transported, the lower the transportation cost per unit. To achieve this, some innovative programs should be developed to group small shipments for consolidated movement. Such programs must be facilitated by working arrangements that transcend the overall supply chain.

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Logistics System Elements Logistics system of a firm is comprised of some very distinguished elements. The system elements of logistics are: (1) Order processing, (2) Warehousing, (3) Inventory control, (4) Transportation, (5) Information monitoring, and (6) Facilities. Let us discuss the aforementioned elements in detail. 1. Order Processing: Physical distribution activities start with the processing of the customer’s orders. In order to provide quicker customer service, the orders received from customers must be processed within the least possible time. Order processing includes receiving the order, recording the order, filling the order, and assembling all such orders for transportation, etc. The company and the customers benefit only when these steps are carried out quickly and accurately. The error committed at this stage proves to be very costly. For example, if a wrong product or the same product with different specifications is supplied to the customer, it may lead to cancellation of the original order besides incurring the loss in the credibility of the firm. Similarly, if the order is not executed within a reasonable time, it leads to serious consequences. High speed data processing techniques are now available which allow for rapid processing of the orders. 2. Warehousing: Warehousing refers to storing and assorting the products in order to create time utility. Basic purposes of the warehousing activity include arranging placement of goods, providing storage facility for them, consolidating them with other similar products, dividing them into smaller quantities and building up assortment of products, etc. Generally, larger the number of warehouses a firm has the lesser would be the time taken in serving customers at different locations, leading to higher cost of warehousing, on the other hand. Thus, the firm has to find a balance between the cost of warehousing and the level of customer service. 3. Inventory Control and Management: Linked to warehousing decisions are the inventory decisions which hold the key to success of physical distribution of goods especially where the inventory costs may be as high as 30 to 40 per cent (e.g., steel and automobiles). No wonder, therefore, that the concept of ‘Just-in-Time’ inventory has gained tremendous popularity among a number of companies. The decision regarding level of inventory mainly refers to an estimate of demand for the product. A correct estimate of the demand is important to hold proper inventory levels and control the inventory costs. The inventory cost consists of holding cost (such as cost of warehousing, tied up capital and obsolescence) and replenishment cost (including the manufacturing cost). Right inventory decisions help to maintain production at a consistent level. Some of the major factors determining the inventory levels are the firm’s policy regarding the customer service level, degree of accuracy of the sales forecasts, responsiveness of the distribution system, i.e., ability of the system to transmit inventory needs to the factory and get the products in the market. 4. Transportation: Transportation system of a company seeks to move goods from points of production and sale to points of consumption in the quantities required at time of need and at a reasonable cost. By adding time and place utilities to the goods handled, the transport system of a

290 Export Import Management company increases their economic value. To ensure this value addition, transportation facilities of a company must be adequate, regular, dependable and equitable in terms of costs and benefits of the facilities and services provided. 5. Information Monitoring: The physical distribution system of a company functions properly only if it is fed with up-to-date information about inventory, transportation and warehousing. For example, with respect to inventory, information about the present stock position at each location, future commitments, and replenishment capabilities are constantly required. In a similar manner, before choosing a carrier, information about the availability of various modes of transport, their costs, services and suitability for a particular product is needed. About warehousing, information with respect to space utilisation, work schedules, unit load performance, etc., is required. In order to receive all the information stated above, an efficient management information system contributes significantly towards controlling costs, improving services and determining the overall effectiveness of distribution. Of course, it is difficult to correctly assess the cost of the physical distribution operations. But if correct information is available, after proper analysis, a great deal of savings can be ensured. 6. Facilities: The facilities element of logistics carries out a variety of planning activities, all of which are directed toward ensuring that all required permanent or semi-permanent operating and support facilities (for instance, training, field and depot maintenance, storage, operational, and testing) are available concurrently with system fielding. Planning has to be comprehensive and must be able to accommodate the need for new construction as well as modifications to existing facilities. Facility construction can take from 5 to 7 years from concept formulation to user occupancy. This element includes any utility requirements, for both fixed and mobile facilities, with emphasis on limiting requirements of scarce or unique resources.

LO3 Discuss the issues in international supply chain management and its role in logistics

SUppLy CHAIN MANAgEMENT (SCM) Supply chain management is defined as ‘a process-oriented approach to procuring, producing and delivering products and services to customers’. The term supply chain management was coined by strategy consulting firm Booz Allen Hamilton. Having a broad scope, SCM includes sub-suppliers, suppliers, internal operations, trade customers, retail customers, and end users. SCM spans all movement and storage of raw materials, work-in-process inventory, and finished goods from point-of-origin to point-of-consumption. Supply chains are dynamic and complex, reaching out to many customers and back to many suppliers throughout the world. It exists in both service and manufacturing organisations, although the complexity of the chain varies greatly from industry to industry and firm to firm. Supply chain management is a cross-functional approach to manage the movement of raw materials into an organisation and the movement of finished goods out of the organisation towards the end user. As business firms strive to focus on core competencies and adapt flexibility, their ownership of raw

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materials’ sources and distribution channels starts reducing. These functions are increasingly being outsourced to other firms that can perform the activities better or more cost effectively. This shift results in increase in the number of companies involved in satisfying consumer demand and reduced management control of daily logistics operations. Less control and more supply chain partners led to the creation of supply chain management concepts. Figure 13.1 presents the flow chart of supply chain of a business firm involved in manufacturing of products. Customer Carrier Supplier

Distribution center

Carrier

Customer

Carrier

Carrier

Customer

Manufacturing site

Supplier

Customer

Carrier Carrier

Supplier

Distribution center

Customer

Customer

Figure 13.1 Flow Chart of Supply Chain

International Supply Chain Management Let us start with an example of a very simple supply chain. This is for a single product which starts from the production house where the product starts its journey and travels through to the supplier, distributor, retailer and ends at the hands of the consumer. This whole journey is well-managed and controlled by supply chain management. When the product goes global and its journey covers multiple countries, then it is called global supply chain management. In this age of globalisation, global supply chain management has emerged as a major element of corporate strategy and occupies an important position in the whole business system. With globalisation, businesses have become more complex and global supply chain management not only mobilises products but also the entire value-added chain, which includes the financial activities and sharing of information. Big business firms have many hubs around the world. Raw materials, finished products, finance and other pertinent information travel from one hub to another. Global supply chain management has become the centre of the whole global operation. The cost of production and profitability are dependent on the global supply chain, including how well employees throughout the firm are trained for such fast-paced tasks. The fundamental principle of global supply chain management is that it is not just domestic anymore nor is it just for large corporations.

292 Export Import Management Small- and mid-size companies too have adopted global supply chain management practices for the sake of their survival in the international market. International supply chain management has two major components: 1. International movement of products and raw materials, title transformation, payments, controlling risk factors. 2. Collection and dissemination of information plays a very important role in running an effective global supply chain management system. Though the concept of supply chain management remains the same at the domestic and international levels, when it comes to practice few similarities and differences have been found. The conceptual framework, movement and storage of products, role of information, quality monitoring and economic and safety regulations do not vary in terms of their usage and importance. On the other hand, a firm has to manage some changes when we compare global supply chain management with the domestic one, these include distance, language, culture, currency, political stability, infrastructure available in the target market.

Supply Chain Management and Logistics There are few definitions which provide evidence of the role played by the logistics business development. These are as follows: A strategic concept that involves the understanding and managing of the sequence of activities—from supplier to customer—that add value to the product supply chain. The supply chain encompasses all activities associated with the upstream and downstream flow and transformation of goods and information from the raw materials stage (extraction), through to the end user. Supply chain management is the collaborative effort of multiple channel members to design, implement, and manage seamless value-added processes to meet the real needs of the end customer. The above definitions highlight that supply chain is the process that starts from the procurement of raw materials and ends with the supply of finished products to end users. Thus logistics and supply chain management cannot be segregated completely as they are interrelated. Some experts distinguish supply chain management and logistics while others suggest that two terms are interchangeable. Logistics plays an important role between the sources of demand and supply, while supply chain management is used in filling the gaps and the logistics is used in closing the gaps. Thus we can say that supply chain management and logistics are a part and parcel of a solution to the same problem. The supply chain management in particular is the planning and management of all activities involved in sourcing and procurement, conversions, and logistics management activities, including collaboration with suppliers, intermediaries, third party service providers and customers to facilitate integration of supply and demand management within and across companies. The overall productivity of the organisation increases many folds, if the supply chain management and logistics function properly.

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Logistics International, LLC - Managing International Logistics by Leveraging Technology to Meet Challenges

Company Profile Logistics International LLC (the company) is a third party logistics provider throughout the United States and Canada. It operates a total of 186,000 square feet in two RF enabled warehouses adjacent to the Minneapolis/St. Paul airport. In addition, the company has temporary warehouses on the east and west coasts as needed to support special programs for their customers. The company was established in 1991 and has a long experience of more than two decades in the industry. It helps companies design, build and manage their supply chains using dynamic and flexible solutions to help maximise profitability. The company has grown their business by providing domestic and international transportation, warehousing fulfillment, installation and project management services to customers in a wide variety of industries. It also provides long/short term warehousing storage in both real and virtual locations. Pain areas Since the company services a range of industries, it stores a large variety of products and needs to capture attributes such as lots, serial numbers, and track lineal fee. One of the primary pain areas was the lack of a centralised reporting repository. Without this facility, there was no global view into the warehouse to provide real time data as to what inventory is currently in the warehouse and where it is located. Due to the lack of real time information, inventory had to be located by warehouse drivers, picked up, then manually verified. Since the information was primarily handled manually, the business lacked the ability to maximise the use of warehouse space, manage information for reporting purposes and process inventory in the most effective manner possible. Solution Logistics International was unable to process data and efficiently report on such issues as inventory levels, lot inventory, or turnover. In order to gain increased control over inventory, a new unified system was set up to report the variety of attributes and parameters needed to accurately track and properly allocate all types of inventory, i.e., lot, serial number, etc. It was a highly unified, flexible, state-of the-art enterprise level system (Foot Print®) developed on Microsoft’s. NET platform. It automated functions such as order management, receiving, put-away, picking, packing, shipping and invoicing. Created for use by third party logistics providers, the solution included the ability to customise customer billing profiles and readily capture accessorial charges, allowing the company to recoup the cost of value added services, handling, and storage. It included such features as yard and container management, dock-door scheduler, cross docking and a web portal. Gains Because of the amount of case picking and shipping via UPS/FedEx, the company needed to have its users capture certain attributes of the carton, using handheld devices in order to allow for seamless integration with the respective carriers. Warehouse team members were now using mobile devices to capture the width, length, weight, and height of the cartons being shipped. Measurement sampling could be accomplished at a ‘picking container’ level, which was either a case or pallet. Providing real time visibility and access to inventory, orders, invoices and customisable reports via a web portal enhanced the ability of Logistics International to meet the dynamic needs of its varied customer base, in addition to satisfying the needs for accuracy and effective operations. Source: https://www.datexcorp.com/wpcontent/uploads/2011/06/Logistics_CaseStudy_Web.pdf; accessed on 18 February 2017 https://www.linkedin.com/company/logistics-international-llc, accessed on 18 February 2017

294 Export Import Management LO4 Explain the role of transportation in international logistics management, different modes of transportation and modal selection

INTERNATIONAL TRANSpORT Transportation is considered one of the most visible elements of logistics operations. Every business firm, regardless of what it produces or distributes, essentially needs the movement of goods from one point to another and therefore is involved in transportation. Transportation concerns the spatial dimension of the business firm. The spatial dimension here refers to geographic relationships and reflects the combination of firms with respect to their material sources, markets, and competitors, plus the spatial relations of the latter to their sources and markets. The core function of the transportation system of a business firm is to serve as a connecting link between the spatially separated units within a firm's own organisation (such as between plants and warehouses) and between units of the firm and units of other firms and individuals (such as suppliers and customers). Good transportation has a significant effect on minimising the time and cost involved in the spatial relationships of the firm.

