Instrument of Foreign Trade

CASE STUDY INSTRUMENT OF FOREIGN TRADE

SEEMA RAMDAS KOTIAN ROLL NO :- DPGD/OC13/0214 SPECIALIZATION:- BANKING INVESTMENT AND INSURANCE.

WELINGKAR INSTITUTE OF MANAGEMENT DEVELOPMENT AND RESEARCH.

YEAR OF SUBMISSION :- OCTOBER , 2015

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SR. NO TABLES 1. Introduction. 2. What is Foreign trade 2.1 Types of foreign trade 2.2 Balance of trade 2.3 Internal & External 2.4 Balance of payment 3. Foreign contract 3.1 International trade agreement 3.2 Euro money 4. Methods of foreign trade 5. Banking facilities 6. Role of Exim Bank 7. Term and condition 8. Document used in foreign trade.

INTRODUCTION

The foreign trade of a country refers to its imports and exports of merchandise from and to other countries under contracts of sales. No country in the world produces all the commodities it requires. On the contrary, a country may produce more of those commodities in the production of which it has a greater or comparative advantage, and may not produce or may produce smaller quantities of those in the production of which it has a greater or comparative disadvantages. The commodities which a country produces at an advantage it exports, while those in producing which it has greater disadvantage it imports. This happens under what in economic terms is called the law of comparative cost or Advantage. Further the price at which goods are traded between two countries depends on the extend and sufficiency of demands for the goods to be imported and exported; this is expressed in economic terms as the law of Reciprocal Demand

What is Foreign Trade Trade is exchange of goods and services between a purchaser and a seller. If the purchaser and the seller are the residents in the same country and purchases and sells goods and/ or services then such business is called as Inland Trade.

When the residents of two or more different countries do the transactions of sale and purchase of goods or services, such trade is said to be foreign trade and transactions are known as Foreign Trade transaction. Such trade is also known as International trade.

Features of foreign trade.

1. Involvement of different monetary units. 2. Imposition of restrictions in imports and export by various countries. 3. Impositions of restrictions on release of foreign currencies. 4. Existence of multiple regulations, legal practices and rules in different countries.

Foreign Trade is of 2 types

Import Export

IMPORT

If the seller is abroad and the buyer is in the home country, trade is known as Import Trade.

EXPORT

When the seller is in the home country and the purchaser is aboard the trade is known as Exports Trade.

VISIBLE AND INVISIBLE Visible trade is one which can be seen.

Transfer or exchange of goods is visible while, exchange of services between the purchaser and seller is invisible.

Balance of trade

Balance of Trade means position of import and export of a country as against other countries. This is also called the net difference between the value of commodities, imported and exported. When the export of the country exceeds the imports of goods it is said to have a surplus, positive or favourable balance of trade. But when imports of goods and services exceeds the exports of goods and services, it is said to have deficit, negative and unfavourable or adverse balance pf trade position.

When the country exports commodities it gains foreign exchange. If the imports exceeds exports; it results in net payments by the country of foreign exchange to other countries from its reserves or borrowings from other countries. It may be known that imports and exports, during any periods of time, are seldom equal, the balance of trade will not ordinarily balanced.

Balance of Trade: Amount in Crore Rupees/ US $ billion

Year $bn imports exports $bn Rs Deficit in $bn

2002-03 61.4 297206 255137 52.7 -42069 8.7 2003-04 78.1 359108 293367 63.8 -65741 14.3 (R) 04-05 11.5 501065 375340 83.5 -125725 28.0 2005-06 142.4 635013 456463 102.7 -178550 39.7 2006-07 181.4 820568 563800 124.6 -256768 56.8 2007-08 160.0 (Target) 2008-09 200.0 (Target)

Factors of Balance of Trade

External Factors:- a. The sudden rise in price of essential commodities of imports likes edible oil, sugar, machinery, drugs and medical equipments etc. b. Migration from countries where Indians are target for violence. This affects the inward remittances. c. Position of world-wide inflation or recession in the developed countries like U.S.A Germany, Japan, France, England etc, with whom regular foreign trade is carried out. d. Trade restriction imposed by the developed countries as regards limit of quantities of imports, restrictions under other bilateral agreements. e. Continuous upsurge of U.S. Dollar. This pushes up the price of the items imported

Internal Factors:-

a. Domestic shortage of agricultural and industrial products. b. Low industrial and agricultural production due to high production cost. c. Absence of hi-technology. d. High consumption of internal production making it unable to export. e. Increasing tendency in population growth, which compiles consumption of domestic production and even ever increasing imports for minimum necessities. f. Inadequate knowledge of export- making. g. Neglect of export profitability. 8

Balance of payments

The balance of payment of a country is a systematic record of all the trade transaction, visible and invisible imports and exports during a given period. A country must pay for its import of goods and services and in turn for its export of goods and services it receives payment from other countries. The balance of payment is a difference between international transfer of funds for a country imports and exports during certain period of reference.

