International Trade Finance

Part A
Unit wise Important Questions and Answers.
Unit I
1. Define International Business or What is International trade? (May 2014)(Nov 2012) (May
2015) (May 2011)
2. International trade may be defined as exchange of goods and services across national
borders. International business comprises all commercial transactions (private and
governmental, sales, investments, logistics, and transportation) that take place between
two or more regions, countries and nations beyond their political boundaries.
3. List out the benefits of International Trade (Nov 2011)
Enhanced potential for expansion of business
Reduce dependence on existing markets
Stabilize seasonal market fluctuations.
4. Write a note on WTO. (May 2014)
The World Trade Organization (WTO) is an intergovernmental organization which
regulates international trade. The WTO officially commenced on 1 January 1995 under
the Marrakesh Agreement, signed by 123 nations on 15 April 1994, replacing the
General Agreement on Tariffs and Trade (GATT), which commenced in 1948.
5. Define Balance of Payment disequilibrium. (Nov 2012)
The balance of payment of a country is said to be in disequilibrium means when the
demand for foreign exchange is not exactly equivalent to the supply of it. There is a
surplus or deficit in the supply of foreign currency.
6. Explain the Balance of Trade. (May 2013)
Balance of Trade is the difference between the value of goods and services exported out
of a country and the value of goods and services imported into the country. Balance of
Trade is the difference between exports and imports.
When value of exports > value of imports = surplus in BOT
When value of imports > value of exports = deficit in BOT
7. What is tariff in international trade? (Nov 2013)
A tariff is a tax on imports, which is collected by the federal government and which
raises the price of the good to the consumer. Also known as duties or import duties,
tariffs usually aim first to limit imports and second to raise revenue.
8. What is Balance of Payment? (May 2015)
Balance of Payment is defined as the 'flow of cash between domestic country and all other
foreign countries'. It includes not only import and export of goods and services but also
includes financial capital transfer.

9. Distinguish WTO from GATT. (May 2011)

GATT was created in 1948 with the aim of bolstering international trade by reducing
trade barriers between countries through negotiations. It was replaced by World Trade

Organization in 1995 after prolonged deliberations that continued for eight years in
GATT. GATT stands for General Agreement on Tariffs and Trade and WTO stands for
World Trade Organization. GATT has a provisional legal agreement and WTO has
legally permanent provision. The members are called contracting parties in GATT and
unlike GATT, they are called members in WTO. GATT is limited to trade in goods only
and WTO is broader with services and intellectual property rights also included in it.
10. What are the components of Balance of Payments Account? (May 2013)
Current Account recording exports and imports, Capital Account Recording capital receipts
and payments abroad, Omissions and Errors, Official Reserve account.

Unit II
11. Define the concept of factoring services. (May 2014)
Factoring is a financial transaction and a type of debtor finance in which a business
sells its accounts receivable (i.e., invoices) to a third party (called a factor) at a
discount. A business will sometimes factor its receivable assets to meet its present and
immediate cash need.
12. What is meant by Letter of credit? (May 2014) (Nov 2012) (May 2015)
Letter of Credit is a commitment by a bank on behalf of the buyer that payment will be
made to the exporter, provided that the terms and conditions stated in the Letter of
Credit have been met, as verified through the presentation of all required documents.
13. List the functions of letter of credit. (Nov 2011)
1. Letter of credit will function as a source of finance.
2. Letter of credit will reduce the credit risk since the banks of both countries are
involved.
14. What is forfaiting? (May 2015)
Forfaiting is a form of financing of receivables pertaining to international trade. It denotes the
purchase of trade bills / promissory notes by a bank / financial institution without recourse to
the seller. The purchase is in the form of discounting the documents covering the entire risk of
non payment in collection. All risks and collection problems are fully the responsibility of the
purchase (forfeiter) who pays cash to seller after discounting the bills / notes.
15. What is revolving Letter of Credit? (May 2011)
Single L/C that covers multiple-shipments over a long period. Instead of arranging a new L/C
for each separate shipment, the buyer establishes a L/C that revolves either in value (a fixed
amount is available which is replenished when exhausted) or in time (an amount is available in
fixed installments over a period such as week, month, or year). L/Cs revolving in time are of
two types: in the cumulative type, the sum unutilized in a period is carried over to be utilized in
the next period; whereas in the non-cumulative type, it is not carried over.
16. What is meant by pre shipment finance? (May 2011)
Pre-shipment Finance is an advance granted to the exporter by the banks for meeting
such financial requirements such as purchase of raw materials and its processing,
packing, storing and shipping of goods.

17. Illustrate duty drawback. (May 2011)

Duty drawback is a refund that can be obtained when an import fee has already been
paid for a good, but the good is then subsequently exported. In order to obtain a duty
drawback, a business does not have to have paid the import duty, nor do they have had
to perform the product's exportation, they only need to be assigned the drawback from
those to whom it would typically be due.
18. Define the concept of packing credit guarantee. (Nov 2012)
The packing credit guarantee mostly provided by ECGC helps the exporter to obtain
better adequate facilities from their bankers. The guarantee assures the bank that in the
event of an exporter failing to discharge his liabilities to the Bank, ECGC would make
good a major portion of the banks loss. The bank is required to be co-insurer to the
extent of the remaining loss.
19. List out the different methods of financing of import of capital goods.(Nov 2012)
Export Promotion Capital Goods (EPCG) scheme allows import of capital goods
including spares for pre production, production and post production at zero duty subject
to an export obligation of 6 times of duty saved on capital goods imported under EPCG
scheme, to be fulfilled in 6 years reckoned from Authorization issue date.
20. What are the primary functions of EXIM Bank? (Write any four)(Nov 2013)
The main functions of the EXIM Bank are as follows:
(i) Financing of exports and imports of goods and services, not only of India but also of the
third world countries;
(ii) Financing of exports and imports of machinery and equipment on lease basis;
(iii) Financing of joint ventures in foreign countries;
(iv) Providing loans to Indian parties to enable them to contribute to the share capital of
joint ventures in foreign countries;
(v) to undertake limited merchant banking functions such as underwriting of stocks, shares,
bonds or debentures of Indian companies engaged in export or import; and
(vi) To provide technical, administrative and financial assistance to parties in connection
with export and import.

Unit III
21. What is meant by Transaction exposure? (May 2014)

'Transaction Exposure' The risk, faced by companies involved in international trade,

that currency exchange rates will change after the companies have already entered into
financial obligations. Such exposure to fluctuating exchange rates can lead to major
losses for firms.
22. State the objectives of FEMA. (May 2014) (May 2011)
The objective of FEMA is to consolidate and amend the law relating to foreign
exchange with the objective of facilitating external trade and payments and for
promoting the orderly development and maintenance of foreign exchange market in
India.
23. Write a short note on FEMA. (Nov 2012)
The Foreign Exchange Management Act, 1999 (FEMA) is an Act of the Parliament of
India "to consolidate and amend the law relating to foreign exchange with the objective
of facilitating external trade and payments and for promoting the orderly development
and maintenance of foreign exchange market in India"
24. What is floating currency? (May 2013)
A country's exchange rate regime where its currency is set by the foreign-exchange
market through supply and demand for that particular currency relative to other
currencies. Thus, floating exchange rates change freely and are determined by trading
in the forex market.
25. What do you mean by Hedging? (May 2013)
Hedging is defined as making an investment to reduce the risk of adverse price
movements in an asset. Normally, a hedge consists of taking an offsetting position in a
related security, such as a futures contract.
26. Explain spot prices and forward prices. (May 2013)
A spot price is a contract of buying or selling a currency for settlement (payment and
delivery) on the spot date, which is normally two business days after the trade date. The
settlement price (or rate) is called spot price (or spot rate). A spot price is in contrast
with a forward price where contract terms are agreed now but delivery and payment
will occur at a future date.
27. What is meant by spot market? (Nov 2012)
The spot market or cash market is a public financial market in which financial instruments or
commodities are traded for immediate delivery. It contrasts with a futures market, in which
delivery is due at a later date. In spot market, settlement happens in t+2 working days, i.e.,
delivery of cash and commodity must be done after two working days of the trade date. A spot
market can be: an organized market; an exchange; or Over-the-counter (OTC);
28. Define Exchange Rate. (May 2015)
In finance, an exchange rate (also known as a foreign-exchange rate, forex rate, FX
rate) between two currencies is the rate at which one currency will be exchanged for
another. It is also regarded as the value of one country's currency in terms of another
currency.
29. What is Hybrid exchange rate system? (May 2015)

A pegged exchange rate system is a hybrid of fixed and floating exchange rate regimes.
Typically, a country will "peg" its currency to a major currency such as the U.S. dollar,
or to a basket of currencies.
30. Expand FEDAI. (May 2011)
FEDAI was set up in 1958 as an Association of banks dealing in foreign exchange in
India (typically called Authorised Dealers ADs) as a self regulatory body and is
incorporated under Section 25 of The Companies Act, 1956. It's major activities include
framing of rules governing the conduct of inter-bank foreign exchange business among
banks vis--vis public and liaison with RBI for reforms and development of forex
market.
Unit IV
31. Write a short note on Bill of lading. (May 2014) (May 2015) (Nov 2011)(May 2011)
Bill of Lading is issued by the carrier to the shipper for receipt of the goods, and is a
contract between the owner of the goods and the carrier to deliver the goods. The B/L
acts as title to the goods so an Original B/L is issued- usually a set of three.
32. What is meant by certificate of origin? (May 2014)
Certificate of Origin is a document prepared by the original manufacturer and certified
by a quasi-official authority - such as a Chamber of Commerce - stating the items
country of origin. Most countries that require a C/O will accept a generic C/O as long
as all of the required data elements are given. However, some countries, like Israel,
have a special green C/O form that must be used.
33. State the advantages of Bill of Lading (May 2013)
A Bill of Lading is issued by the carrier to the shipper for receipt of the goods, and is a contract
between the owner of the goods and the carrier to deliver the goods. Sometimes the B/L acts as
title to the goods so an Original B/L is issued- usually a set of three. Whoever presents one of
those Original, Negotiable B/L can take possession of the goods.

34. What is bill of exchange? (Nov 2012)

Bill of exchange is an instrument in writing containing an unconditional order signed by
the maker directing a certain person to pay certain sum of money only to or to the order
of a certain person or to the bearer of the instrument.
35. What is consular invoice? (May 2015)
A consular invoice is the commercial invoice stamped or notarized by the consulate or
embassy of the customers country, if required. For example, if one is exporting to
Egypt and the buyer requires a consular invoice, the Egyptian embassy in Mumbai will
do this for a small fee.
36. What is the purpose of PP form in International Trade documentation? (Nov 2011)
PP Form is similar to GR Form and the only difference is PP Form is used in exports
through post. It is a declaration that exporters give against each shipment done through
post that he will realize the full export proceeds. He submits the declaration in duplicate

to the customs at the time of shipment. After allotting exports, the customs send the
original to RBI and return the duplicate duly endorsed to the exports.
37. What are UPCDC norms? (May 2011)
Uniform Customs and Practices for Documentary Credits Norms shall apply to all
documentary credits where they are incorporated into the text of the credit. They are
also binding all parties unless otherwise expressly stipulated in the credit.
38. Mention the significance of certificate of Inspection. (Nov 2013)
The consumer protection laws of some countries require mandatory certification of
goods and services. The objectives of this certificate is to secure the safety of
consumers life and health , environmental protection and preventing products like food
stufss, consumer goods.
39. What factors determine the export pricing? (May 2013)
1) Costs 2) Market conditions and customer behavior (demand or value) 3)
Competition, 4) Legal and political issues.
40. Write a short note on software forms. (Nov 2012)
Software forms which are known as SOFTEX Forms are to be filed with STPI to
regulate inward outward remittance by Reserve Bank under export of goods in nonphysical form, either domestic or offshore. The products includes computer software,
export of Video and TV software and all other types of software products and packages
which are falling under goods of non physical form.

Unit V
41. Write a short note on EPCG. (May 2014)
Export Promotion Capital Goods (EPCG) scheme allows import of capital goods
including spares for pre production, production and post production at zero duty subject
to an export obligation of 6 times of duty saved on capital goods imported under EPCG
scheme, to be fulfilled in 6 years reckoned from Authorization issue date.
42. State the advantage of EPCG in export promotion (Nov 2011)
1. It will act as a source of finance through duty exemption while importing capital
goods. 2. Manufacturers will be encouraged to import modern technology into the
country
43. What do you mean by export house? (Nov 2012)
Export House is the recognized established exporter by Director General of Foreign Trade with a view to
building marketing infrastructure and expertise required for export promotion. Export House should
operate as highly professional and dynamic institutions and act as important instruments of export growth.

44. Write a short note on DEPB. (Nov 2012)

Duty Entitlement Pass Book schemes is the export assistance provided by the government
and the objective of DEPB is to neutralize incidence of customs duty on import content of

export product. Component of customs duty on fuel (appearing as consumable in the

SION) shall also be factored in the DEPB rate. An exporter may apply for credit, at
specified percentage of FOB value of exports, made in freely convertible currency.
45. What is meant by Advance License? (May 2014)
Advance License is issued for duty free import of inputs, as defined in paragraph 7.2,
subject to actual user condition. Such licenses (other than Advance License for deemed
exports) are exempted from payment of Basic Customs Duty, Surcharge, Additional
Customs Duty, Anti Dumping Duty and Safeguard Duty, if any. However, Advance
License for deemed export shall be exempted from Basic Customs Duty, surcharge and
Additional Customs Duty only.
46. What are the advantages of EPZ? (May 2013)
1. Export Processing Zone (EPZ) has emerged as an effective instrument to boost
export of manufactured products.
2. Each Zone provides basic infrastructural facilities, like developed land, standard
design factory buildings, built-up sheds, roads, power supply and drainage, in
addition to a whole range of fiscal incentives by way of Customs, Excise and
Income Tax exemptions.
47. State the need for ore export houses in India. (May 2013)
Export House is the recognized established exporter by Director General of Foreign Trade with
a view to building marketing infrastructure and expertise required for export promotion since
India has more ore mines. Export House should operate as highly professional and dynamic
institutions and act as important instruments of export growth of Ore.

48. What is an Indent? (May 2015)

Indent is an Order for goods (placed often through a local or foreign agent of a foreign
supplier) under specified conditions of sale, the acceptance of which by the supplier (or the
agent) constitutes a contract of sale.
49. What is SEZ? (May 2015)
Special Economic Zone (SEZ) is defined as a specifically delineated duty free enclave
that is deemed to be foreign territory for the purposes of trade operations and duties and
tariffs. Goods and services going into the SEZ area from DTA (Domestic Tariff Area)
are to be treated as exports and goods coming from the SEZ area into DTA are to be
treated as imports.
50. What are the conditions applied for constituting the export company in SEZ? (Nov
2011)
i)the proposal meets with the positive net foreign exchange earning requirement as
provided in rule 53; (ii) availability of space and other infrastructure support applied
for, is confirmed by the Developer in writing, by way of a provisional offer of space:
PROVIDED that the Developer shall enter into a lease agreement and give possession
of the space in the Special Economic Zone to the entrepreneur only after the issuance
of Letter of Approval by the Development Commissioner:

Part B
Unit I
1. Give an elaborate account of the barriers to international trade.(Nov 2011) (May
2013) (Nov 2013)
Barriers to International trade: The most common barriers to trade are
1. Tariffs,
2. Nontariff barriers
1. Tariffs

A tariff is a tax on imports, which is collected by the federal government and which
raises the price of the good to the consumer.

Also known as duties or import duties, tariffs usually aim first to limit imports and
second to raise revenue.

The effect of tariffs: raises the price of the foreign good beyond the market equilibrium
price, which decreases the demand for and, eventually, the supply of the foreign good.

For instance, when the United States prohibits the importation of unpasteurized cheese
from France, is it protecting the health of the American consumer or protecting the
revenue of the American cheese producer?

Forms of Tariffs
Depending on the motivation, tariffs come in different forms.
i. Scientific tariff - a tariff may be levied in order to bring the price of the imported good up to
the level of the domestically produced good. This tariff has the stated goal of equalizing the price
and, therefore, leveling the playing field between foreign and domestic producers. In this game,
the consumer loses.

ii. Peril-point tariff is levied in order to save a domestic industry that has deteriorated to the
point where its very existence is in peril. An economist would argue that the industry should be
allowed to expire. That way, factors of production used by that inefficient industry could move
into a new one where they would be better employed.
iii. Retaliatory tariff is one that is levied in response to a tariff levied by a trading partner. In the
eyes of an economist, retaliatory tariffs make no sense because they just start tariff wars in which
no oneleast of all the consumerwins.
2. Nontariff barriers: Nontariff barriers include
i. Import licenses - Each license specifies the volume of imports allowed, and the total volume
allowed should not exceed the quota. Licenses can be sold to importing companies at a
competitive price or fee.
ii. Export licenses - Export control document issued by a government agency to monitor the
export of sensitive technologies (such as advanced computer chips, encryption-decryption
software), prohibited materials (drugs, genetically-modified plants), dangerous materials
(explosives, radioactive substances), strategic materials (uranium, advanced alloys), or goods in
short supply in the home market (foodstuffs, raw materials).
iii. Import quotas - A quota is a limit on the amount of a certain type of good that may be
imported into the country.

A quota can be either voluntary or legally enforced.

Effect of quota: A quota limits the supply to a certain quantity, which raises the
price beyond the market equilibrium level and thus decreases demand.

iv. Subsidies - A subsidy is a form of financial aid or support extended to an economic sector (or
institution, business, or individual) generally with the aim of promoting economic and social
policy.Subsidies come in various forms including:
direct (cash grants, interest-free loans) and
indirect (tax breaks, insurance, low-interest loans, depreciation write-offs, rent
rebates).
For example, in the US at one time it was cheaper to buy gasoline than bottled water.
v. Voluntary Export Restraints (VER) - is a government-imposed limit on the quantity of some
category of goods that can be exported to a specified country during a specified period of time.

