COMPANY

PROFILE
L/C in Lark Engineering Co. ( India ) Private Limited
In this system, first corporate centralized market Lark Engineering department advices a branch
to make sale of Lark Engineering through letter of credit In case of those customers who are
either new for a organization whose credit worthiness is not satisfactory according to market
research report
NOTE
All L/C of Lark Engineering division is deal by State bank of Patiala
Thereafter on the basis of instructions sent by CMY department, the branch advise the
customers to open the L/C with the bank. Some of the common points stated in the L/C are
mentioned below:
 Prorate shipment
 Transshipment
 Shipment date
 Expiry period of L/C
 Usance period
 Rate of interest for the usance period
 Other conditions as per mutual consent between buyer and seller

After opening the L/C concerned unit makes the sale to the customers as per agreed terms
and conditions stipulated in the L/C. Then concerned unit sent the invoice and other papers
to the centralized accounting cell for lodging the documents with the bank.. This documents
consists of
 Bill of exchange
 Original invoice
 Original G/r copy
 Packing list
 Copy of L/C
On the Due date mentioned in the L/C, we receive the realization advice from the bank, where
we have lodged the document drawn under L/C. after getting the advice from the bank, we
credit the customers with the amount we have realized

DOCUMENTS NEED FOR L/C

Letter of credit documents are required to be arranged in the following series:

By seller (duplicate documents)
 Bill of exchange
 Bill

2
 Goods lorry receipt
 Party acceptance letter
 Debit note
 Packing list
 Original letter of credit
By seller’s bank (Duplicate documents)
 Letter
 Bill of exchange
 Bill
 Goods lorry receipt
 Party acceptance letter
 Debit note
 Packing list
 Letter of credit (duplicate)
By buyer’s bank (Original documents)
 Bill of exchange
 Bill
 Goods lorry receipt
 Party acceptance letter
 Debit note
 Packing list
 Letter of credit (DUPLICATE)
Negotiation of letter of credit
NEGOTIABLE means the ability to be sold or transfers to another party as a form of payment.
Something which is negotiable is transferable by endorsement and delivery.
(When documents come back from bank).
JOURNAL ENTIRES
IN THE BOOKS OF LARK ENGINEERING CO. ( INDIA ) PRIVATE LIMITED AT THE
YEAR ENDED MARCH 31ST 2….

How interest is calculated?

Total bill of exchange amount * rate of interest* number of days in Bill of exchange.
Rate of interest is 11.5% (according to STATE BANK OF PATIALA)
Number of days is calculated as per the conditions laid down IN L/C AGREEMENT
3
 Fully payment but late payment (overdue interest charged by bank)
JOURNAL ENTIRES
IN THE BOOKS OF LARK ENGINEERING CO. ( INDIA ) PRIVATE LIMITED AT THE
YEAR ENDED MARCH 31ST 2….

PARTICULARS L.F DEBIT(RS) CREDIT (RS)

Party a/c …………………………..DrTo bank XXXX XXXX
( BEING AMOUNT OF OVERDUE INTEREST DEBITED
TO PARTY ACCOUNT AGST IBD NO. ON DATED ……..)

4
 About Lark Engineering Co. ( India ) Private Limited Group
Lark Engineering made a humble beginning in 1989 when it commenced manufacturing
agriculture machinery. It was the year 1994 when it entered into Feed machinery market and
manufactured its first small 2 H.P. Hammer mill. Over a period the company has come a long
way and today we have 2 Patents, More than 1300 Hammer Mills, More than 850 Mixers, More
than 800 Mash feed Projects, More Than 150 Regular Clients of Pellet Die, More than 75 Pellet
Feed Projects, More than 3200 Satisfied Customers all over the country and abroad.
Vision
Lark will strive hard to deliver energy saving solutions to become the World's leading
company in manufacturing of Feed Machines.
Values
World Class Standards; Innovation and Creativity; Honesty and Integrity; Institutional
Building; Caring for People; Contribution to society
Mission
Right from its beginning, Lark Engineering has a clearly defined mission: to innovate
and produce the best quality highly energy efficient machineries and related parts for
maximizing productivity.
In moving towards these objectives, Lark Engineering Company (INDIA) has extended
its role from the narrow confines of a machinery supply company to a solution
providing company and a preferred partner, through operation of high value for
customer.
HISTORY
1994
Manufactured its first Half Screen Hammer mill
1996
Manufactured complete Mash Feed Plant including Vertical and Horizontal Mixer
1999
Expanded our manufacturing area 2000 sq yards
2002
Exported first Mash feed plant to Nigeria.
2005
Supplied First 100 TPD Pellet plant to M/s Anmol Feeds , Bhiwadi ( Rajasthan )

5
2006
Supplied First 200 TPD Pellet plant to M/s Shri Krishan Kirpa Feeds , Panipat ( Haryana)
Expanded our manufacturing area 3700 sq yards
2007
Applied two patents on Hammer mill & Double ribbon mixer
2008
Supplied Fully Automatic Computerized Feed Mill 200 TPD to Unnat Feeds, Panipat
(Haryana)
2009
Started in house Manufacturing of Gun –Drilled Pellet Dies.
2011
Supplied First Expandable 400 TPD Fully Computerized Plant.
2012
Expanded Gun Drilling Facility with 6 Spindle Machine.
2013
Supplied First Pellet Feed Plant Outside India.
2016
Patent on Hammer Mill Granted.
2017
Expanded our manufacturing area 10,000 sq yards. Started Vacuum Heat Treatment Plant. First
& Only Manufacturer in India to supply 1300 mm OD Pellet Die. Installed Laser Cutting
Machine.
2018
Revenue of sale crosses Rs. 500 Million.

Job with Lark Engineering

Creating “A Perfect Climate” for customers and employees is one of our main goals at Lark
Engineering. We pride ourselves on being a reliable and fair employer who is aware of its
responsibility to all employees.
At Lark Engineering we work with pride and passion to design and build tailor-made machines
and projects for every specific situation. We offer a wide variety of roles and believe in offering
our employees the opportunity to develop themselves.
A career with Lark Engineering offers employees considerable opportunities to broaden their
work assignments and develop in their professional roles A large number of internal and
6
external options for further education and training are therefore our basis for interesting
perspectives and promising career opportunities. This is what has transformed a mid-size
company into a successful global player.
Our company is still expanding and we upload regularly vacancies on our website. Visit our
website every now and then or send an open application by e-mail to hr@larkenggco.com
Quality Assurance
We are committed to provide products & services meeting or exceeding customer's
expectations.
Further to the full satisfaction of customers Lark Engineering Company (India) became
an ISO 9001:2015 Company , first in its field in India and follows TQM ( Total Quality
Management ) for all its products.
In transitiaity the Quality policy into action , we have developed a series of Control &
Monitoring Systems which constantly evaluate each step of process , throw up areas of
Technological Deficiencies thus highlighting areas for improvements and Up gradation.

7
Quality Certificates

Disclaimer
Lark engineering provides general information about its products & services. The information
contained in this website is for general information purpose only. We make no representations
or warranties of any kind, express or implied, about the completeness, accuracy, reliability,
suitability or availability with respect to the website or the information, products, services, or
related literature contained on the website for any purpose. Any reliance you place on such
information is therefore strictly at your own risk.
The information posted in blogs and consultation link is based on data collected from our
existing customers & internet sources and is only for reference purpose. In no event Lark will
be liable for any loss or damage, arising in connection with, the use of this Website Content.
Through this website you are able to link to other websites which are not under the control of
Lark Engineering, We have no control over the nature, content and availability of those sites.
The inclusion of any links does not necessarily imply a recommendation or endorse the views
expressed within them.

8
Every effort is made to keep the website up and running smoothly. However, Lark Engineering
takes no responsibility for, and will not be liable for, the website being temporarily unavailable
due to technical issues beyond our control.