Exhibit 13.3 Growing Global Trade and Freight in 20151 World GDP grew by 3.1 per cent in 2015, almost at the same pace as in 2014. GDP in most advanced economies grew by 1.9 per cent, while GDP in emerging economies increased at a slower pace with respect to the previous years (4 per cent). World export volume grew 3.3 per cent in 2015, which is slightly more than in 2014. World container traffic (measured in TEUs) and air freight tonne-kilometre increased 6.7 per cent and 2.2 per cent respectively in 2015, showing a slowdown in air freight with respect to 2014. Preliminary estimation for 2015 from the International Transport Forum’s database showed only a modest increase of rail freight in Russia and in the European Union (0.2 per cent) and a decrease in the US (– 5.6 per cent). Road freight tonne-kilometre continued to expand in the European Union area (+ 1.6 per cent) but contracted in Russia (– 5.8 per cent), according to preliminary estimates. Source: www.internationaltransportforum.org; www.internationaltransportforum.org, accessed on 12 February 2017

Transportation Utility According to economic theories, the function of transportation is to create a place utility for the goods produced or distributed by the firm. The word ‘utility’ refers to usefulness or ability to satisfy. Place utility is achieved when goods are in the place where they can be consumed. If goods are not in the place where they are needed, then they have less than full value and so transportation is required to create value by creating place utility. In addition to place utility, the time utility of goods is equally important. Time utility means placing the goods at the right time so that they can be consumed. Thus the goods must be there at the right time (time utility), in the right form (form utility), and in the possession or ownership of the person(s) who want to consume them (possession utility). The activities include delivering goods to a warehouse to serve markets, moving goods into storage for future use, or forming an integral part of a ‘Just-In-Time’ system. The current economy of the world is a consumer driven economy which is driven by a business firms’ ability to offer a wide choice of competitive 1

Key Transport Statistics, 2015. International Transport Forum

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products with large scale or ‘intensive’ distribution. Without place, time, form, and possession utility, goods have no value to the customer. In a abroad sense, the production process remains incomplete in the absence of any of the four utilities. Thus, transportation is an essential part of the total production process that cannot be overlooked.

Modal Characteristics In a broader sense, there are five modes of transportation used in national and international logistics and supply chain management. They are rail, highway, water, pipeline, and air. The relative importance of each mode is measured in terms of system mileage, traffic volume, revenue, and the nature of traffic composition. Table 13.1 Transport Modal Share, 2012 Passenger PKM (%)

Freight TKM (%)

Total TU (%)

ROAD

82.7

8.8

31.3

AVIATION

10.6

0.7

3.7

NAVIGATION

0.3

81.5

56.8

RAIL

6.3

9

8.2

Source: IEA Mobility Model, UIC (2014a) and UNCTD (2014)

Let us discuss each mode with respect to these measures in this section. 1. Road / Highway Transport: Since Second World War, there has been significant development and expansion of highway transportation in India. The growth in motor carrier industry has significantly increased the flexibility and speed of intercity movements thus easing the transportation of goods from door to door. Since the motor carriers offer delivery flexibility, they have captured almost all freight moving from wholesalers or warehouses to retail stores. The business firms prefer motor carriers over railroads because the motor carriers can run on any type of road and need much less fixed investments in terminal facilities as they operate on publicly maintained highways. However the cost involved here in the form of licence fees, user fees, and tolls increases the cost of transportation of goods to the company; but these numbers keep varying depending upon the over-the-road units and miles operated. The expenses on driver safety and requirement for substantial dock labour further add to this variable cost. A business firm handling small shipments for shorter distances generally prefers motor carriers over railroads because the characteristics of motor carrier are more suitable for such transactions. The high value products are also transported through motor carriers to ensure the safety of these products during transit. Major difficulties faced by the firms using the motor carriers relates to the cost of replacing the equipment, maintenance, driver wages, and wages to the dock labour. However the fact cannot be denied that an increase in labour cost affects and influences almost all types of modes of transport available to a business firm. To reduce the labour intensity and cost, the firms introduce improved line-haul scheduling that by-passes terminals, mechanised terminals, computerised billing systems, tandem operations that pull two or three trailers by a single power unit, etc. To address this problem, the business firms may also use specialty carriers like Federal Express and United Parcel Service.

296 Export Import Management Although the highway transportation presents some specific challenges in terms of higher labour cost and other related issues, it continues to be most preferred mode of transportation within the country. 2. Rail Network: As we know the rail network includes a traced path having wheeled vehicles bound on it. Monorails and Maglev are additions to the rail network provided by the technological developments in the country. Historically, railroads have handled the maximum tons-miles because till the Second World War, it was the rail network which was comprehensively established, connecting all cities and towns in most of the countries of the world. This network dominated the intercity freight tonnage. The capability of handling large shipments, frequent services and economically superior services helped rail network in gaining its early superiority. However, post the Second World War, motor carriers gave tough competition to rail network and railroads’ share of revenues and ton-miles started to decline. The capacity to handle large shipments is still the unique characteristic of rail network because of which it holds significant intercity tonnage and revenue, even in the current times. The operations of the rail network need high fixed cost investment to fix expensive equipment, switching yards and terminals, but requiring very low variable cost on the other hand. The technological developments resulting in the introduction of electric engines have contributed significantly in reducing the variable cost of rail network. It offers much more potential to further reduce this cost and the labour agreements contribute towards limiting the labour cost. 10 Africa Latin America

8

Middle East & Other Asia 6

India China Other Europe

4

Russia Other OECD 2 OECD Europe

2011

2012

2009

2010

2008

2007

2005

2006

2003

2004

2001

2002

2000

1995

1990

1985

1980

1975

0

OECD North America

Figure 13.2 Railway Freight Transport Activity by Geographic Area – 1975-2012 (trillion tonne-kilometre) Source: Elaboration by IEA based on UIC (2012a)

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3. Water Transport: The oldest mode of transportation available to the world was water transport. Maritime transportation is the most effective mode to move large quantities of cargo over long distances because of two physical properties of water; which are buoyancy and limited friction. The distinctive characteristic of this mode of transport is the capacity to handle extremely large shipments. The deepwater ports are accessed only by deep water vessels while diesel-towed barges generally operate on rivers and canals as they are not suitable to sail through deep waters. On the basis of fixed cost, water transport occupies a position between the rail and motor carriers. The government develops and maintains the right-of-way while the water carriers are generally developed and operated by the business firms. This arrangement is able to bring the overall fixed cost of water transport to a moderate level as both the government and business firms share the burden of the cost. When low freight rates are desired and speed of transit is a secondary consideration, the capability of water transport to carry large tonnage at low variable cost keeps this mode in demand. In addition to the restrictions of navigable waterways, terminal facilities for bulk and dry cargo storage and load unload devices limit the flexibility of water transport. Being a labour intensive operation, loading and unloading at docks, creates operational problems and tends to reduce the potential range of available traffic. Finally, a highly competitive situation has now emerged between railroads and inland water carriers in areas where parallel routes exist. 4. Pipelines: This mode remains operational all the time and every day of the week. Unlike other modes of transport, the empty container or vehicle does not return. The right-of-way, construction and requirements for control stations and pumping capacity need a lot of fixed investment thus attracting very high fixed cost and lowest variable cost in comparison to other modes of transport. On the other hand, less flexibility and limitation of commodities that can be transported through this mode are the other two biggest disadvantages of this mode. 5. Air Transport: The most recent introduction to the modes of transport is air transport; however it is the least popular mode even in the current times. The strengths of this mode lie in speed with which the goods can be transported from one place to another while the biggest limitation is the cost involved in this process. Business firms however can address this issue as a trade-off for high speed, which allows control over the cost of other elements of logistical design, such as warehousing or inventory.

Modal Competition and Model preferences As explained above, each transportation mode offers operational and commercial advantages and has different properties. However, contemporary demand is influenced by integrated transportation systems that require maximum flexibility in the respective use of each mode. This results in modal competition at various degrees and takes several dimensions. Modes can compete or complement one another in terms of cost, speed, accessibility, frequency, safety, comfort, etc. There are three main conditions to ensure that some modes are complementing one another. These are as follows: 1. Different Geographical Markets: If different markets are involved, modes will permit a continuity within the transport system, particularly if different scales are concerned, such as between national and international transportation. This requires an interconnection among the modes of transport, commonly known as a gateway, where it is possible to switch from one mode to the other. Intermodal transportation has been particularly relevant to improve the complementarity of different geographical markets.

298 Export Import Management 2. Different Transport Markets: The nature of what is being transported, such as passengers or freight, often indicates a level of complementarity. Even if the same market area is serviced, it may not be equally accessible depending on the mode used. Thus, in some markets rail and road transportation can be complementary as one may be focusing on passengers and the other on freight. 3. Different Levels of Service: For a similar market and accessibility, two modes that offer a different level of service will generally complement each other. The most prevailing complementarity concerns costs versus time. Thus, there exists a modal competition when there is an overlap in geography, transport and level of service. Cost is one of the most important considerations in modal choice. Since each mode has its own price / performance profile, the actual competition between the modes depends primarily upon the distance travelled, the quantities that have to be shipped and the value of the goods. While maritime transport might offer the lowest variable costs, over short distances and for small bundles of goods road transport is found to be most competitive. Another critical factor is the terminal cost structure for each mode, where the costs (and delays) of loading and unloading the unit imposes fixed costs that are incurred independent of the distance travelled.

Figure 13.3 External Trade by Sea and Air – Percentage change from June 2008 to December 2015 Source: International Transport Forum

With increasing income levels, the propensity for people to travel rises. At the same time, international trade in manufactured goods and parts has also increased. These trends in the demand for travel act differentially upon the modes. Those that offer faster and more reliable services are able to gain preference over modes that might offer a lower cost, but remain a slower alternative. For passenger services, rail has difficulty in meeting the competition of road transport over short distances and aircraft for longer trips. For freight, rail and shipping have faced competition from road and air modes for high value shipments. While shipping, pipelines and rail transport still perform well for large shipments, intense competition over the last decades have seen road and air modes capture an important market share of the high revenue-generating goods. Road transport clearly dominates. Although intermodal transportation opened many opportunities for complementarity between modes, there is intense competition as business firms are now competing over many modes in the

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transport chain. A growing paradigm thus attracts supply chain competition with the modal competition component occurring over three dimensions: 1. Modal Usage: This is the competition that is based on the comparative advantage of using a specific or a combination of modes. Distance remains one of the key determinants of modal usage for passenger transportation. However, for a fixed distance, costs, speed and comfort can be the three significant factors behind the choice of a mode. 2. Infrastructure Usage: This refers to the competition arising from the presence of freight and passenger traffic on the same itineraries linking the same nodes. Each level of capacity used by a mode is thus at the expense of the other mode. 3. Market Area: This is the competition experienced between transport terminals for using new space (terminal re-location or expansion) or capturing new markets (hinterland).

Modal preferences It is generally advocated that a form of modal equality (or modal neutrality) has to be a part of public policy where each mode competes based upon its inherent characteristics. Since different transport modes are under different jurisdictions and funding mechanisms, modal equality cannot be conceptually achieved as some modes will always be more advantageous than others. Modal competition is influenced by public policy where one mode could be advantaged over the others. This particularly takes place over government funding of infrastructure and regulation issues. Roads or highways and rail networks are usually financed and maintained by the government, while many other transport infrastructures are financed and maintained by the operators using them. This is the case for air and maritime transportation. Under such circumstances, public policy shapes modal preferences. Following are some important factors those can be considered for the selections of international carrier: Transportation Cost: This refers to overall cost of transportation involving rates, minimum weight, loading and unloading charges. Transit Time: It is the total time that elapses from the time the consigner makes the goods available for dispatch until carrier delivers same to the consignee. Reliability: Reliability refers to the consistency of the transit-time a carrier provides. Capability: Capability means a carrier’s ability to provide the equipment and facilities that is required for the movement of a particular product. Accessibility: Another important factor for the selection of mode of transport is the physical access or geographical limits of that mode. Security: Firms remain highly concerned about the arrival of good in the same condition, therefore making security an important basis for the selection of mode of transport.

Role of Transportation in Logistics Management The role that transportation plays in the logistics system is more complex than carrying goods for the proprietors. Its complexity can be effectively handled only by high quality management. By means of well-handled transport system, goods can be sent to the right place at right time in order to satisfy customers’ demands. It brings efficacy, and also it plays a connecting role between the producers and

300 Export Import Management consumers. Therefore, transportation is the base of efficiency and economy in business logistics and expands the other functions of the logistics system. In addition, a good transport system performing logistics activities brings benefits not only to service quality, but also to company’s competitiveness in the global marketplace. Transportation provides connect among the several steps that result in the conversion of resources into useful goods. It is the placement of all those functions and sub-functions into a system of goods movement that aim at minimising cost and maximising service to the customers, that constitutes the concept of business logistics. The system, once put in place, has to be effectively managed. Traditionally separate companies are involved for production, storage, transportation, wholesaling, and retail sale, but basically, production/manufacturing plants, warehousing services, merchandising establishments all use varying degrees of transportation. Production or manufacturing plants needed the assembly of materials, components, and supplies, with or without storage, processing and material handling within the plant and plant inventory. Warehousing services between plants and marketing outlets required separate transport. Merchandising establishments complete the chain with delivery to the consumers. Earlier the manufacturers limited themselves to the production of goods, leaving marketing and distribution to other firms. Warehousing and storage can be considered in terms of services for the production process and for product distribution. There have been major changes in the number and location of facilities with the closure of many single-user warehouses and an expansion of consolidation facilities and distribution centres. Such developments reflect factors such as better transport services and pressures to improve logistics performance.