Ex: 1981 Automobile VER: The automobile industry in the United States was threatened by the
popularity of cheaper more fuel efficient Japanese cars, a 1981 voluntary restraint agreement
limited the Japanese to exporting 1.68 million cars to the U.S. annually as stipulated by U.S
Government. This quota was originally intended to expire after three years, in April 1984.
However, with a growing deficit in trade with Japan, and under pressure from domestic
manufacturers, the US government extended the quotas for an additional year. The cap was
raised to 1.85 million cars for this additional year, then to 2.3 million for 1985. The voluntary
restraint was removed in 1994.
vi. Local content requirements / regulations regarding product content
vii. Local quality requirements / product standards
viii. Embargo - a trading ban and is the partial or complete prohibition of commerce and trade
with a particular country or a group of countries.
ix. Currency devaluation - means official lowering of the value of a country's currency within a
fixed exchange rate system, by which the monetary authority formally sets a new fixed rate with
respect to a foreign reference currency.
x. Trade restriction - is an artificial restriction on the trade of goods and/or services between
two countries. It is the byproduct of protectionism. Till 1990s, India was a closed economy:
average tariffs exceeded 200%, quantitative restrictions on imports were extensive
xi. Other nontariff barriers include packing and shipping regulations, harbor and airport
permits, and onerous customs procedures
2. Explain the impact of EXIM Policy on her International Trade (Nov 2011)
Promotional Measures
1. Duty Exemption / Remission Schemes
2. Export Promotion Capital Goods Scheme
3. Export Oriented Units (EOUs),Electronics Hardware Technology Parks (EHTPS),
Software Technology Parks (STPs) and Bio-Technology Parks (BTPs)
4. Special Economic Zones
5. Free Trade & Warehousing Zones
6. Deemed Exports
1. Duty Exemption / Remission Schemes of Exim Policy 2004-2009

The Duty Exemption Scheme enables import of inputs required for export
production. It includes the following exemptions-

Duty Drawback: - The Duty Drawback Scheme is administered by the Directorate

of Drawback, Ministry of Finance. Under Duty Drawback scheme, an exporter is
entitled to claim Indian Customs Duty paid on the imported goods and Central
Excise Duty paid on indigenous raw materials or components.

Excise Duty Refund: - Excise Duty is a tax imposed by the Central Government on
goods manufactured in India. Excise duty is collected at source, i.e., before removal of
goods from the factory premises. Export goods are totally exempted from central
excise duty.

Octroi Exemption: - Octroi is a duty paid on manufactured goods, when they enter
the municipal limits of a city or a town. However, export goods are exempted from
Octroi.

2. The Duty Remission Scheme enables post export replenishment/ remission of duty on inputs
used in the export product.
DFRC: Under the Duty Free Replenishment Certificate (DFRC) schemes, import
incentives are given to the exporter for the import of inputs used in the manufacture of
goods without payment of basic customs duty.

Duty Free Import Authorisation (DFIA): Effective from 1st May, 2006, DFIA is
issued to allow duty free import of inputs which are used in the manufacture of the export
product (making normal allowance for wastage), and fuel, energy, catalyst etc. which are
consumed or utilised in the course of their use to obtain the export product.

3. DUTY ENTITLEMENT PASSBOOK SCHEME

1. Objective of DEPB is to neutralise incidence of customs duty on import content of
export product. Component of customs duty on fuel (appearing as consumable in the
SION) shall also be factored in the DEPB rate
2. An exporter may apply for credit, at specified percentage of FOB value of exports,
made in freely convertible currency. In case of supply by a DTA unit to a SEZ unit/ SEZ
Developer/Co-Developer, an exporter may apply for credit for exports made in freely
convertible currency or payment made from foreign currency account of SEZ Unit/SEZ
Developer/Co-Developer.
3. Credit shall be available against such export products and at such rates as may be
specified by DGFT by way of public notice. Credit may be utilized for payment of
Customs Duty on freely importable items and/or restricted items. DEPB Scrips can also
be utilized for payment of duty against imports under EPCG Scheme.

4. EXPORT PROMOTION CAPITAL GOODS SCHEME

1. Zero duty EPCG scheme - it allows import of capital goods for pre production,
production and post production (including CKD/SKD thereof as well as computer
software systems) at zero Customs duty, subject to an export obligation equivalent to 6
times of duty saved on capital goods imported under EPCG scheme, to be fulfilled in 6
years reckoned from Authorization issue-date.
2.
The scheme will be available for exporters of engineering & electronic products,
basic chemicals & pharmaceuticals, apparels & textiles, plastics, handicrafts, chemicals
& allied products and leather & leather products
3. Concessional 3% Duty EPCG Scheme - Concessional 3% duty EPCG scheme allows
import of capital goods for pre production, production and post production (including
CKD/SKD thereof as well as computer software systems) at 3% Customs duty, subject to
an export obligation equivalent to 8 times of duty saved on capital goods imported under
EPCG scheme, to be fulfilled in 8 years reckoned from Authorization issuedate.
4.In case of agro units, and units in cottage or tiny sector, import of capital goods at 3%
Customs duty shall be allowed subject to fulfillment of export obligation equivalent to 6
times of duty saved on capital goods imported, in 12 years from Authorization issue-date.
5.For SSI units, import of capital goods at 3 % Customs duty shall be allowed, subject to
fulfillment of export obligation equivalent to 6 times of duty saved on capital goods, in 8
years from Authorization issue-date, provided the landed cif value of such imported
capital goods under the scheme does not exceed Rs. 50 lakhs and total investment in plant
and machinery after such imports does not exceed SSI limit.
6.
However, in respect of EPCG Authorization with a duty saved amount of Rs. 100
crores or more, export obligation shall be fulfilled in 12 years.
7.
Second hand capital goods, without any restriction on age, may also be imported
under EPCG scheme.
8. However, import of motor cars, sports utility vehicles/all purpose vehicles shall be
allowed only to hotels, travel agents, tour operators or tour transport operators and
companies owning/operating golf resorts, subject to the condition that:
(i) total foreign exchange earning from hotel, travel & tourism and golf tourism sectors in
current and preceding three licensing years is Rs.1 .5 crores or more.
(ii) duty saved amount on all EPCG Authorizations issued in a licensing year for import
of motor cars, sports utility vehicles/ all purpose vehicles shall not exceed 50% of
average foreign exchange earnings from hotel, travel & tourism and golf tourism sectors
in preceding three licensing years.
(iii) vehicles imported shall be so registered that the vehicle is used for tourist purpose
only. A copy of the Registration certificate should be submitted to concerned RA as a
confirmation of import of vehicle. However, parts of motor cars, sports utility vehicles/
all purpose vehicles such as chassis etc. cannot be imported under the EPCG Scheme.
9. Spares for existing plant and machinery shall be allowed to be imported under the
EPCG scheme subject to an export obligation equivalent to 50% of the already existing
export obligation to be fulfilled in 8 years.
5.

Special Economic Zone (SEZ)

A Special Economic Zone is a geographically distributed area or zones where the

economic laws are more liberal as compared to other parts of the country.

SEZs are proposed to be specially delineated duty free enclaves for the purpose of trade,
operations, duty and tariffs.

SEZs are self-contained and integrated having their own infrastructure and support
services.

Exim Policy 2009-2014

The short term objective of policy is to arrest and reverse the declining trend of
exports and to provide additional support especially to those sectors which have been hit
badly by recession in the developed world.

Policy objective of achieving an annual export growth of 15% with an annual export
target of US$ 200 billion by March 2011. In the remaining three years of this Foreign
Trade Policy i.e. upto 2014, the country should be able to come back on the high export
growth path of around 25% per annum.

By 2014, we expect to double Indias exports of goods and services. The long term policy
objective for the Government is to double Indias share in global trade by 2020. 3.28%
targeted Indias share of global trade by 2020 double from the current 1.64%.

In order to meet these objectives, the Government would follow a mix of policy
measures including fiscal incentives, institutional changes, procedural rationalization,
enhanced market access across the world and diversification of export markets.

Improvement in infrastructure related to exports; bringing down transaction costs, and

providing full refund of all indirect taxes and levies, would be the three pillars, which
will support us to achieve this target. Endeavour will be made to see that the Goods and
Services Tax rebates all indirect taxes and levies on exports.

3.

Discuss as to how the Foreign trade and Economic growth are interrelated. (May
2013)

Foreign Trade and Economic Growth

The issues of international trade and economic growth have gained substantial
importance with the introduction of trade liberalization policies in the developing nations
across the world.

International trade and its impact on economic growth crucially depend on globalization.

As far as the impact of international trade on economic growth is concerned, the

economists and policy makers of the developed and developing economies are divided
into two separate groups.

One group of economists is of the view that international trade has brought about
unfavorable changes in the economic and financial scenarios of the developing countries.

The other group of economists, which speaks in favor of globalization and international
trade, come with a brighter view of the international trade and its impact on economic
growth of the developing nations.

First View - Unfavourable

According to them, the gains from trade have gone mostly to the developed nations of the
world.

Liberalization of trade policies, reduction of tariffs and globalization have adversely

affected the industrial setups of the less developed and developing economies.

As an aftermath of liberalization, majority of the infant industries in these nations have

closed their operations.

Many other industries that used to operate under government protection found it very
difficult to compete with their global counterparts.

Second View - Favourable

According to them developing countries, which have followed trade liberalization

policies, have experienced all the favorable effects of globalization and international
trade.

China and India are regarded as the trend-setters in this case.

There is no denying that international trade is beneficial for the countries involved in
trade, if practiced properly.

International trade opens up the opportunities of global market to the entrepreneurs of the
developing nations.

It also makes the latest technology readily available to the businesses operating in these
countries.

It results in increased domestic and global competition.

This in turn ensures efficient utilization of available resources.

Open trade policies also bring in a host of related opportunities for the countries that are
involved in international trade.

4. Explain the role played by WTO in promoting International Trade among the member
countries (Nov 2013)
Functions:
Administering WTO trade agreements
Forum for trade negotiations
Handling trade disputes
Monitoring national trade policies
Technical assistance and training for developing countries
Cooperation with other international organizations
The ten benefits
1. The system helps promote peace
2. Disputes are handled constructively
3. Rules make life easier for all
4. Freer trade cuts the costs of living
5. It provides more choice of products and qualities
6. Trade raises incomes
7. Trade stimulates economic growth
8. The basic principles make life more efficient
9. Governments are shielded from lobbying
10. The system encourages good government
5. Discuss the structure of Balance of Payment accounts in India. (May 2015)
Structure of Balance of Payments
CREDITS
Current A/c:

DEBITS
Current A/c:

Exports of goods (Visible items)

Imports of goods (Visible items)

Exports of services (Invisibles)

Imports of services (Invisibles)

Unrequited receipts (gifts,

Unrequited payments (gifts, remittance,

remittances, indemnities, etc. from

foreigners)

indemnities etc. to foreigners)

Capital A/c:

Capital A/c:

Capital receipts (Borrowings from

Capital payments (lending to, capital

abroad, capital repayments by, or

repayments to, or purchase of assets

sale of assets to foreigners, increase

from foreigners, reduction in stock of

in stock of gold and reserves of

gold and reserves of foreign currency

foreign currency etc.)

etc.)

1. Current Account Transactions: Records the receipts and payments of foreign exchange in
the following ways:

Current account receipts

Export of goods effects the flow of foreign exchange into the country
Invisibles
Non-monetary movement of gold

Current Account payments

Import of goods causes the flow of foreign exchange from the country
Invisibles
Non-monetary movement of gold
Invisibles include receipts and payments on account of

Trade in services such as travel and tourism, transport, etc.

Investment income, such as, interest and dividend, etc. and

Unilateral transfers include pension, remittances, gifts and other

transfers for which no specific services are rendered. They are unilateral
transfers because they represent flow of funds only in one direction, that
is, the direction of payment.

Movement of gold may be monetary or non-monetary.

Monetary movement is the sale or purchase that influences the international
monetary reserves.
Non-monetary sale and purchase of gold is done for industrial purposes that is
shown in the current account.

If the credit side of the current account is greater than the debit side there is a surplus
balance.

If the debit side of the current account is greater than the credit side there is a deficit
balance.

The current account shows the net amount a country is earning balance of trade (net
earnings on exports minus payments for imports), factor income (earnings on foreign
investments minus payments made to foreign investors) and cash transfers.

So, BOP on current account refers to the inclusion of 3 balances:

Merchandise balance,
Services balance and
Unilateral Transfer balance (gifts)

Where, CA: current account, X and M: export and import of goods and services
respectively, NY: net income from abroad; NCT: net current transfers - The net value of
the balances of visible trade and of invisible trade and of unilateral transfers defines the
balance on current account.

BOP on current account is also referred to as Net Foreign Investment because the sum
represents the contribution of Foreign Trade to GNP.
Structure of Current Account

Transactions
1. Merchandise
2. Foreign Travel
3. Transportation
4. Insurance (Premium)
5. Investment Income
6.Government (purchase

Credit
Export
Earning
Earning
Receipt
Dividend Receipt
Receipt

Debit
Import
Payment
Payment
Payment
Dividend Payment
Payment

Net Balance
-

Surplus (+) orDeficit (-)

of goods & services)

Current A/C Balance

2. Capital Account Transactions

The capital account records all international transactions that involve a resident of the
country concerned changing either his assets with or his liabilities to a resident of another
country.

Transactions in the capital account reflect a change in a stock either assets or liabilities.

Capital account receipts and payments comprise long-term and short-term inflow and
outflow of funds.

Credit side records the official and private borrowing from abroad net of payments,
direct and portfolio investment and short-term investments into the country. It records the
bank balances of the non-residents held in the country.

Debit side includes dis-investment of capital invested into the country, the countrys
investment abroad, loans given to a foreign government or a foreign party and the bank
balances held abroad.

Long-term transactions involve maturity periods of over 1 year (an individual buying a
long term government bond in another country).

Long term capital movement includes:

Investments in shares, bonds, physical assets, etc.
Amortization (repayment) of capital

Short-term flows are effected for 1 year or less (a firm or individual that holds a bank
account with another country and increases its balance in that account).

Short term capital movement includes:

Purchase of short term securities
Speculative purchase of foreign currency
Cash balances held by foreigners
Net balance of current account

Various Forms of Capital Account Transactions

Direct investment is the act of purchasing an asset and the same time acquiring control
of it. Ex: The acquisition of a firm resident in one country by a firm resident.

Portfolio investment by contrast is the acquisition of an asset that does not give the
purchaser control. Ex: Purchase of shares in a foreign company or of bonds issued by a
foreign government or Loans made to foreign firms or governments come into the same
broad category.

Errors and Omissions

Errors and omissions is a statistical residue.

It is used to balance the statement because in practice it is not possible to have

complete and accurate data for reported items.

3. Official Reserves Account

Official reserves are held by the monetary authorities of a country.

Reserves are held in 3 forms: in foreign currency, usually but always the US dollar, as
gold, and as Special Deposit Receipts (SDRs) borrowed from the IMF.

Foreign currency assets are normally held in the form of balances with foreign central
banks and investment in foreign government securities.

Reserves do not have to be held within the country.

Indeed most countries hold a proportion of their reserves in accounts with foreign central
banks.

If the overall balance of payments is surplus, the surplus amount adds to the official
reserves account but if the overall balance of payments is deficit, the official reserves
account is debited by the amount of deficit.

