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CONTEMPORARY MANAGEMENT ISSUE
Submitted to Rajasthan Technical University ,Kota in partial fulfillment for the Award of the Degree of Master of Business Administration
SUBMITTED BY – SAURABH JAIN GOVT. ENGINEERING COLLEGE, AJMER MBA-: PART – 1 ( 2
SUBMITTED TO – Dr. AMIT SHARMA GOVT ENGINEERING COLLEGE, AJMER SEM )
EXECUTIVE SUMMARY - :
Credit and finance is the life blood of any business whether domestic or international. It is more important in the case of export transactions due to encountered by the prevalance of novel non-price competitive techniques
exporters in various nations to enlarge their share of world markets. The selling techniques are no longer confined to mere quality, price or delivery schedules of the products but are extended to payment terms offered by exporters. Liberal payment terms usually score over the competitors of capital equipment but also of consumer goods. The payment terms however depend upon exporters in relation to and post-shipment stage. India has a mission to capture 2% of the global share of trade by 2010, up from the Present level of less than 1%. Export is one of the lucrative business activities in India. In the light of growing need & importance of exports for our country it is of utmost importance that everyone should have an insight in the field of exports. In the course of last decade, the export scenario in India has undergone a tremendous change. The liberalization initiated by the government, the keen competition in the market place & the rapid increase in the export of services have all combined to change the picture completely. The government also provides various promotional schemes to the exporters for earning valuable foreign exchange for the country and for meeting their requirements for importing modern technology and essential inputs. Besides, the income from export business is also exempted to the specified extent under the Income Tax Act, 1961, Refund of Central Excise and Custom Duty on export is also made under the availability of finance to at pre-shipment not only
its quantum, cost and the period
the Duty Drawback Scheme of the Government. There is no Sales Tax on products meant for exports. This project is an attempt to throw light on the various sources of export finance available to exporters, the schemes implemented by ECGC and EXIM for export promotion and analysis of risk in export trade related services.
TABLE OF CONTENTS S.No
1. 2. 3. 4. 5. 6. 7. 8. 9. 10.
Introduction to Exports Concept of Export Financing Import – Export Procedure Types of Export Finance Letter of Credit Some Importanant Concepts in Export Financing Risks Involved In Export Business Major Financial Institutions Export Promotion Schemes And Incentives Policy Initiatives And Incentives by the State Government
5 8 10 15 17 23 26 30 41 45
1) INTRODUCTION TO EXPORTS:Export in simple words means selling goods abroad. International market being a very wide market, huge quantity of goods can be sold in the form of exports. Export refers to outflow of goods and services and inflow of foreign exchange. Export finance is a short term working capital finance allowed to an exporter. Finance and credit are available to help not only export production but also to sell overseas customers on credit . The Foreign Trade (Development and Regulation) Act, 1992 defines export as taking out of India any goods by land, sea or air. "Export" with its grammatical variations and cognate expressions, means taking out of India to a place outside India, as per Section 2 (18) or the Customs Act, 1962. The CA further defines "export goods" as "any goods which are to be taken out of India to a place outside India". The Customs Act also contains definition of exporter, who in relation to any goods at any time between their entry for export and the time when they are exported includes any owner or any person holding himself out to be the exporter.
NEED & IMPORTANCE OF EXPORT:A. 1. From the Viewpoint of a Nation: Foreign Exchange :- Export helps country to earn valuable foreign exchange, which is mainly required to pay for import of capital goods, raw materials, spares and components. 2. Balance of Payments: A country’s external economic strength depends upon its balance of payment position. Since export brings in foreign exchange, it helps a country to solve and improve its Balance of Payments position.
Employment opportunities: Export trade calls for more production, which ultimately opens door for more employment opportunities, not only in the export sector but also in allied sectors like banking, insurance etc.
Financing of Development plans: Export earning can be a source of financing development plans through the import of capital goods and technology. The foreign exchange earned thru exports can be utilized for planned economic development of a country.
Optimum utilization of Resources: There can be optimum use of resources. The excess production can be directed to other countries, there by enabling the exporting country to earn favorable foreign exchange.
Research & Development: Goods to be exported to other countries may not be sold in the same form as it is available in the local markets. Products have to be redesigned according the requirement of the importing country. This leads to constant R & D, which ultimately leads to improve technology and production system. The fruits of R & D would benefit the customers not only in the overseas market but also in the domestic markets.
Spread Effect: Because of export industry, other sectors also expand such as banking, transport, insurance etc. and at the same time a number of ancillary industries come into existence to support the export sector.
High Standard of Living: Export trade calls for more production, which in turn increases employment opportunities. More employment means more purchasing power as a result of which people enjoy new and better quality goods, which in turn improves standard of living of the people.
From the viewpoint of a business organization: 1. Reputation: An organization, which undertakes exports can exports, can bring fame to its company not only in export market but also in domestic market. These companies enjoy worldwide reputation.