The balance of payment is more comprehensive than balance of trade. Balance of payment includes balance of trade other invisible items of foreign.

9 The balance of payment accounting has two types of account, 1. Current Account. 2. Capital Account.

Current Account Sec , 2(J)

1. Foreign trade, services, short-term banking and credit facilities. 2. Payments as interest on Loans and net income from investments. 3. Remittance for living expenses of parents, spouse and children residing aboard. 4. And expenses for foreign travel, education and medical care of parents, spouse, and children.

Capital Account Sec, 2(e)

The capital account transactions includes private long and short-term assets, banking transactions and official loans, amortisation, IMF and reserves and monetary gold contingent liabilities.

Balance of payment broadly divided into:- 1. Balance of payment on Current Account:- The balance of payment concerning the imports and exports of merchandise and services .

2. Balance of payment on Capital Account:- The balance of payments which includes the transactions of the balance of payments on current account and reflects the changes in the foreign assets and liabilities of a country.

3. Balances within the Total:-

1. Merchandise/ trade balance – Import and export of merchandise. 2. Current account balance -- Imports and Export of merchandise and services. 3. Basic balance. 4. Net liquidity balance or regular transaction . 5. Official transaction balance.

Correcting the Deficit

If a country happens to have a persistent deficit in its balance of payments, its Governments has perforce to intervene and adopt measures to correct the position. Such measure includes:- a. Import Curtail: When imports are restricted, the balance of payments position on no doubt improves; but when imports consist of raw materials for the manufacture of export goods it may not be wise to restrict such imports. It may in such circumstances, be a more prudent policy to finances the deficit in the balance of payments by borrowing abroad in the hope of repayment by increased exports, provided that the foreign lending is not tagged.

b. Export promotion: The export promotion policy of a government of India is no exception- may take the form of reducing the rate of interest chargeable by banks on export finance, guaranteeing

Bank advances to exporters by way of packing credit and exports-bill purchases, providing insurance cover for exports, allowing duty drawbacks or cash incentives to exporters, abolishing export duty.

Monetary Measures: If there is excessive purchasing power with large cross- Sections of a country’s population compared with the available supply of goods and services, and if the consequent demand for them causes imports to rise, the monetary authorities.

Fiscal Measures: These relate to the government revenue and expenditure and include budgeting for a surplus by pruning its own expenditure, levying high taxes, extending the areas of taxation, etc.

Devaluation: Devaluation refers to a reduction by the government in the county’s official rate of exchange between its own currency and other currencies. This is effected by reducing the par value of the currency in terms of gold. If the currency of a country is overvalued in terms of other countries, its exports declines and import increase, resulting in a persistent deficit in its balance of payments. Devaluation is the main corrective measure which is employed to set right such fundamental disequilibrium. It makes the export cheaper and import dearer, and thereby stops further drain on the country’s foreign exchange resources. On the other hand, the extra exports after devaluation may leave a smaller supply of goods for domestic consumption as a result of which incomes may exceed the supply of goods, leading to inflation.

Foreign Contracts: International commercial terms used in goods and payments briefly known as Incoterms.

In any trade contract (whether foreign or inland) there exists certain rights and obligations on the buyer and seller, these rights and obligations varying in accordance with the convenience of the parties concerned and as agreed by them. The international chamber of commerce evolved a set of international terms with definite and uniform meanings. This enables the parties specific set of rights and obligations between the parties. The existence of differences in interpretation of trade terms in different countries has been a cause of friction in international trade leading to misunderstanding disputing and references to courts with all the waste of time and money. Incoterms were published first in 1936 and subsequently amended and added to in 1953, 1967, 1976, 1980, 1990 and 2000. The latest 2000 version defines 13 contract terms, providing an upto date set of rules in line with the current international trade practices.