Unit II
6. Describe the INCO terms along with suitable examples. (Nov 2011)
The Inco terms rules or International Commercial Terms are a series of pre-defined
commercial terms published by the International Chamber of Commerce (ICC) that are widely
used in International commercial transactions or procurement processes. A series of three-letter
trade terms related to common contractual sales practices, the Inco terms rules are intended
primarily to clearly communicate the tasks, costs, and risks associated with the transportation
and delivery of goods.
The Inco terms rules are accepted by governments, legal authorities, and practitioners worldwide
for the interpretation of most commonly used terms in international trade. They are intended to
reduce or remove altogether uncertainties arising from different interpretation of the rules in
different countries. As such they are regularly incorporated into sales contracts worldwide.
EXW Ex Works (named place of delivery)
The Seller makes the goods available at his/her premises. This term places the maximum
obligation on the buyer and minimum obligations on the seller. The Ex Works term is often used
when making an initial quotation for the sale of goods without any costs included. EXW means
that a buyer incurs the risks for bringing the goods to their final destination. The seller does not
load the goods on collecting vehicles and does not clear them for export. If the seller does load
the goods, he does so at buyer's risk and cost. If parties wish seller to be responsible for the

loading of the goods on departure and to bear the risk and all costs of such loading, this must be
made clear by adding explicit wording to this effect in the contract of sale.
The buyer arranges the pickup of the freight from the supplier's designated ship site, owns the intransit freight, and is responsible for clearing the goods through Customs. The buyer is
responsible for completing all the export documentation. Cost of goods sold transfers from the
seller to the buyer.
FCA - Free Carrier (named place of delivery)
The seller delivers the goods, cleared for export, to the carrier nominated by the buyer at the
named place. It should be noted that the chosen place of delivery has an impact on the
obligations of loading and unloading the goods at that place. If delivery occurs at the seller's
premises, the seller is responsible for loading. If delivery occurs at any other place, the seller is
not responsible for unloading.
If the buyer nominates a person other than a carrier to receive the goods, the seller is deemed to
have fulfilled his obligation to deliver the goods when they are delivered to that person..
CPT Carriage Paid To (named place of destination)
The seller pays for carriage. Risk transfers to buyer upon handing goods over to the first carrier
at place of shipment in the country of Export. The Shipper is responsible for origin costs
including export clearance and freight costs for carriage to named place (usually destination port
or airport). Shipper is not responsible for buying Insurance and for delivery to final destination
(buyer's facilities).
This term is used for all kind of shipments..
CIP Carriage and Insurance Paid to (named place of destination)
The containerized transport/multimodal equivalent of CIF. Seller pays for carriage and insurance
to the named destination point, but risk passes when the goods are handed over to the first
carrier. CIP is used for intermodal deliveries & CIF is used for Sea .
DAT Delivered at Terminal (named terminal at port or place of destination)
This term means that the seller covers all the costs of transport (export fees, carriage, insurance,
and destination port charges) and assumes all risk until after the goods are import
duty/taxes/customs costs.
DAP Delivered at Place (named place of destination)
Can be used for any transport mode, or where there is more than one transport mode. The seller
is responsible for arranging carriage and for delivering the goods, ready for unloading from the
arriving conveyance, at the named place. Duties are not paid by the seller under this term (An

important difference from Delivered At Terminal DAT, where the buyer is responsible for
unloading.)
DDP Delivered Duty Paid (named place of destination)
Seller is responsible for delivering the goods to the named place in the country of the buyer, and
pays all costs in bringing the goods to the destination including import duties and taxes. The
seller is not responsible for unloading. This term is often used in place of the non-Inco term
"Free In Store (FIS)". This term places the maximum obligations on the seller and minimum
obligations on the buyer. With the delivery at the named place of destination all the risks and
responsibilities are transferred to the buyer and it is considered that the seller has completed his
obligations
Sea and Inland Waterway Transport
To determine if a location qualifies for these four rules, please refer to 'United Nations Code for
Trade and Transport Locations (UN/LOCODE)'.
The four rules defined by Inco terms 2010 for international trade where transportation is entirely
conducted by water are as per the below. It is important to note that these terms are generally not
suitable for shipments in shipping containers; the point at which risk and responsibility for the
goods passes is when the goods are loaded on board the ship, and if the goods are sealed into a
shipping container it is impossible to verify the condition of the goods at this point.
FAS Free Alongside Ship (named port of shipment)
The seller delivers when the goods are placed alongside the buyer's vessel at the named port of
shipment. This means that the buyer has to bear all costs and risks of loss of or damage to the
goods from that moment. The FAS term requires the seller to clear the goods for export, which is
a reversal from previous Inco terms versions that required the buyer to arrange for export
clearance. However, if the parties wish the buyer to clear the goods for export, this should be
made clear by adding explicit wording to this effect in the contract of sale. This term can be used
only for sea or inland waterway transport.
FOB Free on Board (named port of shipment)
The seller must advance government tax in the country of origin as off commitment to load the
goods on board a vessel designated by the buyer. Cost and risk are divided when the goods are
actually on board of the vessel. The seller must clear the goods for export. The term is applicable
for maritime and inland waterway transport only but NOT for multimodal sea transport in
containers. The seller must instruct the buyer the details of the vessel and the port where the
goods are to be loaded, and there is no reference to, or provision for, the use of a carrier or
forwarder. This term has been greatly misused over the last three decades ever since Inco terms
1980 explained that FCA should be used for container shipments.

It means the seller pays for transportation of goods to the port of shipment, loading cost. The
buyer pays cost of marine freight transportation, insurance, unloading and transportation cost
from the arrival port to destination. The passing of risk occurs when the goods are in buyer
account. the buyer arranges for the vessel and the shipper has to load the goods and the named
vessel at the named port of shipment with the dates stipulated in the contract of sale as informed
by the buyer .
CFR Cost and Freight (named port of destination)
Seller must pay the costs and freight to bring the goods to the port of destination. However, risk
is transferred to the buyer once the goods are loaded on the vessel. Insurance for the goods is
NOT included. and This term is formerly known as CNF (C&F, or C+F).
CIF Cost, Insurance and Freight (named port of destination)
Exactly the same as CFR except that the seller must in addition procure and pay for the
insurance.
7. Discuss the organizational structure and functions of ECGC. (Nov 2011) (Nov 2013)
Export Credit Guarantee Corporation of India Ltd. ( ECGC ) is a Government of India
Enterprise which provides export credit insurance facilities to exporters and banks in
India. Over the years, it has evolved various export credit risk insurance products to suit
the requirements of Indian exporters and commercial banks.
Organizational structure
HO
Regions

Branches

Project exports

Large scale
Exports

Bank Business

Credit insurance policy

SCR or standard policy Shipment (Comprehensive Risks) policy

Suited to cover risks in respect of goods exported on short term credit i.e.
credit not exceeding 180 days.
This policy covers both commercial and political risks from the date of
shipment

It is issued to exporters whose anticipated export turnover for the next 12

months is more than Rs 50 lacs
Risk covered under the policy
Commercial risk
Insolvency of the buyer
Failure of the buyer to make the payment within a specified period, normally
4 months from due date.
Buyers failure to accept the goods, subject to certain conditions
Political risk
Imposition of the restriction of the Government of the buyers country or any
Government action, which may block or delay the transfer of payment made
by the buyer
War, civil war, revolution, civil disturbances
New import restrictions or cancellation of a valid import license in the buyers
country.
Interruption or diversion of voyage outside India resulting in payment of
additional freight or insurance charges which cannot be recovered from the
buyer
Any other cause of loss occurring outside India not normally insured by the
general insurers and beyond the control of both the exporter and the buyer.

Packing Credit Guarantee

Exporters may not be able to obtain such facilities from their bankers for
several reasons eg. The exporter may be relatively new to the business, the
extent of facilities needed by him may be out of proportion to the equity of
the firms or the value of the collateral offered by the exporter may be
inadequate.

The packing credit guarantee of ECGC helps the exporter to obtain better and
adequate facilities from their bankers. The guarantees assure the banks that
in the event of exporter failing to discharge his liabilities to the bank, ECGC
would make a good major portion of the banks loss.

The bank is required to be the coinsurer to the extent of the remaining loss.

Eligibility: any loan given to an exporter for the manufacture, processing,

purchasing or packing of goods meant for export against a firm order or letter
of credit qualifies for packing credit guarantees.

Pre shipment advances given to parties who enter into contacts for export of
services or for construction works abroad to meet preliminary expenses in
connection with such contracts are also eligible for cover under guarantee.

The requirement of lodgment of letter of credit or export order for granting

packing credit advance is waived if the bank grants such advances in
accordance with the instruction of the RBI.

Exchange fluctuation Risk cover

The exchange fluctuation risk cover is intended to provide a measure of

protection to exporters of capital goods, civil engineering contractors and
consultants who have often to receive payments over a period of years for
their exports, construction works or services where such payments are to be
received in foreign currency, they are open to exchange fluctuation risk as
the forward exchange market does not provide cover for such deferred
payments.

Exchange fluctuation risk cover is available for

payments scheduled over a period of 12 months or more upto a

maximum of 15 years.

Cover can be extended from the date of bidding upto the final
installment.

The basis for cover will be a reference rate agreed upon. The reference
rate can be the rate prevailing on the date of bid or rate approximating
it.

8. State and explain various financing methods of import of capital goods. (May 2013)
(May 2015)
Letter Of Credit
Letters of credit (LCs) are one of the most secure instruments available to international traders.
An LC is a commitment by a bank on behalf of the buyer that payment will be made to the
exporter, provided that the terms and conditions stated in the LC have been met, as verified
through the presentation of all required documents.
The buyer pays his or her bank to render this service. An LC is useful when reliable credit
information about a foreign buyer is difficult to obtain, but the exporter is satisfied with the
creditworthiness of the buyers foreign bank.
An LC also protects the buyer because no payment obligation arises until the goods have been
shipped or delivered as promised.

Bill of exchange
An instrument in writing containing an unconditional order signed by the maker directing a
certain person to pay certain sum of money only to or to the order of a certain person or to the
bearer of the instrument.
Main features of the Bill of exchange

It must be in writing

It must be signed by the maker

It must be unconditional order to pay

The maker must direct a certain person to pay a certain sum of money.

A written, unconditional order by one party (the drawer) to another (the drawee) to pay a certain
sum, either immediately (a sight bill) or on a fixed date (a term bill), for payment of goods and/or
services received. The drawee accepts the bill by signing it, thus converting it into a post-dated
check and a binding contract.

A bill of exchange is also called a draft but, while all drafts are negotiable instruments, only "to
order" bills of exchange can be negotiated. According to the 1930 Convention Providing A
Uniform Law For Bills of Exchange and Promissory Notes held in Geneva (also called Geneva
Convention) a bill of exchange contains: (1) The term bill of exchange inserted in the body of the
instrument and expressed in the language employed in drawing up the instrument. (2) An
unconditional order to pay a determinate sum of money. (3) The name of the person who is to
pay (drawee). (4) A statement of the time of payment. (5) A statement of the place where
payment is to be made. (6) The name of the person to whom or to whose order payment is to be
made. (7) A statement of the date and of the place where the bill is issued. (8) The signature of
the person who issues the bill (drawer). A bill of exchange is the most often used form of
payment in local and international trade, and has a long history- as long as that of writing.

Pre Shipment Finance

Packing Credit

Advance against Cheques/Draft etc. representing Advance Payments.

Preshipment finance is extended in the following forms :

Packing Credit in Indian Rupee

Packing Credit in Foreign Currency (PCFC)

Requirement for Getting Packing Credit

This facility is provided to an exporter who satisfies the following criteria

A ten digit importerexporter code number allotted by DGFT.

Exporter should not be in the caution list of RBI.

If the goods to be exported are not under OGL (Open General Licence), the exporter
should have the required license /quota permit to export the goods.

Packing credit facility can be provided to an exporter on production of the following evidences
to the bank:

1. Formal application for release the packing credit with undertaking to the effect that the
exporter would be ship the goods within stipulated due date and submit the relevant
shipping documents to the banks within prescribed time limit.
2. Firm order or irrevocable L/C or original cable / fax / telex message exchange between
the exporter and the buyer.
3. Licence issued by DGFT if the goods to be exported fall under the restricted or canalized
category. If the item falls under quota system, proper quota allotment proof needs to be
submitted.
The confirmed order received from the overseas buyer should reveal the information about the
full name and address of the overseas buyer, description quantity and value of goods (FOB or
CIF), destination port and the last date of payment.
Eligibility
Pre shipment credit is only issued to that exporter who has the export order in his own name.
However, as an exception, financial institution can also grant credit to a third party manufacturer
or supplier of goods who does not have export orders in their own name.
In this case some of the responsibilities of meeting the export requirements have been out
sourced to them by the main exporter. In other cases where the export order is divided between
two more than two exporters, pre shipment credit can be shared between them
Quantum of Finance
The Quantum of Finance is granted to an exporter against the LC or an expected order. The only
guideline principle is the concept of NeedBased Finance. Banks determine the percentage of
margin, depending on factors such as:

The nature of Order.

The nature of the commodity.

The capability of exporter to bring in the requisite contribution.

Preshipment Credit in Foreign Currency (PCFC)

3. Authorised dealers are permitted to extend Preshipment Credit in Foreign
Currency (PCFC) with an objective of making the credit available to the exporters at
internationally competitive price. This is considered as an added advantage under
which credit is provided in foreign currency in order to facilitate the purchase of raw
material after fulfilling the basic export orders.
The rate of interest on PCFC is linked to London Interbank Offered Rate (LIBOR).

According to guidelines, the final cost of exporter must not exceed 0.75% over 6
month LIBOR, excluding the tax.
The exporter has freedom to avail PCFC in convertible currencies like USD, Pound,
Sterling, Euro, Yen etc. However, the risk associated with the cross currency
truncation is that of the exporter.
The sources of funds for the banks for extending PCFC facility include the Foreign
Currency balances available with the Bank in Exchange, Earner Foreign Currency
Account (EEFC), Resident Foreign Currency Accounts RFC(D) and Foreign
Currency(NonResident) Accounts.

Forfaiting
Forfaiting is afinancing mechanism that enables a company to convert credit sale to cash sale,
on without recourse basis. Exim bank acts as a facilitator for the Indian exporter, enabling him to
access the services of an overseas agency. Forfaiting derived from the French word a forfait
which means the surrender of rights. Forfeiting is the non recourse discounting of exporting
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 with no
recourse to the exporter or his banker. Forfaiting is a mechanism of financing exports:
1.
2.
3.
4.
5.
6.

By discounting export variables.

Evidenced by bills of exchange or promissory notes.
Without recourse to the seller (viz., exporter)
Carrying medium to long term maturities.
On fixed rate basis (discount)
Upto 100% of the contract value.

9. What is a Letter of Credit? Explain the significance of various types of letter of credits.
(Nov 2013)
Letters of credit (LCs) are one of the most secure instruments available to international
traders. An LC is a commitment by a bank on behalf of the buyer that payment will be made
to the exporter, provided that the terms and conditions stated in the LC have been met, as
verified through the presentation of all required documents. The buyer pays his or her bank to
render this service. An LC is useful when reliable credit information about a foreign buyer is
difficult to obtain, but the exporter is satisfied with the creditworthiness of the buyers
foreign bank. An LC also protects the buyer because no payment obligation arises until the
goods have been shipped or delivered as promised.

Types of Letter of Credit

Revocable / Irrevocable L/C: An irrevocable L/C cannot be cancelled before a specified date
without agreement by all the parties involved in L/C. A revocable L/C can be amended at any
time by the issuing bank. By default, an L/C is irrevocable
Confirmed / Unconfirmed L/C: A confirmed L/C is the L/C for which payment is also
guaranteed by advised Bank.
Transferable / Not transferable L/C : A Transferable L/C is used when the exporter is essentially
a middleman between manufacturer and an importer. The exporter may not want the
manufacturer to know the identity of the importer. In this case the exporter will request for
transferable L/C and uses it to guarantee the payment to the manufacturer.
Back to Back L/C:
If transferable L/C is not possible then back to back L/C can be requested. This involves two
parallel L/C transactions, one involving the exporter and the manufacturer and the other
involving exporter and the importer. These transactions are independent of each other.
Stand by L/C
standby letters of credit can be considered as a slightly modified version of the commercial
letters of credit. Standby letters of credit share the documentary and abstract character of the
commercial letters of credit. The main difference between the standby and commercial letters of
credit is the intention of issuing the credit. Generally, standby letters of credit are used to support
the applicant's position in a contractual relationship where the applicant of the standby letter of
credit is expected to fulfill an obligation. In case of failure of the applicant, the beneficiary of the

standby letter of credit can draw the credit amount from the issuing bank by supplying required
documents. It should be stressed once more that standby letters of credit are separate transactions
from the underlying contracts on which they may be based.
Sight / Deferred payment L/C
Sight L/Cs are payable as soon as the required documents have been presented. Usually seven
days are allowed to permit the banks to examine the documents in detail. A deferred payment
L/C allows the importer to take possession of goods by agreeing to pay the issuing bank or
advising bank at a future date , for example 60 days.
Revolving L/C
Single L/C that covers multiple-shipments over a long period. Instead of arranging a new
L/C for each separate shipment, the buyer establishes a L/C that revolves either in value
(a fixed amount is available which is replenished when exhausted) or in time (an amount
is available in fixed installments over a period such as week, month, or year). L/Cs
revolving in time are of two types: in the cumulative type, the sum unutilized in a period
is carried over to be utilized in the next period; whereas in the non-cumulative type, it is
not carried over.
Red Clause L/C
L/C that carries a provision (traditionally written or typed in red ink) which allows a seller to
draw up to a fixed sum from the advising or paying-bank, in advance of the shipment or before
presenting the prescribed documents. It is normally used only where the buyer and seller have
close working relationship because, in effect, the buyer is extending an unsecured loan to the
seller (and bears the financial risk and the currency risk)
10. Discuss in detail about the role of pre-shipment finance and post shipment finance in
International Trade. (May 2015)
Pre Shipment Finance is issued by a financial institution when the seller want the payment of
the goods before shipment. The main objectives behind preshipment finance or pre export
finance is to enable exporter to:

Procure raw materials.

Carry out manufacturing process.

Provide a secure warehouse for goods and raw materials.

Process and pack the goods.

Ship the goods to the buyers.

Meet other financial cost of the business.

Types of Pre Shipment Finance

Packing Credit

Advance against Cheques/Draft etc. representing Advance Payments.

Preshipment finance is extended in the following forms :

Packing Credit in Indian Rupee

Packing Credit in Foreign Currency (PCFC)

Requirement for Getting Packing Credit

This facility is provided to an exporter who satisfies the following criteria

A ten digit importerexporter code number allotted by DGFT.

Exporter should not be in the caution list of RBI.

If the goods to be exported are not under OGL (Open General Licence), the exporter
should have the required license /quota permit to export the goods.

Packing credit facility can be provided to an exporter on production of the following evidences
to the bank:
4. Formal application for release the packing credit with undertaking to the effect that the
exporter would be ship the goods within stipulated due date and submit the relevant
shipping documents to the banks within prescribed time limit.
5. Firm order or irrevocable L/C or original cable / fax / telex message exchange between
the exporter and the buyer.
6. Licence issued by DGFT if the goods to be exported fall under the restricted or canalized
category. If the item falls under quota system, proper quota allotment proof needs to be
submitted.
The confirmed order received from the overseas buyer should reveal the information about the
full name and address of the overseas buyer, description quantity and value of goods (FOB or
CIF), destination port and the last date of payment.
Eligibility
Pre shipment credit is only issued to that exporter who has the export order in his own name.
However, as an exception, financial institution can also grant credit to a third party manufacturer
or supplier of goods who does not have export orders in their own name.

In this case some of the responsibilities of meeting the export requirements have been out
sourced to them by the main exporter. In other cases where the export order is divided between
two more than two exporters, pre shipment credit can be shared between them
Quantum of Finance
The Quantum of Finance is granted to an exporter against the LC or an expected order. The only
guideline principle is the concept of NeedBased Finance. Banks determine the percentage of
margin, depending on factors such as:

The nature of Order.