2) CONCEPT OF EXPORT FINANCING :Export finance is a short term working capital finance allowed to an exporter. Finance and credit are available to help not only export production but also to sell overseas customers on credit . The short-term finance is required to meet “working capital” needs. The short-term finance is required to meet “working capital” needs. The working capital is used to meet regular and recurring needs of a business firm. The regular and recurring needs of a business firm refer to purchase of raw material, payment of wages and salaries, expenses like payment of rent, advertising etc. The exporter may also require “term finance”. The term finance or term loans, which is required for medium and long term financial needs such as purchase of fixed assets and long term working capital.
2.1) OBJECTIVES OF EXPORT FINANCE
• • To cover commercial & Non-commercial or political risks attendant on granting credit to a foreign buyer. To cover natural risks like an earthquake, floods etc.
Appraisal means an approval of an export credit proposal of an exporter. While appraising an export credit proposal as a commercial banker, obligation to the following institutions or regulations needs to be adhered to: Obligations to the RBI under the Exchange Control Regulations Obligations to the Trade Control Authority under the EXIM policy Obligations to ECGC
Guidenlines for Banks dealing in Export Finance : When a commercial bank deals in export finance it is bound by the ensuing guidelines: a) Exchange control regulations. b) Trade control regulations. c) Reserve Bank’s directives issued through IECD. d) Export Credit Guarantee Corporation guidelines. e) Guidelines of Foreign Exchange Dealers Association of India.
3 ) Import – Export Procedure
1 Seller and Buyer conclude a sales contract, with method of payment by letter of credit (documentary credit). 2
Buyer applies to his issuing bank, usually in Buyer's country, for letter of credit in favor of Seller (beneficiary).
3 Issuing bank requests another bank, usually a correspondent bank in Seller's country, to advise, and usually to confirm, the credit.
Advising bank, usually in Seller's country, forwards letter of credit to Seller informing about the terms and conditions of credit. If credit terms and conditions conform to sales contract, Seller prepares goods and documentation, and arranges delivery of goods to carrier
Seller presents documents evidencing the shipment and draft (bill of exchange) to paying, accepting or negotiating bank named in the credit (the advising bank usually), or any bank willing to negotiate. under the terms of credit
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Bank examines the documents and draft for compliance with credit terms. If complied with, bank will pay, accept or negotiate. Bank, if other than the issuing bank, sends the documents and draft to the issuing bank. Bank examines the documents and draft for compliance with credit terms. If complied with, Seller's draft is honored. Documents release to Buyer after payment, or on other terms agreed between the bank and Buyer. Buyer surrenders bill of lading to carrier (in case of ocean freight) in exchange for the goods or the delivery order.
4) TYPES OF EXPORT FINANCE
4.1) PRE-SHIPMENT FINANCE
Meaning : Pre-shipment is also referred as “packing credit”. It is working capital finance provided by commercial banks to the exporter prior to shipment of goods. The finance required to meet various expenses before shipment of goods is called pre-shipment finance or packing credit. Definition : Financial assistance extended to the exporter from the date of receipt of the export order till the date of shipment is known as pre-shipment credit. Such finance is extended to an exporter for the purpose of procuring raw materials, processing, packing, transporting, warehousing of goods meant for exports. Importance of Finance at Pre- shipment stage : ♦ To purchase raw material, and other inputs to manufacture goods. ♦ To assemble the goods in the case of merchant exporters. ♦ To store the goods in suitable warehouses till the goods are shipped. ♦ To pay for packing, marking and labelling of goods. ♦ To pay for pre-shipment inspection charges. ♦ To import or purchase from the domestic market heavy machinery and other capital goods to produce export goods.
♦ To pay for consultancy services.
♦ To pay for export documentation expenses.
Meaning : Post shipment finance is provided to meet working capital requirements after the actual shipment of goods. It bridges the financial gap between the date of shipment and actual receipt of payment from overseas buyer thereof. Whereas the finance provided after shipment of goods is called post-shipment finance. Definition : Credit facility extended to an exporter from the date of shipment of goods till the realization of the export proceeds is called Post-shipment Credit. Importance of Finance at post-shipment stage To pay to agents/distributors and others for their services. ♦ To pay for publicity and advertising in the over seas markets. ♦ To pay for port authorities, customs and shipping agents charges. ♦ To pay towards export duty or tax, if any. ♦ To pay towards ECGC premium. ♦ To pay for freight and other shipping expenses. ♦ To pay towards marine insurance premium, under CIF contracts. ♦ To meet expenses in respect of after sale service. ♦ To pay towards such expenses regarding participation in exhibitions and trade fairs in India and abroad. ♦ To pay for representatives abroad in connection with their stay board.