Terms Abbreciation 1. Ex- Works EXW 2. Free Carrier FCA 3. Free Alongside Ships FAS 4. Free on Board FOB 5. Cost and Freight CFR 6. Carriage Paid to CPT 7. Delivered EX-Ship DES 8. Delivered EX-Quay DEQ 9. “ D” Terms “D” 10. “ C” Terms “C”

Goods are traded between two countries under contracts of sales/ purchase agreed upon by the buyers and sellers. The quality, quantity, price and the period of supply of the goods to be bought and sold.

International Trade Agreements/ Institutions

G.A.T.T :- Its a General Agreements on Tariffs and Trade, which was signed at General by 23 countries in 1947, effective in 1948. It is world organization designed to bring about the maximum possible rate of growth in world trade by reducing tariff barriers among the member countries. There have since been a number of sessions of the G.A.T.T, and the member countries have, on several occasions, reduced the level of tariff amongst them by mutual agreement, such as the “Kennedy Round” of negotiations concluded in 1967.

The “Kennedy Round” was the world biggest ever tariff cutting deal, and gives a new boost to trade among the developed and developing countries. Under the influences of the G.A.T.T. the “bigger thy neighbour “ policy of the nineteen-thirties has been abandoned, resulting in a great expansion of world trade. The GATT also applies to quota restriction and other import contract.

In September 1986, ministers of 100 countries got together in Uruguary Seaside resort of Punta-del-este and began 8th Round of negotiations to build a bigger, brighter and better world trading order. The round of talks concluded on 15th Dec. 1993 . it concerned matter likes.

1. Reducing specific trade barriers and improving market access tariffs, non-tariff measures, tropical products, natural resources based products, textiles and clothing, agriculture. 2. Strengthening GATT disciplines. 3. New areas like trade related intellectual property rights. 4. Trade related investment measures. 5. Trade in services.

The European Economic Community :-The European economic Community,also referred to as the European Common Market came into beign with the Treaty of Rome signed in 1957 by six countries of Europe, France, West Germany, Italy , Belgium, Holland and Luxemboury. The treaty provides for free movement of goods, persons, services and capital amongst the member countries and has led to the establishment of a cuctoms union amongst them in order to correct the disquilibrium in the balance of payments.

Petro Dollars:- The recent rises in the prices of oil have led to a huge accumulation of currencies at the disposal of the oil-exporting countries of Western Asia and other places. The surplus currencies have been invested by the owner countries,, many of which have linked their own currencies with the U.S. dollars, in peposits with American banks and or in multinational concerns in the U.S.A. Such deposits in dollar in the U.S.A. are reffered to as oil or petro dollars.

Asian Clearing Union:- The Asian Clearings Union was established on 9th December, 1947, with the Reserve Bank of India, the Bangladesh Bank, the Markazi of Iran, the Nepal Rastra Bank, the State Bank of Pakistan and the Central Bank of Sri lanka as the founder members.

The union has been established with the following objects:

1. To facilities payments for current international transactions within the ESCAO region. 2. To reduce eliminate use of extra- regional currencies to settle transactions by promoting the use of the participants currencies. 3. To effect ther by economies in the use of foreign exchange and a reduction in the cost of making payments for such transactions and 4. To contributes to the expansion of trade and promotion of monetary co- operation among the countries of the areas. 18

The payment, excluded from settlement through the ACU are the payments on account of—

1. Travel. 2. Contracts made under loans from an International Financial Institution like this World Banks. 3. Export/Import transaction under bilateral lines of credit between the Government of India and that of any other member country, and 4. Deferred payments facilities extended by one member country to another member country.

Non-residents of Indian nationality or origin working or residing in any member country except Nepal are eligible for the facility of remittance relating to Non-Resident Account through the ACU. This account can be funded by remittances in any permitted currency , or in the currency of the member country from where the remitted originates, or in Indian rupees out of the rupees balance held in an account of a bank in any erstwhile country in the External Group.

The Reserve Bank sells only spot the participants currencies for funding the accounts maintained in the countries concerned. The banks can quoted their buying and selling rates for the currencies by loading the prescribed margin to the Reserve Banks spot and forward buying rates and spot selling rates.