The nature of the commodity.

The capability of exporter to bring in the requisite contribution.

Different Stages of Pre Shipment Finance

Appraisal and Sanction of Limits
1. Before making any an allowance for Credit facilities banks need to check the different aspects
like product profile, political and economic details about country. Apart from these things, the
bank also looks in to the status report of the prospective buyer, with whom the exporter proposes
to do the business. To check all these information, banks can seek the help of institution like
ECGC or International consulting agencies like Dun and Brad street etc.
The Bank extended the packing credit facilities after ensuring the following"
1. The exporter is a regular customer, a bona fide exporter and has a goods standing in the
market.
2. Whether the exporter has the necessary license and quota permit (as mentioned earlier) or
not.
3. Whether the country with which the exporter wants to deal is under the list of Restricted
Cover Countries(RCC) or not.
Disbursement of Packing Credit Advance
2. Once the proper sanctioning of the documents is done, bank ensures whether exporter has
executed the list of documents mentioned earlier or not. Disbursement is normally allowed when
all the documents are properly executed.
Sometimes an exporter is not able to produce the export order at time of availing packing credit.
So, in these cases, the bank provide a special packing credit facility and is known as Running
Account Packing.

Before disbursing the bank specifically check for the following particulars in the submitted
documents"
1. Name of buyer
2. Commodity to be exported
3. Quantity
4. Value (either CIF or FOB)
5. Last date of shipment / negotiation.
6. Any other terms to be complied with
The quantum of finance is fixed depending on the FOB value of contract /LC or the domestic
values of goods, whichever is found to be lower. Normally insurance and freight charged are
considered at a later stage, when the goods are ready to be shipped.
In this case disbursals are made only in stages and if possible not in cash. The payments are
made directly to the supplier by drafts/bankers/cheques.
The bank decides the duration of packing credit depending upon the time required by the
exporter for processing of goods.
The maximum duration of packing credit period is 180 days, however bank may provide a
further 90 days extension on its own discretion, without referring to RBI.
Follow up of Packing Credit Advance
3. Exporter needs to submit stock statement giving all the necessary information about the
stocks. It is then used by the banks as a guarantee for securing the packing credit in advance.
Bank also decides the rate of submission of this stocks.
Apart from this, authorized dealers (banks) also physically inspect the stock at regular intervals.
Liquidation of Packing Credit Advance
4. Packing Credit Advance needs be liquidated out of as the export proceeds of the relevant
shipment, thereby converting preshipment credit into postshipment credit.
This liquidation can also be done by the payment receivable from the Government of India and
includes the duty drawback, payment from the Market Development Fund (MDF) of the Central
Government or from any other relevant source.

In case if the export does not take place then the entire advance can also be recovered at a certain
interest rate. RBI has allowed some flexibility in to this regulation under which substitution of
commodity or buyer can be allowed by a bank without any reference to RBI. Hence in effect the
packing credit advance may be repaid by proceeds from export of the same or another
commodity to the same or another buyer. However, bank need to ensure that the substitution is
commercially necessary and unavoidable.
Overdue Packing
Bank considers a packing credit as an overdue, if the borrower fails to liquidate the packing
credit on the due date. And, if the condition persists then the bank takes the necessary step to
recover its dues as per normal recovery procedure.
Preshipment Credit in Foreign Currency (PCFC)
3. Authorised dealers are permitted to extend Preshipment Credit in Foreign Currency (PCFC)
with an objective of making the credit available to the exporters at internationally competitive
price. This is considered as an added advantage under which credit is provided in foreign
currency in order to facilitate the purchase of raw material after fulfilling the basic export orders.
The rate of interest on PCFC is linked to London Interbank Offered Rate (LIBOR). According to
guidelines, the final cost of exporter must not exceed 0.75% over 6 month LIBOR, excluding the
tax.
The exporter has freedom to avail PCFC in convertible currencies like USD, Pound, Sterling,
Euro, Yen etc. However, the risk associated with the cross currency truncation is that of the
exporter.
The sources of funds for the banks for extending PCFC facility include the Foreign Currency
balances available with the Bank in Exchange, Earner Foreign Currency Account (EEFC),
Resident Foreign Currency Accounts RFC(D) and Foreign Currency(NonResident) Accounts.
Banks are also permitted to utilize the foreign currency balances available under Escrow account
and Exporters Foreign Currency accounts. It ensures that the requirement of funds by the account
holders for permissible transactions is met. But the limit prescribed for maintaining maximum
balance in the account is not exceeded. In addition, Banks may arrange for borrowings from
abroad. Banks may negotiate terms of credit with overseas bank for the purpose of grant of
PCFC to exporters, without the prior approval of RBI, provided the rate of interest on borrowing
does not exceed 0.75% over 6 month LIBOR.
Packing Credit Facilities to Deemed Exports

4. Deemed exports made to multilateral funds aided projects and programmes, under orders
secured through global tenders for which payments will be made in free foreign exchange, are
eligible for concessional rate of interest facility both at pre and post supply stages.
Packing Credit facilities for Consulting Services
5. In case of consultancy services, exports do not involve physical movement of goods out of
Indian Customs Territory. In such cases, Preshipment finance can be provided by the bank to
allow the exporter to mobilize resources like technical personnel and training them.

Advance against Cheque/Drafts received as advance payment

6. Where exporters receive direct payments from abroad by means of cheques/drafts etc. the
bank may grant export credit at concessional rate to the exporters of goods track record, till the
time of realization of the proceeds of the cheques or draft etc. The Banks however, must satisfy
themselves that the proceeds are against an export order.
Post Shipment Finance is a kind of loan provided by a financial institution to an exporter or
seller against a shipment that has already been made. This type of export finance is granted from
the date of extending the credit after shipment of the goods to the realization date of the exporter
proceeds.

Types of Post Shipment Finance

The post shipment finance can be classified as :
1. Export Bills purchased/discounted.
2. Export Bills negotiated
3. Advance against export bills sent on collection basis.
4. Advance against export on consignment basis
5. Advance against undrawn balance on exports
6. Advance against claims of Duty Drawback.

1. Export Bills Purchased/ Discounted.(DP & DA Bills)

Export bills (Non L/C Bills) is used in terms of sale contract/ order may be discounted or
purchased by the banks. It is used in indisputable international trade transactions and the proper

limit has to be sanctioned to the exporter for purchase of export bill facility.

2. Export Bills Negotiated (Bill under L/C)

The risk of payment is less under the LC, as the issuing bank makes sure the payment. The risk is
further reduced, if a bank guarantees the payments by confirming the LC. Because of the inborn
security available in this method, banks often become ready to extend the finance against bills
under LC.
However, this arises two major risk factors for the banks:
1. The risk of nonperformance by the exporter, when he is unable to meet his terms and
conditions. In this case, the issuing banks do not honor the letter of credit.
2. The bank also faces the documentary risk where the issuing bank refuses to honour its
commitment. So, it is important for the for the negotiating bank, and the lending bank to
properly check all the necessary documents before submission.

3. Advance Against Export Bills Sent on Collection Basis

Bills can only be sent on collection basis, if the bills drawn under LC have some discrepancies.
Sometimes exporter requests the bill to be sent on the collection basis, anticipating the
strengthening of foreign currency.
Banks may allow advance against these collection bills to an exporter with a concessional rates
of interest depending upon the transit period in case of DP Bills and transit period plus usance
period in case of usance bill.
The transit period is from the date of acceptance of the export documents at the banks branch for
collection and not from the date of advance.

4. Advance Against Export on Consignments Basis

Bank may choose to finance when the goods are exported on consignment basis at the risk of the
exporter for sale and eventual payment of sale proceeds to him by the consignee.
However, in this case bank instructs the overseas bank to deliver the document only against trust
receipt /undertaking to deliver the sale proceeds by specified date, which should be within the
prescribed date even if according to the practice in certain trades a bill for part of the estimated
value is drawn in advance against the exports.
In case of export through approved Indian owned warehouses abroad the times limit for
realization is 15 months.

5. Advance against Undrawn Balance

It is a very common practice in export to leave small part undrawn for payment after adjustment
due to difference in rates, weight, quality etc. Banks do finance against the undrawn balance, if
undrawn balance is in conformity with the normal level of balance left undrawn in the particular

line of export, subject to a maximum of 10 percent of the export value. An undertaking is also
obtained from the exporter that he will, within 6 months from due date of payment or the date of
shipment of the goods, whichever is earlier surrender balance proceeds of the shipment.

6. Advance Against Claims of Duty Drawback

Duty Drawback is a type of discount given to the exporter in his own country. This discount is
given only, if the inhouse cost of production is higher in relation to international price. This type
of financial support helps the exporter to fight successfully in the international markets.
In such a situation, banks grants advances to exporters at lower rate of interest for a maximum
period of 90 days. These are granted only if other types of export finance are also extended to the
exporter by the same bank.
After the shipment, the exporters lodge their claims, supported by the relevant documents to the
relevant government authorities. These claims are processed and eligible amount is disbursed
after making sure that the bank is authorized to receive the claim amount directly from the
concerned government authorities.
Unit III
11. What are the factors which influence the exchange rate? Explain the effects of
exchange rate fluctuations on foreign trade. (Nov 2011)
1. Differentials in Inflation
As a general rule, a country with a consistently lower inflation rate exhibits a rising
currency value, as its purchasing power increases relative to other currencies. During
the last half of the twentieth century, the countries with low inflation included Japan,
Germany and Switzerland, while the U.S. and Canada achieved low inflation only
later. Those countries with higher inflation typically see depreciation in their
currency in relation to the currencies of their trading partners. This is also usually
accompanied by higher interest rates.
2. Differentials in Interest Rates
Interest rates, inflation and exchange rates are all highly correlated. By manipulating
interest rates, central banks exert influence over both inflation and exchange rates,
and changing interest rates impact inflation and currency values. Therefore, higher
interest rates attract foreign capital and cause the domestic currency value gets
appreciated. However, The impact of higher interest rates is mitigated, if inflation in
the country is much higher than in others, or if additional factors serve to drive the
currency down. The opposite relationship exists for decreasing interest rates - that is,
lower interest rates tend to depreciate the domestic currency value and decrease
exchange rates.
3. Differentials in Money supply

If the country or economy prints more money or increases its money supply, then it
will cause inflation. Inflation will depreciate the domestic currency value and
decrease the exchange rates.
4. Current-Account Deficits
The current account is the balance of trade between a country and its trading partners,
reflecting all payments between countries for goods, services, interest and dividends.
A deficit in the current account shows the country is spending more on foreign trade
than it is earning, and that it is borrowing capital from foreign sources to make up the
deficit. In other words, the country requires more foreign currency than it receives
through sales of exports, and it supplies more of its own currency than foreigners
demand for its products. The excess demand for foreign currency lowers the country's
exchange rate until domestic goods and services are cheap enough for foreigners, and
foreign assets are too expensive to generate sales for domestic interests.
5. Public Debt
Countries will engage in large-scale deficit financing to pay for public sector projects
and governmental funding. While such activity stimulates the domestic economy,
nations with large public deficits and debts are less attractive to foreign investors. The
reason? A large debt encourages inflation, and if inflation is high, the debt will be
serviced and ultimately paid off with cheaper real dollars in the future.
In the worst case scenario, a government may print money to pay part of a large debt,
but increasing the money supply inevitably causes inflation. Moreover, if a
government is not able to service its deficit through domestic means (selling domestic
bonds, increasing the money supply), then it must increase the supply of securities for
sale to foreigners, thereby lowering their prices. Finally, a large debt may prove
worrisome to foreigners if they believe the country risks defaulting on its obligations.
Foreigners will be less willing to own securities denominated in that currency if the
risk of default is great. For this reason, the country's debt rating (as determined by
Moody's or Standard & Poor's, for example) is a crucial determinant of its exchange
rate.
6. Terms of Trade
A ratio comparing export prices to import prices, the terms of trade is related to
current accounts and the balance of payments. If the price of a country's exports rises
by a greater rate than that of its imports, its terms of trade have favorably improved.
Increasing terms of trade shows greater demand for the country's exports. This, in
turn, results in rising revenues from exports, which provides increased demand for
the country's currency (and an increase in the currency's value). If the price of
exports rises by a smaller rate than that of its imports, the currency's value will
decrease in relation to its trading partners.
7. Political Stability
Foreign investors inevitably seek out stable countries with strong economic
performance in which to invest their capital. A country with such positive attributes
will draw investment funds away from other countries perceived to have more
political and economic risk. Political turmoil, for example, can cause a loss of
confidence in a currency and a movement of capital to the currencies of more stable
countries.

8. Economic Performance
The country with strong economic performance will attract more foreign capital
which will appreciate the domestic currency value and the exchange rate to rise.
9. Better climate for investment
If the country has a good atmosphere for the foreign companies to start their
business, it will attract more foreign capital and appreciate the domestic currency
value and increase the exchange rate.
10. Less imports
If imports is reduced then, then the demand for foreign currency will be reduced and
in turn it will appreciate the domestic currency value and increase the exchange rate.
12. Describe the tools used to minimize the impact of exchange rate variations. (Nov
2011)
Forward Contract
Forward contract is an agreement to buy or sell an asset at a certain future time for a
certain price. It can be contrasted with a spot contract, which is an agreement to buy or
sell an asset today. Investors or traders may take long or short position. Long position
means buying the underlying asset or short position selling the underlying asset. So in a
particular forward contract, one party takes a long position and another party takes short
position at a specified price for a specified future date. The forward prices for various
duration from today may be increasing or decreasing. If it is increasing, then it is said that
forward market is at premium and if it is decreasing, then the forward market is at
discount. Suppose the spot rate is Rs.42.4488 / $. And the forward rate are as follows

Spot
1 month forward
3 month forward
6 month forward
1 year forward

Bid
42.4488
42.4465
42.4432
42.4395
42.4275

Offer
42.4500
42.4470
42.4445
42.4410
42.4283

The quote is for the number of Indian rupees per US Dollar. The forward market is at
discount since the forward rates are decreasing for spot rate. Forward contracts can be
used to hedge foreign currency risk. Suppose an investor predicts that after 3 months, the
spot rate in market will be 42.44. He can hedge his foreign exchange risk by buying 3

month forward rate in the forward market. So that he can save 32 bips for every dollar if
the dollar rates fall to his prediction.
A forward contract is an agreement to buy or sell an asset on a specified date for a
specified price. One of the parties to the contract assumes a long position and agrees to
buy the underlying asset on a certain specified future date for a certain specified pric e.
The other party assumes a short position and agrees to sell the asset on the same date for
the same price. Other contract details like delivery date, price and quantity are negotiated
bilaterally by the parties to the contract. The forward contracts are normally traded
outside the exchanges.
The salient features of forward contracts are:
They are bilateral contracts and hence exposed to counter-party risk.
Each contract is custom designed, and hence is unique in terms of contract size,
expiration date and the asset type and quality.
The contract price is generally not available in public domain.
On the expiration date, the contract has to be settled by delivery of the asset.
If the party wishes to reverse the contract, it has to compulsorily go to the same counterparty, which often results in high prices being charged.
However forward contracts in certain markets have become very standardized, as in the
case of foreign exchange, thereby reducing transaction costs and increasing transactions
volume. This process of standardization reaches its limit in the organized futures market.
Futures Contract
Like a forward contract, a futures contract is an agreement between two parties to buy or sell an
asset at a certain time in the future for a certain price. Unlike forward contracts, futures contracts
are normally traded on an exchange. To make trading possible, the exchange specifies certain
standardized features of the contract. As the two parties to the contract do not necessarily know
each other, the exchange also provides a mechanism that gives the two parties a guarantee that
the contract will be honored.
One way in which a futures contract is different from a forward contract is that an exact delivery

date is usually not specified. The contract is referred to by its delivery month, and the exchange
specifies the period during the month when delivery must be made. For commodities, the
delivery period is often the entire month. The holder of the short position has the right to choose
the time during the delivery period when it will make delivery. Usually, contracts with several
different delivery months are traded at any one time. The exchange specifies the amount of the
asset to be delivered for one contract and how the futures price is to be quoted. In the case of a
commodity, the exchange also specifies the product quality and the delivery location.
Options
Options are traded both on exchanges and in the over-the-counter market. There are two basic
types of options. A call option gives the holder the right to buy the underlying asset by a certain
date for a certain price. A put option gives the holder the right to sell the underlying asset by a
certain date for a certain price. The price in the contract is known as the exercise price or strike
price; the date in the contract is known as the expiration date or maturity. American options can
be exercised at any time up to the expiration date. European options can be exercised only on the
expiration date itself.4 Most of the options that are traded on exchanges are American. In the
exchange-traded equity options market, one contract is usually an agreement to buy or sell 100
shares. European options are generally easier to analyze than American options, and some of the
properties of an American option are frequently deduced from those of its European counterpart.
It should be emphasized that an option gives the holder the right to do something. The holder
does not have to exercise this right. This is what distinguishes options from forwards and futures,
where the holder is obligated to buy or sell the underlying asset. Note that whereas it costs
nothing to enter into a forward or futures contract, there is a cost to acquiring an option. This is
called option price or Premium.
There are four types of option positions:
1. A long position in a call option.
2. A long position in a put option.
3. A short position in a call option.
4. A short position in a put option.

Types of Traders
Three broad categories of traders can be identified: hedgers, speculators, and arbitrageurs.
Hedgers use futures, forwards, and options to reduce the risk that they face from potential future
movements in a market variable. Speculators use them to bet on the future direction of a market
variable. Arbitrageurs take offsetting positions in two or more instruments to lock in a profit.