5) LETTER OF CREDIT
Introduction : This is one of the most popular and more secured of method of payment in recent times as compared to other methods of payment. A L/C refers to the documents representing the goods and not the goods themselves. Banks are not in the business of examining the goods on behalf of the customers. Typical documents, which are required includes commercial invoice, transport document such as Bill of lading or Airway bill, an insurance documents etc. L/C deals in documents and not goods. Definition : A Letter of Credit can be defined as “an undertaking by importer’s bank stating that payment will be made to the exporter if the required documents are presented to the bank within the validity of the L/C”. Parties involved in Letter of Credit: Applicant: Issuing bank: Beneficiary: Advising bank: The buyer or importer of goods Importer’s bank, who issues the L/C The party to whom the L/C is addressed. The Seller or supplier of goods. Issuing bank’s branch or correspondent bank in The exporter’s country to whom the L/C is send for Onward transmission to the beneficiary. Confirming bank: The bank in beneficiary’s country, which Guarantees the credit on the request of the issuing Bank.
The bank to whom the beneficiary presents his Documents for payment under L/C
A Letter of Credit contains these elements: • • A payment undertaking given by the bank (issuing bank) on behalf of the buyer (applicant) To pay a seller (beneficiary) a given amount of money on presentation of specified documents representing the supply of goods within specific time limits • • These documents conforming to terms and conditions set out in the letter of credit Documents to be presented at a specified place.
The Issuing Bank's role is twofold: • To guarantee to the seller that if complete documents are presented, the bank will pay the seller the amount due. This offers security to the seller – the bank says in effect "We will pay you if you present documents (XYZ)" • To examine the documents and only pay if these comply with the terms and conditions set out in the letter of credit. This protects the buyer's interests - the bank says "We will only pay your supplier on your behalf if they present documents (XYZ) that you have asked for"
Advantages of Letters of Credit To the exporter: • • • • • • • • • • • • No blocking of funds. Clearance of import regulations. Free from liability. Pre- shipment finance. Non-refusal by importer. Reduction in bad-debts. Better terms of trade. Assurance of shipment of goods. Overdraft facility. No blocking of funds. Delivery on time. Better relations.
To the importer:
Disadvantages of Letters of Credit : • • • • Lacks flexibility. Complex method Expensive for importer Problem of revocable L/C
Sample Document: Letter of Credit (Documentary Credit) THE MOON BANK INTERNATIONAL OPERATIONS 5 MOONLIGHT BLVD., EXPORT-CITY AND POSTAL CODE EXPORT-COUNTRY
OUR ADVICE NO. MB-5432 To, UVW Exports 88 Prosperity Street East, Suite 707 Export-City and Postal Code Dear Sirs:
ISSUING BANK REF. NO. & DATE SBRE-777 January 26, 2005
We have been requested by The Sun Bank, Sunlight City, Import-Country to advise that they have opened with us their irrevocable documentary credit number SB87654 For account of DEF Imports, 7 Sunshine Street, Sunlight City, Import-Country in your favor for the amount of not exceeding Twenty Five Thousand U.S. Dollars (US$25,000.00) available by your draft(s) drawn on us at sight for full invoice value Accompanied by the following documents: 1. Signed commercial invoice in five (5) copies indicating the buyer's Purchase Order No. DEF-101 dated January 10, 2005 2. Packing list in five (5) copies. 3. . Full set 3/3 clean on board ocean bill of lading, plus two (2) non-negotiable
copies, issued to order of The Sun Bank, Sunlight City, Import-Country, notify the above accountee, marked "freight Prepaid", dated latest March 19, 2005, and showing documentary credit number. 4. Insurance policy in duplicate for 110% CIF value covering Institute Cargo Clauses (A), Institute War and Strike Clauses, evidencing that claims are payable in Import-Country.
100 Sets 'ABC' Brand Pneumatic Tools, 1/2" drive,
complete with hose and quick couplings, CIF Sunny Port Shipment from: Partial shipment Tran-shipment Special conditions: 1. All documents indicating the Import License No. IP/123456 dated January 18, 2005. 2. All charges outside the Import-Country are on beneficiary's account Documents must be presented for payment within 15 days after the date of shipment. Draft(s) drawn under this credit must be marked Drawn under documentary credit No. SB-87654 of The Sun Bank, Sunlight City, Import-Country, dated January 26, 2005 We confirm this credit and hereby undertake that all drafts drawn under and in conformity with the terms of this credit will be duly honored upon delivery of documents as specified, if presented at this office on or before March 26, 2005 Very truly yours, __________________________ Authorized Signature
Unless otherwise expressly stated, this Credit is subject to the Uniform Customs and Practice
Moonbeam Port, Export-Country to Sunny Port, Import-Country Prohibited Permitted
for Documentary Credits, 1993 Revision, International Chamber of Commerce Publication No. 500.
6) SOME IMPORTANT CONCEPTS IN EXPORT FINANCING
6.1 - FORFEITING
Forfeiting is a mechanism of financing exports.
• • • • • •
By discounting export receivables Evidenced by bills of exchange or promissory notes Without recourse to the seller (viz. exporter) Carrying medium to long term maturities On a fixed rate basis (discount) Upto 100 percent of the contract value.