The benefits accruing from the ACU are:-

1. Appreciable savings of the liquid foreign exchange reserves for somr of the member countries derived from the multilateral settlement of the net position of the claims arising over a period of time. 2. Reduction of the working balances in the foreign exchange the banks in the member countries so long needed to maintain in London and/ or New York for settlement of intra-regional transactions in pounds sterling or U.S. Dollars

3. Elimination of the need for double conversion of currencies and thereby savings in the cost of settlement. And 4. Curtailment of the time needed before for settlement of transactions by the elimination of the intermediary correspondents in London or New York. 20

EURO MONEY

Euro money is a monetary system of eleven European countries, which started its functioning since Jan.1999. this is the third strong currency after dollar U.S. this is the money against which there is neither gold backing nor any natural government. From Jan.2002, currencies of all eleven countries are converted into Euros. The countries to such joint efforts are Italy, Germany, Australia, Belgium and Spain and the other 5 mentioned nations have yet not joined the Euros due to economic and political reasons are, Great British, France , Denmark, Egypt and Sweden.

Condition for this agreement are:

1. The countries have to keep their Budget degicit, below 3% of Gross Domestic Product. 2. Countries should have government debts below 60% of G.D.P. 3. Inflation should not exceed 1.5%. 4. Rate of interest should not be more than 2%.

21 Advantages to India: India’s 80% export business is in US Dollars and European Union is having 20% share in exports of India, the cost of transactions to Indian exporters.

Advantages to World: Euro would become very strong currency in the world economy and the world would be set out of the influence of US Dollar. Looking to the number and economic progress of Euro, it would be weighty on Japanese Yens and US. Dollar.

Methods of Foreign Trade

Foreign trade may be carried on, that is, goods may be traded between the exporter and importer, in any of the following three ways: a. On open Account Basis: This means that the goods may, where the credit status of the importer is high, be sent direct to in expectation of payment in due course on presentation of the relative documents through a bank, Exports on this basis are not permissible in India. b. Under Bill of Exchange: The exporter may draw bills of exchange on the importer for the value of the exports and collect the bills through a bank. c. Under Letter of Credit: The exporter may agree to export the goods only against a letter of credit opened in his favour.

Banking Facilities

To Indian merchants and manufactures already engaged in, or intending to enter, foreign trade, banks can render assistance in a number of ways. For instance, to exporter and importer in India, a banker can provide the names, addresses and status reports as to the credit- worthiness and the ability to fulfil contracts of overseas buyers and sellers of goods they what to export to or import form.

Secondly, when can Indian exporter or importer goes abroad on a business tour for purposes of export promotion through on- the spot studies of the taste and preferences of foreign buyer, or of the manufacturing, packaging and advertising and technique followed, or for personal contact with foreign sellers for concessional terms, the banker can give instruction to his corresponding in this countries concerned to render such help and advices as the exporter or importer or may need aboard.

Thirdly, the banker may, where required, provide the names and addresses of foreign firms and organization which may be interested in joint ventures in India. 24

Role of Exim Bank

Various facilities offered to exporter / buyers credit/ suppliers credit.

The object of establishing this bank is for providing financial assistance to exporter, facilitating, promoting foreign trade of India by co-ordinating the working of institutions enagaged in financing export and import of goods and services with a view to promoting the countries international trade and for matters connected therewith or incidental thereto. It is also empowered to finance export of consultancy and related services. Assist Indian joint ventures in third world, conduct export market studies and provide international merchant banking services. EXIM Bank concentrates on medium and long- term financing.

Function of Exim Bank are:- 1. To provides financial assistance to exporter and importer. 2. To act as the principal financial institution for co-ordinatind the working of other institutions engaged in the field of financing internal trade. 3. To undertake limited development and merchant banking activities in relation to export-oriented industries.

Important of Exim Bank

1. Refinancing loans and advances granted by banks and other notified financial institutions for export and import. 2. Granting loans and advances in and outside India for purpose of export and import. 3. Rediscounting usance export bills of banks. 4. Providing investment finance to Indian companies towards their equity participation in joint ventures established abroad .

Objectives The following objective have been setup before Exim Banks

1. Selling or discounting of export bills in the world markets. 2. Discounting of export bills negotiated or purchased by a scheduled bank or a financial institution or granting loans and advances against such bills. 3. Planning, promoting, developing and financing export-oriented industries. 4. Financing export of machinery and equipment on lease basis. 5. Granting of loans and advances to Indian joint ventures abroad.

Supplier Credit:-

Supplier or seller credit, funds are provided on deferred payment terms to Indian exporters of plants, equipment and related services which enable them to extend deferred credit to the overseas buyer. This programmes covers project exports, when could be a turkey project or construction project.