CENTRALISED ACCOUNTING SYSTEM

Centralized Accounting System means the accounting system, which is maintained centrally
for the units or branches located at different locations. With this system, the company can
maintain the accounts for the different units at the head office or the desired place where ever
they want to keep those.

Accounts Department

Accounts Payable Accounts Receivable

ACP ACR

Business Planning Exports Import Cell

Control System EXIM Cell
BPCS

9
 ACCOUNTS RECEIVABLE OVERVIEW

Accounts Receivable is the amount owed to a company from customers who have purchased
goods or services on credit. ,Account Receivable is a multi-company and open item debtors
system and is fully integrated with Configurable Enterprise Accounting (General Ledger).
Customer accounts can be maintained for one or multiple companies. Every invoice or payment
transaction can be stored separately, enabling individual payments to be applied against
individual invoices for the customer. Unpaid or partially paid invoices remain on file until paid
or written off. Accounts Receivable collects and reports information to assist in collecting
receivables, assessing credit and reducing bad debt. It generates an audit report during each
transaction posting session indicating that all transactions are posted during the session.

ACR application consists of following applications:

ACR Setup - This includes defining various types of system parameters and master files
required for implementation of BPCS ACR module.

ACR Processing – This includes on-line data entry/maintenance related to customer payments,
debit and credit memos. It generates an audit report during each transaction posting session
indicating that all transactions are posted correctly during the session.

ACR Reports and Inquires – This includes aging, standard receivable reports and inquiries
to assist in managing Accounts Receivable operations effectively.

10
 Process Flow

ACR Cash &

Memo Posting Event
Setup Processing
,Bank Payment
& Debit Credit
Memos

Configurable
Ledger
ACR
Account Reports
Inquiry

Manual Part -2 covers the ACR application and is divided into following chapters

ACR Setup
This chapter describes in detail various setup for system parameters and master files required for
implementation of BPCS ACR module. These are explained as below.

Company Master – Company master application is used to define or maintain the company
information. The Company master contains the following information:

i. Company Number – It is a two digit numeric code.

ii. Company Name
iii. Address
iv. Currency Code
Every customer must have a default company number. In Lark Engineering Co. ( India )
Private Limited setup following company codes are being used

Customer Terms - It is a two character alphanumeric code and is used to compute the due date
for an invoice. The invoice due date is calculated from the invoice date. In Lark Engineering Co.
( India ) Private Limited setup following are some examples of term codes being used and the
complete list is available in the system.

Bank Code – It is a three character alphanumeric code used along with company and currency to
define a unique bank account code. At least one valid bank code must be setup before issue any
cash payment. In Lark Engineering Co. ( India ) Private Limited setup following are some
examples of bank codes being used and the complete list is available in the system.

11
Document Sequence

Document Prefix - It is a two character alphanumeric code assigned to different A/R transactions
like payment, debit memo and credit memo. This is used to group customer transactions on
different parameters like company name, unit name and type of transaction. Document Sequence
- It is a sequence number automatically generated by the system for every document prefix.

Customer Master – It is a six digit alphanumeric code used for unique identification
of a customer. This file contains

 Company code
 Address
 Phone Number
 Fax Number
 Customer Type
 Payment type
 Term Code
 Credit Days
 Credit Limit
 Document Prefix

ACR Processing
Here we will describe in detail the steps required to process following types of transactions
available in Accounts Receivable Application.

 Create On-account payments

 Apply On-account payments to existing invoices
 Apply Payments to existing invoices
 Create Credit Memo (without any reference to existing invoice)
 Apply Credit Memo to existing invoices
 Create Credit Memo against existing invoices
 Create Debit Memo (without any reference to existing invoice
 Apply Debit Memo to existing invoices
 Create Debit Memo against existing invoices
 Convert initial open invoices to BPCS system.
 Maintain Customer Invoice

12
 ACR REPORTS

Report Name
 Customer Outstanding Unit Wise
 CMY Customer Outstanding Exception Report
 Payment not received against Invoices
 Customer Outstanding Invoice Wise (buckets)
 Collection breakup summary
 Customer outstanding (cmy)
 Customer outstanding prefix wise as on date
 Zone/ agent wise customer wise outstanding
 Product wise outstanding
 Customer wise invoice details
 Sales tax return (within state & out of state), bt, consignment agents
 Interest calculation
 Customer wise balance confirmation letter
 Cash receipt journal
 Account statement
 Aged trial balance- company
 Salesman/ customer wise outstanding
 Customer/invoice wise outstanding
 Category/customer/invoice wise outstanding
 City/customer/invoice wise outstanding
 Salesman/customer/invoice wise outstanding
 Category/customer wise outstanding
 Sister concern wise outstanding

13
 LARK ENGINEERING OPERATIONS

The unique combination of man & machine, competing & supplementing each other with
continuos increase in productivity has enable LARK ENGINEERING CO. ( INDIA )
PRIVATE LIMITED to dexterously ripe the fruit of economies of scale & process variety of
raw material required for variety of end products to textiles.
Evenness results falls in 5% to 15% of user standards achieved through

Proper selection of raw materials

World class Pre spinning and Spinning Facilities

Techincal Know How

Human Skills

100% Quality Assurance System

14
ACCOUNTING PRECUDURE FOR CUSTOMER COLLECTION
(LARK ENGINEERING S)
There are three types of collections
 Domestic collections
 Collection under CMS
 Collection through letter of credit L/C

DOMESTIC COLLECTION
Domestic collection means collection, which are collected by Ludhiana branch and corporate
centralized market Lark Engineering s department. in this system they collect the cheque or
demand draft from the Lark Engineering s customers and handed over it over to the centralized
accounting cell for the depositing the same in to the bank on daily basis. After receiving all
cheque on a particular day the e centralized accounting cell deposit the instruments in to the
bank for clearing.
After depositing the collections into the bank, the ACR section account for the same in
respective customer’s accounts on basis of advise sent to bank on day -to -day basis.

CASH MANAGEMENT SERVICES

Cash management means the proper use of an entity’s cash resources . it serves as a means to
keep an organization functioning by making th best use of cash or liquid resources of the
organization . at the same time the organization have the responsibility to use timely , reliable
and comprehensive financial information system .
Cash management helps the organization in:
 Eliminating idle cash balances
 Monitoring exposure and reducing the e risk
 Ensuring timely deposit of collections
 Properly timely the disbursements

COLLECTION THROUGH LETTER OF CREDIT (L/C)

A letter of credit is a document issued mostly by financial institutions which usually provides
an irrevocable payment undertaking to a beneficiary against complying documents as stated in
the credit.

15
INTRODUCTION
TO
TOPIC

16
INTRODUCTION TO TOPIC
I had the opportunity to take up the Internship Project at Lark Engineering Co. ( India ) Private
Limited textiles limited . During the project I had the privilege of being guided by Mr. Ajay
Sharma, Executive in Finance department.
Lark Engineering Co. ( India ) Private Limited, a household name in Northern India, has carved
out a niche for itself in textile industry. The Lark Engineering Co. ( India ) Private Limited
group was setup in 1962 by late Lala Rattan Chand Oswal, father of present Chairman cum
Managing Director, Sh. S.P. Oswal. Lark Engineering Co. ( India ) Private Limited aims to be
world class textile organization producing diverse range of products for the global textile
market. Lark Engineering Co. ( India ) Private Limited seeks to achieve customer delight
through excellence in manufacturing and customer service based on creative combination of
state-of-the-art technology and human resources.
My project is study of inland bill discounting under letter of credit of Lark Engineering
division Of Lark Engineering Co. ( India ) Private Limited textiles limited.
The study was conducted at the commercial department of textiles limited under Account
Receivable Department. The project was of 6 weeks duration. During the project interviewed
the executives & staff to collect the data, & also made use of company records & annual reports.
The data collected were then compiled, tabulated and analyzed.
The objective of my internship was the knowledge of sale under letter of credit of Lark
Engineering customers and to operate the working capital cycle of the management.
LC is a very important facet of financial management due to:
 Investments in current assets represent a substantial portion of total investment.
 Investment in current assets & the level of current liabilities have to Be geared quickly
to change sales.
Some the points to be studied under this topic are:
 How much cash should a firm hold?
 What should be the firms credit policy?
 How to & when to pay the creditors of the firm?
 How much to invest in inventories?
By studying about the company s different areas I came to know
certain things like:
 Acid test ratio is more than one but it does not mean that company has excessive liquidity.
 Creditors turnover ratio also improved so it is better for company

17
 Inventory turnover ratio is improving from 2006-7 to 2007-08, which means inventory is
used in better way so it is good for the company.