The word `forfeit' is derived from the French word `a forfeit' which means the surrender of rights. Simply put, Forfeiting is the non-recourse discounting of export receivables. In a forfeiting transaction, the exporter surrenders, without recourse to him, his rights to claim for payment on goods delivered to an importer, in return for immediate cash payment from a forfeiter. As a result, an exporter in India can convert a credit sale into a cash sale, with no recourse to the exporter or his banker. All exports of capital goods and other goods made on medium to long term credit are eligible to be financed through forfeiting.Receivables under a deferred payment contract for export of goods, evidenced by bills of exchange or promissory notes, can be forfaited. Benefits accrue to an exporter from forfeiting - : ● Converts a deferred payment export into a cash transaction, improving liquidity and cash flow ● Frees the exporter from cross-border political or commercial risks associated with export receivables ● Finance up to 100 percent of the export value is possible as compared to 80-85 percent financing available from conventional export credit program
● As forfeiting offers without recourse finance to an exporter, it does not impact the exporter's borrowing limits. Thus, forfeiting represents an additional source of funding, contributing to improved liquidity and cash flow ● Provides fixed rate finance; hedges against interest and exchange risks arising from deferred export credit ● Exporter is freed from credit administration and collection problems ● Forfaiting is transaction specific. Consequently, a long term banking relationship with the forfeiter is not necessary to arrange a forfeiting transaction ● Exporter saves on insurance costs as forfeiting obviates the need for export credit insurance
6.2 - FACTORING
Factoring may be defined as “A contract by which the factor is to provide at least two of the services, (finance, the maintenance of accounts, the collection of receivables and protection against credit risks) and the supplier is to assigned to the factor on a continuing basis by way of sale or security, receivables arising from the sale of goods or supply of services”. Factoring offers smaller companies the instant cash advantage that was once available only to large companies with high sales volumes. With Factoring, there's no need for credit or collection departments, and no need to spend your profits on maintaining accounts receivables.
In simple words...Factoring turns your receivable into cash today, instead of waiting to be paid at a future date.
7) RISKS INVOLVED IN THE EXPORT BUSINESS
Whether it be the exporter himself, or the bank financing the exporter in the preshipment and post-shipment stages, or the bank negotiating the documents of
the exporter, or the bank purchasing the Letter of Credit on behalf of the exporter, or the bank adding its own confirmation to the overseas Irrevocable Letter of Credit, or the factoring agent, or the forfaiting agent, or the bank adding its guarantee in a bid bond – each of these agencies or organisations are faced with risk. To understand each type of risk and to appreciate the effects of such risk, we must delve into each of these kinds of risk associated with export trade
Payment for Goods
the risk of non-payment for goods will be dealt with in maximum detail while compared to the other kinds of risk related to export trade. This is because the risk of non-payment has several aspects to it. COMMERCIAL RISKS ▪ Insolvency of the buyer : He is declared bankrupt if -
He has made a valid assignment, composition or other arrangement for the benefit of his creditors generally. If the buyer be an incorporated body An order has been made for compulsory winding up, or An effective resolution has been passed for voluntary winding up provided that
such resolution is not merely for the purpose of reconstruction or amalgamation. ▪ Wilful default of the buyer: - : This is reflected in the failure of the buyer to make payment due within a specified period, normally four months from the due date,
to the exporter. Here, by payment, we refer to the gross invoice value of the goods delivered to and accepted by the buyer. ▪ Buyer’s failure to accept the goods:- This means failure or refusal on the part of the buyer to accept goods which have already been exported by the exporter. Reasons generally cited for such events include quality disputes. ▪ Insolvency of the bank opening the Irrevocable Letter of Credit: ▪ Default of the bank opening the irrevocable Letter of Credit: POLITICAL RISKS ▪ Transfer of Payment risk: This refers to the imposition of any restriction by the Government of the buyer’s country or any Government action which may block or delay the transfer of payment made by the buyer. ▪ War:
▪ Causes ▪ Buyer’s
inherent in the nature of the goods: failure:
▪ Agent’s failure: Risk also comes in the form of insolvency or protracted default of any agent of the exporter. ▪ Collecting Bank’s failure: Again, as in the above point, there is the risk of insolvency or default of the collecting bank. ▪ Shipments on consignment basis: Here the risk is two-fold: there is the political risk of the agent’s country; there is also the commercial risk of non-payment by “ultimate buyers” if the agent sells the goods to them on credit terms. ▪ Shipments made by air: Where shipments are made by air, the buyers are often 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. There is the risk of the buyer failing to make the payment subsequently as per the contract. This is generally referred to as shipping on OPEN DELIVERY terms.