The credit is provided by Exim bank in participation with commercial banks where individual contract value is not more than 3 crores, banks may provide the credit and avail 100% refinance from the Exim Bank. Buyers Credit:-

Credit is extended by Exim Bank to buyers abroad to enable them to import engineering goods and projects from India on deffered credit terms. Similar to direct lending to exporters, the facility is to be secures by a letter of credit or bank guarantee or guarantee from government or promissory note from government. Exporter can be financial by any bank at the pre-shipment stage or post shipment stage by extending financial under Pre-shipment packing credit facilities or by granting export bill discounting limit or negotiating export bills under post shipment finance.

Exim Bank directly enters into an agreement with the overseas borrower outlining the terms and conditions of the credit covering the export confract.

Various Facilities to Exporters:

In addition to providing lending for supplier and buyers credit following ither facilities are providing by Exim Bank

a. Consultancy and Technology Services Finance Programme: Indian consultants, executing overseas contracts involving consultancy and technology services, wherein deferred payments terms need to be offered to the client, can utilize the facility. The credit will be extended by Exim Bank in participation with commercial banks. The exporter is normally expected to obtain an advance down payment of 25% of contract value and remaining portion would be covered by credit under the programme.

b. Overseas Investment Financing Programme: Exim Bank provides financing, where an Indian Company establishes a joint venture and overseas and required funds towards equity participation. The joint venture should have been approved by the government, of India as well as the concerned authorities in the host country. Rupees funds are provided by Exim Bank in the form of long term credit, The Exim Bank may also stipulate as collateral security charges on the assets of the exporters. c. Exports Oriented Units: Units registered as 100% Export Oriented Units and units setup in Free trade Zones and Domestic Tariff Area units exporting of their annual sales are eligible for financial assistance from Exim Bank for acquisition of Land, building, Plant and Machinery and preliminary cost.

d. Export Product Development: Under it, firms undertake product development, research and development for exports.

e. Project Preparatory Services Overseas: Sectors which are considered include agriculture industry water supply and sewerage education health. Maximum loan is 20 lakhs and grant is 10 lakhs.

Assistance Terms And Condition

Exim Bank has been operating a lending programme for extending financial assistance to eligible industrial units subjects to the following terms and conditions:

1. The assistance may be direct in the form of a rupees term loan granted or deferred payments guarantee given by the Bank on it own or in participation with a term-lending institution or a commercial bank, or it may be direct by way of refinance to a commercial bank providing financial to an eligible uint.

2. 100 per cent export-oriented units recognized as such by the Central Government or units in the free trade zones in india, either existing or to be set up, are eligible for the assistance for projects which call for capital outlay of over 2 crores.

3. The assistance rendered is usable for acquisition of fixed assets, such as land and building, plant and machinery, etc. For margin money working capital preliminary and pre-operative expenses, and or for expansion diversification of product or products.

4. The loan is repayable in 10 years including the moratorium period.

5. A commitment fee is charged on the undrawn loan amount during the availability period.

Free Port/ Free Trade Zone

A free port is a port declared as such by the government og the country in which it is located. At a free port ships belonging to any country may load or unload cargo without havind to pay customs or any other duties, barring of course the harbour charges. Similarly, an area or zone may be declared a free trade zone with a view to getting the benefits of free trade with other countries.

There are no quantitative restrictions on imports into or exports from free port or a free trade zone. The imports into a free port or a free trade zone are, however, to be used with the port or the zone, any such import moving out to oyher parts of the coutry is coutry is subject to customs duty.

A free port or a free trade zone is also is also conducive to entrepot trade,

The Electronic Export Processing Zones at Santacruz, Mumbai has about 30 units set up in its area engaged in producing 100 percent export-oriented electronic equipment, component and consumable durables such as radios, TV sets, integrated circuits, semi-condutors, remote control.

Off-shore Banking Operations

Off-Shore banking is an altogether new systems of banking which has come into vogue. This system is operated through the off-shore banking units of overseas banks established in off-shore banking zones, similar to free trade zones, in under development countries,

The off-shore banking unit of an overseas bank is required to maintain a certain base as well as a certain level of liquidity. It is precluded from entering into competition with the banks or from raising funds from the residents of the host country. The funds of the unit have to be bought in from the residents of the host country. The funds of the unit have to be brought to be in from the parent or from overseas money markets.

The funds of an off-shre banking unit are omployed in financial capital- intensive local projects or in turkey projects undertake in foreign countries by the exporters of the host country. The funds may also be utilized in manufacturing in the off-shore zone goods out of raw materials, components and technical know-how imported duty free into the area, taking advantage of the comparatively low cost of trained manpower in the host country . The goods so manufactured may be taken back to the parent country or exported to other countries the profits made out of such banking operations may be repatriated, usually tax free, to the parent bank.