Illustrate the impact and effects of exchange rates in Foreign Trade. (May 2013)
Explain Forward, Futures and Currency options and its uses. (May 2013)
What is a currency trade? Explain how currency trade is regulated and monitored. (Nov
2013).
13. Explain and illustrate the purchasing power parity. (May 2013)
Purchasing power parity theory
According to this theory, when the exchange rates are free to fluctuate, the rate of
exchange between two currencies in the long run will be determined by their respective
purchase powers. In the word of Cassel, who found this theory, the rate of exchange
between two currencies must stand essentially on the quotient of the internal purchasing
power of these currencies.
The essence of this theory is while the value of the unit of one currency in terms of
another currency is determined at any particular time by the market conditions of demand
and supply in the long run, that value is determined by the relative values of the two
currencies as indicated by their relative purchasing power over goods and services in
their respective countries. In other words, the rate of exchange tends to rest at that point
which expresses equality between the respective purchasing powers of the two
currencies. This point is called the purchasing power parity.
Thus according to this theory, the exchange rate between one currency and another is in
equilibrium when their domestic purchasing powers at the exchange rate are equivalent.
For example, assume that a particular bundle of goods in India costs Rs.48 and the same
in USA costs $1. Then the exchange rate will be in equilibrium if the exchange rate is
$1= Rs.48.
Once the equilibrium is established, the market forces will operate to restore the
equilibrium if there are some deviations. For example, if the exchange rate changes to
$1= Rs.50 when the purchasing powers of these currencies remain stable, dollar holder
will convert dollars into rupees because by doing so, they can save Rs.2 when they
purchase commodity worth $1. This will increase in the foreign exchange market and
ultimately the equilibrium rate of exchange will be re-established.
A change in the purchasing power of currencies will be reflected in their exchange rates.
The index number of prices may be made use of to determine the purchasing power
parity. If there is a change in prices, the new equilibrium rate of exchange can be found
out by the following formula

ER = Er X Pd / Pf
ER = Equilibrium exchange rate
Er = Exchange rate in the preference period
Pd = Domestic Price index
Pf = Foreign countrys price index.
14. Discuss the various functions of foreign exchange market. (May 2015)
A foreign exchange market performs the following important functions:
Transfer of Purchasing Power
The primary function of a foreign exchange market is the transfer of purchasing
power from one country to another and from one currency to another. The
international clearing function performed by foreign exchange markets plays a
very important role in facilitating international trade and capital movements.
Provision of Credit
The credit function performed by foreign exchange markets also plays a very
important role in the growth of foreign trade, for international trade depends to a
great extent on credit facilities. Exporters may get pre-shipment and postshipment
credit. Credit facilities are available also for importers. The Eurodollar market has
emerged as a major international credit market.
Provision of Hedging Facilities
The other important function of the foreign exchange market is to provide
hedging facilities. Hedging refers to covering of export risks, and it provides a
mechanism to exporters and importers to guard themselves against losses arising
from fluctuations in exchange rates.
Making settlements in foreign exchange:
There are five important methods to effect international payments.
Telegraphic Transfer
By this method, a sum can be transferred from a bank in one country to a bank in
another part of the world by cable or telex. It is, thus, the quickest method of
transmitting funds from one centre to another.
Mail Transfer
Just as it is possible to transfer funds from a bank account in one centre to an
account in another centre within the country by mail, international transfers of
funds can be accomplished by Mail Transfer. These are usually made by air mail.
Cheques and Bank Drafts
International payments may be made by means of cheques and bank drafts. The
latter is widely used. A bank draft is a cheques drawn on a bank instead of a
customer's personal account. It is an acceptable means of payment when the
person tendering is not known, since its value is dependent on the standing of a
bank which is widely known, and not on the credit-worthiness of a I1rl11 or
individual known only to a limited number of people.
Foreign Bill of Exchange

A bill of exchange is an unconditional order in writing, addressed by one person

to another, requiring the person to whom it is addressed to pay a certain sum on
demand or on a specified future date.
There are two important differences between inland and' foreign bills. The date on
which an inland bill is due for payment is calculated from the date on which it
was drawn, but the period of a foreign bill runs from the date on which the bill
was accepted. The reason for this is that the interval between a foreign bill being
drawn and its acceptance may be considerable, since it may depend on the time
taken for the bill to pass from the drawer's country to that of the acceptor. The
second important difference between the two types of bill is that the foreign, bill
is generally drawn in sets of three, although only one of them bears a stamp, and
of course, one of them is paid.
Nowadays, it is mostly the documentary bill that is employed in international
trade. This is nothing more than a bill of exchange with the various shipping
documents-the bill of lading, the insurance certificate and the consular invoiceattached to it. By using this, the exporter can make the release of the documents
conditional upon either (a) payment of the bill, if it has been drawn at sight, or (b)
its acceptance by the importer if it has been drawn for a period.
Documentary (or reimbursement) Credit Under this method, a bill of exchange
is necessarily employed, but the distinctive feature of the documentary credit is
the opening by the importer of a credit in favour of the exporter, at a bank in the
exporter's country.
Discuss the determinants of the prices of Future and Forward Contracts (MAY 2015)
Discuss the role of RBI for regulation and development of foreign exchange market. (Nov
2012)
15. What is a currency trade? Explain how currency trade is regulated and monitored?
The Currency trading market is a multi trillion dollar market where world currencies are
exchanged back and forth on a daily basis. The foreign exchange market (forex, FX, or
currency market) is a global decentralized market for the trading of currencies. This
includes all aspects of buying, selling and exchanging currencies at current or
determined prices. In terms of volume of trading, it is by far the largest market in the
world.
Currency trade is regulated and monitored through FEMA

It permits only authorised person to deal in foreign exchange or foreign security. Such an
authorised person, under the Act, means authorised dealer, money changer, off-shore
banking unit or any other person for the time being authorised by Reserve Bank. The Act
thus prohibits any person who:

Deal in or transfer any foreign exchange or foreign security to any person not
being an authorized person;

Make any payment to or for the credit of any person resident outside India in any
manner;

Receive otherwise through an authorized person, any payment by order or on

behalf of any person resident outside India in any manner;

Enter into any financial transaction in India as consideration for or in association

with acquisition or creation
or transfer of a right to acquire, any asset outside India by any person;

is resident in India which acquire, hold, own, possess or transfer any foreign
exchange, foreign security or any immovable property situated outside India.

The Act regulates two types of foreign exchange transactions, namely 'Capital Account
Transactions' and 'Current Account Transactions'.

According to the Act, 'Capital account transaction' means a transaction which alters the
assets or liabilities, including contingent liabilities, outside India of persons resident in
India or assets or liabilities in India of persons resident outside India, and includes the
following transactions referred in the Act:-

Transfer or issue of any foreign security by a person resident in India;

Transfer or issue of any security by a person resident outside India;

Transfer or issue of any security or foreign security by any branch, office or agency in
India of a person resident outside India;

Any borrowing or lending in rupees in whatever form or by whatever name called;

Any borrowing or lending in rupees in whatever form or by whatever name called

between a person resident in India and a person resident outside India;

Deposits between persons resident in India and persons resident outside India;

Export, import or holding of currency or currency notes;

Transfer of immovable property outside India, other than a lease not exceeding
five years, by a person resident in India;

Acquisition or transfer of immovable property in India, other than a lease not

exceeding five years, by a person resident outside India;

Giving of a guarantee or surety in respect of any debt,obligation or other liability

incurred(i) By a person resident in India and owed to a person resident outside India; or
(ii) By a person resident outside India.

It also defines the term 'current account transaction' as a transaction other than a
capital account transaction and without prejudice to the generality of the foregoing such
transaction includes:- (i) payments due in connection with foreign trade, other current business,
services, and short-term banking and credit facilities in the ordinary course of business; (ii)
payments due as interest on loans and as net income from investments; (iii) remittances for
living expenses of parents, spouse and children residing abroad; and (iv) expenses in connection
with foreign travel, education and medical care of parents, spouse and children.

1 The Act has empowered the Reserve Bank of India (RBI) to specify, in consultation with the
Central Government, the permissible capital account transactions and the limits upto which
foreign exchange may be drawn for such transactions.
2 Any person may sell or draw foreign exchange if such sale or drawal is a current account
transaction.
3 Every exporter of goods shall:- (i) furnish to the Reserve Bank or to such other authority a
declaration in such form and in such manner as may be specified, containing true and correct
material particulars, including the amount representing the full export value (ii) furnish to the
Reserve Bank such other information as may be required by it for the purpose of ensuring the
realization of the export proceeds by such exporter.
4 The Reserve Bank may, cause an inspection to be made, by any officer specially authorized in
writing by it (i) verifying the correctness of any statement, information or particulars furnished
to the Reserve Bank; (ii) obtaining any information or particulars which such authorized person
has failed to furnish on being called upon to do so; (iii) securing compliance with the
provisions of this Act or of any rules, regulations, directions or orders made there under.
If any person contravenes any provision of this Act, / he shall, upon adjudication, beliable to a
penalty.
Unit IV

16. Elaborately deal with the various types of Bill of exchange giving
appropriate examples. (Nov 2011) (Nov 2013)
Bill of exchange
An instrument in writing containing an unconditional order signed by the maker directing a
certain person to pay certain sum of money only to or to the order of a certain person or to the
bearer of the instrument.
Main features of the Bill of exchange

It must be in writing

It must be signed by the maker

It must be unconditional order to pay

The maker must direct a certain person to pay a certain sum of money.

A written, unconditional order by one party (the drawer) to another (the drawee) to pay a certain
sum, either immediately (a sight bill) or on a fixed date (a term bill), for payment of goods and/or
services received. The drawee accepts the bill by signing it, thus converting it into a post-dated
check and a binding contract.
A bill of exchange is also called a draft but, while all drafts are negotiable instruments, only "to
order" bills of exchange can be negotiated. According to the 1930 Convention Providing A
Uniform Law For Bills of Exchange and Promissory Notes held in Geneva (also called Geneva
Convention) a bill of exchange contains: (1) The term bill of exchange inserted in the body of the
instrument and expressed in the language employed in drawing up the instrument. (2) An
unconditional order to pay a determinate sum of money. (3) The name of the person who is to
pay (drawee). (4) A statement of the time of payment. (5) A statement of the place where
payment is to be made. (6) The name of the person to whom or to whose order payment is to be
made. (7) A statement of the date and of the place where the bill is issued. (8) The signature of
the person who issues the bill (drawer). A bill of exchange is the most often used form of
payment in local and international trade, and has a long history- as long as that of writing.
The parties of Bill of exchange
1. Drawer The person who draws / writes the bill is known as drawer.
2. Drawee The person who is liable to pay the amount of bill is known as drawee.
3. Payee The person who receives the amount is known as payee.
Types of Bill of exchange
(a) Sight Bill of Exchange: In this Bill of Exchange, also known as demand Bill of Exchange,
the drawee has to make the payment, on presentation.
(b) Usance Bill of Exchange: In case of Usance or Time Bill of Exchange, payment is to be
made on the maturity date, after a certain period, known as tenor. When the calculation of period
is made with reference to the sight of bill, the bill is known as after sight usance bill.
Sometimes, the maturity date is calculated with reference to the date of bill of exchange, it is
known as after date usance bill.

(c) Clean Bill or Exchange: A clean Bill of Exchange is one when the relative shipping
documents do not accompany with it. In this case, the relative shipping documents i.e. Bill of
Lading is sent directly to the importer to enable him to take delivery of the cargo.
(d) Documentary Bill of Exchange: A documentary Bill of Exchange is one where the relative
shipping documents such as Bill of Lading, marine insurance policy, invoice and other
documents are sent along with the Bill of Exchange. This is the common form in export trade.
The documents are given the bank either for collection or negotiation. In case the importer gets
the documents on acceptance, it is called Documents against Acceptance. If the importer gets the
documents only on payment, it is called Documents against Payment.
After shipment of goods, the exporter draws the bill on the importer or, more frequently, on bank
acting for the importer, as agreed between the exporter and importer. The exporter usually draws
the bill to his own order or that of his bank. Later, he endorses the bill in favor of his bank.
Exporter may request his bank to collect or purchase the bill. In case of purchase of bill, exporter
receives the exports proceeds immediately. In any case, the exporters bank sends the documents
to its branch or correspondents bank in importers place. The bank at that end sends the
intimation of receipt of documents to the importer either for acceptance or payment, dependent
on the nature of bill drawn. In case of Documents Against acceptance, importer accepts the bill
and then only gets title to goods. In case of Documents against payment, importer has to make
the payment for securing delivery of documents

17. What are the documents used in the context of export? Give a brief
account of each document. (Nov 2011) (MAY 2013) (May 2015)
Financial Documents
Bill of exchange
An instrument in writing containing an unconditional order signed by the maker directing a
certain person to pay certain sum of money only to or to the order of a certain person or to the
bearer of the instrument.
Main features of the Bill of exchange

It must be in writing

It must be signed by the maker

It must be unconditional order to pay

The maker must direct a certain person to pay a certain sum of money.

A written, unconditional order by one party (the drawer) to another (the drawee) to pay a certain
sum, either immediately (a sight bill) or on a fixed date (a term bill), for payment of goods and/or
services received. The drawee accepts the bill by signing it, thus converting it into a post-dated
check and a binding contract.
A bill of exchange is also called a draft but, while all drafts are negotiable instruments, only "to
order" bills of exchange can be negotiated. According to the 1930 Convention Providing A
Uniform Law For Bills of Exchange and Promissory Notes held in Geneva (also called Geneva
Convention) a bill of exchange contains: (1) The term bill of exchange inserted in the body of the
instrument and expressed in the language employed in drawing up the instrument. (2) An
unconditional order to pay a determinate sum of money. (3) The name of the person who is to
pay (drawee). (4) A statement of the time of payment. (5) A statement of the place where
payment is to be made. (6) The name of the person to whom or to whose order payment is to be
made. (7) A statement of the date and of the place where the bill is issued. (8) The signature of
the person who issues the bill (drawer). A bill of exchange is the most often used form of
payment in local and international trade, and has a long history- as long as that of writing.
The parties of Bill of exchange
4. Drawer The person who draws / writes the bill is known as drawer.
5. Drawee The person who is liable to pay the amount of bill is known as drawee.
6. Payee The person who receives the amount is known as payee.
Commercial Documents:
Invoices

Pro-forma Invoice: A pro-forma invoice is an invoice sent to the buyer before the shipment,
giving the buyer a chance to review the sale terms (quantity of goods, value, specifications) and
get an import license, if required in their country. It also allows the buyer to work with their bank
to arrange any financial process for payment. For example, to open a Documentary Credit (Letter
of Credit), the buyers bank will use the pro-forma invoice as a source of information. The
exporter/seller should not send their customer a pro-forma invoice unless they fully understand
what they are offering to the buyer. If no changes are required on the pro-forma invoice after the
buyer reviews it, the exporter can simply change its date and title and turn it into a commercial
invoice.

Commercial Invoice: A commercial invoice is prepared by the seller/exporter and addressed to

the buyer/importer, and is one of the first documents prepared when a transaction has been
agreed upon. The invoice identifies the buyer and seller, describes the goods sold and all terms of
sale, including IncoTerms, payment terms, relevant bank information, shipping details, etc. An
invoice may be itemized to show cost of goods, freight, and insurance, or other special handling.
The invoice may be numbered and have multiple purchase order numbers. U.S. Customs does
not actually need a copy of the invoice, unless requested, but the information included is used to
prepare other documents.
Consular invoice: A consular invoice is the commercial invoice stamped or notarized by the
consulate or embassy of the customers country, if required. For example, if one is exporting to
Egypt and the buyer requires a consular invoice, the Egyptian embassy in Mumbai will do this
for a small fee. Usually a freight forwarder will offer this service, but an exporter can send the
original invoice to the consulate, have it notarized/legalized as required, pay the fee, and have the
documents returned or forwarded on. It is important to understand that consular invoices are
required in the buyers country, so one needs to add the time/costs associated with obtaining one
to the price of the goods you are shipping.

Customs Invoice:
The invoice is prescribed by the customs authorities of importing countries and the invoice is
called Customs invoice. This is the requirement in US, Canada and Australia. An exporter can
obtain copies of this invoice from any shop selling government publications and forms.
Legalized invoice
It is the same as consular invoice. This term is in use in countries like Turkey, Liberia, Taiwan,
Latin American countries etc.
Certificate of Origin (C/O): A document prepared by the original manufacturer and certified by
a quasi-official authority - such as a Chamber of Commerce - stating the items country of origin.
Most countries that require a C/O will accept a generic C/O as long as all of the required data
elements are given. However, some countries, like Israel, have a special green C/O form that
must be used. To take advantage of duty free provisions in a U.S. Free Trade Agreement, be sure
to use the particular C/O that addresses the rules of origin criteria for each country.