A study of letter of credit deals with studying and understanding the Letter of credit, different
fields of letter of credit and different types of L/C charges namely L/C Advising charges, L/C
Amendment charges and discrepancy charges and calculating saving potential and making
recommendations.
A letter of credit (LC) is a binding document that a buyer can request from his bank in order to
guarantee that the payment for goods will be transferred to the seller. Basically, a letter of
credit gives the seller reassurance that he will receive the payment for the goods.
By studying the LC of Lark Engineering division I came to know
 All the dealing of LC is centralized of Lark Engineering customers.
 It reduces the credit risk of company
 It even reduces the payment delays
 It increase the liquidity position of company

LETTER OF CREDIT

The English name “letter of credit” derives from the French word “accreditif”, a power to do
something, which in turn is derivative of the Latin word “accreditivus”, meaning trust.
A letter of credit is basically a document issued by a bank guaranteeing a client's ability to pay
for goods or services. A bank or finance company issues a letter of credit on behalf of a buyer,
authorizing the seller to obtain payment within a specified timeframe once the terms and
conditions outlined in the letter of credit are met. The letter of credit acts like an insurance
contract for both the buyer and seller and practically eliminates the credit risk for both parties,
while at the same time reducing payment delays. A letter of credit provides the seller with the
greatest degree of safety when extending credit. It is useful when the buyer is not well known
and when exchange restrictions exist or are possible.
The LC can also be the source of payment for a transaction, meaning that a will get paid by
redeeming the letter of credit. Letters of credit are used primarily in international trade
transactions of significant value, for deals between a supplier in one country and a customer in
another. The parties to a letter of credit are usually a beneficiary who is to receive the money,
the issuing bank of whom the applicant is a client, and the advising bank of whom the
beneficiary is a client. Almost all letters of credit are irrevocable, i.e., cannot be amended or

18
canceled without prior agreement of the beneficiary, the issuing bank and the confirming bank,
if any. In executing a transaction, letters of credit incorporate functions common Traveler's
cheques.

FROM ABOVE WE CAN CONCLUDE LETTER OF CREDIT IS

A letter of credit is a document issued mostly by financial institutions which usually provides
an irrevocable payment undertaking to a beneficiary against complying documents as stated in
the credit.
Once the beneficiary or a presenting bank acting on his behalf, makes a presentation to the
issuing bank or confirming bank, if any, within the expiry date of L/C, comprising documents
complying with the terms and conditions of the L/C, the applicable UCP. And international
standard banking practices. The issuing bank or confirming bank, if any, is obliged to honor
irrespective of any instructions from the applicants to the contrary.

Elements of a Letter of Credit

 A payment undertaking given by a bank (issuing bank)

 On behalf of a buyer (applicant)
 To pay a seller (beneficiary) for a given amount of money
 On presentation of specified documents representing the supply of goods
 Within specified time limits
 Documents must conform to terms and conditions set out in the letter of credit
 Documents to be presented at a specified place

PARTIES TO AND ASSOCIATED WITH THE LETTER OF CREDIT

1. Applicant
The applicant is the party who requests and instructs the issuing bank to open a letter of credit
in favor of the beneficiary. The applicant usually is the importer or the buyer of goods and/or
services. The applicant can also be another party acting on behalf of the importer, such as a
confirming house. The confirming house is equivalent to a buying office, it acts as an
intermediary between buyer and seller, and it can be located in a third country or in the seller’s
country.

19
2.Beneficiary
The beneficiary is entitled to payment as long as he can provide the documentary evidence
required by the letter of credit. The letter of credit is a distinct and separate transaction from
the contract on which it is based. All parties deal in documents and not in goods. The issuing
bank is not liable for performance of the underlying contract between the customer and
beneficiary. The issuing bank's obligation to the buyer, is to examine all documents to insure
that they meet all the terms and conditions of the credit. Upon requesting demand for payment
the beneficiary warrants that all conditions of the agreement have been complied with. If the
beneficiary (seller) conforms to the letter of credit, the seller must be paid by the bank.

3.Issuing Bank
The issuing bank's liability to pay and to be reimbursed from its customer becomes absolute
upon the completion of the terms and conditions of the letter of credit. Under the provisions of
the Uniform Customs and Practice for Documentary Credits, the bank is given a reasonable
amount of time after receipt of the documents to honor the draft.The issuing banks' role is to
provide a guarantee to the seller that if compliant documents are presented, the bank will pay
the seller the amount due and to examine the documents, and only pay if these documents
comply with the terms and conditions set out in the letter of credit.Typically the documents
requested will include a commercial invoice, a transport document such as a bill of lading or
airway bill and an insurance document; but there are many others. Letters of credit deal in
documents, not goods.

4.Advising Bank
An advising bank, usually a foreign correspondent bank of the issuing bank will advise the
beneficiary. Generally, the beneficiary would want to use a local bank to insure that the letter
of credit is valid. In addition, the advising bank would be responsible for sending the documents
to the issuing bank. The advising bank has no other obligation under the letter of credit. If the
issuing bank does not pay the beneficiary, the advising bank is not obligated to pay.

5.Confirming Bank
The correspondent bank may confirm the letter of credit for the beneficiary. At the request of
the issuing bank, the correspondent obligates itself to insure payment under the letter of credit.
The confirming bank would not confirm the credit until it evaluated the country and bank where
the letter of credit originates. The confirming bank is usually the advising bank.

20
 IMPORT LETTERS OF CREDIT

COMPLIANCE OF REQUIREMENTS
An import LC is a commitment by the issuing bank to make payment, for the imports which
are to be taken place on a future date. While opening import LC, the following requirements
of various agencies are to be complied with.

An Import LC is normally opened when

i) A resident in India is importing goods / software / designs and drawings into India
ii) A resident merchant trader for the purpose of merchanting trade is importing goods
from one country for sale to another country
iii) An Indian exporter executing a contract abroad, imports goods from a third country into
the country where the project is being executed.

1. TRADE CONTROL REQUIREMENTS

Trade Control lays down the policy and regulations relating to physical movement of goods
into India. Hence bank has to first ensure that goods to be imported can be physically brought
to India under the Foreign Trade Policy. Import shall be free except in cases where they are
regulated by the provisions of the Foreign Trade Policy or any other law in force for the time
being. Item wise import policy shall be as specified in ITC (HS) published and notified by
DGFT from time to time. Hence L/Cs should be opened as per the conditions relating to
importability of the respective item as stated in ITC (HS) Classification. Valid import licence
issued by competent authority should be submitted by the importer, if required under the policy.

2 FEMA GUIDELINES

Exchange Control Regulations of RBI lay down conditions/procedures of payments to be made

for import of goods into India. Detailed EC Regulations pertaining to Import are furnished in
Chapter 19 of this manual. Payments are to be made in strict conformity with these regulations.
An Import LC should be opened only on behalf of bank’s own customers who are known to be
participating in the trade and for whom valid sanctioned limits for issuance of Import LCs are
in force. "Know Your Customer" (KYC) rules should be observed while handling import
transaction.