Off-shore banking units are at present operating at such places as Bahrain, Singapore, Hong Kong etc There are 20 centres throughout the world.

a. Inflow of interest- free foreign capital into the country. b. Supply of capital from foreign sources to capital intensive local industries. c. Earning foreign exchange by way of payment for services rendered in converting raw materials into finished goods etc d. Exemption from minimum reserve requirements. e. Low or non-existent taxes and levies. f. Licence fees are generally low. g. Close proximity to the important loan outlets or deposit sources. The banks operating in India, both in public or private sector as well as foreign banks authorized to deal in foreign exchange, are eligible to set up off-shore banking units.

Libor

The world LIBOR stands for London interbank offer Rate used in connection with the lending operations in the currency market.

Interest is charged for each interest period at the base rate plus the spread negotiated between the borrower and the bank acting on behalf of the syndicated banks. The interest rate is adjusted every six month in accordance with the changes in the base rate. Some loan agreements provide or a minimum loan rate to take effect when the LIBOR plus the negotiated spread falls below the predetermined level, while some others provide for an increasing spread in the later year of the loan.

European Currency Units (ECU)

a. At present the ECU has been recognized from Jan. 2002 as a foreign currency officially by Italy, France, Belgium and Luxembouary and de facto by the United Kingdom, Eire , Netherlands, and Denmark. Of late, Japan has also recognized the ECU as a foreign exchange. The Reserve Bank of India has granted the ECU the status of approved currency for the purpose of foreign exchange transactions. Banks in Indian can freely open accounts abroad denominated in ECU.

b. The ECU is a currency basket composed, according to the ‘open basket’ formula of the eight EMS currencies plus pound sting and drachma in the following proportions. 36

Documents used in Foreign Trade

Documents are used to record a written evidence of having carried out a transaction in both local and international trade. This section deals with the documents used in international trade where is a fairly large number of documents required to satisfy the two basic requirements VIZ, Regulatory and Operational.

A list of the various documents required in across border trade are given below:

1. Commercial Invoice 2. Bills of Lading/ Airway Bill 3. Marine Insurance Policy and Certificate 4. Bills of Exchange 5. Consular Invoice 6. Customs Invoice 7. Certificate of Origin 8. Inspection Certificate 9. Packing List.

A brief description of each of these document is given in the following paras: Commercial Invoice:

It is the sellers bill for the merchandise, it contains a description of the goods, the price per unit at a particular location and total value of the goods, packing specifications, terms of sales, terms of payment, identification markets of the packages, bill of lading number, etc. There is no standards form for commercial invoice.

Each exporter design his own format of commercial invoice. Commercial invoice is not required to be signed by the seller and is submitted in a set of at least three to five copies. Its main purpose is to check whether the appropriate goods have been shipped and also the unit price, total value, markings on the package, etc. 38

Bills of Landing

This document is an evidence of shipment of the goods. It is a receipt duly and issued by a shipping company acknowledging that the goods mentioned in the document have been shipped or received for shipment and an undertaking to deliver the goods at the agreed destination. B/L is the most important document in foreign trade.

a. It is a document of title to goods: The B/L is a document giving ownership right to the goods and the possession of a B/L entitles the holder to the possession of the goods.

b. It is a receipt from the shipping company: It constitutes evidence that the goods have been received by the shipping company. As a receipt it is only an evidence of the number and sizes of packages involved and does not guarantee the contents of the packages.

39 Negotiation of Bill of Landing:

1. By practice and custom the bill of lading is transferable by endorsement . if the shipper assigns the bill of lading and delivers it to the transferee with the intention of passing the property in the goods, then the transferor of the B/L effects a transfer of the property also. A “consignee” is the party named in the of lading to whom the goods are to be handed over, and it is usual for the words” or order” to be added to the name of the consignee.

Types of Bill of Lading

a. Freight Paid and Freight Collect Bill of lading: The price charged by the shipping company for their services is called freight. When the freight is prepaid, paid by the exporter when he hands over the merchandise, the bill of lading is normally marked to this effect.

b. Clean “vs, “Claused” Bill of Lading: To be an acceptable document, the B/L must be “clean”. This means that no adverse notation of any kind must appear on it with regard to the apparent order and the condition of the goods. If the goods show signs of damage when the master or agent receives them on board the ship, he draws the attention to this fact on the B/L by stating “ improper Packing”.

c. Through Bill of Lading: Where there is no direct shipping link between sellers and buyers ports and the terms of contract for sale is buyers port, the exporter will arrange to get a B/L to ensure necessary through transhipment, and subsequent carriage by a second vessel from the intermediary port. He must see that he gets a B/L covering the voyage to the buyers port and not once that merely undertakes whole shipment to be intermediate point with an expression of hope that they will be placed on the vessel covering the remainder to the journey to their destination.