LO5 Describe the future prospects of logistics in international business

FUTURE pROSpECTS OF LOgISTICS To survive in the worldwide competition, the improvement of logistics system has to be undertaken by both business firms and the government. Researches in the area of international logistics management have revealed three revolutions in business that have substantial impacts on the purchasing and supply strategies of the manufacturing sectors. These three revolutions are: the globalisation of trade; commencement of the information era resulting in growing number of demanding consumers, and continuously changing consumer preferences. The main characteristics of future logistics development are summarised as follows: Government Role: To help industries maintain competitiveness, the government has to lead the way to assist the logistics industries. For instance, the idea of freight village of city logistics offers the environment to promote logistics efficiency and to reduce operation costs. However it involves large investments and some problems relating to laws and national policies. Without the lead and support of the government, achieving the plan is difficult. Growth of International Goods Transport: Rapid growth in international freight transport is contributed by several factors. These factors include the growth of E-commerce that propels international business activities, the change of production strategy requiring international

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cooperation, and the pressure of organisations such as the World Trade Organisation (WTO) that pushes local industries to reach an international standard and face worldwide competition. Improvement of Services: Providing good customer service is now a necessary requirement of business operations with the intense competition from global markets. The quality of services is the main factor affecting consuming behaviour among the business firms having high similarities. The service systems involve several developed techniques now, such as Efficient Consumer Response (ECR) and Quick Response (QR). In the near future, India will witness newer techniques being applied in providing better services for customers. Revolution of Logistics Operation: IT techniques and its products bring efficiency and fluency to the logistics systems. Radio Frequency ID (RFID) is one of these techniques. The main difference between the bar-code system and RFID is that RFID does not need the action of scanning the barcode on goods. RFID thus saves manual operation-time dramatically. RFID systems can sense the amount of goods input in the tags automatically and immediately when the costumers push their trolley through the exit. Shorter Product Life Cycle: According to the current global trend, the merchandise design is changing day by day, and therefore the product life cycle is becoming shorter, especially in computer science. To confront the impacts, the logistics system has to improve its efficiency and reliability of goods delivery. Otherwise an inappropriate logistics system would hinder the competitiveness of new products and lower the business profits. Improvement of Logistics Facilities: The advancement and development of logistics are based on several techniques and theories. High-tech facilities and systems, e.g. Information Technology Systems (ITS), bring more possibilities and advantages to logistics. For instance, the improvement of related facilities, e.g., forklift trucks is necessary for transport efficiency. In the future, factory automation is the main target for all supply-chain procedures. It would help to improve efficiency and also reduce the operation costs. Channel Cooperation between Companies: In order to save the logistics costs, a key concept is to maximise the usage of available transport capacity. Integrating the logistics demands between numerous departments tremendously helps to achieve this purpose. In practice, a conglomerate can develop its own logistics service for the branches. For some medium-sized companies, sharing their transport channels with other companies of similar or bigger size is a feasible option. Specialised Logistics Delivery: One of the current notable trends of the logistics industries is specialised delivery service. For instance, delivering fresh food from the place of origin needs low-temperature containers. Computer chips, gases and petroleum need particular conveyances to carry them. These demands are rising day by day since the products are becoming more and more delicate. Logistics Centres: The development of logistics centres is good for industry promotion and the development of a national economic system. Logistics centres can successfully shorten the distance between production and marketing vertically, and also integrate various industries horizontally, and thus decrease the costs. Governments can propose specific areas for storehouses and logistics to reduce land acquisition. The future logistics will make use of e-commerce, the Internet and the new door-to-door service to create new business prospects.

302 Export Import Management Freight Transport: The alliance between middle- and small-sized delivery companies is an important trend in future logistics. The strategy would help to expand service areas and increase service quality, and meanwhile raise the loads of single trips to reduce delivery costs.

Key Terms Logistics: It is the process of planning, implementing and controlling the efficient, effective flow and storage of goods, services and related information from point of origin to point of consumption for the purpose of conforming to the customer requirements. Warehousing: It refers to storing and assorting products in order to create time utility. Supply Chain Management: It is a process-oriented approach to procuring, producing and delivering products and services to customers.

In revIew Globalisation of markets and re-organisation of distribution are mutually dependent processes that involve changes in market structures. In order to sustain the growth of the international marketplace and the integration of the world’s economic activities it is essential to conduct efficient and cost-effective distribution. It is vital for business firms who are about to establish abroad to realise that the choice of distribution channel is crucial for future success and growth. The decision process for the selection of international distribution channel has four phases; preparing the intermediary profile, locating intermediary prospects, evaluating intermediary prospects, and selecting the intermediary. An effective logistics system contributes immensely towards achieving the business and marketing objectives of a firm. By creating time and place utilities in the products, it helps in maximising the value satisfaction to consumers. Logistics system of a business firm aims to maximise the customer service and minimise the distribution cost. It is comprised of these elements: order processing, warehousing, inventory control, transportation, information monitoring and facilities. Supply chain management (SCM) is defined as ‘a process-oriented approach to procuring, producing and delivering products and services to customers’. Though the concept of supply chain management remains same at the domestic and international level, when it comes to practice, there are a few similarities and differences. The logistics plays an important role between the sources of demand and supply, and supply chain management is used in filling the gaps whereas logistics is used in closing the gaps. Every business firm, regardless of what it produces or distributes, essentially needs the movement of goods from one point to another and, therefore is involved in transportation. According to economic theories, transportations function is to create place utility for the goods

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produced or distributed by the firm. In a broader sense, there are five modes of transportation used in national and international logistics and supply chain management. They are rail, highway, water, pipeline, and air. Each transportation mode offers operational and commercial advantages and has distinct properties. However, contemporary demand is influenced by integrated transportation systems that require maximum flexibility in the respective use of each mode. Although intermodal transportation opened many opportunities for a complementarity between modes, there is intense competition as business firms are now competing over many modes in the transport chain. Researches in the area of international logistics management have revealed three revolutions in business that have substantial impacts on the purchasing and supply strategies of the manufacturing sectors. The main characteristics of future logistics development are government role, growth of international goods transport, improvement of services, revolution of logistics operation, shorter product life cycle, improvement of logistics facilities, channel cooperation between companies, specialised logistics delivery, logistics centres and freight transport.

mulTIple ChoICe QuesTIons 1. _______ consists of the manufacturer placing the goods or services in as many outlets as possible. (a) Intensive distribution (b) Selective distribution (c) Exclusive distribution (d) All of these 2. It is vital for the exporting company that the _______ outlook and approach comprehends the companies’ outlook. (a) customers’ (b) intermediaries’ (c) suppliers’ (d) none of these 3. _______ is generally applied on rarely bought goods such as DVDs, computers and cameras. (a) Intensive distribution (b) Selective distribution (c) Exclusive distribution (d) All of these 4. _______ is basically a military concept, which is now commonly applied to marketing management. (a) Supply chain management (b) Distribution (c) Logistics (d) Marketing 5. _______ used when the producer wants to maintain control over the service level and service outputs offered by the resellers. (a) Intensive distribution (b) Selective distribution (c) Exclusive distribution (d) All of these 6. _______ activities start with the processing of customers’ orders. (a) Warehousing (b) Transportation (c) Logistics (d) Physical distribution

304 Export Import Management 7. _______ refers to storing and assorting products in order to create time utility. (a) Warehousing (b) Transportation (c) Logistics (d) Physical distribution 8. _______ is considered as one of the most visible elements of logistics operations. (a) Order processing (b) Warehousing (c) Inventory control (d) Transportation

ConCepT QuesTIons 1. Suggest strategies to meet emerging challenges of international distribution in the light of changes taking place in distribution channels in the global marketplace. 2. ‘Selection of the distribution channel is a systematic step by step process.’ Elaborate the statement and explain the process. 3. What is the significance of international marketing logistics in international marketing of a product or a service? Cite relevant examples. 4. Explain the value added by each element of the logistics system of a company. 5. ‘Supply chain management is a cross functional approach for the movement of goods.’ Justify the statement. 6. Discuss in details the operational and commercial advantages and properties of each mode of international transportation. 7. What are the main characteristics of future logistics development? Explain.

FurTher readIng Osman L., Westgerd M., (2005). International distribution channels–from the perspective of exporting companies. D Master thesis–Industrial Organisation. Luleå University of Technology. Bin J., Edmund P., (2002). Distribution and logistics development in China: The revolution has begun. International Journal of Physical Distribution & Logistics Management. 32(9):783–798. Louis W. Stern and Torger Reve. (1980). Distribution Channels as Political Economies: A Framework for Comparative Analysis. Journal of Marketing. 44(3): 52-64. Railway Handbook, 2015, International Union of Railways.

Answers to Multiple ChoiCe Questions 1. (a) 7. (a)

2. (b) 8. (d)

3. (b)

4. (c)

5. (c)

6. (d)

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Case Study iWalkfree: Exploring Distribution Channels for a New product People having lower leg non-weight-bearing injuries who wish to remain ambulatory have long used standard crutches. The use of standard crutches is dependent upon the person’s ability to use their arms and hands to support their weight as they move around in their surroundings. The use of standard crutches does not allow the free use of ones hands and arms for other activities. XYZ Ltd. (the company) noted that there was a need for a device that allowed one to remain ambulatory while still allowing them to freely use their arms and hands. The company developed a device named as iWalkfree which was a hands-free crutch substitute. It was a first of its kind mobility device that frees one from the limitations of conventional crutches. Rather than marketing this new device directly to the consumer, the company chose to market the device directly to clinicians who would ordinarily be fitting the target population with standard crutches. Common misconceptions from just looking at ‘iWalkfree’ were that it was unstable and one might be injured using it, or that it would be difficult to learn and use. So how was this addressed for both the clinician and the consumer? First, the company developed a highly informative website to be served as a reference for the clinicians and consumers. Next, the company personally taught each retailer about the device, how to sell it, and how to fit it. The company provided a webinar and certified clinicians (dealers) could become ‘iWalkfree’ fitters. The product typically outperformed consumer expectations, so the dealer had to be armed with the knowledge to disarm consumer misconceptions. The ‘iWalkfree’ distribution channel was a direct selling by the manufacturer to trained dealers who in turn sold the product to the consumer. There was no promotion strategy other than competing with other new medical devices at various trade shows throughout the nation, and winning them.

Discussion Questions 1. When choosing a distribution channel for a new product what are the questions to be answered first? 2. What could have been an alternative distribution channel for ‘iWalkfree’? 3. Would you suggest the same distribution channel for ‘iWalkfree’ when it is to be sold in international markets? Why or why not?

References Ross, D. F., (1996). Distribution; planning and control. New York: Chapman & Hall http://www.incotermsexplained.com/the-incoterms-rules/the-logic-of-the-rules/ http://www.india-briefing.com/news/import-policy-procedures-duties-8728.html/

Chapter

14 Shipment in India

Learning Outcomes After reading this chapter, you will be able to: LO1 Know about the Indian shipping Industry LO2 Review the obligations of carriers and process of cargo clearance LO3 Understand the meaning of some important world shipping terms

INTRODUCTION Research in the area of international trade claims that international trade, economic growth and expenditure on international transport are all interrelated. This growth in international trade is associated with an even higher growth in transportation related services. The early 1970s experienced the increasing importance of international trade and commerce. World trade was slowly becoming an engine of global growth. This growth had a positive impact on many economies like Japan, Western Europe, South East Asia, etc. where the quality of life improved considerably. Shipping continues to be the dominant mode of transport for global trade, as it accounted for almost two thirds of world trade. Thus, there is a strong relation between trends in maritime trade and global trade. Trends in international maritime transport affect globalisation, and the maritime business also gets affected by globalisation. The feasibility and relative economics of maritime transport significantly affects the international trade and generates new trends in international trade flows.

LO1 Know about the Indian shipping Industry

INDIaN ShIppINg INDUSTRy: ECONOmIC INSIghTS A higher level of economic growth generally leads to a higher demand for industrial raw materials, which in turn boosts imports and exports. The shipping market is cyclical in nature and freight rates generally tend to be volatile. Shipping is a global industry, having its prospects closely tied to the level of economic activity in the world. Indian shipping industry is no exception to this. The Indian

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shipping industry plays a crucial role in the Indian economy as 90 per cent of the nation’s trade by volume is done via the water route. India has the largest merchant shipping fleet among the developing nations. The Indian shipping industry facilitates transportation of national and international cargoes and also provides various other services such as ship building, ship repairing, lighthouse facilities, freight forwarding, etc. The Indian shipping industry with emergence of globalisation and liberalisation is completely ready to acquire new dimensions in terms of demand and infrastructural development. Figure 14.1 shows the shipping share of domestic cargo.