21
 3. CREDIT NORMS

Import letter of credit requirements of a customer are to be assessed like any other normal credit
proposal in view of the fact that:

i) Though initially a non-funded credit facility, it has the potential to turn into a funded facility.
ii) Usance LC on DA basis is a substitution of funded facilities.
If imports are of capital goods, availability of adequate long-term funds in the form of Term
Loan/DPG, Surplus Cash flows etc. are to be ensured. The following are also to be considered
before sanctioning on Import LC limit

i ABILITY OF THE APPLICANT to retire the import bills on due date/presentation and/or
availability of funded facilities to meet his import payment obligations including payment
duties and taxes. It must be ensured that the applicant will be in a position to clear the goods
by payment of duties.

ii STANDING OF THE OVERSEAS SUPPLIER : Credit standing and capability of the

supplier to ship the goods as per the requirements is to be assessed by the branches by obtaining
a credit report from the overseas banker of the supplier/Credit rating agency for establishing
import LCs of over USD 100000/ or its equivalent. Waiver of Credit report above the cut off
limit should be referred to regional office and within the cut off limit should be by the Branch
Manager/Officer of Scale IV grade. The field Officials are required to formally record waiver
of credit reports after the delegatee has examined such requests for all transactions within the
monetary ceiling. The branch has to be satisfied about the standing of the import clients based
on their track record for waiver of credit reports.

iii ECONOMIC IMPORT ORDER : The minimum economic import order and the accepted
level of inventory are to be considered along with the total usance period and total lead time
while fixing the quantities limit.

iv EXCHANGE RISK : As the import LC is drawn in a freely convertible foreign currency, the
importer is exposed to exchange risk. Therefore importer may be advised to consider booking
of forward contract to protect himself from adverse movement of the exchange rates. Delegated
Authority for approval of waiver would be with the respective sanctioning authority, who has
sanctioned the credit limits.

22
4. FEDAI/UCPDC PROVISIONS/INTERNAL CONTROL GUIDELINES

FEDAI guidelines regarding opening of LC, crystallization of liability etc., are to be followed
strictly. Similarly standard formats of LC application/LC documents are suggested by FEDAI
which are also adopted by us subject to certain changes. UCPDC lays down various guidelines
for handling LC based international trade transactions. These are also to be borne in mind.
Provisions of URR, (Uniform Rules for Reimbursement) are also to be followed with regard to
reimbursement instructions. In addition, precautions like landed cost, ruling price comparison,
manufacturing capability for actual user licence, storage and marketing facility etc. are also to
be appropriately considered.

5. OPENING OF LC – GENERAL GUIDELINES

a) Original letter from DGFT allotting an IEC Number is to be scrutinized and a

certified copy to be kept on record for all customers desiring to open LCs for import
purposes.
b) LC application form (AD 04) and following documents are to be obtained from the
importer.
i) Underlying contract or indent
ii) Exchange Control copy of valid import licence, or Open General Licence (OGL)
declaration stating that the goods are freely importable furnishing therein ITC(HS)
classification number.
iii) Insurance policy or cover note if the imports are on FOB or C&F basis for 110% of LC
value, in the currency of the LC to be opened and in favour of the Bank A/c importing
customer
iv) Declaration under FEMA 1999, Section 10(5), Chapter III
v) Credit Report on Overseas Seller from the approved credit rating agency, for LCs value
exceeding USD one lac and above or equivalent

Branch to satisfy that:

i) The LC application cum agreement form is adequately stamped as per respective State
Stamp Duty Act/Laws
ii) The LC application is signed by an authorised signatory of the firm, company etc. The
signature is to be verified by the processing officer to satisfy the genuineness. However,

23
 no rubber stamp/initial for having verified the signature is to be affixed on the
application, since it is a stamped security document. In the case of companies, common
seal of the Co. is to be affixed as per sealing clause contained in the Articles of
Association duly backed by Board Resolution.

iii) The LC application is complete in all respects with clear and consistent instructions
which correspond to the conditions / provisions of accompanying contract / indent /
licence. In case of any variance the importer customer should be asked to obtain
necessary modifications.

iv) The beneficiary of the LC should not be importer himself or his nominee or his buying
agent. Further, beneficiary should be either a manufacturer, supplier or shipper of the
goods. Care should be taken with regard to method of payment where the beneficiary
is in one country and shipment is authorised from a different country.

v) If the commodity imported is subject to actual user condition or any other condition, its
compliance is ensured by the branch.

vi) If the merchandise is freely importable, the relevant declaration paragraph in the LC
application is properly filled in.

vii) The insurance policy / cover note provides coverage up to 110% of the invoice value,
in the currency of invoice in the banks’ name and covers risks under Institute Cargo

viii) Clause ‘A”. If ‘shipment on deck’ is permitted under the LC the risk of
jettisoning and washing overboard should be covered in case LC permits transshipment,
such risk must be covered by insurance. The validity of the insurance should be in
consonance with the LC/contract terms.

ix) The LC should stipulate a condition that goods should be consigned to the bank with
importer as a notify party.

x) If the import is from Nepal/Bhutan payment under the LC is to be made only in Indian
Rupees. Similarly if imports are from ACU countries, payment under the LC should
conform to ACU mechanism.

xi) If the import is covered under licence, the importer must submit Exchange Control copy
of the same. The licence must be scrutinised to ensure that:

a) it has not been cancelled by any notification/order etc.

24
 b) it is issued on security paper

c) it has a printed number and date

d) it has a security seal (including on the annexures, if any)

e) it is issued in the name of applicant or properly transferred in his name with proper
transfer letters where transferer’s signature is attested by his bankers.

f) commodity specified is in agreement with the item specified in the application.

g) quantity / quality / value limits specified are in agreement with those mentioned in the
application. It is pertinent to note that irrespective of the sale terms for which letter of
credit is proposed to be opened, licence must have adequate value to cover CIF value
plus agency commission and interest if any.

h) country of origin of goods if stated in the licence agrees with that specified in the letter
of credit application.

i) country of shipment authorised is in agreement with the one stated in the letter of credit
application.

6. STANDARD CLAUSES IN LC The LC is to be opened incorporating all

mandatory/standard clauses listed below and other clauses as per LC application. The terms
laid down in the LC should conform to the Exchange Control / Trade Control regulations.

LIST OF MANDATORY CLAUSES

i) All required documents except transport documents and insurance and in cases
specifically stipulated, must be issued by beneficiary only.

ii) Transport documents / Bills of Lading / Airway bills dated prior to LC date are not
acceptable.

iii) Invoice required to be submitted for a value not exceeding draft/Bill of Exchange
amount.

iv) Short Form and third party Bills of Lading are not acceptable.

v) Transport documents indicating final place of destination different from port of

discharge, documents indicating ‘intended’ or a similar clause in relation to the vessel,

25
 other means of transport and/or port of loading and/or the port of discharge are not
acceptable.

vi) Transport documents or Bill of Lading / Airway bill issued by Clearing and Forwarding
agents / Freight Forwarders acting as Carrier Agents/Carriers are not acceptable.

vii) Transport documents or Bill of Lading / Airway bill to indicate date on which goods
loaded on board the vessel / flight no and date.

viii) LASH transport documents in case of sea shipments are not acceptable.

ix) Transport documents showing any charges additional to freight charges such as cost of
disbursement related to loading, unloading or similar operations are not acceptable

x) Documents must be presented for negotiation within 21 days of each shipment. (Note:

xi) Period may vary based on importer’s requirement and mode of transport and transit
time from the exporting country).