Exchange rate volatility is a fact of life. There is a continuous fluctuation in exchange rates, thereby bringing uncertainty in receipt for exports and payments against exports. Extended Credit Period Risk Extended credit period refers to bills carrying medium or long term maturities. This involves receivables under a deferred payment contract for export of goods, evidenced by bills of exchange or promissory notes. All exports of capital goods and other goods made on medium to long term credit are classified as having an extended credit period. Risk arising out of an extended credit period or deferred payment for goods exported is reduced to some extent through the mechanism of Forfaiting.
8) MAJOR FINANCIAL AND OTHER INSTITUTIONS
For providing credit and finance and insuring export credit risk, there are 2 primary institutions i.e. EXIM Bank and ECGC.
8.1 - EXIM BANK
Exim Bank Act-Completed 28 years of operations. Set up by an Act of Parliament in September 1981. Commenced operations in March 1982. Wholly owned by the Government of India. Export-Import Bank of India was set up for the purpose of financing, facilitating and promoting foreign trade in India. Exim is the principal financial institution in the country for co-ordinating working of institutions engaged in financing
Offices :Head office – Mumbai. A network of 13 offices in India and Overseas. Domestic Offices - Ahmedabad, Bangalore, Chennai, Hyderabad, Kolkata, Mumbai, New Delhi, Pune. Overseas Offices - Budapest, Johannesburg, Milan, Singapore, Washington DC. Purpose : The EXIM bank was established for the purpose of financing medium and long term loan to the exporters thereby promoting foreign trade of India. Main Objectives : -
● To provide financial assistance (medium and long term) to exporters and importers. ● To function as the principal financial institution for coordinating the working of institutions engaged in providing export finance.
● To promote Foreign Trade of India. ●To deal with all matters that may be considered to be incidental or conducive to
the attainment of above objectives. Functions : The assistance provided by EXIM Bank to the exporters can be grouped under two heads: Fund Based Assistance. Non-Fund based Assistance.
The various assistance provided by EXIM Bank can be charted as follows:
ASSISTANCE OFFERED BY EXIM BANK
FUND BASED ASSISTANCE
NON-FUND BASED ASSISTANCE
INDIAN PARTIES. INDIAN BANKS. OVERSEAS BUYERS. OVERSEAS BANKS.
FINANCIAL GUARANTEES. ADVISORY AND OTHER SERVICES.
A. Fund Based Assistance : • Assistance to Indian Exporters: (a) It provides financial assistance to “Deferred credit exports”. (b) It offers credit facilities to “Deemed Exports”. (c) It finances “Indian Joint Ventures in Foreign countries”. (d) Finances units in“EPZ/ SEZ and 100% EOU’s”. (e) It provides Pre-shipment finance to exporters for procuring raw materials and other inputs. (f) It finances export/import of machinery and equipment on lease basis. (g) It provides Computer Software exporters foreign exchange loan subject to RBI clearance. (h) It provides finance facility against deferred credit to exporters of consultancy, technology and other services. (i) It provides finance to Indian exporters to undertake various export marketing activities in India and abroad through Export Marketing Fund (EMF). (j) It also operates Export Development Fund (EDF) to finance technoeconomic survey/research or any other study for the development of Indian Exports. • Assistance to Indian Commercial Banks: (a) It provides Refinance Facilities so as to Indian exporters who extend term credit to importers. (b) It offers Export Bills Rediscounting Facility to commercial banks in India who have earlier discounted bills of exporters.
Assistance to Overseas Buyers: (a) It offers “Overseas Buyer’s Credit” facility to foreign importers for import of Indian capital goods and related services with repayment spread over a period of years.
Assistance to Overseas Banks: (a) Long term finance is also provided under “Lines of Credit” to finance financial institutions abroad, who in turn, extend finance to importers of their country to buy Indian Capital goods. (b) It provides Relending Facility to overseas Banks to make available term finance to their clients for import of Indian goods. 3. Non - fund Based Assistance : -
Guarantees and Bonds:
EXIM Bank provides non-fund base assistance in the form of guarantees in the nature of Bid Bonds, Performance Guarantee etc. These guarantees are provided together with Commercial Banks.
Advisory and Other Services:
It advises Indian companies, in Executing Contracts Abroad, and on sources of overseas financing.It advises Indian exporters on global exchange control practices.The EXIM Bank offers Financial and Advisory Services to Indian construction projects abroad.It advises small-scale manufacturers on export markets and product areas.It provides Euro Financing sources and Global Credit sources to Indian exporters.It assists the exporters under Forfeiting scheme.
Exim Bank plays the role of an intermediary for facilitating the forfaiting transaction between the Indian exporter and the overseas forfeiting agency. Assistance is extended to Indian Promoter Companies by way of programmes that address to different requirements of the promoter company in setting up of the joint venture. • • Overseas Investment Finance Programme for setting up joint ventures and wholly owned subsidiaries abroad. Asian Countries Investment Partners (ACIP) Programme for creation of a joint venture in India with East Asian countries, through four facilities that address different stages of a project cycle.