Figure 14.1

Coastal Shipping Share of Domestic Cargo (by Volume)

Source: CRISIL, Primary Discussion, KPMG in India Analysis

Growth Since Independence the Indian shipping tonnage has earned a remarkable growth. Representing 54fold increase till 2012 in Gross Registered Tonnage (GRT) since Independence, the Indian merchant fleet strength stood at 1246 vessels with Dead Weight Tonnage (DWT) of 15.37 million by the end of November 2015. The outlay and expenditure on the shipping sector has been consistently increasing over the Five-year plans (Figure 14.2). Outlay and Expenditure for Shipping Sector during the 5 Year Plans (In Crore) Five Year Plan Outlay 1951-56 26 1956-61 48 1961-66 57 Annual Plans (1966-69) 23 1969-74 141 1974-79 450 1980-85 755 1985-90 827 1992-97 3669 1997-02 6305 2002-07 7754 2007-12 15026 2012-17 10142

Expenditure 19 53 40 32 155 469 444 720 3033 2466 2992 9788 N/A

Figure 14.2 Shipping sector outlays as per the 5 year Plans Source: planningcommission.nic.in/plans/planrel/fiveyr/1st/1planch4.htm, accessed on 5 january 2017

308 Export Import Management

Fleet Composition As indicated by Economic Survey of India 2016, around 42 per cent of the vessels are above 20 years old, 12 per cent of the fleet fall between 15–19 years, and the remaining are equally spread across the age groups of 6–10 years. An analysis of the fleet classified by the type of vessels in 2014 revealed that the maximum number of vessels (684) were dry cargo liners with oil tankers (135) at the second position in the list. In terms of GRT, the fleet composition confirms that the maximum tonnage of 5413 thousand tonnes (52.5 per cent of the total tonnage) belonged to the category of oil tankers whereas dry cargo liners which accounted for highest number of vessels (684) could only contribute a mere 14.97 per cent (1544 thousand tonnes) to India’s total tonnage (Figure 14.3). The composition of India’s tonnage reveals that the tonnage share of oil tankers dropped drastically from 62.9 per cent in 2004 to 52.5 per cent in 2014. On the other hand, the tonnage share of dry cargo bulk carriers recorded little increase from 26.9 per cent in 2004 to 27.9 per cent in 2014. Similarly, over the same period of time the tonnage share of dry cargo liners also increased to appreciable numbers from 5.5 per cent to 15 per cent.

Composition of Indian Tonnage

0.30% 52.50%

Cargo Liner 4.30%

Cargo Bulk Carrier Oil Tanker

15%

Ore/Oil Bulk Carrier Other

27.90%

Figure 14.3 Fleet Composition Source: Economic Survey of India-2016

Contribution in India’s Trading India is the sixteenth largest maritime country in the world, with a coastline of about 7,517 kilometres. Indian ports and shipping industry play a crucial role in sustaining growth in the country’s international and domestic trade and commerce. It is worth mentioning here that around 95 per cent of India's trade by volume and 70 per cent by value is done through maritime transport. At present, India maintains12 major and 200 notified minor and intermediate ports. Cargo traffic, recorded in 2015 was 1,052 million

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metric tonnes (MMT) and the same is expected to reach 1,758 MMT by 2017. Table 14.1 shows the major and intermediate ports of India. Table 14.1 List of Major and Intermediate Seaports in India Major Ports on Western Coast Kandla (formed after Karachi given to Pakistan)

Intermediate Ports on Western Coast Porbander (an all-weather port)

Mumbai (India’s busiest and biggest port, natural Bhavnagar (ancient port famous for its ship-breaking and deep-water harbour) yard at Alang) Jawaharlal Nehru Port / Nava Sheva (largest Bharuch (ancient port) container port) Panaji / Panjim port (Goa’s Captain of Ports, known Surat/Hazira (deep-water LNG terminal and for coal imports) multi-cargo deep-water port) Marmagao (natural harbor, and leading iron ores Veraval (ancient port) exporter port) Mangalore / Panambur (Kudemukh iron-ore exports, Ratnagiri (a small size, all-weather seaport deep-water all-weather port) maintained by Maharashtra Maritime Board) Kochi (natural harbor, and has the largest container Alappuzha (ancient port) transshipment facility) Major Ports on Eastern Coast

Intermediate Ports on Eastern Coast

Kolkata-Haldia (riverine port, Indian coast guard Kakinada base) Paradip (deep-water port, which exports raw iron Machillipatnam (deep-sea port) to Japan) Vishakhapatanam (oldest shipyard and natural Nagapattinam (natural port) harbor) Ennore / Kamarajar Port (most modern-in private hands) Chennai (oldest and second largest port of India, and artificial harbor) Tuticorin (Southernmost and artificial deep-sea harbor)

Market Size During April-August 2016, cargo traffic handled by India’s major ports recorded an increase of 4.6 per cent year-on-year to 264.73 million tonnes (MT). During August 2016, India’s major ports handled a total volume of 718,000 Twenty-foot-Equivalent Units (TEU), up from 679,000 TEUs during same month in 2015. The containerised cargo tonnage increased by 3.7 per cent during August 2016. During April-June 2016, the ports handled a combined volume of 2.12 million TEUs, which is approximately 70 per cent of the country’s overall container trade. In terms of composition of cargo traffic, the largest traded commodity through ports was petroleum, Oil and Lubricants also called p.O.L. (32.44 per cent),

310 Export Import Management followed by coal (24.09 per cent), container traffic (19.65 per cent), other cargo (12.68 per cent), iron ore (4.6 per cent) and other liquids (4.13 per cent) in the list.

Exhibit 14.1 Coastal Shipping in Kerala: A Case Study

Incentives

Objective -

Beneficiaries Status

Source: http://www.aivp.org/wpcontent/uploads/2016/06/suresh_trishala_indian_maritime_ industry.pdf

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policy Initiatives to promote Shipping Industry As discussed above, Indian shipping industry plays a crucial role in India’s trade with outside countries. The government’s role is very important in promoting and supporting the shipping industry by appropriate policy initiatives. A number of such initiatives have been taken. The Government of India has planned to convert 101 rivers across the country into waterways. This ambitious plan aims at promoting water transport and propels economic growth. Two new major ports, one at Sagar in West Bengal and the other at Dugarajapatnam in the Nellore district of Andhra pradesh are being planned. The foundation stone for the fourth container terminal of Jawaharlal Nehru port at Mumbai has been laid down which will increase the existing capacity of the container terminal by more than twice. A proposal to set up an Integrated National Waterways Transport Grid (INWTG) is under consideration. The plan proposes to promote primarily five national waterways. It involves the development of these national waterways with at least 2.5 metres of Least Available Depth (LAD) and the upgrade/setting up of priority terminals. It is also being considered to establish road connectivity and rail and port connectivity wherever feasible. A number of incentives to promote the domestic ship building industry and ship-repair industry were announced in the year 2015. These included financial assistance to domestic shipyards for building any vessel and subsequently its delivery. Another incentive is the relaxation of eligibility criteria for the procurement or repair of vessels done by government departments or other agencies including pSUs for government purposes or for their own purpose, to give them a Right of First Refusal to domestic shipyards.

policy Initiatives Following is the summary of some important policy initiatives taken by the government in the recent past. The Ministry of Shipping decided to review 13 rules under the Merchant Shipping Act 1958 (as amended), after finding them to be obsolete. Out of the 13 rules, 6 rules have been rescinded and 7 have been reproduced before rescindments. The Ministry has provided a simplified procedure for Ship Repair Units (SRUs) by lifting the requirement of registration of the Ship Repair Units (SRUs) with Directorate General (Shipping). Ministry of Finance and Ministry of Commerce & Industry have been informed to allow concessions and facilities to SRUs without demanding the registration with DG (Shipping) as a prerequisite. To meet the growing demand of steel by ship and barge builders, it has been decided that after ascertaining its sourcing and processing re-rolled steel obtained from re-cycling yards/ ship breaking units, it would be certified for use in construction of inland barges, river sea vessels (RSV Types 1 and 2) and port and harbour crafts. This will bring down the cost of constructions of barges, river sea vessels and port and harbour crafts. The Ministry of Road Transport and Highways and National Highways Authority of India (NHAI) under the ‘Bharatmala’ project has planned to take up 82 highway development projects to improve connectivity to both major as well as minor ports in the country. The Ministry of Shipping is planning to install 160.64 megawatts (MW) of solar and wind based power systems at all the major ports across the country by 2017. The plan aims at

312 Export Import Management promoting the use of renewable energy sources and giving a fillip to the government's ‘Green port Initiative’. The Union Cabinet is planning to propose major amendments to the Multi Modal Transportation of Goods Act 1993, to increase transparency in the shipping and logistics sectors. The amendments propose to discourage container freight stations from overcharging both importers and exporters. Amendments in the current Model Concession Agreement (MCA) are being planned. The amendment proposes to provide a better allocation of risks between the government and private firms, by encouraging investments in the sector. The Government of India is planning to introduce a new framework for re-negotiation of public private partnership (ppp) contracts. The new framework will facilitate the re-negotiations based on sector-specific issues. Specific focus is given on national highways and ports to provide greater flexibility to the parties involved. The Government of Maharashtra has proposed a policy for developing new ports along the 720 km long coastline of the state. Development of creeks at Vasai, Jaigad and Rajapuri for integrated coastal shipping is also being planned. The Central Government gave approval to the amendments to ‘The National Waterways Bill 2015’. The amendment provides for the enactment of a central legislation to declare 106 additional inland waterways as the national waterways. Special purpose Vehicles (SpV) to provide smooth, uninterrupted and efficient last mile rail connectivity to major ports. Rail Vikas Nigam has been incorporated under the Companies Act. The Indian port Rail Corporation Limited started functioning from July 2015 and till now it has taken up 23 projects which are critical for last mile rail connectivity to the major ports. The Ministry of Shipping, along with the Directorate General of Lighthouses and Lightships (DGLL) developed an ambitious programme to bring up 78 lighthouses in the country as centres of tourism in the first phase under public private partnership (ppp). These lighthouses will be developed in Gujarat, Maharashtra, Goa, Karnataka, Kerala, Lakshadweep, Tamil Nadu, puducherry, Andhra pradesh, Odisha, West Bengal and Andaman and Nicobar Islands.

LO2 Review the obligations of carriers and process of cargo clearance

OBLIgaTIONS OF CaRRIERS aND CUSTOm CLEaRaNCE Obligations of Carriers To regulate and exercise control on imports and exports, the Customs Act 1962 enjoins certain liabilities on the carriers. These obligations can be studied under the following two heads: Obligations of Imported Cargo: The imported cargoes are required to be brought into the country for unloading only at notified ports or customs stations. Detailed information is required to be furnished to customs about goods brought in for unloading at that port and also about those goods which would be carried further to other ports. Before the arrival of the vessel/aircraft at the customs station a declaration of a cargo must be made in an ‘Import General Manifest’ (IGM). The cargo clearance

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formalities are usually linked with the availability of information about the cargo being brought by a vessel for unloading at any port. Therefore the provisions must be made for prior filing of an IGM if all details of relevant cargo for any port are available, even before the arrival of the vessel. The final IGM can be filed after arrival of the vessel. Under normal circumstances, unless the IGM is furnished in the prescribed form, unloading of cargo cannot be undertaken from any vessel. After the delivery of the IGM, the unloading takes place under the supervision of the preventive Officers of Customs (pOC). In India it is prohibited to unload the goods at a customs station which is not mentioned in the IGM/import report. Obligations of Exporting Cargo: Just as there are obligations of imported cargo, in a similar manner, there are restrictions on loading of export items. No vessel is allowed to load goods for export without providing due information to customs and obtaining a permission for loading the goods. This permission is also called ‘Entry Outward’ of the vessel. Loading of cargo on vessels is done under the supervision of the preventive Customs Officers who ensure that the cargo which has been loaded has discharged the prescribed customs formalities including payment of duties or cess (as applicable) or any other formalities enjoined by the prevailing law. The authorisation for exports is required to be given by an authorised officer as a part of customs clearance formalities. The person in charge of the vessel is required to provide details of all the goods loaded on the vessel in a prescribed form, which is termed ‘Export General Manifest’ (EGM). Another report called ‘Export Report’ is also furnished before the vessel departs. These two reports are essentially taken as the proof of shipment/export.

Customs preventive Control No vessel can leave a customs station without providing a written order for port clearance issued by an authorised officer of customs. This permission for departure is issued only when the issuing officer is satisfied that all the prescribed formalities have been fulfilled, duties/penalties etc. have been paid or secured. The preventive Officers of Customs (pOC) are authorised to board the vessels to collect suitable declarations, crew property list etc. The pOC may also check whether there are any goods which are not declared for unloading at a particular customs station in the IGM, with the intention to smuggle them without following the prescribed formalities and payment of duties. A thorough examination and checking of the vessels which is known as ‘rummaging’ is also undertaken on a selective basis, taking due note of the past history of the vessels, the port from which these have arrived, the intelligence report etc. The preventive Officers of Customs remain very careful and vigilant for checking any illegal activities and develop intelligence to guard against any possible attempts of unauthorised removals from the docks, unloading of un-manifested cargo etc.