xii) Insurance is required to be issued irrespective of percentage, with the following :

‘Insurance Policy / Certificate dated not later than B/l unto order and blank endorsed
for 110% over invoice value covering, Institute Cargo Clause (A), Institute War Clause
(Cargo), Institute Strikes Clause (Cargo) and Warehouse to Warehouse Clauses with
claims payable in India irrespective of percentage. Insurance also to cover the age of
the vessel.’ xii) All documents required in English only.

xiii) Goods to be shipped by seaworthy vessel and a certificate to that effect as per
Llyods or equivalent classification society from Steamship Company or their agent if it
is a member of the Conference Line to accompany documents. ( This clause is to be
incorporated only in case of shipment by sea)

xiv) A certificate of inspection by well known international inspection agencies to

accompany documents, wherever required xv) A discrepancy fee clause of US$ 50 as
per the following : ‘Without prejudice to our right to refuse to take up the documents
presented which are not in compliance with the terms and conditions of this L/C,
discrepancy fee of US$50 will be deducted from the proceeds of any drawing if
documents are presented with discrepancies and same are accepted by us.
Notwithstanding any instructions to the contrary, this charge shall be to the
beneficiary’s account’. Branch Head / Chief Managers are permitted to delete those

26
 additional clauses which are not mandatory from Exchange control / Trade Control /
FEDAI point of view. In such cases following procedure is to be adopted.

a) Request to delete / change / add any clause is to be considered after assessing the additional
credit risk.

b) Branch to satisfy itself about credit worthiness / capability of the customer to honour the
documents without any reserve, on first presentation.

c) Genuine need for such deletion / change / addition to L/C clauses to be ascertained

d) Branch to explore the possibility of substitute cover for additional credit risk exposure.

7. AGE AND SEAWORTHINESS OF SHIPPING VESSEL The stipulation regarding

shipping vessel not to be older than 20 years can be relaxed subject to availability of Marine
Insurance and proper classification of sea worthiness. In such cases LC should contain
following clause :

‘Shipment by seaworthy vessels classed 100A1 by Lloyds or equivalent classification society

and a certificate from steamship Co. or its agent to that effect to accompany the documents’.

List of few approved classification societies is as under :

Name

i) Lloyds Register
ii) American Bureau of shipping
iii) Bureau veritas
iv) Germanischer Lloyds
v) Korean Register of Shipping
vi) Nippon Kaizi Kyokai
vii) Registro Italiano Navale
viii) Det Norske Veritas
ix) China Classification Soceity
x) Russian
xi) Maritime Registar of Shipping

27
TYPES OF LETTER OF CREDIT

1.Commercial and stand by L/C: Commercial letters of credit are used primarily to facilitate
foreign trade. The commercial letter of credit is the primary payment mechanism for a
transaction. It is a contractual agreement between a bank, known as the issuing bank, on behalf
of one of its customers, authorizing another bank, known as the advising or confirming bank,
to make payment to the beneficiary. The issuing bank, on the request of its customer, opens the
letter of credit. The issuing bank makes a commitment to honor drawings made under the credit.
The beneficiary is normally the provider of goods and/or services. Essentially, the issuing bank
replaces the bank's customer as the payee The standby letter of credit serves a different
function. The standby letter of credit serves as a secondary payment mechanism. The bank will
issue the credit on behalf of a customer to provide assurances of his ability to perform under
the terms of a contract. A bank will issue a standby letter of credit on behalf of a customer to
provide assurances of his ability to perform under the terms of a contract between the
beneficiary. The parties involved with the transaction do not expect that the letter of credit will
ever be drawn upon. The standby letter of credit assures the beneficiary of the performance of
the customer's obligation. The beneficiary is able to draw under the credit by presenting a draft,
copies of invoices, with evidence that the customer has not performed its obligation. The bank
is obligated to make payment if the documents presented comply with the terms of the letter of
credit.

They are issued by banks to stand behind monetary obligations, to insure the refund of advance
payment, to support performance and bid obligations, and to insure the completion of a sales
contract. The credit has an expiration date.The standby letter of credit is often used to guarantee
performance or to strengthen the credit worthiness of a customer. In the above example, the
letter of credit is issued by the bank and held by the supplier. The customer is provided open
account terms. If payments are made in accordance with the suppliers' terms, the letter of credit
would not be drawn on. The seller pursues the customer for payment directly. If the customer
is unable to pay, the seller presents a draft and copies of invoices to the bank for payment.

2.Revocable or irrevocable letter of credit: Letters of credit may be either revocable or

irrevocable. A revocable letter of credit may be revoked or modified for any reason, at any time
by the issuing bank without notification. A revocable letter of credit cannot be confirmed. Once
the documents have been presented and meet the terms and conditions in the letter of credit,
and the draft is honored, the letter of credit cannot be revoked. The revocable letter of credit is
28
not a commonly used instrument. If a letter of credit is revocable it would be referenced on its
face.The irrevocable letter of credit may not be revoked or amended without the agreement of
the issuing bank, the confirming bank, and the beneficiary. An irrevocable letter of credit from
the issuing bank insures the beneficiary that if the required documents are presented and the
terms and conditions are complied with, payment will be made. If a letter of credit is irrevocable
it is referenced on its face.

3) Sight or usance letter of credit: All letters of credit require the beneficiary to present a
draft and specified documents in order to receive payment. A draft is a written order by which
the party creating it, orders another party to pay money to a third party. A draft is also called a
bill of exchange. There are two types of drafts: sight and time. A sight draft is payable as soon
as it is presented for payment. The bank is allowed a reasonable time to review the documents
before making payment. A time draft is not payable until the lapse of a particular time period
stated on the draft. The bank is required to accept the draft as soon as the documents comply
with credit terms. The issuing bank has a reasonable time to examine those documents. The
issuing bank is obligated to accept drafts and pay them at maturity. A Letter of credit is known
as a Sight letter of credit if it involves payment to the seller against a Sight Draft. On the other
hand, if the payment is made against a Usance Draft, then it is known as Usance letter of credit.

DIFFERENT FIELDS OF LETTER OF CREDIT

 FROM :( NAME & ADDRESS OF OPENING BANK )

This clause contains details of bank which has opened the Letter of Credit, and it works on
the behalf of the buyer of goods. The opening bank plays the first step in the whole process
of letter of credit.

 TO :( NAME & ADDRESS OF ADVISING BANK )

This clause shows the details of bank which plays the foremost role in the process of letter
of credit. The advising bank belongs to the country of seller. It plays the role of middleman
between the seller and the opening bank

 TYPE OF L/C :IRREVOCABLE

This clause shows the type of L/C in which it is being made. Various types of L/C’s are
Revocable, Irrevocable, Commercial, Negotiable etc.

29
 L/C Number :
The clause shows a particular number for L/C and every L/C has different number so that
difference can be judged between different L/C’s.

 DATE OF ISSUE :
This clause shows that date on which the opening bank has issued the L/C.

 DT. & PLACE OF EXPIRY : IN INDIA

This shows about the date and the place in india where the lc will get expired, means that
financial institution where the L/C is send by the opening bank.

 NAME & ADDRESS OF THE:

APPLICANT
It contains detail about the buyer of the goods. It gives complete address of the buyer.
 NAME & ADDRESS OF THE:
BENEFICIARY
It shows details of the seller of goods, like seller’s name, address, country to which he
belongs.

 AMOUNT OF CREDIT IN :
 US DOLLARS /EURO/ANY
 OTHER FREELY
 EXCHANGEABLE CURRENCY
 (IN FIGURES & WORDS)
It shows the currency in which the deal is been made, the code for that currency as well as
the amount of the goods

 PERCENTAGE CREDIT : AS PER CONTRACT

AMOUNT TOLERANCE
Sometimes the amount in the letter of the credit and the exact amount of the goods does not
match. There can be a difference between the both. So a specific percentage of amounts of
goods specified in L/C is given as a tolerance and the exact amount of goods can be in
between the minimum and maximum tolerated limits.