Certificate of Insurance: This document indicates the type and amount of insurance in force on a
particular shipment for loss or damage while in transit. It is sometimes referred to as Marine
insurance, but may cover the entire voyage.
Packing List: A packing list is prepared by the shipper and is a detailed break down of the items
within a shipment. It may also include any special marks for identification. For example, the
customer may want ABC XX in blue letters on the side of the packaging. For insurance claims
and tracking purposes, it helps to describe what is in each package. The packing list should
also reference the customers purchase order number and destination. Often, a packing list is
taped to palletized cargo or on the main carton/box of a shipment so that the importers customs
agency or any transportation handlers can have easy access to it to know what the goods are and
their destination. The quantity and items listed on the commercial invoice must match with the
packing list, but not necessarily match the pro-forma invoice. Some companies prepare a packing
list that is identical to the commercial invoice, minus the prices and other monetary details.
Certificate of Inspection: Some customers will require a pre-shipment inspection to satisfy
their own requirements or local regulations, according to an industry, government, or carrier
specification. Neutral organizations specialize in these types of certifications, whereby an
inspector checks the goods in question prior to shipment. Sometimes an inspector can look at a
sample, but other times inspection must occur when the goods are packaged to issue a certificate.
Weight Certificate:
Many a time, the shipping lines may ask for certificate of measurement of the volume of the
shipment to determine the amount of freight payable on the shipment. This certificate is issued
by the Indian Chamber of Commerce or any other recognized chamber.
Certificate of Analysis and Quality:
Sometimes importers ask for a certificate regarding chemical analysis of the contents of products
to ensure their quality and grade of items like metallic ores,pigments etc. The exporter can
obtain this certificate from any recognized chemical analyst.
Health Certificate:
In case of export of food stuffs, marine products, hides etc an exporter is required to obtain a
certificate from health / veterinary / sanitary authorities to certify that the goods being exported
are fit for human consumption. This is generally the requirement of the importing countries. The

exporter should check with the importer to know if he / she required this certificate to comply
with his/ her countrys sanitary and phyto- sanitary regulations.
Certificate of Free Sale: This form may be required by the importing country to ensure that the
goods offered for entry comply with domestic requirements for sale in the U.S. It is often
required for agricultural, medicinal, or cosmetic products and can be issued by the VEDP or U.S.
FDA.
Transport Documents
Dock (or Warehouse) Receipt: The dock or warehouse receipt is issued by a warehouse
supervisor or port officer and certifies that the goods have been received by the shipping
company. This document is used to transfer accountability when goods are moved by the
domestic carrier to the port of embarkation and left with the international carrier. At this time, the
carriers Bill of Lading is also signed by both parties and copies are issued accordingly.
Bills of Lading (B/L)
A Bill of Lading is issued by the carrier to the shipper for receipt of the goods, and is a contract
between the owner of the goods and the carrier to deliver the goods. Sometimes the B/L acts as
title to the goods so an Original B/L is issued- usually a set of three. Whoever presents one of
those Original, Negotiable B/L can take possession of the goods. A B/L can be either negotiable
or non-negotiable.
Non-negotiable (or straight) B/L: Indicates that the shipper will deliver the goods to the buyer
and that title of the goods has not been transferred to the shipper (i.e., the buyer or seller owns
the goods while they are being shipped). This type of B/L is often used when payment for the
goods has already been made in advance.
Negotiable (or shippers order ) B/L: Serves as a title document to the goods, issued to the
order of a party, usually the shipper, whose endorsement is required to effect its negotiation. It
can also be issued to the order of the buyers bank as part of a documentary credit/letter of
credit stipulation so that when the buyers bank receives the Original B/L, they can endorse it
over to the buyer at the time of payment for the buyer to clear the goods at customs. Sometimes
the negotiable B/L may be consigned To Order without reference to a company. A negotiable

B/L can be bought or traded while the goods are in transit, whereas a Straight B/L is nonnegotiable and is consigned to the buyer.
The B/L is frequently electronically manifested by the shipping line company using the data sent
by the shipper or its agent. Bills of Lading also include a notify party (usually the buyer or
their agent) so that when the vessel arrives at the port of destination, the carrier can notify the
party that the goods are available, are in need of customs clearing, or are ready for pick up.
Usually the importer can pick up the goods after customs clearance and duties are paid. Freight
Collect means the consignee pays the freight charges as well. Freight Prepaid means the
shipper pays the freight charges, but not customs clearance unless the terms are delivered duty
paid. If payment is due to the exporter before the importer receives the goods, advance
charges can be added to the bill so the importer pays for the goods along with the other charges.
Two checks should be received so the carrier can forward one check to the exporter for the cost
of goods.
Inland Bill of Lading: Issued by the trucking company and/or the railroad line for taking the
goods from the exporters facility to the port of embarkation or consolidation facility.
Ocean Bill of Lading (OBL): The Ocean B/L is an invoice, and may be issued as a clean bill of
lading, meaning the carrier certifies that the goods have been received without visible damage.
An On-Board B/L may be issued when the goods are received into the carriers port facility,
basically confirming the cargo will be sailing.
Combined or Multimodal Transport document
Combined transport document is also known as Multimodal Transport document and is used
when goods are transported using more than one mode of transportation. In the case of
multimodal transport document, the contract of carriage is meant for a combined transport from
the place of shipping to the place of delivery. It also evidence receipt of goods but it does not
evidence on board shipment, if it complies with ICC500, Article 26(a). The liability of the
combined document transport operator starts from the place of shipment and ends at the place of
delivery. This document needs to be signed with appropriate number of originals in the full set
and proper evidence which indicates the transport charges have been paid or will be paid at
destination port. Multi modal transport document would normally show:

That the consignee and the notify parties are as the credit.

The place goods are received, or taken in charges and place of final destination
Whether freight is prepaid or to be collected
The date of dispatch or taking in charge and the on board notation , it must be dated

and signed.
Total number of originals
Signature of the carrier, multimodal transport operator or their agents.

18. Discuss the various procedure and formalities involved in the export
procedure. (may 2013)
Export procedure
1. Receiving an enquiry
An exporter will advertise his product abroad through various marketing
channels
It will generate enquiries from the foreign buyers
2. Scrutinizing the order
The order should be scrutinized with reference to the terms and conditions
of the contract. The exporter should first see if the buyer is from a country
where foreign exchange restrictions are imposed, whether he has acquired
the permission of the competent authority for importing and releasing of
foreign exchange
The terms and conditions in the order may include mode of payment,
delivery schedule, and documents required. Usually required documents
are bill of exchange, commercial invoice, Bill of lading, packing list,
certificate of Orign.
3. Acknowledgement of the order:
The order should be acknowledged if everything is as per decided terms
and conditions. If the importer is an old customer then there will not be
any hitch in confirming the order because credit limits etc. will already be
in operation and he will comply with the conditions of foreign exchange
and import license at the first insurance.
The confirmation of the order should contain the following information
Acknowledging the receipt of the order, The likely dates of dispatch of
goods from the factory and from the seaboard, If there is any variation in
price from the one given in the order by giving sound explanation for the
same, Mode of shipment of the goods, Method of packing, Packing marks
which will be used while sending the goods, the names of the bank which
will be used for collecting the draft.
4. Arranging the goods
A manufacturer exporter will issue an indent to the Factory Manager or
Works manager giving details of goods to be supplied, the time when
goods should be ready and date of shipment etc.

If the importer has given some instructions about the goods then these
should be passed on to the factory manager.
Excise clearance for goods
If the goods are excisable, there are two methods of getting the goods
cleared. One method is that whenever the goods are to be removed for
export, the excise duty is paid by the exporter. Later when the goods are
exported a claim is made for refund of excise duty.
The second method is to till a bond form B-I. The duty is not paid in this
case. The bond is discharged when the goods are exported.
Before removing excisable goods from the factory, each consignment is
presented to the Central Excise Office having jurisdiction over the factory
altogether with an application in form AR-4 for claiming rebate of excise
duty.
Inspection of Goods
The Government of India has introduced a compulsory pre shipment
inspection of selected goods of export in order to ensure their high quality.
Under this scheme, the exporter makes an application in the prescribed
form to the Export Inspection Agency (EIA) with the following
documents: 1. A copy of the commercial invoice 2. A draft for the
necessary fees for inspection. 3. A Copy of the export contract 4. A
declaration of the importers technical specifications of quality or a sample
approved by the importer in support of the declaration of specifications.
Under the new EXIM policy, pre shipment inspection for export houses
stand withdrawn.
Getting Insurance Policy:
After getting a certificate of Inspection the exporter applies for insurance
cover or policy as the case may be. If the importer wants an insurance
policy then it will be for GIF value plus 10% to cover expsenses.
The insurance policy is received in duplicate
Shipment of goods
The exporter has the option of using sea or air route to send the goods. A
decision is taken based on the volume and weight of goods and amount of
freight involved. A number of formalities are to be performed and for this
purpose, the services of clearing and forwarding agents are availed.
The agents are supplied the following documents: commercial invoice,
original export order, original letter of credit, GR1 Form showing
exporters code number, AR 4 form in original and in duplicate, excise
gate pass in original, certificate of inspection where necessary, Declaration
form in Triplicate, Packing and weight lists, Railway receipt.
Preparing shipping bill
On the basis of railway receipt, the clearing and forwarding agent takes
delivery of goods and arranges their storage in a warehouse. The agent
prepares the requisite copies (generally five) of the shipping bill

5.

6.

7.

8.

9.

The shipping bill incorporate the following information: name and address
of the exporter and importer, Port of origin and destination, Number and
mark on packages, Gross and net weight, Description of goods, Real value
The agent presents a copy of the shipping bill to the shed superintendent
of the port trust and obtains a carting order. It enables the agent to cart the
goods to the transit shed for physical examination. The dock appraiser, if
satisfied, makes an Out of charge endorsement on the duplicate copy of
the shipping bill and returns it with other documents. The duplicate copy
of the shipping bill is presented to the preventive officer of the custom
department who endorses it with Let Ship order
10. Obtaining Mate Receipt:
After the clearance of the customs authorities, the cargo is loaded in the
ship. The Mates receipt is signed by the captain of the ship or his agent
indicating that goods have been received on board. The mates receipt is
delivered to the port commissioners shed. The clearing and forwarding
agent pays the dock dues and obtains mates receipt.
The mates receipt is presented to the Preventive officer for certifying the
fact of shipment on all copies of shipping bill and duplicate copy of AR-4
and all other documents which need post shipment endorsement from him.
The mates receipt is presented to the shipping company and requisite
copies of Bill of lading are obtained by the agent.
11. Shipment intimation to the importer
After the receipt of various documents from clearing and forwarding
agents, an intimation of shipment is sent to the importer.
The intimation contains the date of dispatch of goods, name of the ship
etc. The exporter also sends non negotiable copy of the bill of lading,
Master document copy.
12. Presenting documents to the Bank
Once goods have been sent, the exporter should arrange to obtain his
payment for the exports by submitting relevant documents to the bank.
The process of submitting documents and obtaining payments is known as
negotiating the documents.
The bank examines the documents with reference to the terms and
conditions of the original letter of credit. Thereafter, relevant documents
are sent to the banker of the importer by the air mail.

19. What is export certification? Explain its significance. (Nov 2013)

Export Certification: The consumer protection laws of some countries require
mandatory certification of goods and services. The objectives of this certificate is to
secure the safety of consumers life and health , environmental protection and preventing
products like food stufss, consumer goods.

Certificate of Authentication (Apostille): An original document that has been notarized

may require authentication by the Secretary of the Commonwealth. An Apostille
certificate will be issued according to the country (language) of destination, confirming
the status of the notary who has witnessed the original document.
Phytosanitary Certificate: Primarily a document required to import goods into the U.S.,
confirming compliance with phytosanitary safety regarding agricultural and animal health
standards.
Declaration of Dangerous Goods (DGD): A DGD declares the nature, quantity, and
quantity of hazardous materials and reports the proper classification for each item.
ATA Carnet: A Carnet, sometimes referred to as a merchandise passport, is used for
shipping goods to countries on a temporary, duty-free basis only. For a fee, this passport
allows a company to ship needed materials to foreign trade shows or conduct repairs
overseas. Within a year, the materials must return to the U.S. in order to avoid a hefty
fine.
Certificate of Inspection: Some customers will require a pre-shipment inspection to satisfy
their own requirements or local regulations, according to an industry, government, or carrier
specification. Neutral organizations specialize in these types of certifications, whereby an
inspector checks the goods in question prior to shipment. Sometimes an inspector can look at a
sample, but other times inspection must occur when the goods are packaged to issue a certificate.
Weight Certificate:
Many a time, the shipping lines may ask for certificate of measurement of the volume of the
shipment to determine the amount of freight payable on the shipment. This certificate is issued
by the Indian Chamber of Commerce or any other recognized chamber.
Certificate of Analysis and Quality:
Sometimes importers ask for a certificate regarding chemical analysis of the contents of products
to ensure their quality and grade of items like metallic ores,pigments etc. The exporter can
obtain this certificate from any recognized chemical analyst.
Health Certificate:
In case of export of food stuffs, marine products, hides etc an exporter is required to obtain a
certificate from health / veterinary / sanitary authorities to certify that the goods being exported
are fit for human consumption. This is generally the requirement of the importing countries. The

exporter should check with the importer to know if he / she required this certificate to comply
with his/ her countrys sanitary and phyto- sanitary regulations.
20. Write a short notes on the following a) Insurance cover note b) GSPS C) COD form d)
UPCDC norms
a) Insurance Policy / Cover Note: This is a document indicating the Insurance of the Cargo. It is
issued by the insurance company. The difference between the two is that the certificate is just an
evidence of insurance. It does not state the terms and conditions of insurance. The insurance
policy, on the other hand, states the terms and conditions of insurance of the goods.
b) GSPS: The Generalised System of Preferences (known as GSPS for short) is a scheme
whereby a wide range of industrial and agricultural products originating in certain developing
countries are given preferential access to the markets of the European Union.
Preferential treatment is given in the form of reduced or zero rates of customs duties.
The GSP scheme is specifically designed to benefit certain developing countries and integrate
them into the world economy.
Certain products on importation into the EU are eligible for reduced or zero rates of customs
duties provided that they:
are eligible for preference under the GSP scheme
qualify as originating products under the rules of origin set down in the Community Customs
Code Implementing Provisions.
are transported directly from the GSP country to the EU (commonly referred to as the Direct
Transport Rule)
GSP Forms A and Invoice Declarations issued in a GSP Beneficiary country have a period of
validity of 10 months from their date of issue, and they must be presented in support of a claim
to preference within that period. In exceptional circumstances we may accept Forms A and
Invoice Declarations outside their period of validity.
C) COD form: Exports made on value payable and cash on delivery basis by parcel / post have
to be declared on COD form.
D) Uniform Customs and Practices for Documentary Credits Norms (If 4 marks question, write
only four ponts)

1. All documentary credits: UPCDC norms shall apply to all documentary credits where they are
incorporated into the text of the credit. They are also binding all parties unless otherwise expressly
stipulated in the credit.
2. Credit and Contracts: A credit by their nature are separate transactions from the sales or other
contracts on which they may be based and banks are in no way concerned with or bound by such
contracts, even if any reference to such contracts is included in the credit is not subject to claims or
defenses by the applicant resulting from his relationships with the issuing bank or the beneficiary.
3. Credit and Sales In credit operations all parties concerned deal with documents and not with goods,
services and/or other performances to which documents may relate.
4. Complete and Precise: Instructions for the issuance of credit or instructions for an amendment thereto,
shall be complete and precise. In order to guard against confusion and misunderstanding, banks should
discourage any attempt - i. to include excess detail in credit or in any amendment. ii. to give instructions
to issue credit or amendment reference to a previously issued credit where such previous issue of credit
has been subject to accepted or unaccepted amendments.
5. Revocable or Irrevocable: The credit should clearly indicate whether it is revocable or irrevocable. In
the absence of such indication the credit shall be deemed to be irrevocable.
6. Advising Bank: A credit may be advised to a beneficiary through another bank, the Advising bank,
without engagement on the part of the advising bank, but that bank, if it elects to advise the credit, shall
take reasonable care to check the apparent authenticity of the credit which it advises. If the bank elects not
to advise the credit, it must so inform the issuing bank without any delay.
7. Apparent Authenticity: If the Advising Bank cannot establish such apparent authenticity it must
inform, without delay, the issuing bank that it has been unable to establish the authenticity of the Credit.
8. Revocable Credit: A revocable credit may be amended or cancelled by the Issuing Bank at any
moment and without prior notice to the Beneficiary. However, the Issuing Bank must reimburse another
bank with which a revocable Credit has been made available for sight payment, acceptance or negotiation
for any payment, acceptance or negotiation made by such bank prior to receipt by it of notice of
amendments or cancellation, against documents which appear on their face to be in compliance with the
terms and condition of the Credit.
9. Irrevocable Credit: An irrevocable Credit constitutes a definite undertaking of the Issuing Bank,
provided that the stipulated documents are presented to the Nominated Bank or to the Issuing Bank and
that the terms and conditions of the Credit are complied with:
i. if the Credit provides for sight payment to pay a sight,
ii. if the Credit provides for deferred payment to pay on the maturity date(s) determinable in accordance
with the stipulations of the Credit,
iii. if the Credit provides for acceptance: to accept Draft(s) drawn by the Beneficiary on the Issuing Bank
and pay at maturity
10. Confirming Bank: A confirmation of an Irrevocable Credit by another bank (the Confirming Bank)
upon the authorization or request of the Issuing Bank, constitutes a definite undertaking of the
Confirming Bank, in addition to that of the Issuing Bank, provided that the stipulated documents are
presented to the Confirming Bank or to any other Nominated Bank and that the terms and conditions of
the Credit are complied.
11.Types of Credit: All credits must clearly indicate whether they are available by sight payment, by
deferred payment by acceptance or by negotiation. Unless the Credit stipulates that it is available only
with the Issuing Bank, all Credits must nominate the bank (the Nominated Bank) which is authorized to
pay, to incur a deferred payment undertaking, to accept Draft(s) or to negotiate.
12. Teletransmitted and Pre-Advised Credits: i. When an Issuing Bank instructs an Advising Bank by
an authenticated teletransmission to advise a Credit or to amend a Credit, the teletransmission will be
deemed to be the operative Credit instrument or the operative amendment, and no mail confirmation
should be sent.
13. Incomplete or Unclear Instructions: If incomplete or unclear instructions are received to advise,
confirm or amend a Credit, the bank requested to act on such instructions may give preliminary

notification to the Beneficiary for information only and without responsibility. This preliminary
notification should state clearly that the notification is provided for information only and without the
responsibility of the Advising Bank. In any event, the Advising Bank must inform the Issuing Bank of the
action taken and request it to provide the necessary information. The Issuing Bank must provide the
necessary information without delay. The Credit will be advised, confirmed or amended, only when
complete and clear instructions have been received and if the Advising Bank is then prepared to act on the
instructions.
14. Standard for Examination of Documents
Banks must examine all documents stipulated in the Credit with reasonable care to ascertain whether or
not they appear, on their face, to be in compliance with the terms and conditions of the Credit.
Compliance of the stipulated documents on their face with the terms and conditions of the Credit, shall be
determined by international standard banking practice as reflected in these Articles. Documents, which
appear on their face to be inconsistent with one another, will be considered as not appearing on
their face to be in compliance with the terms and conditions of the Credit. Documents not stipulated in the
Credit will not be examined by banks. If they receive such documents, they shall return them to the
presenter or pass them on without responsibility.
15. Force Majeure - Banks assume no liability or responsibility for the consequences arising out of the
interruption of their business by Acts of God, riots, civil commotion, insurrections, wars or any other
causes beyond their control, or by any strikes or lockouts.