Customs Clearance of Cargo 1. Customs Clearance of Imported Goods Before any imported goods are approved for home consumption in the country or for warehousing for subsequent customs clearances etc. the imported goods have to go through a prescribed customs clearance process. Essentially, the process of clearance involves the presentation of certain documents along with a prescribed application. This application accompanied by required documents is termed ‘Bill of Entry’, which provides essential particulars in relation to imported goods, like country of

314 Export Import Management origin, particulars of vessel/aircraft etc. seeking clearance of goods for home consumption/warehousing etc. The importing firm either itself handles the import clearance documents or exercises an option of appointing a Custom House Agents (CHAs) (also referred to as Customs Brokers) for the same purpose. The CHAs are licenced, trained and experienced agents having expertise in customs clearance work. The CHAs are licenced by customs for such work in terms of the CHA Licensing Regulations 2004. Import Clearance Documentation: Appraising staff trained in assessment matters handle the import clearance documentation, presentation, and processing in the custom houses. First of all, a tally is made with the related IGM, to ensure that the goods under process for clearance have arrived and declared in the particular IGM of the vessel mentioned in the bill of entry (or even where the prior manifest is filed). Thereafter the scrutiny of documents is done manually or through the EDI system. It is the responsibility of the appraising staff in the custom houses that a careful scrutiny of the bill of entry and related particulars / information is done to check the import permissibility in terms of the Foreign Trade policy and other laws regulating import. The purpose of this scrutiny is also to determine value, classification and duties leviable on the goods (basic, additional, anti-dumping, safeguards etc.).The appraising staff also checks and verifies the permissibility of various benefits of duty free clearances under different schemes or applicability of any exemption notification benefits. Issuance of Out of Custom Charge: Normally, the import declarations made by the importing firms are scrutinised without prior examination of the goods with reference to the values/classification of the goods available with customs. On the basis of these documents, duties chargeable on the goods are assessed and paid up by the importer or his authorised representative. It is only at the time of clearance of the goods from the custody of the port trusts or other custodians that goods are examined on percentage basis by separate staff posted in the premises where the goods are stored pending customs clearance. This designated staff undertakes checking the nature of goods, valuation and other parts of the declaration, or draw samples as may be ordered by the appraising officers of the custom house. If no discrepancies in relation to the nature of goods, quantity, value etc. are found at the time of examination of the cargo, ‘Out of Customs Charge’ orders are issued. Thereafter goods can be cleared after discharging any other fees/charges etc. of the custodians. However, at times, for determining the duty liability and permissibility of import, it may be necessary to examine the goods. In such conditions, goods are examined after filing of bill of entry and other documents. Based upon the report of the examining staff, duties, etc. are assessed. If there is no prohibition, the goods are taken as cleared from the custodian without the need for further examination. Provisional Clearance in Case of Dispute: If there is a dispute in the matter of classification/ valuation or violations of any provisions of law, the goods are not allowed clearance without further investigations and following adjudication proceedings, the law provides for provisional clearances of such goods subject to suitable bond/security. However the use of provisional clearance will not be available if the goods belong to the prohibited goods category or in certain other exceptional cases, where provisional release is not considered advisable. Final decision is taken after the results of investigations are known and adjudication proceedings are complete, where necessary. 2. Customs Clearance of Exports Customs clearance process for goods meant for export requires the presentation of ‘Shipping Bill’ and other related documents to the export section of the custom houses or EDI service centres. The

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appraising staff verifies and checks the declarations to make an assessment of duties/cess, if leviable. The staff also checks the propriety of export incentives, if claimed under different schemes like duty drawback or duty free exemption schemes etc. The customs staff in the docks/cargo examines the goods to be exported on percentage basis, and allows shipment after being satisfied that there are no discrepancies or mis-declarations etc. and no prohibitions/violations are found. During initial stage of scrutiny or at the time of examination, if any fraudulent practices are detected, an appropriate penal action as per law is initiated.

LO3 Understand the meaning of some important world shipping terms

WORLD ShIppINg TERmS There are some terms used worldwide in the shipping industry. Following is the brief explanation on the important world shipping terms. Actual Gross Weight: The full weight of a shipment, including goods and packaging. Air Waybill (AWB): Specifies the terms under which the air carrier agrees to transport the goods and contains limitations of liability; contract between shipper and carrier. Assessment of Duties and Taxes: Determines the amount of duties and taxes payable. Bill of lading (B/l): This is the official legal document that represents ownership of cargo; the negotiable document to receive cargo; and the contract for cargo between shipper and carrier. Box: Another (less formal) name for a shipping container. This is how they are often referred to in the industry. Brake horsepower: A common unit of power or the rate at which work is done. The power of cars and other motors of engine-driven vehicles, including container ships, is often measured in brake horsepower. Bulk Cargo: Commodity cargo that is transported unpackaged in large quantities. These cargoes are usually dropped or poured as a liquid or solid, into a bulk carrier’s hold. Examples of bulk cargo are grain, seed, and coal and iron ore. Business Close Time: Indicates the time that a particular place of business closes for the day. Carrier: Any individual, company or corporation engaged in transporting goods. Container shipping lines are sometimes referred to as ocean carriers. Certificate of Origin: A document that certifies the country where the product was made (i.e., its origin). A common export document, a Certificate of Origin is needed when exporting to many foreign markets. It may be required in order to obtain preferential tariff treatment under several Free Trade Agreements (i.e., NAFTA, ApTA, DR_CAFTA, etc.) Charter Rate: A rate for shipping freight agreed upon between the owner of a vessel and the person wanting to use the vessel (the ‘charterer’). Commercial Invoice (CI): Commercial invoice is a document prepared by the exporting firm or freight forwarder, and required by the foreign buyer/importing firm, to prove ownership and arrange for payment to the exporting firm. CI must provide basic information about the

316 Export Import Management transaction, description of goods, address of shipper and seller as well as delivery and payment terms. In some cases, the CI is used to assess customs duties. Consignee: A person or company (named in the bill of lading) to whom commodities are shipped. Container: A reusable steel rectangular box for carrying cargo that first came into common use about 50 years ago. The sizes of containers are standardised so that they can easily be moved between specially adapted containers ships, trains and trucks. Container Terminal: A docking, unloading and loading area within a port designed to suit the sizes and needs of container ships. Custom house Broker: An individual or firm licenced to enter and clear goods through customs. Customs Declaration: A document that traditionally accompanies exported goods bearing such information as the nature of the goods, their value, the recipient and their ultimate destination. Required for statistical purposes, it accompanies all controlled goods being exported under the appropriate permit. Customs Invoice: A formal document used to clear goods through customs in the importing country by providing pertinent shipment information including but not limited to country of origin, description and value. Customs Self-Assessment (CSA): Offers approved importers, approved carriers, and registered drivers the benefits of a streamlined clearance option for CSA eligible goods. Customs: Customs is the government service that is responsible for the assessment of import and export duties and taxes. It also looks after the administration of other laws and regulations applicable to the importation, transit and exportation of goods. Declared Value for Customs: Declared value for customs refers to the selling price or cost of an international shipment's contents as determined by the different valuation methods. Delivery Instructions: Also called delivery orders, they are the documents providing specific information to a carrier regarding delivery to a specific port, pier, terminal, airport, or steamship line. These documents show the shipping carrier, delivery deadlines, name and address of consignee, and name and telephone number of the shipper in case of delivery problems. Dimensional Weight: Dimensional weight is a calculation of the shipment’s weight based on its volumetric standard instead of the actual weight of the shipment. It is calculated by multiplying the length, width, and height of each package in inches or centimeters and then dividing by a dimensional weight divisor. The dimensional weight divisor keeps changing by service offering and unit of measure (inches or centimeters). Duty: Duty refers to the tax imposed by customs on imported goods. Electronic Data Interchange (EDI): Transfer of data between different companies using networks (e.g. Internet) is called electronic data interchange. Electronic Manifest (E-Manifest): It is the submission of a manifest electronically. Exchange licence: Similar to import licences, exchange licences protect a country’s foreign exchange reserves. These licences help in useful utilisation of a country’s foreign reserve. Export licences also authorise the conversion of currency.

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Exchange Permit: Exchange permit is a government permit sometimes required by the importer’s government to enable the importing firm to convert its own currency into foreign currency to make payment to a seller in another country. Export Broker: Export broker is an individual or a firm which does not take part in sales transactions, but brings together buyers and sellers, for a fee. Export Control Classification Number (ECCN): Most products carry an export control classification number (formerly export commodity classification number) within the Commerce Control List (CCL). The ECCN is made up of a five-character number that identifies categories, product groups, strategic level of control, and country groups. Export Declaration: A formal statement declaring full details about goods being exported, submitted to the collector of customs at a port of exit. Export licence: Export licence is a government document that permits participation in the export of designated goods to certain destinations. Export Management Company: Export management company is a private firm that serves as the export department for other firms (usually manufacturers), locating customers, developing foreign advertising, transacting export business for its clients, etc. An EMC provides the aforementioned services for a commission (ranging from 7.5 to 20 per cent), salary, or retainer plus commissions. Export Merchant: A firm purchasing goods directly from various domestic manufacturers, then packaging and marking the merchandise for resale under its own name is called an export merchant. Export merchants usually are experts in specific product categories. Export Quotas: Export quotas are specific restrictions or ceilings imposed by an exporting country on the value or volume of certain exports to protect domestic industry and consumers from temporary shortages of the goods affected or to bolster their prices in world markets. Export: A shipment transported out of a country. FEU: ‘Forty-foot Equivalent Unit’. This is a container that is the same height and width as a TEU but twice the length. As a result, it has twice the capacity. Free on Board (FOB): The goods are placed on board the vessel by the seller at the port of shipment specified in the sales contract. The risk of loss or damage is transferred to the buyer when the goods pass the ship’s rail. Freight Rates: The charge levied by a shipping line for the transportation of freight aboard one of its ships from one place to another. Gantry Crane: A type of crane used to load and unload container ships. It lifts objects with a hoist and can move horizontally on a rail or pair of rails. harmonised System Code (hS Code): A universally accepted classification system for trade goods, used to classify products and their corresponding tariffs. Import Certificate: The means used by the government of the country of ultimate destination to exercise legal control over the internal channeling of the commodities covered by the import certificate. Import licence: Some national governments issue and require an import licence document to allow imports into their countries.

318 Export Import Management Import Quota: Import quota is a means to restrict imports by the issuance of licences to importers, assigning each a quota, after determining the total amount of any commodity to be imported during a period. Import licences sometimes also specify the country from which the importer must purchase the goods. Import Restrictions: Import restrictions are applied by a country to reflect a desire to control the volume of goods coming into the country from other countries. Such restriction may include the imposition of tariffs or import quotas, a requirement for import deposits, imposition of import surcharges, restrictions on the amount of foreign currency available to cover imports, non-tariff barriers, or even prohibition of various categories of imports. Import Substitution: A strategy emphasising the replacement of imports with domestically produced goods, rather than the production of goods for export is called import substitution. It is used to encourage the development of domestic industry. Import: A shipment brought in from a foreign country. Inter modalism: A system whereby standard-sized cargo containers can be moved seamlessly between different ‘modes’ of transport, typically specially adapted ships known as containerships, barges, trucks and trains. Because the cargo does not need to be unloaded from the container every time it is moved from one mode to the other it is a very efficient and fast system of transportation. International Convention for the Safety of life at Sea (SOlAS): It prescribes the numbers of lifeboats and other emergency equipment that ships must have, as well as safety procedures including continuous radio watches when a ship is at sea. International Maritime Organisation (IMO): A specialised agency of the United Nations responsible for measures to improve the safety and security of international shipping and to prevent marine pollution from ships. It is also involved in legal matters, including liability and compensation issues and the facilitation of international maritime traffic. International Organisation for Standardisation (ISO): An international standard-setting body composed of representatives from various national standards organisations. It was the ISO that prescribed the standard size of shipping containers to make global container trade more efficient. International Ship and Port Facility Security Code (ISPS Code): A code agreed between the signatories of the 1974 International Convention for the Safety of Life at Sea (SOLAS) on minimum security arrangements for ships, ports and coast guard agencies. The Code was introduced by the International Maritime Organisation (IMO), the overseer of the original SOLAS agreement, in the wake of fears of terrorist attacks on ships and ports after the September 11 terrorist attacks in the United States in 2001. Invoice: Statement of charges issued after the preliminary invoice, i.e., when the goods have arrived at the destination, a true weight quantity/value is determined and agreed upon. Knot: A nautical measurement of speed equal to 1.15 miles or 1.85 kilometers per hour on land. The speed of ships is measured in knots. legal Weight: The total weight of the merchandise, including any immediate packaging which is sold along with the goods, i.e., the weight of a tin can as well as its contents, but excluding the cartons in which the cans are packed.