Airway Bill or Air Transport Document

Airway bill is an acknowledgement issued by an Airway company it their authorized agents stating that they have received the goods detailed therein for dispatch by air to the named consignee at the address stead their. Unlike a bill of Lading.AWB is not a document of title to goods because it is merely an acknowledgement of goods. When it is not title to goods, naturally it is not a negotiable document. 42

House Airway Bill: House Airway Bill is a receipt for goods issued on the same lines as Airway Bill by cargo consolidating agents. When air cargo is shipped under consolidation, the Airway company issues an Airway Bill called Master Airway Bill to the consolidating cargo agent and he in turn issues an House Airway Bill to individual shippers.

Multimodal Transport Document: This document is issued when the movement of goods involves more than one mode of transport. Hence, this is also called as Intermobile Transport Document” or Combine Transport Document. In simple words, it is defined as a document evidencing contract for performance and procurement of performance of combine transport.

MTD is a safer document than a through Bill of Lading in the sense, it has the guarantee of MTO for the safe conduct of goods right through. 43

Marine Insurance Policy

In international trade it is customary to insure the goods against the of loss or damage. Whether the insurance will be taken by the exporter on his own account or on the account of the overseas buyer depends on the terms of sale if the terms of sales are or the insurance will be taken by the exporter. If it is the insurance will be taken by the exporter on account of the overseas buyer or the buyer arranges to take it through an agent. The usual practice in international trade is to cover the goods for the full value plus 10 per cent. This will cover the exporter in respect of all the additional expenditure he may have to incur in the event of loss or damage to the shipment.

A marine insurance policy can be taken either by an open policy or a specific policy. Open policy is taken by exporters who have continuous shipment to make and the insurance policy is issued as an open cover, which can be used for insurance of all consignments to one or more destinations. 44

Marine Risks

The risks usually covered under marine insurance are:

1. Perils of the sea: These includes damage to the cargo while at sea by the force of waves or strom, or by contact with sea water, or by collision, stranding or sinking:

2. Fire:

3. Piracy;

4. Jettisoning: This refers to the throwing overboard of cargo or a part thereof, or the cutting of masts, rigging of sails, etc, voluntarily to lighten the ship in order to avoid sinking or damage:

5. Barratry: This is a marine term used to refer to the misconduct or fraudulent or unlawful act on the part of the master and the crew of the ship on account of which the ship may be abandoned or may run ashore:

6. Perils of war: Theft pilferage and or non-delivery

7. Additional risks due to explosion, damage to machinery latent defects, heating bursting, sweating, damage by other cargo etc.

45 Marine Insurance Losses

Marine Insurance losses may be broadly classified into total losses and partial losses.

a. A Total Loss means loss arising out of the destruction of the subject insured or when the insurance is irretrievably deprived thereof. A total loss may be actual or constructive. An actual total loss is a loss which happens under circumstances beyond control, while a constructive total loss refers to a complete loss due to high cost of reconditioning salvaging and conveying to destination.

b. A Partial Loss is not a complete loss and may be “ general average”. Partial average or salvage. The term average in marine insurance signifies less than total loss.

c. General Average: When a ship is caught up a storm or heads towards a rock or is leakings, and the capital of the ship thinks, after due deliberation, that in order to protect the whole property or to enable the ship to proceed safely to destination, a part of cargo should be sacrificed by being thrown overboard: or that some extraordinary expenditure should be incurred.

d. Salvage:

Salvage refers to charges recoverable under maritime law by a salvor independently or contract. Such charges do not includes expenses for services in the nature of salvage rendered by the assured or his agent.

e. Clauses:

In order to limit or particularise the insurers liability, a marine insurance policy may be endorsed with one or the other of the following clauses.