Unit V

21. Describe the organizational support extended by the Government of

India to promote export. (Nov 2011)
In India there are a number of organization and agencies that provides various types of
support to the exporters from time to time. These export organizations provides market
research in the area of foreign trade, dissemination of information arising from its activities
relating to research and market studies. So, exporter should contact them for the necessary
assistance.
Export Promotion Councils
1. To act as an interface between the industry and Government of India to formulate export
oriented policies and also create a favourable environment to augment exports of the
respective items from India.
2. to Participate in International exhibitions held abroad and invites overseas delegations to
India to promote our exports and establish long term strategic alliances.
3. Assists its members in locating and pinpointing the sources of requirements. It also helps
to effect a smooth trade deal between buyers and sellers to offer a total service package,
completele free.
4. It is the nodal agency appointed by the Ministry of Commerce and Industry for compliance
of REACH legislation of the European Union.
5. Participates in the Grievance committee meeting organized by DGFT from time to time
and take up issues of the member - exporters connected with customs, central excise, port
authorities etc and try to resolve the same.

6.participates in the review meetings as well as the task force meetings being organized by
the Ministry of Commerce and Industry from time to time to chalk out strategies for
promotion of exports of the items coming under the purview of the council with presentations
covering suggestions / views being received from its members.
7. Prepares the Action Plan for promotion of exports of the items covering Budget proposals
for participation in various international exhibitions /Buyer Seller Meets / being held abroad
as well as in India for the benefit of its members / exporters.
8. Issues recommendation letters to various overseas consulates /embassies in India for issue
of Visas for the member exporters for attending exhibitions / delegations as well as export /
business promotion tours aborad
9.It has been authorised by the Ministry of Commerce and Industry to issue non preferential
certificates of origin to its member exporters for the member exporters for export of their
items to various countries aborad on the condition that the said items are manufactured in
India.
10.It organizes export award function to felicitate outstanding exporters on their excellent
export performance.
In short, it is 'one contact point' for sourcing information on any of the products from India.
Commodity Boards
The board is mainly focusing its activities areas of research, extension, development, quality
upgradation, economic and market intelligence, external and internal promotion and labour
welfare. It also maintains collection, collation and dissemination of statistical data, take steps
to promote marketing and exports of the respective products and undertake labour welfare
activities. There are five statutory commodity boards to enhance exports of the respective
commodities. They are Coffee board, Rubber Board, Tea Board, Tobaco board, spices Board.
Export Development Authority
There are two export development authorities in India. Agricultural and Processed Food
Products Export Development Authority (APEDA) and Marine Products Export
Development Authority (MPEDA). Both have offices all over India. The authority is
responsible for the development of the respective Industry with special focus on respective
exports.
Development authorities have been actively engaged in the development of markets besides
upgradation of infrastructure and quality to promote the export of products. In its endeavour
to promote exports, Export development authorities provide financial assistance to the
registered exporters under its schemes for market development, infrastructure development,
quality development and transport assistance.
APEDA has been entrusted with the responsibility of export promotion and development of
14 agricultural and processed food product groups listed in the Schedule to the APEDA Act.
In addition to this, APEDA has been entrusted with the responsibility to monitor the import
of sugar as well.
Public Sector Undertakings

1. STC (State Trading Corporation) and MMTC (Metals and Minerals Trading
Corporation)
STC has played an important role in countrys economy. It has arranged imports of essential
items of mass consumption (such as wheat, pulses, sugar, edible oils, etc.) into India and
contributed significantly in developing exports of a large number of items from India. The
core strength of STC lies in handling exports/ imports of bulk agro commodities. Over the
years, STC has also diversified into exports of steel, iron ore, molasses and imports of
bullion, hydrocarbons, minerals, metals, fertilizers, petro-chemicals, etc. This has helped
STC achieve high level of performance in the recent years. STC is today able to structure and
execute trade deals of any magnitude, as per the specific requirement of its customers.
Ever since liberalisation of trade policies since 1991, the Corporation carries out most of its
business operations purely on commercial terms in the competitive global trading
environment.
It endeavours constantly to explore emerging opportunities by synergizing and blending them
with its own core competencies, thereby creating new epicentres of growth and expanding its
role as a trade organizer and facilitator. The company has participated in various valuemultiplier initiatives to enhance its future sustainability through the JV and PPP route.
2. PEC Ltd
PEC Ltd (formerly The Project and Equipment Corporation of India Ltd.) was carved out
of the STC in 1971-72 to take over the canalized business of STCs (State Trading
Corporation of India Ltd.) railway equipment division, to diversify into turn-key projects
especially outside India and to aid and assist in promotion of exports of Indian engineering
equipment.
The main functions of PEC Ltd. includes export of projects, engineering equipment and
manufactured goods, defence equipment & stores, import of industrial raw materials, bullion
and agro commodities, consolidation of existing lines of business and simultaneously
developing new products and new markets; diversification in export of non-engineering
items eg. coal and coke, iron ore, edible oils, steel scraps, etc.; and structuring counter trade/
special trading arrangements for further exports.
3. Export Credit Guarantee Corporation of India Limited (ECGC)
ECGC is the premier organization in the country which offers credit risk insurance cover to
exporters, banks, etc. The primary objective of the Corporation is to promote countrys
exports by covering the risk of export on credit. It provides: (a) a range of insurance covers to
Indian exporters against the risk of non-realization of export proceeds due to commercial or
political causes and (b) different types of guarantees to banks and other financial institutions
to enable them to extend credit facilities to exporters on liberal basis.
Other Government Organizations
Federation of Indian Export Organizations (FIEO)
FIEO was set up jointly by the Ministry of Commerce, Government of India and private trade
and industry in the year 1965. FIEO is thus a partner of the Government of India in
promoting Indias exports.
Indian Institute of Foreign Trade (IIFT)
The Indian Institute of Foreign Trade (IIFT) was set up in 1963 by the Government of India
as an autonomous organisation to help Indian exporters in foreign trade management and

increase exports by developing human resources, generating, analysing and disseminating

data and conducting research.
Indian Institution of Packaging (IIP)
The Indian Institute of Packaging or IIP in short was established in 1966 under the Societies
Registration Act (1860). Headquartered in Mumbai, IIP also has testing and development
laboratories at Calcutta, New Delhi and Chennai. The Institute is closely linked with
international organisations and is recognized by the UNIDO (United Nations Industrial
Development Organisation) and the ITC (International Trading Centre) for consultancy and
training. The IIP is a member of the Asian Packaging Federation (APF), the Institute of
Packaging Professionals (IOPP) USA, the Insitute of Packaging (IOP) UK, Technical
Association of PULP AND Paper Industry (TAPPI), USA and the World Packaging
Organisation (WPO).
Export Inspection Council (EIC)
The Export Inspection Council or EIC in short, was set up by the Government of India under
Section 3 of the Export (Quality Control and Inspection) Act, 1963 in order to ensure sound
development of export trade of India through Quality Control and Inspection..
Indian Council of Arbitration (ICA)
The Indian Council for Arbitration (ICA) was established on April 15, 1965. ICA provides
arbitration facilities for all types of Indian and international commercial disputes through its
international panel of arbitrators with eminent and experienced persons from different lines
of trade and professions.
India Trade Promotion Organisation (ITPO)
ITPO is a government organization for promoting the countrys external trade. Its
promotional tools include organizing of fairs and exhibitions in India and abroad, BuyerSeller Meets, Contact Promotion Programmes, Product Promotion Programmes, Promotion
through Overseas Department Stores, Market Surveys and Information Dissemination.
Chamber of Commerce & Industry (CII)
CII play an active role in issuing certificate of origin and taking up specific cases of exporters
to the Govt.
Federation of Indian Chamber of Commerce & Industry (FICCI)
Federation of Indian Chambers of Commerce and Industry or FICCI is an association of
business organizations in India. FICCI acts as the proactive business solution provider
through research, interactions at the highest political level and global networking.
Bureau of Indian Standards (BIS)
The Bureau of Indian Standards (BIS), the National Standards Body of India, is a statutory
body set up under the Bureau of Indian Standards Act, 1986. BIS is engaged in standard
formulation, certification marking and laboratory testing.
Textile Committee
Textile Committee carries pre-shipment inspection of textiles and market research for textile
yarns, textile machines etc.
India Investment Centre (IIC)
Indian Investment Center (IIC) was set up in 1960 as an independent organization, which is
under the Ministry of Finance, Government of India. The main objective behind the setting
up of IIC was to encourage foreign private investment in the country. IIC also assist Indian
Businessmen for setting up of Industrial or other Joint ventures abroad.
Directorate General of Foreign Trade (DGFT)

DGFT or Directorate General of Foreign Trade is a government organization in India

responsible for the formulation of guidelines and principles for importers and exporters of
country.
Director General of Commercial Intelligence Statistics (DGCIS)
DGCIS is the Primary agency for the collection, compilation and the publication of the
foreign inland and ancillary trade statistics and dissemination of various types of commercial
information.

22. Critically appraise the performance of Special Economic Zones taking

into account the economic as well as social impact. (Nov 2011) (Nov
2013)
Special Economic Zones
In order to create an internationally competitive and smooth working environment for exports in
India, the Government of India formulated the Special Economic Zone policy on 1/4/2000.
Under the current foreign trade policy, Special Economic Zone (SEZ) is defined as a specifically
delineated duty free enclave that is deemed to be foreign territory for the purposes of trade
operations and duties and tariffs. Goods and services going into the SEZ area from DTA
(Domestic Tariff Area) are to be treated as exports and goods coming from the SEZ area into
DTA are to be treated as imports.
The following facilities/incentives are available to units in SEZs:

No licence required for import.

Exemption from customs duty on import of capital goods, raw materials,

consumables, spares etc.

Supplies from DTA to SEZ units treated as deemed exports.

Reimbursement of Central Sales Tax paid on domestic purchases.

100% income tax exemption for a block of five years, 50% tax exemptions
for two years and up to 50% of the profits ploughed back for the next three
years under Section 10-A of Income Tax Act.

SEZ units may be for manufacturing, trading or service activity.

SEZ unit to be positive net foreign exchange earner within three years.

100% Foreign Direct Investment in manufacturing sector allowed through

automatic route, barring a few sectors.
Facility to retain 100% foreign exchange receipts in EEFC Account.
Facility to realize and repatriate export proceeds within 12 months.

Re-export imported goods found defective, goods imported from foreign suppliers on
loan basis etc.

Domestic Sales on full duty subject to import policy in force.

No fixed wastage norms.

Full freedom for sub-contracting including sub-contracting abroad.

Job work on behalf of domestic exporters for direct export allowed.

No routine examination by Customs of export and import cargo.

No separate documentation required for Customs and Exim Policy.

In-house customs clearance.

Support services like banking, post office clearing agents etc.
Differences between SEZ and EPZ
SEZ are much larger in geographical size than EPZ.

 SEZ has much larger scope of business than EPZ.

SEZ is found all the countries but EPZ are generally located in under developed or
developing countries.
Infrastructure of SEZ consist of manufacturing units, townships, roads, hospitals, schools
and other services but EPZ are confined to manufacturing establishments.
The benefits of SEZ are more towards the growth of domestic business where as EPZ has
the main objective of developing exports business.
SEZ is open to all fields of business like manufacturing, trading and services but EPZ has
more focus on manufacturing.
Tax benefits in SEZ are much more than in EPZ.
There is very limited accountability of export performance in SEZ but it has great influence
over the business carried out in EPZ as the penalties and duty recovery is imposed in case of
shortfall.
The consumption of raw material that is imported duty free has to be consumed over a
period of 5 years in SEZ but the time period in EPZ is only 1 year.
Laws concerning the certification of the import goods are much more relaxed in SEZ than
in EPZ.
Custom department has less interference in the inspection of the premises in SEZ but EPZ
requires routine customs inspection of cargo.
FDI investment in manufacturing unite does not require sanctions from the board as it is in
EPZ.

23. Explain the scope and functions of EPZ, SEZ and Export House in
export promotions (Nove 2011)
Export promotion EPZ
An Export Processing Zone (EPZ) is a Customs area where one is allowed to import plant,
machinery, equipment and material for the manufacture of export goods under security, without
payment of duty.
Export Processing Zone Scheme
Free Trade Zones (FTZ)/ Export Processing Zones (EPZs) have emerged as an effective
instrument to boost export of manufactured products. The Zones, set up as enclaves separated
from the Domestic Tariff Area (DTA) by physical barriers, are intended to provide an

internationally competitive duty free environment for export production at low costs. The basic
objectives of EPZs are to enhance foreign exchange earnings, develop export-oriented industries
and to generate employment opportunities. The first Zone was set up at Kandla (Gujarat) in
1965, followed by SEEPZ, Mumbai in 1972. Thereafter, four more Zones were set up at NOIDA
(UP), FALTA (West Bengal), Cochin (Kerala), Chennai (Tamil Nadu) in 1984 and at
Vishakapatnam (Andhra Pradesh) in 1989. In 1997, Surat Export Processing Zone came into
existence. With the announcement of Special Economic Zone Scheme in year 2000, the four
Export Processing Zones / FTZ, namely Kandla, SEEPZ, Cochin and Surat have been converted
into Special Economic Zones with effect from 1-11-2000.
2. Each Zone provides basic infrastructural facilities, like developed land, standard design
factory buildings, built-up sheds, roads, power supply and drainage, in addition to a
whole range of fiscal incentives by way of Customs, Excise and Income Tax exemptions.
Customs clearance facilities are offered within the Zone at no extra charge, while
facilities like banking, post office and clearing agencies are also available in the service
centers attached to each Zone.
3. The Export & Import Policy provisions for Export Processing Zones are the same as
applicable to EOUs. Thus, the provisions of EXIM Policy regarding importability of
goods, DTA sale, clearance of samples, sub-contracting, inter-unit transfer, repairs, reconditioning and re-engineering, sale of unutilized material, debonding etc. for EOUs are
applicable to EPZ units.
4. The Development Commissioners appointed by the Ministry of Commerce monitor and
coordinate the functioning of each Zone. The Customs act in close liaison with the
Development Commissioner of the respective Zone in providing bond facilities and for
ensuring that goods imported/indigenously procured duty free are utilised in the
production of goods for export. To enable the EPZs to import/procure locally their
requirement of raw materials, capital goods and office equipment etc. duty free, a number
of Customs and Central Excise notifications have been issued by the Ministry of Finance.
These notifications specify the different categories of items allowed to be
imported/procured duty free as well as the conditions thereof. The permissible item,
cover almost all categories of goods required in connection with the production activity
for export & include capital goods, raw materials, components, packing, consumables,
spares etc.
Special Economic Zones (SEZs)
In order to create an internationally competitive and smooth working environment for exports in
India, the Government of India formulated the Special Economic Zone policy on 1/4/2000.
Under the current foreign trade policy, Special Economic Zone (SEZ) is defined as a specifically
delineated duty free enclave that is deemed to be foreign territory for the purposes of trade
operations and duties and tariffs. Goods and services going into the SEZ area from DTA
(Domestic Tariff Area) are to be treated as exports and goods coming from the SEZ area into
DTA are to be treated as imports.
The following facilities/incentives are available to units in SEZs:

No licence required for import.

Exemption from customs duty on import of capital goods, raw materials,

consumables, spares etc.

Supplies from DTA to SEZ units treated as deemed exports.

Reimbursement of Central Sales Tax paid on domestic purchases.

100% income tax exemption for a block of five years, 50% tax exemptions
for two years and up to 50% of the profits ploughed back for the next three
years under Section 10-A of Income Tax Act.

SEZ units may be for manufacturing, trading or service activity.

SEZ unit to be positive net foreign exchange earner within three years.

100% Foreign Direct Investment in manufacturing sector allowed through

automatic route, barring a few sectors.
Facility to retain 100% foreign exchange receipts in EEFC Account.
Facility to realize and repatriate export proceeds within 12 months.
Re-export imported goods found defective, goods imported from foreign suppliers on
loan basis etc.
Domestic Sales on full duty subject to import policy in force.
No fixed wastage norms.
Full freedom for sub-contracting including sub-contracting abroad.
Job work on behalf of domestic exporters for direct export allowed.
No routine examination by Customs of export and import cargo.
No separate documentation required for Customs and Exim Policy.
In-house customs clearance.
Support services like banking, post office clearing agents etc.

Export House
Trading House, Star Trading House and Super Star Trading House with a view to building
marketing infrastructure and expertise required for export promotion. Such Houses should
operate as highly professional and dynamic institutions and act as important instruments of
export growth.
Eligibility: Merchant as well as Manufacturer exporters, Service providers, Export Oriented
Units (EOUs)/ units located in Export Processing Zones (EPZs)/ Special Economic
Zone(SEZs) /Electronic Hardware Technology Parks (EHTPs)/ Software Technology Parks
(STPs) shall be eligible for such recognition.
Criterion for Recognition The eligibility criterion for such recognition shall be on the basis of
the FOB/NFE value of export of goods and services, including software exports made directly, as
well as on the basis of services rendered by the service provider during the preceding three
licensing years or the preceding licensing year, at the option of the exporter. The exports made,
both in free foreign exchange and in Indian Rupees, shall be taken into account for the purpose
of recognition.