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Maiden Voyage: The very first journey a ship makes after being delivered from the shipyard. Manifest: A list of cargo being carried by a ship as declared by the shipper. Memorandum of Understanding (MOU): A legal document describing an agreement between parties. Multiple Package Shipments: Multiple package shipments consist of individual packages that may have different weights, dimensions and declared value but can be accepted on one waybill if the shipment is destined to a single address. Non-Document Shipments: Non-document shipments are shipments that are not personal, Inter-office or Business documents (pIB) and usually require a commercial invoice. Pallet: A term used for a load-carrying platform onto which loose cargo is stacked before being placed inside a container. It is designed to be moved easily by fork-lift trucks. Prior Notice (PN): prior Notice requirements include a set of data elements on food imports that must be filed electronically, using either the FDA website or Automated Broker Interface (ABI). Pro Forma Invoice: An invoice prepared by the exporter prior to shipping the goods, informing the buyer of the goods to be sent, their value and other key specifications. Quantitative Restrictions (QR): Explicit limits, usually by volume, on the amount of a specified commodity that may be imported into a country, sometimes also indicating the amounts that may be imported from each supplying country. Quotas: The quantity of goods that may be imported without restriction or additional duties or taxes. Quotation: An offer to sell goods at the stated price and under stated terms. Reefer: Industry term for a temperature-controlled container. Inside each one is a complex system of coils, wires and electrical fittings, which are managed by a computer that controls everything from the temperature and humidity to ventilation and gas levels, all working to prevent the deterioration of fresh food or other sensitive goods over long distances and periods of time. Shipper: Any person or organisation paying for its cargo to be shipped from one place to another. Shipper’s Export Declaration (SED): It is an official document submitted by a US exporting firm when a shipment of merchandise is shipped from the United States to a foreign destination. The joint Bureau of Census-International Trade Administration is the authority to issue this form which is used for complying with US export control laws. In SED, the shipper discloses the value, weight, consignee, destination, etc. of export shipments as well as Schedule B identification numbers. Shipper’s letter of Instructions for Issuing Air Waybill: It is a document required by the carrier of goods or freight forwarders as a prerequisite to obtain (besides the data needed) authority to issue and sign the waybill in the shipper's name. Shipping Permit: It is issued by a shipping or carrier company authorising the receiving clerk at pier, dock, warehouse, airport, or on board, to receive a specified amount of merchandise from a specified firm.

320 Export Import Management Shipping Weight: Shipping weight represents the gross weight in kilograms (kg) of shipments. It includes the weight of moisture content, wrappings, crates, boxes, and containers (other than cargo vans and similar substantial outer containers). Ship’s Manifest: It is an instrument in writing, signed by the captain of the ship, listing the individual shipments constituting the ship’s cargo. Tariff: A duty (or tax) levied on goods transported from one customs area to another. Tariffs raise the prices of imported goods, thus making them less competitive within the market of the importing country. Terms of Sale: The point at which sellers have fulfilled their obligations so the goods are said to have been delivered to the buyer. They are shorthand expressions that set out the rights and obligations of each party when transporting the goods. TEU: It stands for ‘Twenty-foot Equivalent Unit’. This is the industry standard to measure containers. A 20-foot container’s dimensions are twenty feet long (6.09 meters), 8 feet wide (2.4 meters) and 8 feet six inches high (2.6 meters). These dimensions have been set by the International Organisation for Standardisation (ISO). Total Declared Value: It is the declared value for carriage of any shipment representing FedEx’s maximum liability related to that shipment, including but not limited to, any loss, damage, delay, mis-delivery, non-delivery, mis-information, any failure to provide information, or mis-delivery of information. Exposure to and risk of loss in excess of the declared value is assumed by the shipper. Vessel: Another word for a boat or ship. Container ships are sometimes referred to as vessels. Waybill: A detailed description of the shipment is sent to the transfer point. Weight Certificate: Usually issued by an official weigher on the dock, this certificate records the weight (as well as measurements) being entered on the back of the second and third copies of the dock receipt by the clerk on the dock. Weight Note: This note, or slip, shows the individual weight of each unit and is included in some cases. It is also the official weigher’s record. World Customs Organisation (WCO): An intergovernmental organisation comprised of customs administrations from 170 countries who participate to communicate and co-operate on customs issues.

In RevIew The Indian Shipping Industry plays a crucial role in the Indian economy as 90 per cent of the nation’s trade by volume is done via the water route. India has the largest merchant shipping fleet among the developing nations. As indicated by the economic survey of India 2016, around 42 per cent of the vessels are above 20 years of age, 12 per cent of the fleet between 15-19 years, and the remaining spread almost equally across the age groups of 6-10 years. Around 95 per cent of India’s trading by volume and 70 per cent by value is done through maritime transport.

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The Government of India has set an ambitious target to convert 101 rivers across the country into waterways to promote water transport and propel economic growth. To regulate and exercise control on imports and exports the Customs Act 1962, enjoins certain liabilities on the carriers. The imported cargoes are required to be brought into the country for unloading only at notified ports or customs stations. Unless the IGM is furnished in the prescribed form, unloading of cargo cannot be undertaken from any vessel in normal circumstances. As there are obligations of imported cargo, similarly, there are restrictions on loading for export such that no vessel can begin loading goods for export unless intimation is given to customs and its permission for loading obtained. No vessel can leave a customs station unless a written order for port clearance is given by an authorised officer of customs. Before any imported goods are cleared for home consumption in the country or for warehousing for subsequent customs clearances as and when needed, the imported goods have to undergo prescribed custom clearance processes. The import clearance documentation, presentation, and processing is handled in the custom houses by appraising staff trained in assessment matters. If there is a dispute in the matter of classification/valuation or any violations of the provisions of law, where the goods cannot be allowed clearance without further investigations and following adjudication proceedings, the law provides for provisional clearances subject to suitable bond/security. Customs clearance process for goods meant for export requires the presentation of ‘Shipping Bill’ and other related documents to the export section of the custom houses or EDI service centres.

MultIple ChoICe QuestIons 1. Around _______ of India's trading by volume and 70 per cent by value is done through maritime transport. (a) 50 per cent (b) 65 per cent (c) 80 per cent (d) 95 per cent 2. India is the _______ largest maritime country in the world, with a coastline of about 7,517 km. (a) tenth (b) eleventh (c) fifteenth (d) sixteenth 3. _______ is the very first journey a ship makes after being delivered from the ship-yard. (a) Maiden Voyage (b) Knot (c) Manifest (d) pallet 4. _______ is a term used for a load-carrying platform onto which loose cargo is stacked before being placed inside a container. (a) TEU (b) Knot (c) pallet (d) Manifest 5. _______ is a nautical measurement of speed equal to 1.15 miles or 1.85 kilometers per hour on land. (a) Knot (b) Maiden Voyage (c) TEU (d) Reefer 6. _______ is a government document permitting participation in the export of designated goods to certain destinations. (a) Exchange permit (b) Export Licence (c) Exchange Licence (d) Export permit

322 Export Import Management 7. The person in charge of the vessel has to furnish details of all the goods loaded on a vessel in a prescribed form, which is termed as _______. (a) ‘Entry Outward’ (b) ‘Export Report’ (c) ‘Export General Manifest’ (EGM) (d) None of these 8. Two new major ports, one at Sagar in West Bengal and the other at _______ in Andhra pradesh are being planned. (a) Dugarajapatnam (b) Kolkata (c) Both (a) and (b) (d) None of these

ConCept QuestIons 1. prepare a summary report based on past five years’ facts on growth of Indian shipping industry and its contribution to Indian economy. 2. Throw light on major policy initiatives of the government in the recent past to promote and support shipping industry in India. 3. Discuss in detail the liabilities on the carriers enjoined by the Customs Act 1962 to regulate and exercise control on imports and exports. 4. Explain following terms and their relevance in international trade: (a) Weight certificate (b) Total declared value (c) Inter modalism (d) Harmonised System Code (HS Code)

FuRtheR ReadIng http://www.worldshipping.org/about-the-industry/glossary-of-industry-terms https://community.data.gov.in/growth-of-indian-shipping/ http://www.aivp.org/wpcontent/uploads/2016/06/suresh_trishala_indian_maritime_industry.pdf

Answers to Multiple ChoiCe Questions 1. (d) 7. (c)

2. (d) 8. (a)

3. (a)

4. (c)

5. (a)

6. (b)

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Exercise The Indian Government under its new investment policy has introduced new measures for helping and encouraging public-private partnerships in the shipping and port sector. Some of the important measures are listed below Any project providing support services to water transport attracting foreign equity up to 51 per cent does not need any approval. For the projects for construction and maintenance of ports and harbors, the automatic approval route is now open for foreign equity up to 100 per cent. On a Build Operate-Transfer (BOT) basis, open tenders can be invited for private sector participation.

Question 1. prepare a summary of more such measures introduced by Indian Government to encourage private partnership in port sector. Also identify those areas which are still ignored and need to be addressed.

Appendix

Foreign Exchange Management in India

IntroductIon A business firm importing goods from other countries, exporting its products to foreign business markets or making investments abroad, needs foreign exchange. Foreign exchange refers to ‘foreign currency’ and includes the following: Deposits, credits and balances payable in any foreign currency Drafts, travellers cheques, letters of credit or bills of exchange, expressed or drawn in Indian currency but payable in any foreign currency Drafts, travellers cheques, letters of credit or bills of exchange drawn by banks, institutions or persons outside India, but payable in Indian currency

ForeIgn exchange ManageMent act, 1999 Until 1999, all transactions in India that included foreign exchange were regulated by Foreign Exchange Regulations Act (FERA) 1973. FERA’s main objective was to conserve and properly utilise the foreign exchange resources of the country. It also sought to control specific aspects of the conduct of business outside India by domestic companies and in the country by foreign companies. FERA fell into the category of criminal law and therefore its violation led to imprisonment and payment of a heavy monetary fine. Having a number of restrictive clauses, FERA deterred foreign investments. In the early 1990s, India witnessed extensive economic reforms leading to the deregulation and liberalisation of the country’s economy. To keep pace with the economic reforms and in the light of the liberalised scenario, FERA needed to be replaced by a new act and consequently in the year 1999, a new act called the Foreign Exchange Management Act (FEMA) replaced FERA. FEMA was formulated in order to be compatible with the policies of pro-liberalisation of the Indian government. It assisted the country by encouraging external payment and trade. FEMA was formulated by the Indian government in 1999 and it came into force on 1 June 2000. FEMA is applicable to all branches, offices and agencies outside India which are owned or controlled by a person who is a resident of India. It is treated as an investor friendly legislation and is purely a civil legislation by nature. Therefore its violation implies only payment of monetary fines and penalties. However FEMA provides that a person shall be liable to civil imprisonment only if he

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fails to pay the levied fine within 90 days from the date of notice. The punishment of imprisonment is attracted by issuing a show cause notice and personal hearing. FEMA also offers a two-year sunset clause for offences committed under FERA. It is taken as the transition period granted for moving from one ‘harsh’ law to the other ‘industry friendly’ legislation.

application of FeMa FEMA is applicable across the entire country. Any agency, office and branch located outside India, but owned by Indian residents, also fall under the jurisdiction of this act. This act is extended to all disputes that are committed in offices, agencies and branches outside India owned by individuals covered under this Act.

objectives of FeMa The main objective behind the enforcement of FEMA is to consolidate and amend the law relating to foreign exchange. It aims to facilitate external trade and payments and to promote the orderly development and maintenance of the foreign exchange market in India. Among the various other objectives of FEMA, an important one is to combine and revise all the laws related to foreign exchange.

Implementation of FeMa FEMA directs the Central Government to appoint its officers as adjudicating authorities for conducting inquiries pertaining to contravention of the act. The act also has a provision for appointing one or more special directors (appeals) to hear appeals against the order of the adjudicating authorities. To hear such appeals, an ‘Appellate Tribunal for Foreign Exchange’ is also established by the Central Government. For taking up investigations of contraventions under this act, FEMA authorises the Central Government to establish a Director of Enforcement, with a director and other officers or class of officers, as required.

Important Features of the FeMa The act allows only authorised persons to deal in foreign exchange or foreign security and no other person is permitted to do so. Here an authorised person refers to the authorised dealer, money changer, off-shore banking unit or any other person temporarily authorised by the Reserve Bank. FEMA prohibits any person(s) from the following Dealing in or transferring any foreign exchange or foreign security to any person who is not an authorised person: Making any payment to or for the credit of any person residing outside India; Receiving through an authorised person any payment by order or on behalf of any person residing outside India; Entering into any financial transactions in India as consideration for or in association with acquisition, creation, or transfer of a right to acquire any asset outside India by any person who is a resident of India, which acquire, hold, possess or transfer any foreign exchange, foreign security or any immovable property situated outside India.