A RANGE OF EXPORT SERVICES PROVIDED BY EXIM BANK
EXIM INDIA provides a range of analytical information and export related services necessary for globalization of Indian companies. EXIM INDIA through its wide network of alliances with financial institutions, trade promotion agencies, information providers across the globe assists externally oriented Indian companies in their quest for excellence and globalization. Services include search for overseas partners, identification of technology suppliers, negotiating alliances, and development of joint ventures in India and abroad.
It promotes Indian consultancy by having tie up with International Finance Corporation, Washington D.C. Africa Project Development Facility Africa Enterprise Fund Technical Assistance & Trust Funds Mekong Project Development Facility
Eastern & Southern African Trade & Development Bank (PTA Bank)
African Management Services Company (AMSCO), Netherlands
EXAMPLES Gems & Jewellery Study - Zambia Financial Training Mission - Kenya Cement Project - Cameroon Software - Madagascar Wool Knitting - Vietnam Textile - Nigeria Refrigeration - Ghana Financial Training - Poland It promotes Knowledge building .There is EXIMIUS CENTRE FOR LEARNING, BANGALORE which was set up, in October 1994, to organize seminars and workshops in areas such as international trade & investment, export marketing, quality, packaging, business opportunities in multilateral agencies funded projects, sector and country specific programmes. It have guest faculty from network partners such as IFC, World Bank, EBRD, UNIDO. Research Studies on products, sectors, countries, macro economic issues relevant to international trade and investment are carried out INFORMATION Function Exporters/Importers Industry/Market Reports
Trade Regulations & Laws Country Reports International Quality Standards Partner Identification Product Display Examples of Information Services • • • • • • • • • • • Hungarian Pharmaceutical Sector Importers of Sanitary ware, Castings in North America Importers of Agro-chemicals in Eastern Europe Study for ear buds market in Hungary Study of the Indian Wine market for a Hungarian Company Partner identification for an Italian Sanitary ware manufacturer Study of the Indian Crane Industry for a Finnish company Regulatory Framework for setting up a Pharma Project in China Market report for Computer Monitors in India for a Singaporean firm Study on Bicycle market in Eastern Europe for Indian Cycle Market Potential for Denim in South East Asia
6.2 - EXPORT CREDIT GUARANTEE CORPORATION OF INDIA LTD.
In order to provide export credit and insurance support to Indian exporters, the GOI set up the Export Risks Insurance Corporation (ERIC) in July, 1957. It was transformed into export credit guarantee corporation limited (ECGC) in 1964. Since 1983, it is now know as ECGC of India Ltd. ECGC is a company wholly owned by the GOI. It functions under the administrative control of the Ministry of Commerce and is managed by a Board of Directors representing government, Banking, Insurance, Trade and Industry. The ECGC with its headquarters in Bombay and several regional offices is the only institution providing insurance cover to Indian exporters against the risk of nonrealization of export payments due to occurrence of the commercial and political risks involved in exports on credit terms and by offering guarantees to commercial banks against losses that the bank may suffer in granting advances to exports, in connection with their export transactions. OBJECTIVES OF ECGC: To protect the exporters against credit risks, i.e. non-repayment by buyers To protect the banks against losses due to non-repayment of loans by
exporters COVERS ISSUED BY ECGC: The covers issued by ECGC can be divided broadly into four groups: 1. STANDARD POLICIES – issued to exporters to protect then against
payment risks involved in exports on short-term credit.
SPECIFIC POLICIES – designed to protect Indian firms against payment risk
involved in (i) exports on deferred terms of payment (ii) service rendered to foreign parties, and (iii) construction works and turnkey projects undertaken abroad. 3. FINANCIAL GUARANTEES – issued to banks in India to protect them from risk of loss involved in their extending financial support to exporters at pre-shipment and post-shipment stages; and
SPECIAL SCHEMES such as Transfer Guarantee meant to protect banks
which add confirmation to letters of credit opened by foreign banks, Insurance cover for Buyer’s credit, etc.