24. Enumerate and discuss about the incentives and assistance rendered by
the Government of India towards the export promotion. (May 2013)
Export incentives
The various incentives/exemptions available to exporters in India in greater details:

Sales Tax/VAT Exemption

Excise Exemption
Duty Drawback
Income Tax Concessions
Import Concessions
Special Economic Zones
Free Trade & Warehousing Zones
Star Export Houses
EOUs, Electronic Hardware Technology Parks, Software Technology Parks,
Bio-Technology Parks

Deemed Exports
Sales Tax/VAT Exemption
VAT at zero rate and full credit of input tax is also available to a dealer directly selling to an
exporter provided the same goods are actually exported.
The exporter needs to provide the following documents as evidence of goods exported:

Copy of export contract or order from a foreign buyer

Copy of the customs clearance certificate

Copy of the commercial invoice issued to the foreign buyer

Copy of Bill of Lading/Air-Way Bill

Proof of payment from the foreign purchaser or letter of credit

Excise Exemption
Excise is a tax on production or manufacture of goods. It is a duty levied on the production of
goods and the liability of payment of excise duty arises immediately upon manufacture of goods.
In India, excise duty is governed by the provisions of the Central Excise Act, 1944.
Exporters can avail excise clearance in the following ways:

Exports under Claim of Excise Rebate

Triplicate

Quadruplicate

Quintuplicate

Sextuplicate

Export under Bond- Under Rule 19 of Central Excise Rules, an exporter is permitted to remove
excisable goods for export without payment of excise duty by executing a bond (legal
undertaking) in favour of the excise authorities for the amount of the excise duty payable.
Duty Drawback
Duty drawback is an incentive given to the exporters of different categories of goods under the
"Customs and Central Excise Duty Drawback Rules, 1995". The duty drawback scheme is
administered by the Directorate of Duty Drawback in the Ministry of Finance, Government of
India.
There are two types of drawback rates:
I.
All Industry Rates
II.
Brand/Special Brand Rates
Income Tax Concessions

Under Section 10A of the Income Tax Act, 1961 undertaking operating from a Special Economic
Zone (SEZ ) that manufactures articles/things or computer software are eligible for deduction of
export profits. For undertaking commencing operation from the notified Special Economic Zones
(SEZs) on or after 1st April, 2002, the tax holiday is available for a total period of seven
assessment years, comprising of a deduction of 100% of export for five years followed by
deduction of 50% of export profits for subsequent two years.
Import Concessions
The Government of India has several schemes in place that allow the exporters to import inputs/
capital goods at concessional rates of import duty. The schemes are discussed below:

Export Promotion Capital Goods Scheme (EPCG)

Duty Free Import Authorisation Scheme

Duty Exemption Passbook Scheme (DEPB)

Duty Free Import Authorization Scheme
This scheme is the latest improvement announced in the Annual Supplement 2006 to the FTP
2004-09. The new scheme seeks to clubs the Advance Licencing scheme and the Duty Free
Replenishment Certificate and were to come into effect from May 1, 2006.
Advance Licence can be issued for the following:
i.
Physical exports
ii.
Intermediate supplies
iii.
Deemed exports
An Advance Licence contains:
a)
The names and description of items to be imported and exported/supplied.
b)
The quantity of each item to be imported or wherever the quantity cannot be
indicated, the value of the item shall be indicated.
c)
The aggregate CIF value of imports.
d)
The FOB/FOR value and quantity of exports/supplies.
Duty Entitlement Passbook (DEPB) Scheme
Under DEPB (Duty Entitlement Passbook) Scheme, exporters are allowed to claim customs duty
credit as a specified percentage of FOB value of exports made in freely convertible currency. The
objective of DEPB is to neutralize the incidence of Customs duty on the import content of the
export product. The neutralization shall be provided by way of grant of duty credit against the
export product.
The scheme launched in 1997 is likely to be replaced by some superior alternative that is being
worked out through a dialogue with the export community. Under the DEPB.
The DEPB is valid for a period of 24 months from the date of issue.
Information Technology

Strong telecommunication backbone

A unique work environment that powers the city

Optic-fibre cable network

On-site sub-station for failsafe power

Rail station onsite to provide for easy cost effective transport options

Pollution-free, clean and green environment

Free Trade and Warehousing Zones

The units functioning out of such zones will be extended:
i.
Income Tax Exemption as per Section 80-IA of the Income Tax Act
ii.
Exemption from Service Tax
iii.
Free foreign exchange currency transactions
iv.
Other benefits as applicable to units in Special Economic Zones
Deemed Exports
i.
Supply of goods against Advance Licence/Advance Licence for annual
requirement.
ii.
Supply of goods to Export Oriented Units.
iii.
Supply of capital goods to holders of licences under the Export Promotion Capital
Goods (EPCG) scheme.
iv.
Supply of goods to projects financed by multilateral or bilateral agencies.
v.
Supply of capital goods, including in unassembled/disassembled condition as
well as plants, machinery, accessories, tools, dyes.
vi.
Supply of goods to any project or purpose in respect of which the Ministry of
Finance.
vii.
Supply of goods to the power projects and refineries not covered in (vi) above.
viii.
Supply of marine freight containers by 100% EOU.
ix.
Supply to projects funded by UN agencies.
x.
Supply of goods to nuclear power projects through competitive bidding as
opposed to International Competitive Bidding.
Deemed exports are allowed the following privileges:

Advance Licence for intermediate supply/deemed export/DFRC/DFRC for

intermediate supplies

Deemed Export Drawback

Exemption from terminal excise duty where supplies are made against
International Competitive Bidding. In other cases, refund of terminal excise
duty
will be given.
Market Assistance
Export Promotion continues to be a major thrust area for the Government. In view of the
prevailing macro economic situation with emphasis on exports and to facilitate various measures
being undertaken to stimulate and diversify the country's export trade, Marketing Development
Assistance (MDA) Scheme is under operation through the Department of Commerce to support
the under mentioned activities:
(i) Assist exporters for export promotion activities abroad
(ii) Assist Export Promotion Councils(EPCs) to undertake export promotion activities for their
product(s) and commodities ;
(iii)
Assist approved organization/trade bodies in undertaking exclusive nonrecurring
innovative activities connected with export promotion efforts for their members ;
(iv) Assist Focus export promotion programmes in specific regions abroad like FOCUS (LAC),
Focus (Africa), Focus (CIS) and Focus (ASEAN +2) programmes ; and
(v) Residual essential activities connected with marketing promotion efforts abroad.

Exporting companies with an f.o.b. value of exports upto Rs. 15.00 crore in the preceding
year will be eligible for MDA assistance for participation in EPC etc. led Trade
Delegations/ BSMs/Trade Fairs/ Exhibitions.
Under Reverse trade visits for prominent delegates and Buyers (one person from each
organization) for participation in buyer cum Seller meets, exhibitions etc. in India from the Focus
Area Regions, exhibitions etc. in India, the foreign delegates/ buyer/journalists would be assisted
in meeting their return air travel expenses in economy excursion class upto the entry point in
India. This would, however, be subject to financing only the well planned participations wherein
the potential of the incoming delegate(s)/buyer(s)/journalist(s) have been screened by the
concerned EPC and territorial division.
EXPORT PROMOTION CAPITAL GOODS SCHEME (EPCG)
1. Zero duty EPCG scheme - it allows import of capital goods for pre production, production and
post production (including CKD/SKD thereof as well as computer software systems) at zero
Customs duty, subject to an export obligation equivalent to 6 times of duty saved on capital
goods imported under EPCG scheme, to be fulfilled in 6 years reckoned from Authorization
issue-date.
2.
The scheme will be available for exporters of engineering & electronic products, basic
chemicals & pharmaceuticals, apparels & textiles, plastics, handicrafts, chemicals & allied
products and leather & leather products
3. Concessional 3% Duty EPCG Scheme - Concessional 3% duty EPCG scheme allows import
of capital goods for pre production, production and post production (including CKD/SKD
thereof as well as computer software systems) at 3% Customs duty, subject to an export
obligation equivalent to 8 times of duty saved on capital goods imported under EPCG scheme, to
be fulfilled in 8 years reckoned from Authorization issuedate.
4. In case of agro units, and units in cottage or tiny sector, import of capital goods at 3%
Customs duty shall be allowed subject to fulfillment of export obligation equivalent to 6 times of
duty saved on capital goods imported, in 12 years from Authorization issue-date.
5. For SSI units, import of capital goods at 3 % Customs duty shall be allowed, subject to
fulfillment of export obligation equivalent to 6 times of duty saved on capital goods, in 8 years
from Authorization issue-date, provided the landed cif value of such imported capital goods
under the scheme does not exceed Rs. 50 lakhs and total investment in plant and machinery after
such imports does not exceed SSI limit.
6.
However, in respect of EPCG Authorization with a duty saved amount of Rs. 100 crores
or more, export obligation shall be fulfilled in 12 years.
7.
Second hand capital goods, without any restriction on age, may also be imported under
EPCG scheme.

8. However, import of motor cars, sports utility vehicles/all purpose vehicles shall be allowed
only to hotels, travel agents, tour operators or tour transport operators and companies
owning/operating golf resorts, subject to the condition that:
(i) total foreign exchange earning from hotel, travel & tourism and golf tourism sectors in current
and preceding three licensing years is Rs.1 .5 crores or more.
(ii) duty saved amount on all EPCG Authorizations issued in a licensing year for import of
motor cars, sports utility vehicles/ all purpose vehicles shall not exceed 50% of average foreign
exchange earnings from hotel, travel & tourism and golf tourism sectors in preceding three
licensing years.
(iii) vehicles imported shall be so registered that the vehicle is used for tourist purpose only. A
copy of the Registration certificate should be submitted to concerned RA as a confirmation of
import of vehicle. However, parts of motor cars, sports utility vehicles/ all purpose vehicles such
as chassis etc. cannot be imported under the EPCG Scheme.
9. Spares for existing plant and machinery shall be allowed to be imported under the EPCG
scheme subject to an export obligation equivalent to 50% of the already existing export
obligation to be fulfilled in 8 years.
Duty Entitlement Pass Book Scheme (DEPB)
1. Objective of DEPB is to neutralize incidence of customs duty on import content of export
product. Component of customs duty on fuel (appearing as consumable in the SION) shall also
be factored in the DEPB rate
2. An exporter may apply for credit, at specified percentage of FOB value of exports, made in
freely convertible currency. In case of supply by a DTA unit to a SEZ unit/ SEZ Developer/CoDeveloper, an exporter may apply for credit for exports made in freely convertible currency or
payment made from foreign currency account of SEZ Unit/SEZ Developer/Co-Developer.
3. Credit shall be available against such export products and at such rates as may be specified by
DGFT by way of public notice. Credit may be utilized for payment of Customs Duty on freely
importable items and/or restricted items. DEPB Scrips can also be utilized for payment of duty
against imports under EPCG Scheme.
Advance License
Advance License is issued for duty free import of inputs, as defined in paragraph 7.2, subject to
actual user condition. Such licenses (other than Advance License for deemed exports) are
exempted from payment of Basic Customs Duty, Surcharge, Additional Customs Duty, Anti
Dumping Duty and Safeguard Duty, if any. However, Advance License for deemed export shall
be exempted from Basic Customs Duty, surcharge and Additional Customs Duty only. Such
licenses are issued to:

Merchant exporter where the merchant exporter agrees to the endorsement of the name(s) of the
supporting manufacturer(s) on the relevant DEEC Book and in the case of deemed exports, sub
contractor(s)whose names appear in the main contract. Such licences and/or materials imported
thereunder shall not be transferable even after completion of export obligation. However, in
exceptional cases, the material may be allowed to be transferred on merits by ALC. Such
licences shall be issued with a positive value addition. However, for exports for which payments
are not received in freely convertible currency, the same shall be subject to value addition as
specified in Appendix- 39 of Handbook (Vol.1) , 1997-2002. Advance Licence shall be issued in
accordance with the Policy and procedure in force on the date of issue of licence and shall be
subject to the fulfillment of a time bound export obligation as may be specified.
Advance License may be issued for intermediate supply to a manufacturer-exporter for the
import of inputs required in the manufacture of goods to be supplied to the ultimate
exporter/deemed exporter holding another Advance License. Advance License can be issued for
deemed export to the main contractor for import of inputs required in the manufacture of goods
to be supplied to the categories mentioned in `paragraph 10.2(b), (c), (d), (e), (f) and (g) of the
Policy. In addition, in respect of supply of goods to specified projects mentioned in paragraph
10.2 (d), (e), (f) & (g) of the Policy, an Advance Licence for deemed export can also be availed
by the sub-contractor of the main contractor to such project. Such licence for deemed export can
also be issued for supplies made to United Nations Organisations or under the Aid Programme of
the United Nations or other multilateral agencies and paid for in foreign exchange.

25. What are the different categories of Export Houses? Explain with
suitable examples. (Nov 2013).
Trading House, Star Trading House and Super Star Trading House with a view to building
marketing infrastructure and expertise required for export promotion. Such Houses should
operate as highly professional and dynamic institutions and act as important instruments of
export growth.
Eligibility: Merchant as well as Manufacturer exporters, Service providers, Export Oriented
Units (EOUs)/ units located in Export Processing Zones (EPZs)/ Special Economic
Zone(SEZs) /Electronic Hardware Technology Parks (EHTPs)/ Software Technology Parks
(STPs) shall be eligible for such recognition.
Criterion for Recognition The eligibility criterion for such recognition shall be on the basis of
the FOB/NFE value of export of goods and services, including software exports made directly, as
well as on the basis of services rendered by the service provider during the preceding three
licensing years or the preceding licensing year, at the option of the exporter. The exports made,
both in free foreign exchange and in Indian Rupees, shall be taken into account for the purpose
of recognition.

The level of export performance for the purpose of recognition shall be as per the table below:

Category

Average FOB
value during
the preceding
three
licensing
years, in
Rupees

FOB value
during the
preceding
licensing year,
in Rupees

Average NFE
earnings made
during the
preceding three
licensing years ,
in Rupees

NFE earned
during the
preceding
licensing year,
in Rupees

(1)

(2)

(3)

(4)

(5)

EXPORT HOUSE

15 crores

22 crores

12 crores

18 crores

TRADING HOUSE

75 crores

112 crores

62 crores

90 crores

STAR TRADING
HOUSE

375 crores

560 crores

312 crores

450 crores

SUPER STAR
TRADING HOUSE

1125 crores

16 80 crores

937 crores

1350 crores

Calculation of Net Foreign Exchange : For the purpose of calculation of the Net Foreign
Exchange earned on exports, the value of all the licences including the value of 2.5 times of the
DEPB Credit earned/ granted and the value of duty free gold/ silver/ platinum taken from
nominated agency or from foreign supplier shall be deducted from the FOB value of exports
made by the person. However, the value of freely transferable SIL, EPCG licences and the value
of licences surrendered during the validity of licence shall not be deducted.
Weightage to exports: For the purpose of recognition, weightage shall be given to the following
categories of exports provided such exports are made in freely convertible currency:

Triple weightage on FOB or NFE on the export of products manufactured and exported by units
in the Small Scale Industry (SSI)/Tiny sector/Cottage Sector and double weightage on FOB or
NFE to merchant exporter exporting products reserved for SSI units and manufactured by units
in the Small Scale Industry (SSI)/Tiny sector/Cottage Sector. The facility under this paragraph
shall not be available to units exporting gems & jewellery products.
Triple weightage on FOB/NFE on the export of products manufactured and exported by the
handlooms and handicraft sector and double weightage on FOB/NFE to merchant exporter
exporting products manufactured by the handlooms and handicraft sector (including handloom
made silk products), hand knotted carpets, carpets made of silk
Double weightage on FOB or NFE on the export of fruits and vegetables, floriculture and
horticulture produce/ products, project exports.
Double weightage on FOB or NFE on export of goods manufactured in North Eastern States;
Double weightage on FOB or NFE on export to such countries as listed in Appendix-33 of the
Handbook (Vol.1).
The manufacturing units registered with KVIC or KVIBs shall be granted triple weightage on
FOB or NFE on the export of products manufactured and exported by them with effect from 15th
August, 97. However, such units shall not be entitled for the weightage given in sub paragraph
(a) and (b) above.
Double weightage on FOB or NFE on exports made by units having ISO 9000(series) or IS/ISO
9000 (series) or ISO 14000 (series) certification.
Double weightage on FOB or NFE on exports of bar coded products.
Double weightage on FOB or NFE on export of goods manufactured in Jammu and Kashmir
Validity Period: Status Certificate shall be valid for a period of three years starting from 1st
April of the licensing year during which the application for the grant of such recognition is made,
unless otherwise specified. On the expiry of such certificate, application for renewal of status
certificate shall be required to be made within a period as prescribed in the Handbook (Vol.1).
During the said period, the status holder shall be eligible to claim the usual facilities and benefits,
except the benefit of a SIL.
Manufacturing companies or Industrial houses : Manufacturing companies or Industrial
houses with an annual manufacturing turnover of Rs.300 crores and Rs.1,000 crores in the
preceding licensing year shall be recognised as Star Trading House and Super Star Trading
House respectively on signing a Memorandum of Understanding in the prescribed form for
achieving physical exports as currently prescribed for these categories over a period of next three
years. Similarly, companies/project exporters, domestic service providers with annual turnover of
Rs.100 crores or more in the preceding licensing year shall be recognised as Export House and
International Service Export House respectively on signing a Memorandum of Understanding in

the prescribed form for achieving physical exports as currently prescribed for this category over
a period of next three years.
Golden Status Certificate : Exporters who have attained Export House, Trading House, Star
Trading Houses and Super Star Trading Houses status for three terms or more and continue to
export shall be eligible for golden status certificate which would enable them to enjoy the
benefits of status certificate irrespective of their actual performance thereafter as per the
guidelines issued in this regard from time to time.