326 Export Import Management Key features of FEMA are summarised as follows: Unlike FERA, FEMA is a civil law and the contraventions of the act attract provisions for arrest only in exceptional cases. FEMA is not applicable to Indian citizens residing outside India. FEMA consistently provides for full current account convertibility. It has provisions for progressive liberalisation of capital account transactions. Maintaining the transparency to a larger extent, it clearly mentions the areas where specific permissions of the Reserve Bank/Government of India are required for acquisition/holding of foreign exchange. FEMA has categorised the foreign exchange transactions in two categories viz., capital account and current account transactions. The act empowers the Reserve Bank for specifying, after having consulted with the Central Government, the classes of capital account transactions and limits to which exchange is admissible for such transactions. FEMA extends freedom to persons residing in India, who were earlier non-residents, to hold/ own/transfer any foreign security/immovable property located outside India and acquired when he was resident.

FeMa guIdelInes For trade credIts FroM abroad Guidelines of FEMA provide different methods of accessing funds from abroad by Indian companies. Following are the methods: 1. External Commercial Borrowings (ECB): ECB is the method of borrowing under which an Indian company can take commercial loans in the form of bank loans, buyers credit, suppliers credit, securitised instruments (floating rate notes and fixed rate bonds, non-convertible, optionally convertible or partially convertible preference shares) from non-resident lenders, where the average maturity period is not less than three years. 2. Foreign Currency Convertible Bonds (FCCBs): FCCB is a bond issued by an Indian company expressed in foreign currency. Here the Indian company pays the principal and interest in foreign currency. 3. Preference shares: An Indian company can access funds from investors outside the country by issuing preference shares. These preference shares can be non-convertible, optionally convertible, or partially convertible. These instruments are treated as a debt and denominated in Indian currency. The rupee interest rate is based on the swap equivalent of LIBOR plus spread. 4. Foreign Currency Exchangeable Bond (FCEB): FCEB is a bond expressed in foreign currency. Under this method of raising funds, the issuing company pays the principal and interest in foreign currency and the bond is subscribed to by a person who is a non-resident, in foreign currency and which is convertible into equity shares of another company, called the ‘Offered Company’, in any manner, either wholly, or partly or on the basis of any equity related warrants attached to debt instruments. The FCEB can be denominated in any freely convertible foreign currency.

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routes to access external coMMercIal borrowIngs The External Commercial Borrowings (ECBs) by an Indian company can be accessed by the following two routes: 1. Automatic Route: If an Indian company accesses funds under automatic route, it does not require approval from RBI or Government of India (GOI). ECB through automatic route can be accessed by corporates including hotels, hospitals, software sectors (registered under the Companies Act 1956) and Infrastructure Finance Companies (IFCs) except financial intermediaries such as banks, FIs, HFCs, and NBFCs. Units located in SEZs are also eligible to raise ECB for their captive requirements. NGOs engaged in micro finance activities can (subject to certain conditions) also avail the facility of ECB through automatic route. However, trusts and non-profit making organisations cannot access the funds through ECB. Under automatic route, NBFCs categorised as Infrastructure Financing Companies (IFC) can avail ECBs including outstanding in existing ECBs up to 50 per cent of their owned funds for lending to infrastructure sector and beyond 50 per cent of owned funds under approval route. Following are the internationally recognised sources through which ECBs can be raised: International banks International capital markets Multilateral financial institutions (such as IFC, ADB, CDC, etc.)/ regional financial institutions and government owned development financial institutions Export credit agencies Suppliers of equipment Foreign collaborators Foreign equity holders (other than erstwhile overseas corporate bodies) Purpose: A company can raise ECB for a number of purposes that includes an investment (import of capital goods as classified by the DGFT in Foreign Trade Policy) in new projects, modernisation/ expansion of existing units in industrial and service sectors including infrastructure sector.

Restrictions (i) ECBs under automatic route cannot be utilised for following purposes: On-lending or investment in capital markets Acquiring a company (or a part thereof) in India by a corporate Investment in real estate sector For working capital General corporate purpose Repayment of existing rupee loans (ii) A company cannot use the ECB raised under automatic route for issuing guarantees, standby letters of credit, letter of undertaking or letter of comfort by banks, FIs and NBFCs from India relating to ECB. (iii) The borrowing company has the option to offer security against the ECB. The lender is subject to FEMA regulations and ECB guidelines for the creation of charge over immoveable assets and financial securities, such as shares, in favour of the overseas lender.

328 Export Import Management Other Provisions The borrowing company can park the ECB proceeds abroad or can even remit these funds to India. ECB proceeds secured in various liquid assets as per regulation are permitted to be invested in treasury bills and other monetary instruments of one year maturity, along with other requirements for quality standards. While investing the proceeds, it must be ensured that the investments can be liquidated when required by the borrowing company in India. The borrowing company is permitted to repatriate the ECB funds to India for credit to the borrowers’ rupee accounts with banks (AD) in India, pending utilisation for permissible end uses. When the borrowing company complies with the minimum maturity period applicable to the loan, pre-payment of ECB up to USD 500 million is allowed by AD banks. Here the approval of RBI is not required. In conformity with the ECB guidelines, the designated AD bank is permitted to make remittances of instalments of principal, interest and other charges. Before raising the ECB as per the procedure laid down in the policy, the borrowing company has to enter into an agreement with recognised lender in compliance of ECB guidelines without RBI approval and obtain a Loan Register Number (LRN) from RBI. 2. Approval Route: The other route to access funds from non-resident lenders is through approval route. Proposals falling under this category include the following: On lending by the EXIM Bank for specific purposes (decided on case to case basis). Banks and financial institutions having participated in the textile or steel sector restructuring packages, as approved by the government. ECBs having average maturity of not less than five years by NBFC to finance import of infrastructure equipment for leasing to infrastructure projects. Infrastructure Finance Companies (IFCs) for on-lending to the infrastructure sector as defined under the ECB policy and subject to compliance of certain stipulations. Housing Finance Companies issuing Foreign Currency Convertible Bonds (FCCBs). Special Purpose Vehicles (SPV) or any other entity notified by the RBI, set up to finance infrastructure companies/projects exclusively. Multi-state co-operative societies engaged in manufacturing which are financially solvent. SEZ developers offering infrastructure facilities within the SEZ. Eligible corporates under automatic route but no corporates in the services sector viz. hotels, hospitals and software sector can avail of ECB beyond USD 750 million per financial year. Corporates in the service sector looking to raise ECB beyond USD 200 million per financial year. Cases falling outside the purview of the automatic route limits and maturity indicated, etc. ECB under the approval route can be availed from the recognised lenders as explained under automatic route.

Restrictions Restrictions on availing ECB through approval route remain the same as that of ECB under automatic route.

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Other Provisions The guidelines permit the Indian infrastructure companies (as defined under the extant ECB policy) to import capital goods by raising short term credit under the approval route in the nature of ‘bridge finance’, subject to the conditions prescribed. The registered airline companies possessing scheduled operator permit licence from DGCA for passenger transportation can also avail ECB for working capital, with an average maturity period of not less than three years. Such type of borrowings will have an overall ceiling of USD one billion for the entire civil aviation sector and individual maximum permissible ceiling of USD 300 million. The borrowing company may offer security against the ECB. Subject to FEMA regulations and ECB guidelines the borrower can create charge over immoveable assets and financial securities, such as shares, in favour of the overseas lender. The borrowing company can park the ECB proceeds abroad or can even remit these funds to India. ECB proceeds secured in various liquid assets, as per regulations, are permitted to be invested in treasury bills and other monetary instruments of one year maturity, along with other requirements for quality standards. While investing the proceeds, it must be ensured that the investments can be liquidated when required by the borrowing company in India. When the borrowing company complies with the minimum maturity period applicable to the loan, pre-payment of ECB up to USD 500 million is allowed by AD banks. Here the approval of RBI is not required. The borrower can re-finance the existing ECB by raising a fresh ECB provided that the fresh ECB is raised at a lower all-in-cost and the outstanding maturity of the original ECB is maintained. In conformity with the ECB Guidelines, the designated AD bank is permitted to make remittances of instalments of principal, interest and other charges.

ForeIgn currency exchangeable bonds (Fceb) The company issuing the FCEB must be a part of the promoter group of the offered company and must essentially hold the equity share/s being offered at the time of issuance of FCEB. The offered company is required to be a listed company, engaged in a sector which is eligible to receive FDI. The offered company must also be eligible to issue or avail of FCCB or ECB. Only those entities which comply with the FDI policy and adhere to the sectoral caps at the time of issue of FCEB are eligible to subscribe to FCEB. It is required to take prior approval of the Foreign Investment Promotion Board, wherever applicable. An Indian company not eligible to access funds from the Indian securities market, including a company restrained from accessing the securities market by the SEBI, is not permitted to issue FCEB. In a similar manner, all the entities restricted from buying, selling or dealing in securities by the SEBI cannot subscribe to FCEB.

trade credIts For IMports Into IndIa Trade Credits (TC) like suppliers credit or buyers credit means the credits given for imports directly by the overseas supplier, bank and financial institution for maturity of less than three years. Suppliers

330 Export Import Management credit is the credit extended by the overseas supplier for imports into India whereas the buyers credit means the loans arranged by the importer for payment of imports into India from a bank or financial institution outside India for maturity of less than three years. The suppliers credit and buyers credit taken for a period of three years and above come under the category of ECB. Such credits are governed by ECB guidelines. For imports, Indian banks (AD) are eligible to approve trade credits up to USD 20 million per import, permissible under FTP with a maturity period of not more than one year. However for capital goods, the trade credits can be granted up to USD 20 million with maturity periods of more than one year and less than three years (from the date of shipment). No roll-over/extensions are allowed beyond the permissible period. Banks cannot approve trade credit exceeding USD 20 million per import transaction. Subject to prudential norms, banks can issue LC/Letter of Undertaking (LOU)/Letter of Comfort (LOC)/ in favour of the overseas supplier, bank and financial institution up to USD 20 million per import of goods other than capital goods, and for capital goods up to three years.

Index

Actual Gross Weight 315 Agmark Certification 13 Air Waybill (AWB) 315 Arbitration in International Commercial/Trade Disputes 75 International trade arbitration 75 Powers of the arbitrators 78 Procedure 76 Voluntary arbitration in international trade 76 Assessment of Duties and Taxes 315 Auxiliary Commercial Documents 105 Bill of Lading (B/L) 10, 315 Board of Trade (BOT) 38 Brake Horsepower 315 Bulk Cargo 315 Business Close Time 315 Canalisation 138 Canalised Items 266 Cargo Insurance 72 Carriage and Insurance Paid (CIP) 277 Carriage Paid To (CPT) 277 Carrier 315 Carriers and Custom Clearance 312 Customs clearance of cargo 313 Customs preventive control 313 Obligations of carriers 312 Cash-in-Advance 145 Certificate of Origin 105, 315 Charter Rate 31 CIF 78 Clean Payments 144, 160 Coffee Board 35

Commercial Documents 105 Commercial Invoice (CI) 105, 315 Commodity Board 138 Complete State Trading 232 Consignee 316 Consignment 158 Construction Works Policy 20 Container Terminal 316 Container 316 Custom House Broker 316 Customs 316 Customs Declaration 316 Customs Invoice 316 Customs Self-Assessment (CSA) 316 Declared Value for Customs 316 Delivered at Place (DAP) 277 Delivered at Terminal (DAT) 27 Delivery Instructions 316 Department of Commerce Organisational set-up 33 advisory bodies 38 attached offices 34 autonomous bodies 35 Export Promotion Councils (EPCs) 38 other organisations 38 Public Sector Undertakings (PSUs) 37 subordinate offices 34 Role of the department 30 Devaluation of Rupee 4 Dimensional Weight 316 Director General of Foreign Trade (DGFT) 41 Directorate General of Anti-Dumping and Allied Duties (DGAD) 34, 48

332 Index Directorate General of Commercial Intelligence and Statistics (DGCI&S) 34, 48 Directorate General of Foreign Trade (DGFT) 34 Directorate General of Supplies and Disposals (DGS&D) 34, 48 Distribution Channels 282 International distribution channels 282 International distribution channel selection 283 Documentary Credit (DC) 74, 79 Draft of Documentary Collection Method 154 Duty 316 Duty Drawback 182 Duty Entitlement Passbook (DEPB) 182 Duty Exemption Schemes (DES) 166, 181 Duty Free Import Authorisation (DFIA) 170, 182 Duty Free Replenishment Certificate (DFRC) 182 Duty Remission Scheme 182 Electronic Data Interchange (EDI) 316 Electronic Hardware Technology Park (EHTP) 251 Electronic Manifest (E-Manifest) 31 Escrow 160 Ex Works (EXW) 277 Exchange Licence 316 Exchange Permit 317 EXIM Policy 22 Export 317 Export and Trading Houses in India 229 Export Broker 317 Export Control Classification Number (ECCN) 317 Export Credit and Guarantee Corporation Limited 228 Export Credit Guarantee Corporation (ECGC) Schemes 194 Financial guarantees 199 export finance guarantee 201 export performance guarantee 201 packing credit guarantee 199 post-shipment export credit guarantee under (ECIB-INPS) 200 whole turnover pre-shipment and post shipment credit guarantee 202 Standard policy or Shipment (Comprehensive Risk) policy (SCR) 194 risks covered under the standard policy 194 risks not covered under the policy 195 shipment covered under standard policy 195 Specific policies 197 types of specific policies 198