9) EXPORT PROMOTION SCHEMES AND INCENTIVES
Schemes for Concessional Imports Inorder to reduce or remove the anti-export bias inherent in the system of indirect taxation and to encourage exports, several schemes have been established which allow importers to benefit from tariff exemptions, especially on inputs. The schemes have been summarized as under: Scheme Duty Drawback About the Scheme The rebate of duty chargeable on any imported or excisable material used in the manufacture of goods exported from India; based on industry drawback rates Import of capital goods at concessional rate of duty subject to an appropriate export obligation accepted by the exporter Objective Provide a level playing field to the country’s exporters so as to exclude the export production from the incidence of import duty and other indirect taxes Reduce the incidence of high capital cost on export prices to make exports competitive by way of reduced import duty on capital goods
Export Promotion Capital Goods
Duty Exemption Duty Remission
Promote duty free imports when An advance licence is used to large quantities of standard raw allow duty free import of physical materials are required for export inputs used in producing exports production products after making normal allowance for wastage The grant of customs duty credit Neutralizes the incidence of is on post export basis as a customs duty by assuming the
inputs as imported and additional specified percentage of fob value duty is not levied of exports made in freely convertible currency
Schemes to Infrastructure
The development of export related infrastructure and enclaves, which create an environment conducive for export production, is crucial to sustain the export growth. Schemes for concessional import for firms primarily engaged in export production are summarized as under: Scheme Exportoriented Units Export Processing Zones Special Economic Zones About the Scheme Objective Offers wide option in locations for Attract large number of exporters to units under DTA(Domestic Tariff set up their units in these zones Area) Develop infrastructure for export Special enclaves separated from production at internationally DTA by fiscal barriers competitive prices and environment and economic development Act as growth engines that boost A duty-free enclave to be treated manufacturing, augment exports as a foreign territory for trade and generate employment operations and duties and tariffs Services which are expected to be managed and coordinated by state government/corporate sector and include various provisions A software development unit is set up for software development , data entry and conversion, data processing, data analysis and control data management or call center services for exports Promote agricultural exports from the country and remunerative returns to the farming community in a sustained manner
Software Technology Parks
Facilitate export oriented production of computer software
Electronic Hardware Technology Parks
A unit can be set up for Facilitate export oriented production manufacture and development of of computer hardware electronic hardware or electronic hardware and software in an integrated manner
Export Houses/Trading Houses/Star Trading Houses/Superstar Trading Houses
The objective of the scheme Export Houses, Trading Houses, Star Trading Houses, Superstar Trading Houses is to give recognition to the established exporters and large export houses to build up the marketing infrastructures and expertise required for export promotions. The registered exporters having a record of export performance over a number of years are granted the status of export/trading houses or star trading houses subject to the fulfillment of minimum annual average export performance in terms of FOB value or net exchange earning on physical export or services prescribed in the Exim policy.
Category Export House Trading House Star Trading Houses Super Star Trading House
Average FOB/FOR value during the preceding 3 licensing years (in Rs) 15 crores 100 crores 500 crores 2000 crores
The exporters who have been granted the status of export house/trading house are entitled to a number of benefits under the EXIM policy including the following: • License/Certificate/Permission and customs clearances for both imports and exports on self declaration basis
• • •
Fixation of input-output norms on a priority basis Priority finance for medium and long-term capital requirement as per conditions notified by RBI Exemption from compulsory negotiation of documents through banks. The remittance, however, would continue to be received through banking channels
100% retention of foreign exchange Enhancement in normal repatriation from 180-360 days
The registered exporters are provided certain extra benefits.
10) POLICY INITIATIVES AND INCENTIVES BY THE STATE GOVERNMENTS
The state governments generally do not distinguish between production for domestic market and production for export market. Therefore, there had been few specific measures taken by the state governments especially targeted at exporting units. However, the state governments have taken a number of policy measures to encourage industrial activity in the state. These measures mainly relate to (a) Capital investment subsidy or subsidy for the preparation of feasibility report, project report, etc.; (b) Waiver or deferment of sales tax or providing loans for sales tax purposes; (c) Exemption from entry tax, octroi duty, etc.; (d) Waiver of electricity duty; (e) Power subsidy; (f) Exemption from taxes for certain captive power generation units; (g) Exemption from stamp duties; and (h) Provision of land at concessional rate, etc. It may be noted that most of the exemptions tend to encourage capital or power-intensive units, though some concessions are linked to turnover. Most of the concessions in the state industrial policies have been
designed keeping in view the manufacturing industries. An analysis of industrial policies of various states indicates that most state governments do compete among themselves in extending such concessions.
On examination of export promotion initiatives by the state governments, it is difficult to find commonality among various states. However, some of the measures taken by the state governments are as follows. (a) provide information on export opportunities (b) allot land for starting an export-oriented unit (EOU) (c) plan for the development of export promotion industrial parks (d) exemption from entry-tax on supplies to EOU/EPZ/SEZ units (e) exemption from sales tax or turnover tax for supplies to EOU/EPZ/SEZ units and inter-unit transfers between them.
ASSISTANCE TO STATES FOR INFRASTRUCTURE DEVELOPMENT OF EXPORTS (ASIDE)
The State Governments shall be encouraged to participate in promoting exports from their respective States. For this purpose, Department of Commerce has formulated a scheme called ASIDE. Suitable provision has been made in the Annual Plan of the Department of Commerce for allocation of funds to the states on the twin criteria of gross exports and the rate of growth of exports. The States shall utilise this amount for developing infrastructure such as roads
connecting production centres with the ports, setting up of Inland Container Depots and Container Freight Stations, creation of new State level export promotion industrial parks/zones, augmenting common facilities in the existing zones, equity participation in infrastructure projects, development of minor ports
and jetties, assistance in setting up of common effluent treatment facilities, stabilizing power supply and any other activity as may be notified by Department of Commerce from time to time.