30
  CREDIT AVAILABLE WITH:
This part shows the details of that party from where the amount can be reimburses by the
seller. This state’s either a specified bank in India or any bank in India.

 USANCE OF THE DRAFTS :

This clause shows whether the draft is payable at sight or at any date in future.

 DRAFTS TO BE DRAWN ON:

It tells about the party which acts as a drawee. Generally the opening bank acts as a drawee
 PARTIAL SHIPMENT : AS PER CONTRACT
This clause contains details whether the shipment of goods is allowed through one shipment
or the goods can be sending through various shipments.

TRANSHIPMENT : AS PER CONTRACT

Transshipment means when the goods are send,

 SHIPMENT FROM :
It tells about that place from where goods are send by the seller.

 SHIPMENT TO :
It’s that place where the goods are sending by the seller. And generally its that country
where the buyer lives.

 LATEST SHIPMENT DATE :

It’s that date till which the goods should reach to the buyer. After that date, it’s the choice
of the buyer whether he accepts the goods or not.

 DESCRIPTION OF GOODS :
 Description of Materials
 Size ( in mm) and Quantity (in MT)
 Specification
 Tolerance
 Quantity
 Quantity Tolerance

31
LITERATURE
REVIEWS

32
 LITERATURE REVIEWS

1. Bergami Robert (2007) analysis that that international trade transactions carry inherently
more risk than domestic trade transactions, because of differences in culture, business
processes, laws and regulations. It is therefore important for traders to ensure that payment
is received for goods dispatched and that the goods received and paid for comply with the
contract of sale. One effective way of managing these risks has been for traders to rely on
the letter of credit as a payment method. However for exporters in particular, the letter of
credit has presented difficulties in meeting the compliance requirements necessary for the
payment to be triggered. The current rules that govern letter of credit transactions(UCP
500) have been under review for the past three years and an updated set of rules (UCP 600)
is expected to be introduced on 1July 2007. This paper focuses on the changes mooted for
2007and compares these main issues with the existing rules and other associated guidelines
and regulations governing this method of payment. This paper considers the implication to
changes of letter of credit transactions and the sharing of risk. Firstly the paper provides
some background to letters of credit, then comments on existing literature and models, and
subsequently an analysis of the most important changes to the existing rules, before
reaching a conclusion. The conclusion is that the UCP 600 have not paid enough
consideration to traders and service providers and are likely to engender an environment of
uncertainty for exporters in particular.

2. Dolan John (2007) analysis that The Law of Letters of Credit – Commercial and Standby
Credits is the four the Edition of a traditional treatise on a rather narrow legal subject.
Letters of credit fall into two categories: (1) commercials, which find use in international
sales; and (2) standbys that are a common device in many domestic transactions. As
international trade becomes more and more rationalized, the use of commercials has
diminished; but the use of the standby has enjoyed something of a boom, for it
accomplishes much that security interests, surety ship arrangements, and other credit
enhancing devices accomplish and does it with significantly lower transaction costs.
Regrettably, the parties using letters of credit often are unaware of the credit’s legal
significance. This treatise covers the legal features of the commercial and the standby, all
in a global context. While it is codified to some extent in the Uniform Commercial Code,
the law of letters of credit is largely the law merchant, the is gentium; and the UCC defers
in many respects to international rules. Thus, the treatise deals with those international rules

33
 and cites cases from virtually all of the common-law jurisdictions in an effort to provide
complete coverage of the field.

3. Padachi Kesseven (2006 ) analysis that A well designed and implemented working capital
management is expected to contribute positively to the creation of a firm’s value The
purpose of this paper is to examine the trends in working capital management and its
impaction firms’ performance. The trend in working capital needs and profitability of firms
are examined to identify the causes for any significant differences between the industries.
The dependent variable, return on total assets is used as a measure of profitability and the
relation between working capital management and corporate profitability is investigated
for a sample of 58small manufacturing firms, using panel data analysis for the period 1998
–2003. The regression results show that high investment in inventories and receivables is
associated with lower profitability. The key variables used in the analysis are inventories
days, accounts receivables days, accounts payable days and cash conversion cycle. A strong
significant relationship between working capital management and profitability has been
found in previous empirical work. An analysis of the liquidity, profitability and operational
efficiency of the five industries shows significant changes and how best practices in the
paper industry have contributed to performance. The findings also reveal an increasing
trend in the short-term component of working capital financing.

4. Klien Carter (2005) studied that For a relatively small fee and assuming sufficient
collateral or creditworthiness of the tenant or a guarantor, a tenant may be able to apply
for and have its bank issue to its landlord a letter of credit (“L/C”) to secure the tenant’s
obligations under a long-term lease. If the L/C is large enough, the landlord may enter into
a lease with a tenant that the landlord would otherwise refuse due to the tenant’s lack of
creditworthiness. From the tenant’s perspective, an L/C may be preferable to a large
security deposit. An L/C will not necessarily tie up large amounts of the tenant’s cash or
other liquid collateral, as would a security deposit. Instead, the cash can be deployed as
working capital in the tenant’s business. An L/C is an independent obligation of the issuer.
As long as conforming documents specified by the terms of the
L/C is presented to the issuer before the expiration date and no fraud is involved, the issuer
must honor. The credit of the issuer stands behind the obligation of the tenant. If the tenant is
insolvent and/or bankrupt, the issuer still must honor the beneficiary’s conforming draws.
Rights the landlord will lose if the L/C draw is enjoined and the credit expires. This two-part
34
article provides tips for drafting L/Cs. Part one includes a discussion of using the International
Standby Practices, keeping the draw condition s simple and allowing partial draws conclusion
addresses issues such as providing coverage of the settlement period after lease termination;
shortening pitfalls is eliminated.. The conclusion of this article will provide six more drafting
tips and a discussion of the issuing banks’ concerns.

5. Lazaridis Dr Ioannis, Tryfonidis Dimitrios (2004) analysis that the relationship of corporate
profitability and working capital management. We used a sample of 131 companies listed
in the Athens Stock Exchange (ASE) for the period of 2001-2004. The purpose of this paper
is to establish a relationship that is statistical significant between profitability, the cash
conversion cycle and its components for listed firms in the ASE. The results of our research
showed that there is statistical significance between profitability, measured through gross
operating profit, and the cash conversion cycle. Moreover managers can create profits for
their companies by handling correctly the cash conversion cycle and keeping each different
component (accounts receivables, accounts payables, inventory) to an optimum level.

6. Schelin Johan (2004) studied that This thesis give a historical introduction in foreign trade
and letters of credit. The reasons for using letters of credit will be shown. The legal
relationships of the concerned parties will be analysed. The doctrine of strict compliance
will be explained. Then problems will be worked out: the different interpretation of strict
compliance, the fraudulent exception and questions of liability if the doctrine of strict
compliance was not carefully used. The thesis bases on German law, but tries, whenever
useful, to compare with law of other countries and / or International law. At the end of the
thesis a critical outlook will follow. The analyse of problems concerning the strict
compliance lead to the result that still today, about 100 years after letters of credit became
a common method to pay, problems exist. One of these problems is the different
interpretation of courts in different countries. Especially the considerations of German
courts that strict compliance must be interpreted in the frontiers of good faith and that letters
of credit must be interpreted as will declarations.

7. Shelton Fred (2002) studied that Working capital, an important liquidity indicator, has
historically been a major benchmark of the surety and credit-granting institutions. In
today’s environment, because of the tight bond and credit markets, both institutions are

35
 scrutinizing the amount and quality of working capital more than ever. The fewer resources
that need to be invested in working capital, after recognizing liquidity risk, the better.