Special schemes 203 exchange fluctuation risk cover 204 overseas investment insurance 204 transfer guarantee 203 Export Credit Guarantee Corporation of India Limited (ECGC) 191 Debt recovery 194 Declaration of shipments and payment of premium 193 Drawee-wise credit limit 193 Exchange transfer delay 194 Exporter Co-Insurer 192 Functions of ECGC 192 Historical background 191 How to obtain policy 193 Maximum liability 193 Restricted cover countries 193 Whole turn over principle 193 Export Credit Guarantee Corporation of India Limited (ECGC) 38, 48, 209 Export Credit Insurance (ECI) 73 Medium/long-term ECI 74 Short-term ECI 74 Export Declaration 317 Export Documentation 83 Export documentation in India 83 easing of documentation 84 mandatory documents for export and import 84 Important documents used in export trade 88 documents related to bank processing 100 documents related to goods 89 documents related to payment 101 documents used for shipment 95 official documents 104 Types of export documents 85 export documents on the basis of nature of documents 85 export documents on the basis of sequence of activity flow 87 Export Finance Guarantee 209 Export Import Policy 2009-14 16 Objectives 16 announcements for agro exports 18 announcements for automobile industry 20 announcements for FPS, FMS, MLFPS 17 announcements for gems and jewellery sector 18 announcements for handloom exports 19 announcements for leather exports 19 announcements for marine sector 18

Index

announcements for medical devices 20 announcements for pharma exports 19 announcements for project exports 19 announcements for sports weapon 20 announcements for tea exports 19 announcements for Value Added Manufacturing (VAM) 19 disposal of manufacturing wastes 19 easy import of samples 19 extension of ECGC 18 extension of income tax exemption to EOU and STPI 18 import of restricted items 20 recognition of Towns of Export Excellence (TEE) 17 reduction in transaction costs 19 re-fixation of annual average export obligation 17 relaxation in EPCG scheme 16 scheme for Export Oriented Units (EOU) 19 scheme for status holders 18 Export Inspection Council (EIC) 36, 48 Export Licence 138, 317 Export Management Company 317 Export Merchant 317 Export Oriented Undertakings Schemes (EOUS) 241, 251 DTA sale 245 EOUs permitted under the scheme 244 General conditions of duty free import 244 Historical background and purpose 241 Implementation of the scheme 243 Incentives/facilities to special economic zone units 245 Objectives 242 Policy changes in the EOUs scheme 243 Scope of the scheme 242 Export Procedure 110 Custom procedure for exports 119 Export documents 118 Export licence 111 obtaining export licence 111 Export of samples 114 export of garment samples 115 export of software and electronics 115 export samples against payment 115 sending export samples from India 114 Inspection certificates and quality control 116 In-process Quality Control (IPQC) 117

333

ISI and agmark certification 117 ISO 9000 118 self-certification scheme 117 Packaging and labeling of goods 115 labeling 116 packaging 115 Registration of firms 113 registration of export firms 113 Export Promotion Capital Goods Scheme (EPCG) 18 Export Promotion Schemes 165 Duty Exemption Schemes (DES) 166 advance authorisation 168 Duty Free Import Authorisation (DFIA) 170 Duty remission schemes 172 duty drawback scheme 174 Duty Entitlement Passbook (DEPB) scheme 173 Duty Free Replenishment Certificate (DFRC) scheme 172 Reward schemes 176 Focus Market Scheme (FMS) 177 Focus Product Scheme (FPS) 178 Market Linked Focus Products Scrip (MLFPS) 178 Served From India Scheme (SFIS) 176 special agriculture and village industry scheme 177 Status Holders Incentive Scrip (SHIS) 178 Vishesh Krishi and Gram Udyog Yojana (VKGUY) 177 Schemes for import of goods 178 advance customs clearance permit 180 Export Promotion Capital Goods Scheme (EPCG) 178 manufacture under bond 180 project imports 180 Export Quotas 317 Export-Import Bank of India (EXIM Bank) 206, 209 EXIM bank initiatives 207 Financial assistance provided by EXIM bank to Indian companies 208 Financial assistance provided by EXIM bank to overseas companies 208 Overview of EXIM bank 206 Exports from India to SAARC 126 Export to Afghanistan 126 Export to Bangladesh 129 Export to Bhutan 130 Export to Maldives 138

334 Index Export to Nepal 131 Export to Pakistan 138 Export to Sri Lanka 131 Federation of Indian Export Organisations (FIEO) 38, 48 FEU 317 FOB 78 Footwear Design and Development Institute (FDDI) 39 Foreign Currency Exchangeable Bonds (FCEB) 329 Foreign Exchange Management Act, 1999 324 Application of FEMA 325 Implementation of FEMA 325 Important features of the FEMA 325 Objectives of FEMA 325 Free Carrier (FCA) 277 Free on Board (FOB) 317 Freight Rates 317 Future Prospects of Logistics 30 Gantry Crane 317 Goods in Transit 78 Harmonised System Code (HS Code) 317 Import 318 Import Certificate 31 Import Duties 265 Import Licence 317 Import Procedure and Documentation 257 Import procedure 258 Indian trade classification 257 Import Quota 318 Import Restrictions 318 Import Substitution 318 Import Tariff 22 Importer Exporter Code (IEC) 45, 49 Documents required for applying 45 Eligibility and other provisions for applying for IEC 47 Online application for IEC code 46 Procedure to apply for IEC 46 Incoterms 277 Incoterms 270 Purpose of incoterms 270 Incoterms 2010 Rules 271 Applicable to any mode of transport 273 Applicable to sea and inland waterway transport only 274 India Trade Promotion Organisation (ITPO) 38, 226, 233

India’s Export–Import Performamce 20 Indian Council of Arbitration (ICA) 38 Indian Diamond Institute (IDI) 39 Indian Institute of Foreign Trade (IIFT) 36 Indian Institute of Packaging (IIP) 37, 48 Indian Shipping Industry 306 Economic insights 306 Fleet composition 308 Policy initiatives to promote shipping industry 311 Indian State Trading Organisations 222 Export Credit and Guarantee Corporation Limited 228 India Trade Promotion Organisation (ITPO) 226 Minerals and Metals Trading Corporation Limited (MMTC) 225 Projects and Equipment Corporation of India Limited (PEC) 228 State Trading Corporation of India Limited (STC) 222 In-process Quality Control (IPQC) 117 Insurance in International Trade 70 Export finance and insurance 74 Types of insurance 72 insuring goods in transit 72 product liability insurance 72 Types of product claims 73 Export Credit Insurance (ECI) 73 insuring against non-payment 73 Trade facilitation programme 75 Weighing up the risks 71 for exporter 71 for importer 71 International Bank of Reconstruction and Development (IBRD) 22 International Commercial Contracts 60, 78 Conflict of laws agreement 62 Principle of contractual freedom 61 Private international law 61 International Convention for the Safety of Life at Sea (SOLAS) 318 International Maritime Organisation (IMO) 318 International Marketing Logistics 284 Logistics system elements 288 Objectives of marketing logistics 286 Significance of marketing logistics 285 International Organisation for Standardisation (ISO) 318 International Sale Contracts 64 Issue of risk 68 delivery to carrier 69

Index

documentary credit 70 goods in transit 69 important aspects of passing of risk 70 passing of risk in bulk shipment of CIF contracts 69 passing of risk in case of bulk shipment 69 Passing of property in FOB contracts 66 Passing of property in international sales 66 Passing of property in sale contracts 64 Reservation of right of disposal by seller in international sale 66 Rules of passing of property 64 Transferring of property in CIF contracts 67 notice of appropriation in international sale 68 rejection of goods by buyer in international sale contracts 68 International Ship and Port Facility Security Code (ISPS Code) 318 International Substantive Rules 78 International Trade Legal aspects of 60 International Trading Company 30 Procedure for setting up 39 obtaining export/import licence and certificate of origin 42 registering a company in India 40 registering with the director general of foreign trade 41 registering with the export promotion council 42 registration with tax authorities 42 International Trading Houses 217, 232 Selection of trading house 221 Services provided to manufacturing firms 218 International Transport 294 Modal characteristics 295 Modal competition 297 Modal preferences 299 Role of transportation in logistics management 299 Transportation utility 294 Inter-State Trade Council 38 Invisible Exports 124 Invoice 318 ISO 9000 118 ITC-HS code 42 Knot 31 Labeling 13 Legal Weight 31

335

Letter of Credit (L/C) 105, 145, 160 Letter of Credit Method 148 Licenced (Restricted) Items 266 Loger 284 Logistics 284, 302 Definition 285 Maiden Voyage 319 Mandatory Documents for Export and Import 85 Manifest 319 Marine Products Export Development Authority (MPEDA) 36, 48 Memorandum of Understanding (MOU) 319 Minerals and Metals Trading Corporation (MMTC) 225, 232 MMTC Limited (Minerals and Metals Trading Corporation) 37, 48 Multiple Package Shipments 319 National Centre for Trade Information (NCTI) 39 Non-Document Shipments 319 Off-shore Banking Units (OBUs) 25 On Consignment Method 159 Open Account Method 157 Open Account Transaction 160 Open General Licence (OGL) 6, 22 Packaging 138 Pallet 319 Partial State Trading 232 Payments for Exports 143 Cash-in-Advance 145 Consignment 158 how to export on consignment 159 Documentary collections 153 role of various parties 154 types of documentary collections 155 Letter of Credit 147 fees and reimbursements 152 import operations under L/C 152 parties to letters of credit 149 risk associated with opening imports L/C 150 types of letter of credit 150 Methods and terms of payments 144 clean payments 144 Letter of Credit (L/C) 145 payment collection of bills in international trade 144

336 Index Open account 156 factoring 158 forfaiting 158 Policy Framework for India’s Foreign Trade 1 Historical background 1 Post-Liberalisation era 7 administrative set up 14 approval mechanism of SEZs 13 foreign trade policy reforms after 1991–92 9 growing foreign trade of India 7 reforms in foreign direct investments policy 9 relaxed import licensing 8 simplified tariff structure 8 special economic zones 12 structural changes in the policy 10 Pre-Liberalisation era 2 changed pattern of exports 2 devaluation of rupee 4 development of a complex regime 5 emergence of need for economic reforms 6 export incentives 5 relaxation in import controls 6 restrictions on imports 4 types of goods and import restrictions 6 Post-shipment Export Finance 190, 209 Pre-shipment Export Finance 189, 209 Price Stabilisation Fund Trust (PSF) 39 Prior Notice (PN) 319 Pro Forma Invoice 105, 319 Prohibited Items 266 Projects and Equipment Corporation of India Limited (PEC) 37, 228 Quantitative Restrictions (QR) 319 Quotas 319 Quotation 319 Reefer 319 Rubber Board 35 Seaports in India 309 SEZ Act, 2005 239, 251 Ship’s Manifest 320 Shipment in India 306 Shipper 319 Shipper’s Export Declaration (SED) 319 Shipper’s Letter of Instructions for Issuing Air Waybill 319 Shipping Bill 105

Shipping Permit 319 Shipping Terms 315 Shipping Weight 320 Software Technology Park (STP) 249, 251 Software Technology Park (STP)/Electronic Hardware Technology Park (EHTP) Scheme 249 Historical background 249 Implementation of the STP/EHTP scheme 249 Procedure under the scheme 250 Purpose and scope of the schemes 249 Specific provisions 250 South Asian Free Trade Area (SAFTA) 126 Special Economic Zones (SEZs) 12, 239 Factsheet of SEZs 15 State-wise distribution of approved SEZs 240 Specific Shipment Policy-Short Term (SSP-ST) 209 Spices Board 36 Standard Policy or Shipment (Comprehensive Risk) Policy (SCR) 209 State Trading 214 Objectives 215 Rationale of state trading 216 Types of state trading 217 State Trading 232 State Trading Corporation of India Limited (STC) 37, 48, 222, 232 Supply Chain Management (SCM) 290, 302 International supply chain management 291 Supply chain management and logistics 292 SWIFT 160 Tea Board 36 Tobacco Board 36 Total Declared Value 320 Towns of Export Excellence (TEE) 17 Trade Related Intellectual Property Rights (TRIPs) Agreement 22 Uniform Rules for Collection 144 Vessel 320 Warehousing 302 Waybill 320 Weight Certificate 320 Weight Note 320 Whole Turnover Pre-shipment Credit Guarantee (WTPCGS) 20, 209 World Customs Organisation (WCO) 320