1. FPA Free from particular average

2. FGA free from general average

3. WPA with particular averages

4. WA with average, implying that losses under general averages are covered under the policy. 48 f. Goods clause:

These clauses drawn up by the institute of London, may be divided into clauses which exlude the particular average unless the ship is stranded or is involved in a specified casualty, and those which include the particular average.

g. Claims:

In the event of any loss of or damage to the insured goods or to a package or packages containing them giving rise to a claim the insurance at once file a claim for compensation with the insurance company, giving details of the loss or damage. If the loss or damage is noticed while taking delivery of the consignment, a detailed survey by the ships surveyors should be called for and a claim for the monetary value of the goods lost or damaged lodged with the shipping company by the consignee. Where the ship survey is time-barred.

As per provisions of the carriage of goods by sea act of 1925, the following documents should be submitted along with the claim:

The insurance policy The original invoice and the packing list

A copy of the bill of lading and

Copies of correspondence with shipping company.

Bills Of Exchange

A bill of exchange is an unconditional order in writing, addressed by the drawer to the drawee requiring the drawee to pay on demand a stated sum of sum of money to the bearer person or organisation, A Bill or Exchange is a negotiable instrument and is payable to the bearer or to the person in whose favour it is endorsed.

The drawing of a Bill of Exchange is not always necessary. In certain countries, Bill of Exchange is not recognized as a legal document, while it is discourage in a few other countries due to incidence of a heavy stamp duty. In India also Bill of Exchange for documents drawn on DA basis for over 90 days attracts Stamp Duty. 50

Types of Bill of Exchange

a. Clean and Documentary Bills:

A clean bill is one, which is not accompanied by the relative shipping documents. As soon as the shipment is made, the documents are sent directly to the importer abroad who can take delivery of the goods and the bills are handed over to the bank for collecting the payment from abroad. On the other hand, a documentary bill is accompanied by the relative shipping documents.

b. Sight and Usance Bills:

A sight bill is payable at sight or demand or on presentation. Drawee of such o bill has to pay the bill immediately on presentation and take delivery of the accompanying documents, if any, after payment drawee aboard only on payment is one where the relative shipping documents will be released to the drawee on the acceptance of the claim. The drawee is deemed to have accepted the claim when he signs across the bill. 51

Inspection Certificate

Inspection certificate by an established inspection authority is needed under some contracts or by some countries. This certificate is issued by one of the authorized inspection agencies in the exporters country by the agency nominated by the importer.

52 Consular Invoice

A consular invoice is a special types of invoice required by some countries for their imports. Such invoice are required by the USA, Canada, Philippines and some Middle East countries, etc. A consular invoice is made out on a prescribed format certified by the consulate of the importing country is to have authenticated particulars of the goods that are imported into their country. It also facilities the clearance of the goods at the port of entry by avoiding delay arising from the customs formalities.

53 Customs Invoice

Certain countries such as Canada and the USA. Need customs invoice. Canada has prescribed a specific form of customs invoice for allowing entry of merchandise at preferential tariff rates. The USA. In addition to the special customs invoice requires a particular annex to the invoice for cotton manufacturers. The forms are supplied by the consular office of the respective importers country and are to be duly filled in and signed by the supplier.

Certificate of Origin

54 Certificate of origin :

In many countries, permission to import is refused unless a certificate of origin is produced by the buyer. This document may from part of the invoice itself, the essential features is certification of the country of origin indicating where the goods were originating produced and or manufactured. There may be preferential tariff in favour of goods from particular countries and therefore it has to be ensured that the from have some other palace of origin, which is not eligible for the preference. A similar certificate may be needed where goods of a particular types from certain countries are banned. Such certificates are issued by the chamber ob commerce export promotion councils and various trade associations, which have been authorized by the government concerned. They charge a small fee for issuing this certificate. As per current exchange control regulations calling for the certificate is not mandatory, as far as its imports into India are concerned.

55 IBU International Financial LTD.

The IBU International Financial Ltd, the first ever international financial organization sponsored by a corporation of India nationalised banks , such as Indian Bank, Bank of Baroda and Union Bank of India was established in Hong Kong and started functioning, with effect from October,1980.

56 A deposit taking organisation with off-shore and other activities. The organization is eligible to accept deposit or Hong Kong dollars 50000 and above

The Sodhani Committee on Foreign Exchange Reforms recommendation for allowing Indian banks and financial institutions to set up off-shore banking units as it would prove to be cost effective for local institutions. These units can offer many services including managing funds raised by Indian Corporates through GDR issues.

57 Packing List

The exporter prepares a packing list showing, items by item, the contents of the containers or cases to enable the receiver of the shipment to check the identify of shipments. It should give the description of the goods, number and marks on the packages, quantity per package, net weight and gross weight, measurement may design his own packing list.