8. Weinraub Herbert, Visscher Sue (1998) studies that This study looked at ten diverse
industry groups over an extended time period to examine the relative relationship between
aggressive and conservative working capital practices. Results strongly show that the
industries had significantly different current asset management policies. Additionally, the
relative industry ranking of the aggressive/conservative asset policies exhibited remarkable
stability over time. Industry policies concerning relative aggressive/conservative liability
management were also significantly different. Interestingly, it is evident there is a high
and significant negative correlation between industry asset and liability policies. Relatively
aggressive working capital asset management seems balanced by relatively conservative
working capital financial management.

9. Mills Geofrey (1996) analysis that the impact of inflation on the capital budgeting process.
It has shown that it is reasonable to expect that the cost of capital will increase at the same
rate as the rate of inflation on an ex ante basis, and that this increase will be a multiplicative
relationship. In addition, the paper has shown that the capital budgeting process is not
neutral with respect to inflation, even if output prices rise at the same rate as costs. Of
critical importance is the degree of net working capital as a proportion of the overall
financing required, the higher the net working capital the greater being the impact of
inflation on capital spending. Finally, it would appear that corporate financial behavior is
influenced by inflation. Inflation will cause the firm to reduce its capital budget, to attempt
to reduce net working capital, and to alter the debt/asset ratio using short term debt, thus
driving up short term rates relative to long term rates.

36
OBJECTIVE
OF
STUDY

37
OBJECTIVES OF STUDY

 To study L/C of Lark Engineering division.

 Knowledge of sale under Letter of Credit in Lark Engineering Division
 Bill Discounting under letter of credit
 What factors that considers their L/C.
 L/C Policies.
 To operate the L/C cycle of the management.
 Detail study of Account receivable department (ACR)

38
 RESEARCH

METHODOLOGY

39
 RESEARCH METHODOLOGY

Research comprises of defining & redefining problems, formulating hypothesis or suggested

solutions, collecting, organizing & evaluating data, making deductions & reaching conclusions.
In research design we decide about:
 Type of data
 From whom to get data
 About sample size
 How to analyze data
 How to make report

DATA TYPE
Data collected was both Primary and Secondary in nature

SAMPLE SIZE
The sample size for the study of the project was Lark Engineering division of LARK
ENGINEERING CO. ( INDIA ) PRIVATE LIMITE.

RESEARCH DESIGN
STEP 1- To study the ACR module of Lark Engineering division
STEP 2 – understanding various methods used for collection of debtors to study procedure
followed for LC in Lark Engineering Co. ( India ) Private Limited

DATA COLLECTION
The information is collected through the PRIMARY SOURCES like:
 Talking with the employees of the department.
 Getting information by observations e.g. in manufacturing processes.
 Discussion with the head of the department.

40
Data was collected from following SECONDARY SOURCES like
1. Corporate department
a) Marketing department
b) Finance department
2. ACR reports
3. MIS Department
The collected information was edited & tabulated for the purpose of analysis.

TOOLS USED FOR PROJECT

While making the project file various tools were used. These tools helped in doing the work.
These are:-
 Microsoft Excel
 Microsoft Word
 Various analysis tools like Bar Graphs, Pie Graphs, tables

41
 DATA ANALYSIS
&
INTERPRETATIONS

42
Q1 Does your company have knowledge about letter of credit?

Table -1

Awareness about letter of Respondents Percentage

credit
Yes 50 100
No 0 0

Interpretation

The above graph shows that all the respondents have knowledge of letter of credit .

43
Q2. Which document from a bank guaranteeing that a seller will receive payment in full
as long as certain delivery conditions.

Table -2

Document from a bank Respondents Percentage

Agreement 20 40
Letter of credit 25 50
Bill paper 3 6
None of the above 2 4

Interpretation
From the above graph it is clear that according to 50% of respondents letter of credit is used
for guaranteed by bank for international, 40% of respondents agreement can be used for
guaranteed by bank for international shipments, 6% of respondents bill paper is used for
guaranteed by bank for international shipments and 4% of respondents do not agree with this.

44
Q3 Did the Letter of Credit is used only for international trading payment
operations:

Table -3

LOC is only for Respondents Percentage

International payment
Yes 48 96
No 2 4

Interpretation
The above graph shows that according to 96% letter of credit is only for payment but 4% don’t
know about this.

45
Q4 For your company the Letters of Credit are governed by rules promulgated by
the:
Table -4

Governed by Respondents Percentage

International Chamber of commerce 4 8
Uniform customs and practice for documentary 6 12
credits
Both of above 35 70
None of above 5 10

Interpretation
The above graph depicts that according to 70% of respondents Both of above i.e.
international chamber and uniform customs governed this letter of credit, 12%
respondents says uniform customs, 10% says none of above.
Q5 According to your company’s demand Letter of Credit is beneficial for which
party:
Table -5

Benefit of LOC Respondents Percentage

Seller (Exporter) 15 30
Buyer (Importer) 10 20
Both of above 25 50

Interpretation
From the above graph it is clear that 50% of respondents says that both seller and buyer
both have benefits of letter of credit, 305 says that seller have benefit and 20% says
buyer have benefit of letter of credit.

47
Q6 Which type of letter of credit provided by bank to your company for export?

Document from a bank Respondents Percentage

Confirmed 40 80
Irrevocable 4 8
Revocable 6 12

Interpretation
The above graph shows that 80% of the respondents says that when bank provide
confirmed letter of credit only then they export the products, 12% of the respondents
says that when bank provide revocable letter of credit and 8% of the respondents says
that when bank provide irrevocable letter of credit.

48
Q7. Letter of Credit are usually issued by:

LOC issued by Respondents Percentage

Banks 7 14
Financial Instt 3 6
Both of above 40 80

Interpretation
The above depicts that according to 80% of respondents the letter of credit can be
issued by Both bank and Financial Institute for export, 14% respondents says that banks
can issue and 6% only says that financial institute can issue letter of credit for import
of products in any country .

49
Q8. Besides the Banks and Financial Institutions, Letter of Credit can be issue by:

Who will issue LOC Respondents Percentage

Insurance Companies 4 8
Mutual Funds 2 4
Both of above 44 88

Interpretation
The above graph shows that according to 88% of respondents letter of credit can be
issued other than bank by Both Insurance Companies and Mutual Funds companies,
8% of respondents letter of credit can be issued insurance companies and 4% of
respondents letter of credit can be issued other than mutual funds.

50
Q9. The bank with which credit is available (to seller) called ______:

Bank which credit is Respondents Percentage

available
Delegated bank 12 24
Nominated bank 36 72
Any bank 2 4
None of above 0 0

Interpretation
From the above graph it is clear that according to the 72% of respondents the bank who
provide LOC is called nominated bank, 24% says that it is delegated but 4% says that
it is any bank.

51
Q10. Did your company know that Letter of Credit can be transferred?

Document from a bank Respondents Percentage

Yes 49 98
No 1 2
None of the above 0 0

Interpretation
The above graph shows that according to 98% respondents’ letter of credit can be
transferred as it is transferable to other company and 2% say not to this.

52
LIMITATIONS

53
 LIMITATIONS

Letter of credit is powerful tool of determining company’s strength and weakness. But
the analysis is based on the information available in the financial statements, which
are as follows:

1. It is only a study of interim report.

2. LC study is only based upon monetary information and non-monetary factors
are ignored.
3. It does not consider change in price level.
4. As LC is prepared on the basis of going concern, it does not give extract
position. Thus, accounting concept and conventions causes a serious limitation
to financial analysis.
5. Analysis is only a mean and not an end in itself. The analyst has to make
interpretation and draw his/her conclusion. Different people may interpret the
same analysis in different ways.