MARKET DEVELOPMENT ASSISTANCE (MDA)
In order to encourage exporters to explore the overseas markets and to promote their exports, Market Development Assistance (MDA) Scheme of the Department of Commerce is available for the following activities. Assist Export Promotion Councils, Commodity Boards, and Exports Development Authorities to undertake promotional activities for their products and commodities • • • • • Assist consortium approach for overseas marketing Assist trade bodies/approved organization for carrying out non-recurring innovative activities for export promotion Assist export promotion councils to contest countervailing duty/antidumping cases initiated abroad Assist focus export promotion programmes in specific regions abroad like FOCUS LAC programme Assist individual exporters for export promotion activities abroad
Residual essential activities connected with marketing promotion efforts abroad.
MARKET ACCESS INITIATIVE (MAI)
In order to supplement the Market Development Scheme and facilitate
promotional efforts on a sustained basis, Market Access Initiative (MAI) Scheme was launched in 2001-02. The scheme is formulated on focus product-focus country approach to evolve specific strategy for specific market and specific product through market studies or surveys. Under the scheme, assistance is provided to export promotion organizations/trade promotion organizations or exporters for the enhancement of export through venturing into new markets or through increasing the share in the existing markets. Financial assistance is provided for the following activities under the scheme: • • • • To identify the priorities of research relevant to the Department of Commerce and to sponsor research studies consistent with the priorities To carry out studies for evolving a WTO-compatible strategy To support EPCs/trade promotion organizations in undertaking market studies/surveys for evolving proper strategies To support marketing projects abroad based on focus product-focus country approach. Under marketing projects, the following activities are funded Opening of showrooms Opening of warehouses Display in international department stores Publicity campaign and brand promotion Participation In trade fairs abroad
• • •
Research and product development Reverse visits of the prominent buyers from the project focus countries
To undertake export potential survey of the states To take registration charges for product registration abroad for pharmaceuticals, bio-technology, and agro-chemicals To test charges for engineering products abroad
To support cottage and handicraft industries To support recognized associations in industrial clusters for marketing abroad
Under the scheme, the financial assistance is given to central and state governments and its departments, export promotion councils, commodity boards, registered trade promotion organizations and apex trade bodies, recognized industrial clusters, and individual exporters. However, the assistance to individual exporters is available only for evaluating the charges of engineering products abroad and registration charges of pharmaceuticals, biotechnology, and agro-chemicals. The proposals for assistance are examined by an Empowered Committee under the Championship of Commerce Secretary for a particular product and a particular market. The Market Access Initiative scheme provides an excellent opportunity, especially for public and private-sector export promotion organizations, to fiancé their marketing activities for the thrust products in the pre-identified markets. The scheme could not make the anticipated headway mainly due to limited initiatives by the state and central government organizations, which had been the target principal beneficiaries, and also because of non-
awareness among the target beneficiaries due to poor marketing of the scheme.
Learning’s/Suggestions through this project:
♦ Export Finance is a very important branch to study & understand the overall gamut of the international finance market. ♦ Availability of favorable Export finance schemes directly impacts the local trade, encourages exporters, enlarges markets abroad, improves quality of domestic goods and overall helps the nation boost its exchange earnings. ♦ The Government of any nation plays a very vital role in boosting export turnover. The credit policy of the Indian Government is also changed depending upon the needs of the exporters, global trade environment etc. The credit policy of Oct 2001 is a pointer in this direction. ♦ ECGC and EXIM Bank take a lot of efforts for Export promotion. The strategies of these 2 agencies in India should be flexible & their finance schemes should be constantly synchronized with the changing scene of world trade. This alone can help Indian exporters to stand competition in world markets effectively and more gain-fully. ♦ Finally, a very essential question needs to be answered by the International Trade gurus with reference to “Relevance of EXIM Policy in the current times”. Exim policies had emerged when the state decided to limit imports
and encourage exports in order to maintain currency reserves. However, such ideas backfired: consumers were hurt and producers turned lazy.
Assistance provided by Exim ( 1998 ) . Retrieved on August 12 , from www.eximbank.com Indian Trade Marching ( 2002 ) . Retrieved on July 15, from from www.exportimporttrade.com Indian prospectives of Business ( 2006 ) . Retrieved on July 10 www.tradeindia.com Ram Paras ( 2005 ). Export –What Where & How . Delhi : Trade India Books Mahajan M.. I. A Guide to Export . Mumbai : Export Intro Books ECGC Services Manual RBI Mid term review for year 2001-02 Import – Export Procedure ( 2004 ) Retrieved on August 10, 2009 from www. Exportprocedures.com A.D. Pillai ( 2003 ) .Risks involved in Export Financing. New Delhi – The Financial Express Borleaug D. Global Exports ( 2006 ) Washington D.C. -Economic Times Pillai . M . Analysis of Risk ( 2008 ), New Delhi – The Business Standard Objectives and Scope ( 2002 ) . Retrieved on August 10 , from www.ecgcindia.com
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