54
 FINDINGS
&
SUGGESTIONS

55
FINDINGS

1. All the respondents have knowledge of letter of credit.

2. 50% of respondents letter of credit is used for guaranteed by bank for
international, 40% of respondent’s agreement can be used for guaranteed by
bank for international shipments, 6% of respondents bill paper is used for
guaranteed by bank for international shipments and 4% of respondents do not
agree with this.
3. 96% letter of credit is only for payment but 4% don't know about this.
4. 70% of respondents Both of above i.e. international chamber and uniform
customs governed this letter of credit, 12% respondents say uniform customs,
10% says none of above.
5. 50% of respondents says that both seller and buyer both have benefits of letter
of credit, 305 says that seller have benefit and 20% says buyer have benefit of
letter of credit.
6. 80% of the respondents says that when bank provide confirmed letter of credit
only then they export the products, 12% of the respondents says that when bank
provide revocable letter of credit and 8% of the respondents says that when bank
provide irrevocable letter of credit.
7. 80% of respondents the letter of credit can be issued by Both bank and Financial
Institute for export, 14% respondents say that banks can issue and 6% only says
that financial institute can issue letter of credit for import of products in any
country.
8. 88% of respondents letter of credit can be issued other than bank by Both
Insurance Companies and Mutual Funds companies, 8% of respondents letter
of credit can be issued insurance companies and 4% of respondents letter of
credit can be issued other than mutual funds.
9. 72% of respondents the bank who provide Letter of Credit is called nominated
bank, 24% says that it is delegated but 4% says that it is any bank.

56
 SUGGESTIONS

1. The prices should be less to re-establish the market for Lark Engineering.
2. Since the customer is very specific in terms of value so the company can introduce
new and alternative products whenever possible by adjusting the raw-material
mixing as a result achieve better profitability.
3. As far as accounting is concerned, although the entire system is computerized, but
there still involves lots of paperwork. So, this should be minimized b acquiring
more advanced accounting software
4. Not only for Lark Engineering customers but for other product customer dealing
under letter of credit should done
5. L/C period should also increase
6. Company should put more efforts to improve its liquidity position
7. Company should stretch the credit period given by the suppliers.

57
CONCLUSION

58
CONCLUSION
The other stage of the letter of credit is the contract between the issuing bank and the
correspondent bank. The issuing bank instructs the corresponding bank where is
employed from the beneficiary’ country. The corresponding bank role has been given
by the issuing bank and has to follow his instruction under the letter of credit. As I
mentioned before, when the correspondent bank has received unclear instruction, he
has to give primary notification to the beneficiary for information only and without
responsibility. After that the correspondent bank must request to necessary information
from the issuing bank. The credit will be acted only when clear instruction have been
received.
According to the role of the correspondent bank given by the issuing bank, he has to
work as an advising or confirming bank. If the issuing bank instructs the correspondent
bank to confirm the credit, the correspondent bank is then known as the confirming
bank. The confirming bank has to add his undertaking to honour the credit. On the other
hand, when the correspondent bank has not added his undertaking to honour the credit,
he is known as the advising bank. His role is only to accept the tendered documents and
to make payment against to these documents.
The differences between the advising bank and the confirming bank is that, the former
works as an agent of the issuing bank, but the latter assumes the role of the principle.
In addition to this that there are three different situation for the confirming bank; 4 First
one is that, when the confirming bank makes a payment to the beneficiary against to
the confirming documents, he has a right to be reimbursement. However, the issuing
bank fails to reimburse to the confirming bank, the former could be liable to the latter
in damages between the amounts paid to the beneficiary and the amounts recovered on
the sale of the goods act.
Second one is that, according to the Mance J “if the confirming bank pays on a late
presentation of documents where time had not been properly extended under article
44(a) UCP 500 or by agreement, the issuing bank could clearly recover any money paid
to the confirming bank as money paid under a mistake of fact.”3 The last one is that,
when the confirming bank has accepted a nonconforming documents as a result of
mistake, they can take an action against the beneficiary.

59
BIBLIOGRAPHY

60
BIBLIOGRAPHY

1. Bergami Robert, (2007), "Will the UCP 600 Provide Solutions to Letter of
Credit Transactions?" International Review of Business Research Papers,Vol.3
No.2, June 2007, Pp. 41 - 53
2. Dolan John, (2007)," THE LAW OF LETTERS OF CREDIT" The Wayne State
University Law School Legal Studies Research, Vol 1, April 2007, p149
3. Padachi Kesseven, (2006), "Trends in LC Management and its Impact on Firms
Performance: An Analysis of Mauritian Small Manufacturing Firms",
International Review of Business Research PapersVol.2 No. 2. October 2006,
Pp. 45 -58
4. Klien Carter, (2005), "Using Letters of Credit to Secure Lease Obligations",
Law journal Newsletter ,Vol 18, No 4 , September 2005, p. 585
5. Lazaridis Dr Ioannis, Tryfonidis Dimitrios, (2004), "The relationship between
working capital management and profitability of listed companies in the Athens
Stock Exchange", University of Macedonia ,Greece, Vol 28, No78,October ,
pp1013.
6. Schelin Johan (2004), "Letter of credit and doctrine of strict compliance",
University of Uppsala, Vol. 4, No. 3,, January, pp 27 - 34
7. Shelton Fred (2002), "letter of credit", journal of construction accounting and
taxation, December, pp. 45-56.
8. Weinraub Herbert, Visscher Sue (1998), "Industry practices relating to
aggressive conservative working capital policies", Journal of Financial and
Strategic Decisions, Vol 11 No 2, November, pp. 770-774.
9. Mills Geofrey (1996), "The Impact of inflation on capital budgeting and Letter
of credit", Journal Of Financial And Strategic Decisions, Vol 9 No 1 ,October,
pp. 26-32.

61
WEB PAGES

1. www.google.com
2. https://www.investopedia.com/terms/l/letterofcredit.asp
3. https://www.thebalance.com/letter-of-credit-example-how-money-and-
documents-move-315042
4. http://www.businessdictionary.com/definition/letter-of-credit-L-C.html
5. https://efinancemanagement.com/sources-of-finance/types-of-letter-of-
credit-lc
6. http://en.widipedia.org/wiki/Letters_of_credit
7. www.Lark Engineering Co. ( India ) Private Limited.com

62
ANNEXURE

63
QUESTIONNAIRE

Q1. Does your company have knowledge about letter of credit?

a) Yes
b) No

Q2. Which document from a bank guaranteeing that a seller will receive
payment in full as long as certain delivery conditions.
a) Agreement
b) Letter of Credit
c) Bill Paper
d) None of The Above

Q3. Did the Letter of Credit is used only for international trading payment
operations?
a) Yes
b) No

Q4. For your company the Letters of Credit are governed by rules promulgated
by the:
a) International Chamber of Commerce
b) Uniform Customs and Practice for Documentary Credits
c) Both of The Above
d) None of The Above

Q5. According to your company's demand Letter of Credit is beneficial for

which party:
a) Seller (Exporter)
b) Buyer (Importer)
c) Both of The Above
Q6. Which type of letter of credit provided by bank to your company for export?
a) Confirmed
b) Irrevocable

64
 c) Revocable
Q7. Letter of Credit are usually issued by:
a) Banks
b) Financial Institutions
c) Both of Above

Q8. Besides the Banks and Financial Institutions, Letter of Credit can be issue
by:
a) Insurance Companies
b) Mutual Funds
c) Both of Above

Q9. The bank with which credit is available (to seller) called ______:
a) Delegated Bank
b) Nominated Bank
c) Any Bank
d) None of The Above

Q10. Did your company know that Letter of Credit can be transferred?
a) Yes
b) No)
c) None of The Above

65